Laminate Update 2007 - August/September 2007

By Brian Hamilton

It probably comes as no surprise that the slump in the housing market has sent sales of laminate plummeting in the last year, with the biggest drop-off in the first half of this year. While industry executives remain bullish about the long term future of laminate sales, they realize that some tough months lie ahead, probably well into next year. The one bright spot is the commercial market, where sales are decent and expanding, but still make up just a fraction of laminate business for most companies.

Signs of the housing meltdown are everywhere. New home sales have fallen 40% below their June 2005 peak, according to the National Association of Homebuilders, and all major homebuilders posted substantial second quarter losses. However, the biggest problem is the resale market, where a single home sale can result in two or three flooring upgrades—one by the seller as the house is prepared for sale, and one or two by the purchaser, who might have different tastes.

This summer, sales of existing homes have hit their lowest level in more than four years, the National Association of Realtors (NAR) says, and the slump is proving to be worse than forecasters thought. Countrywide Financial, the nation’s largest mortgage lender, said it doesn’t see an upturn until 2009. Ultimately, how the downturn plays out will depend on what happens in the subprime mortgage market, as interest rates rise and more and more borrowers with spotty credit histories who took out zero-down, adjustable rate mortgages default on their loans.

What this means for most laminate manufacturers is that sales are holding their own at the value level, where wholesale prices are $1 a square foot or less, and at the high end, generally over $1.80 a foot, where margins are higher. But the middle of the market, which represents the bulk of most residential sales, is getting hammered.

As one executive said, “We as an industry need to re-invent ourselves in the middle price point. That’s where the category thrives.”

As often happens when times get tough in any industry, there’s change at the manufacturing level. In the laminate sector, Alloc and Tarkett are reorganizing. Mohawk Industries is purchasing Columbia, its largest supplier of wood, and Columbia’s laminate flooring business is part of the deal. In March, Pergo was purchased by the German firm Pfleiderer, a year and a half after Pfleiderer bought the Canadian company Uniboard. And Armstrong has been on the auction block for five months now.

Many observers expect the consolidation trend to continue, and there are compelling financial and logistical reasons for companies to become as vertically integrated as possible. The strength of the euro against the dollar has made it attractive for European players to not only set up shop in the U.S., but also to integrate backwards into coreboard production. Several manufacturers are expanding plants or building new ones. Kronospan’s first U.S. manufacturing plant, an 800,000 square foot facility in Alabama, is scheduled to be operating by the end of the year.

There are more than 100 laminate manufacturers worldwide and about 30 of them do business in North America, according to the U.S. FLOOReport. But there are only two integrated suppliers—Quick-Step and Uniboard/Pergo, soon to be joined by Tarkett. Those players have much lower costs than their non-integrated rivals.

Imports from China, which doubled in 2006 and now represent 12% of all imports, are also depressing prices at the lower end, but most executives we talked to don’t seem overly worried. They say Chinese products have too many quality problems and customer service is lacking. And because manufacturing is becoming increasingly automated, it’s becoming more cost effective to manufacture in the U.S. and avoid the shipping costs and delays.

For all its short term difficulties, the long term outlook for laminate is still bright. The industry has had double digit growth during the last five years and some analysts believe it can continue at that pace. New in-register embossed technologies are making laminates so realistic looking that they’re almost indistinguishable from wood and tile, and handscraped designs are growing in popularity. Boomers with a preference for low maintenance products are increasingly likely to gravitate to laminate.

THE PLAYERS
Pergo

Pergo, the inventor of laminate flooring and the largest producer in the U.S., was purchased by Pfleiderer this spring. New CEO George R. Kelly took over shortly thereafter. Pfleiderer’s purchase of Pergo, along with its 2005 acquisition of the former Kunz Group, maker of Uniboard, gave it an entree into the laminate flooring market as one of the few vertically integrated suppliers, as well as a market leading 15% share in North America. One ongoing project is to network all its North American plants to become more streamlined and cost efficient, especially as it grapples with higher costs for high density fiberboard and transportation.

Pergo is anticipating high single digit growth this year as it uses aggressive promotions to drive sales. Sales are likely to be dominated by lower price points, although the company is encouraged by sales of its higher end, narrow width products, such as those in the Pergo Select line, an area it plans to expand with new designs and textures.

Mohawk Industries

Mohawk, the most successful of the vertically integrated manufacturers, acquired Belgium’s Unilin and its Quick-Step brand two years ago and is now buying the $180 million Columbia hardwood and laminate flooring business. Once the acquisition is completed sometime this quarter, the nation’s largest flooring manufacturer will continue to market Columbia branded flooring, produced by the Unilin division. However, the Quick-Step brand will still dominate its product line. That division is planning to double the capacity of its North Carolina plant next year, which will enable it to manufacture 90% of its products in the U.S. In addition, it will retrofit a Columbia plant to produce beveled edges and other complex products that it now manufactures in Belgium, with the big ramp-up in production coming next year.

Although planning for 2008 isn’t completed, there should be two significant product introductions for the Quick-Step brand and one for the Columbia brand at Surfaces 08.

Unilin won a key patent dispute this year regarding its method for clicking laminate panels together that will keep unlicensed foreign products out of the market. However, Unilin has issued licenses to nine Chinese companies since the beginning of the year.

Shaw Industries

Shaw Industries is one of the nation’s largest volume producers of laminate flooring. The company saw 7% growth in the last six months of 2006, but that rate was cut in half in the first half of 2007. Shaw is updating one of the milling lines at its Ringgold, Georgia plant to produce wider planks and tile looks with narrow grout joints—products with precise milling tolerances. The firm plans to introduce five or six new products next year, including new tile looks and more beveled edges and in-register embossed products in a traditional wide plank that will compete at the high end of the residential market.

