Repair & Remodel Building Products Outlook – Interview with Donnie Di Norcia, President of Construction Resources

With UMI now fully integrated with CR, talk about some of the business synergies gained and elaborate on how the two are more powerful together.

While the integration of UMI and CR has been symbiotic, we have maintained a level of independence that has allowed us to build upon the success achieved prior to the acquisition in 2019. The combination of CR and UMI expanded each company’s geographic and product reach; the partnership has created attractive cross-selling opportunities for both UMI and CR in their core geographies. UMI recently opened a location in Atlanta to accelerate the cross-selling initiative and help support CR’s Atlanta Kitchens division. Additionally, the two companies have shared best practices on the sourcing side, with UMI bringing new, attractive supply relationships to CR. Before the acquisition, our brand strength and customer service allowed us to succeed in the countertop product category. Following the acquisition, we are now able to sell our products through select CR business units.

Furthermore, it has allowed UMI to interact more closely with the key decision makers across the value chain. The two teams continue to share best practices and identify additional opportunities to create value across the platform. We are excited by the progress we have made to date and are excited about the meaningful incremental synergy capture on the horizon from our strategic partnership with CR.

Overall, how did 2020 play out for UMI?

UMI performed incredibly well in 2020, especially when considering everything we had to overcome in response to COVID. In April and May 2020, we were meaningfully impacted and decided to temporarily shutdown showrooms given the uncertainty in market demand and in an attempt to protect our employees. During those early months, foot traffic at our showrooms slowed significantly; however, that did not last long as pent-up demand and the rise in work-from-home remodel trends led to a V-shaped recovery in demand, with June performance exhibiting particular strength. Demand continued to scale as we moved through 2020, driven by the continued migration to Florida and tailwinds from a growing homeowner focus on home improvement projects, which benefits our business given our focus on residential repair and remodel work. Despite the challenges we faced in April and May, we were able to post meaningful growth in 2020. That strength and momentum have continued in 2021, and we see continued tailwinds for the remainder of this year and beyond.

What type of disruption have you seen in UMI’s supply chain, and how has that impacted UMI’s ability to meet demand?

The supply chain issues that are being felt across the building products landscape have not affected our business in a meaningful way. Our long-term strategic supplier relationships have helped defend and grow our market position within the state of Florida by enabling us to maintain appropriate levels of inventory to serve our customers during the rising demand environment. In our business, we must have supply readily available when called upon by our customers. While the countertops supply chain has experienced pressure over the past few years from a supply/demand imbalance, as well as tariffs on Chinese supply, we have remained well-positioned as a result of our unique supplier relationships and believe these relationships will continue to pave the way for growth as others in the industry experience difficulties in procuring supply. Like everyone with global supply chains, one area where we have experienced modest pressure is rising shipping costs and expanded lead times; however, these issues have not impaired our ability to service our customers.

With the proliferation of folks working from home since the start of COVID, how are you viewing the current R&R demand cycle?

UMI’s markets have benefitted from continued migration to Florida and the sudden and lasting transition to work-from-home. Investing in home improvement projects became a focus for the general population as they were forced to spend more time in their homes. Additionally, there were fewer places for the consumer to spend their disposable income, resulting in a redirection of funds from categories like travel and leisure to improving their homes. This greatly benefitted UMI, given our focus on residential repair and remodel. Additionally, we have benefitted from the continued trend of people moving to Florida, which was only accelerated by the attractiveness of working remotely in a warm climate with fewer COVID restrictions. We have not seen a slow-down in migration patterns or investment in home improvement, evidenced by our continued strong momentum through the first quarter of 2021. We believe in the long-term sustainability of these trends when viewed in conjunction with the structural demographic and migratory trends. In summary, we believe we are far from the end of this current R&R demand cycle.

Any specifics trends you are seeing within R&R?

As stated in earlier responses, UMI’s focus on R&R allowed us to benefit from the growth in home improvement demand experienced over the past 12 months. This came in the form of both pre-existing homeowners investing in their homes and new home buyers revamping their recently purchased homes. It is clear that the general population will continue to find ways to upgrade their homes, especially when they are spending an outsized portion of their time at home, which has been the case since the onset of COVID. Our products are uniquely advantaged as they allow the consumer to customize their home in an aesthetically pleasing way while also being affordable.

Furthermore, we see increased investment in countertops, as they typically are purchased as part of kitchen and bathroom renovation projects, two of the most frequently renovated rooms in any macro environment, including one impacted by COVID.

How has the pandemic impacted foot traffic in your showrooms?

