Trend Tracker November/December 2021November 9th, 2021 by Nathan Hobbs
Remembering the Risks: It Pays to Keep a Close Eye On Business and Market Conditions
By Michael Collins
In the last two years, the COVID-19 pandemic, along with its many offshoots, has been the primary challenge in the door and window industry. With the pandemic nearing the start of its third year, it is easy to lose sight of other risk factors on which door and window manufacturers should also focus.
Weighing the Near-Term
There are boilerplate risks faced by all door and window manufacturers. Inclement weather, cybersecurity, interest rate changes, natural disasters, increased competition and fluctuations in economic demand are all commonly disclosed factors. Still, companies must focus primarily on more immediate risks for which concrete plans can—and should—be made today.
Underlying commodity price increases have created risk in the form of demand dislocations in the market. When lumber prices rose sharply over the last year, many home buyers delayed purchase decisions in light of higher costs. The positive aspect of this is that it has resulted in unmet demand that should come back into the market over the next two years.
When everyone in the building industry seems to be performing well, it is especially important to monitor any perceived changes in the credit risk of customers. Is anyone paying slower than usual or showing signs of distress? Ask your customers how their businesses are going, how their customers are performing and their outlook for the industry. These conversations often reveal trouble with customers lurking below the surface.
No one is immune to the risk of not hiring sufficient numbers of workers in the current market. In this battle, it is important to remain vigilant to local wage ordinances, such as increasing local minimum wage requirements. An increase in local wages can worsen your place in the local hiring food chain. Many building products businesses report stiff competition from local coffee shops and fast food restaurants for entry level employees.
In a challenging market, liquidity risks can rise to the top of the list very quickly. It is important to remember that the largest liquidity challenge may be the one hiding around the corner in the form of future maturity dates for business loans. Companies must review all of their loan maturity dates and contemplate what the economy may be like when that loan comes up for renewal. It may even be worth refinancing today at a slightly higher interest rate if a loan is set to mature two or three years from now. If the economy has slowed by that point, a borrower may be glad that their loan matures at a still later time when things have had a chance to recover again.
Finally, this is a good time to revisit your customer concentration figures. How much of your revenue is derived from your top five or ten customers? In times like these, customers that figure out their own hiring and supply chain challenges better than other customers may start to swell on the customer ranking list. This doesn’t mean intentionally reducing sales to such customers, but it does mean that additional vigilance of these customers’ financial condition is in order.
A timely assessment of these and other risks may help door and window manufacturers continue to perform well, despite the unpredictable challenges we all face.
Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.
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