Although Shaw makes products for the commercial market, that market is not a significant part of its business.

Faus

The Spanish company Faus began making laminate floors for Shaw Industries ten years ago. It eventually expanded that business to other U.S. manufacturers, and quickly gained a reputation for making very innovative, high quality products.

Two years ago, Faus decided to create and market its own Fausfloor brand. It quickly built a North American network of distributors while it was building a new plant in Calhoun, Georgia and another in Shanghai. The firm’s U.S. plant opened late last year and the company introduced ten new styles at Surfaces 07, along with two unique surface technologies: UltraClarity and DualFinish. UltraClarity gives the floor’s surface a striking, polished finish, while DualFinish can change the gloss levels on individual boards to give them greater depth and realism.

The firm continues to invest in its U.S. plant and will soon double the capacity to 80 million feet a year. This will enable it to make more product in the U.S. for the global market—taking advantage of the dollar’s weakness against the Euro. Faus wants to expand its business in the builder and commercial markets. It recently signed a contract with Abbey.

Mannington

Last year Mannington introduced high end residential products with in-register embossed technology, narrow widths and beveled edges with a dealer price of $2.50 to $3.50. This year it expanded the high end line with hand scraped wood looks in Heritage Cherry and Harvard Cherry—along with Adirondack, a tile line—and sales have been good. It has also invested in attached backing, so do-it-yourselfers can avoid installing underlayment.

Mannington anticipates that business will be off about 5% this year. However, the commercial side of the business, which contributes about 10% of revenues, is doing reasonably well. Its unique iCore line, which is made with a plastic core, sells at a dealer price of $9 to $10. Commercial business could probably double as a percentage of total sales as iCore takes share from ceramic tile and hardwood.

Alloc

Two years ago roughly 10% of Alloc’s business was commercial. Now it’s up to 25% as its commercial lines are being worn well by retail chains, such as Jos. A. Bank and Burlington Coat Factory, as well as in healthcare and office applications. The company is planning a second launch of at least ten new designs later this year, all in the high end. It’s also working on some improvements to its aluminum locking system to make installation faster and more efficient. There are no major investments in the works but Alloc is not as vertically integrated as it would like to be.

Alloc also has a new president. Claes Wennerth, who headed Alloc Inc. for many years, was recently replaced by Bengt Rasin, CEO of the Alloc Group.

Wilsonart

Wilsonart is the dominant brand in the commercial market and that segment of the laminate industry continues to expand. Today it makes up more than 10% of the company’s business, after refocusing its efforts on the commercial market back in 2005. Next year, Wilsonart plans to add 30 SKUs to its commercial line, including 23 planks and seven tiles.

Wilsonart’s investment in a new production line a year ago to manufacture new products for the high end of the residential replacement market is starting to pay off. The firm is just completing the rollout of 25 new SKUs, half of them in the premium Red Label Hand Scraped Collection.

Tarkett

The last 12 months have been a time of significant change for Tarkett. First, Kohlberg, Kravis Roberts acquired 50% of the Paris company. Then it entered the bidding to acquire Armstrong before dropping out in June. Just two months ago, Tarkett chairman Marc Assa tapped Johnsonite president Jeff Buttitta to run the firm’s entire $761 million North American flooring business. Commercial rubber flooring specialist Johnsonite was acquired by Tarkett at the end of 2005.

The company’s joint venture with Chilean firm Aconcagua Timber is nearly ready to begin production in its new $40 million Pennsylvania plant. Tarkett wants to move to thicker products and the new plant, which is next to Aconcagua’s coreboard plant, will be able to produce them.

The company has seen modest growth in the last 12 months, mostly from its association with Menards, but sales in its distribution channels have been slack. Retail price points are $1.50 for unbranded products, and $2.50 to $3.50 for its display products.

Next year the company will introduce a new 12 mm collection called Unique that will be manufactured in Pennsylvania specifically for the North American market. In the past, the company has offered a global collection, a compromise between European and North American tastes, which often differ dramatically. The new collection will feature thicker products with random lengths, a better click system and commercial warranties. Also included will be a new tile line.

Tarkett expects eventually to take advantage of the experience of its new North American president, Jeff Buttitta, and go after the commercial market.

Kronotex/Formica

Kronotex, the maker of Formica brand flooring, said its square foot sales are up but the average price point sold continues to decline as more imports enter the market and competitors drop their prices. Sales have been strong at the $1.49 and $4.99 suggested retail price points. Kronotex wants to get off the wave of competing on price and focus more on differentiating itself with innovative products.

The company also wants to become more vertically integrated and investments will be made over the next couple of years at its South Carolina plant toward that end. However, there are no plans to push into the commercial market.

Sales of Formica’s new mid priced Cordelia line—the wholesale price is $1.69—have been strong. In general, though, Kronotex plans to focus on the higher end of the market, where it feels there’s more profitable growth.

Armstrong

Armstrong launched its Bruce Park Avenue premium line early in 2007 and found that demand has exceeded capacity, but the company added another production line and should be able to fill all orders starting this month. Park Avenue is a premium 12mm product that mimics rare wood species. Suggested retail is $3.50 to $4.50. Armstrong Grand Illusions, an older high end product, also continues to sell well. It’s largest sellers, however, are the Armstrong tile line, Nature’s Gallery, and the Bruce tile line, Garden Stone.

However, because Armstrong’s largest product category is wood, most new products are likely to mimic its most popular solid wood designs. It has new patented technology to create realistic surfaces.

Armstrong’s future as a standalone company is uncertain. It’s been on the auction block for five months now, with no offers at press time.

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