During Q2 2020, with lockdowns and other restrictions coming into effect, we decided to curtail access to our showrooms to 10% of normal foot traffic volume. This reduced traffic was for a brief period of 4-6 weeks, and we experienced an immediate rebound to pre-COVID levels once we opened back up. Not all of our locations were impacted to the same degree. Our showroom in Jacksonville was impacted the least, while our Boynton Beach location experienced a more significant decline in foot traffic. Overall, across all locations, as the year progressed, foot traffic continued to grow to levels greater than those experienced in prior years.

What geographies do you supply, and how have those markets held up?

We supply our products throughout Florida from our showroom locations in Naples, Tampa, Boynton Beach and Jacksonville. We recently opened up a satellite location in Atlanta to help support Construction Resources through our differentiated sourcing capabilities and capitalize on cross-selling opportunities across CR’s showrooms in the Atlanta market. As mentioned in prior responses, the shutdown ordinances were not uniform across the entire state. Miami and Palm Beach faced more stringent shutdown ordinances, which impacted our performance during Q2 2020. Other locations, like Jacksonville and Atlanta, were less impacted given our ability to continue operating showrooms at a higher capacity. Once these ordinances were lifted, foot traffic quickly rebounded, and we were well-positioned to serve the pent-up demand. Showroom traffic across our locations has remained robust in the first part of 2021, and we are confident that this trend will continue throughout 2021 and beyond.

In your view, has there been any consumer shift in stone preference over the last few years?

The shift to Engineered Quartz (our proprietary brand being Pompeii Quartz) has been taking place over several years. This shift away from natural stone to Engineered Quartz has occurred for several reasons, including (i) durability and affordability, (ii) adaptability to meet current and future color and design trends and (iii) the product being easier for the trade to sell and specify. We were an early adopter of Engineered Quartz and set up strategic supply partnerships with global suppliers. Our brand recognition and service levels coupled with our early-mover advantage have positioned Pompeii Quartz as the market leader in Engineered Quartz in the state of Florida. More recently, we have seen the porcelain slab market start to gain popularity, which we believe is still in its infancy. In anticipation of this growing market, we utilize the playbook used with Engineered Quartz to meet the anticipated demand for porcelain. Through our proprietary Infinity line, we offer the porcelain product of choice and are best positioned to capitalize on the ongoing growth in this material.

What are some of the tailwinds you see coming in the industry?

The current market environment continues to be ripe for growth. Historically low interest rates, migration to Florida, and growing popularity in home improvement will continue to position UMI for success going forward. We expect to disproportionately benefit from these tailwinds given our market leadership position and are confident that our track record of market share gains due to our differentiated product and service offering will continue. The new construction and R&R markets remain strong; we have strategically invested in people and product to support the growth that we see as inevitable going forward.

What are some of the headwinds you see coming in the industry?

As previously alluded to, the primary headwinds we currently face, along with the rest of our industry, are rising freight costs and lead times. We have successfully navigated them to this point due to our preparedness and the strength of our supplier relationships. We have also taken strategic actions, including price increases, that help offset these additional costs, even if they were to continue. Labor availability has also been a challenge that we have had to work through. Labor constraints became apparent in Q3 and Q4 2020 and created challenges as demand continued to accelerate. We worked hard to find talent in our markets and now believe we are staffed appropriately for the market demand we are forecasting.

Discuss UMI’s growth opportunity in 2021 and beyond.

UMI has continued to achieve meaningful growth within its markets over the last few years. We have created a playbook for programmatic growth through both acquisition and green-fielding that we will utilize as we seek new markets for expansion. This playbook is based on the success UMI has had in its Tampa and Boynton Beach greenfield operations and in the Jacksonville location we added as the result of our acquisition of Any Old Stone in late 2019. We have identified other attractive adjacent markets within Florida to expand into and establish UMI as a market leader. This expansion can be achieved through a combination of green-fielding and acquisitions – there is no shortage of potential M&A opportunities given the high degree of fragmentation within the Florida market.

There is also tremendous growth potential from expanding into Florida’s neighboring states. We are in the process of evaluating the expansion of our proprietary brands into Georgia and other Southeast states. The growth opportunity is massive, and we feel we are best positioned to take advantage of it given the repeatable playbook we have developed over many years of successful expansion and market leadership.

Monomoy Capital Partners is a private investment firm with $2.4 billion in committed capital across a family of five investment funds. Monomoy invests in the debt and equity of middle market businesses that can benefit from operational and financial improvement with a focus on manufacturing, distribution and consumer product businesses in North America and Europe.

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