Strategic Exchange - April 2012
By Kemp Harr
Statistically, we’ve been in a recovery since the middle of 2009 and, while recent indicators are showing signs that this recovery will continue to move in a positive direction, most of us in the floorcovering business are still looking for reassurance. We see that the stock market is up (the S&P is up 9.5% this year) because corporations are making money, we acknowledge that unemployment figures continue to improve (falling from 10.1% to 8.3% at press time), we understand that auto sales are back up to a 15 million unit annual pace, and we read that factory orders have reached a bullish six-month high in January. All of these are positive leading indicators.
On the other hand we recognize that the success of our industry is closely coupled with real estate activity, which continues to be hurt by declining values. In the residential sector, the Case-Shiller home price index is down 34% from its peak and has yet to flatten out. And even though housing permits are at a three-year high, we still need to pay down $3.7 trillion in mortgage debt just to get back to normal loan-to-value ratios.
The incentives exist for home ownership with extremely low interest rates and undervalued inventory but credit remains tight and consumers who have watched these home values fall are still a bit jittery. Even Warren Buffett acknowledges that housing recovery is the engine that can put this economy back on track and in his recent shareholder letter he said, “Housing will come back—you can be sure of that. … Fortunately, demographics and our market system will restore the needed balance—probably before long. When that day comes, we will again build one million or more residential units annually. I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America’s best days lie ahead.”
So, we have a choice. We can sign on with Warren’s seasoned (he’s 81 years old), patriotic exuberance for a brighter future or we can wring our hands about this country’s continued reckless spending and ever increasing deficit. We can focus on what will happen to the economy when we end the payroll tax holiday and extend unemployment benefits, or if we fail to extend the Bush tax rates, both of which are scheduled to expire at the end of the year. We can also focus on the rising price of fuel prices, which sucks away the consumer’s disposable income and increases the rate of inflation.
All of these issues need to be addressed, but if we recognize that this most recent recession was the worst we’ve seen in 80 years—and the recovery line continues to point up—we should be optimistic about the future. Although our dollar is weak, our factories are running and our population is growing. Not only are we seeing a rejuvenated desire amongst ourselves for American made products but our goods are also more competitively priced in the global market.
Granted, we can’t relax until the housing market recovers, but we can look at the positive statistics within our own industry. All of the publicly traded flooring companies have reported top-line and bottom-line growth for 2011 and we hear that for the first quarter of 2012 that trend is continuing. Rapidly increasing raw material prices are putting a burden on earnings but most companies have been able to pass along at least one price increase this year. As an added bonus, weather conditions are better than last year, which also has a positive impact on year over year financial comparisons.
However, we have an election year ahead of us, the European economy continues to be challenged, Israel is threatening to attack Iran and, to top it all off, the Mayan calendar says the world is going to end on December 21. If you want to be reassured that this recovery is real and sustainable, you can go with your gut instincts, listen to the pundits or review the statistics. Fortunately, most indicators are pointed toward a slow but sustainable recovery.
MORE CONSOLIDATION AHEAD?
If you haven’t had a chance to listen to the audio interview we recently ran on FloorDaily with Dan Frierson, chairman of the Dixie Group, about Dixie’s year-end and fourth-quarter results, it’s worth a listen. In that interview, Dan said more than once that he anticipates that we’ll see some “structural changes” in the industry in 2012. I understood that to mean ownership changes, and we already saw one major change in March when Mannington Mills acquired U.K. based Amtico. It’s anybody’s guess who’s next but I doubt Dan would make this comment if he didn’t believe the market was ripe for a few more transactions.
Also, Warren Buffett was recently quoted in a Bloomberg Businessweek article as saying he was “on the prowl” for large buyouts and he’s empowered Berkshire managers (specifically naming Vance Bell, Shaw Industries’ CEO) to find strategic acquisitions and pursue takeovers when their markets are slumping and some of the best opportunities may be available. Berkshire has plenty of liquidity, with $37.3 billion in cash. Since Shaw was acquired by Berkshire in 2006, it has acquired three hardwood plants (Anderson, Zickgraf and Stuart) and two artificial turf companies (Sportexe and Southwest Greens) and has begun construction on a new modular carpet facility in China.
The Amtico acquisition is a smart move on Mannington’s part for several reasons. First and foremost, it provides Mannington with modern U.S. based factories for LVT, one of the fastest growing categories in the flooring business. Granted, Mannington was already a player in LVT, though, while the majority of Mannington’s other product categories are made in the U.S., it was sourcing LVT from Asia. By buying Amtico, Mannington now has two LVT plants in Georgia and one plant in England. Also, up until now, over half of Mannington’s LVT business was in the residential sector and Amtico’s focus has leaned more toward the commercial market.
A second strategic reason for this acquisition is that it gives Mannington a launching pad for international business. Amtico not only has brand recognition throughout Europe, but it also has established channels of distribution in South America, Africa and Asia. Just last month in São Paulo, Brazil, Amtico had a strong exhibitor presence right off the main aisle of the Revistir tile show. Eventually, Mannington could use these established channels to sell more of Mannington’s broad product line—packaged under the Amtico brand.
And lastly, this acquisition was smart because the price was right. Our records show that ABN AMRO capital, which later become AAC Capital, acquired its 56% stake in Amtico in 2006 for £98.25 million, (approximately $182 million), which would have put the overall value of Amtico that year at $325 million. And according to Dow Jones News, Mannington bought the whole international company for £127 million (approximately $200 million). One insider told us that the purchase price is just a few million more than last year’s annual revenue.
A CHALLENGE TO DIFFERENTIATE RESIDENTIAL BROADLOOM
As you might imagine, we get our share of feedback from our readers, especially when they read something they don’t agree with. While almost all of the feedback from our interview with Bob Shaw of Engineered Floors was complimentary, he made one comment that ruffled the feathers of a few of the industry’s marketing professionals. Shaw said, “Let’s face it; most of what you see in the residential floorcovering market is a commodity.” Some in the carpet industry disagree with this notion, especially those who go to work everyday focused on differentiating their company’s products. But, it is discouraging to watch some of the larger firms in this industry as they copy each other instead of coming up with creative ideas of their own that differentiate them from the pack. As we slowly pull out of this recession, I challenge those who disagree with Bob Shaw to find a creative way to differentiate themselves—to, as he would say, set the trend line rather than follow it.
If you have any comments about this month’s column, you can email me at email@example.com.
Copyright 2012 Floor Focus