Jordan, Knauff and Company Gives Fall 2006 Window and Door Update

Michael E. Collins of Jordan, Knauff and Company Investment Bankers of Chicago presented his Fall 2006 Window and Door Update in a free webinar for members of the door and window manufacturing industry yesterday. The presentation included an industry overview, capital markets review, transactions expansions, industry trends and issues and lots of information about the coming wave of Chinese competition.

Collins presented an overview of the industry relative to the housing industry.

"We've seen softening but the market appears to be stabilizing. If you look at a number of economists, many agree that there is six to 12 months remaining in the correction cycle."

The population of the United States will go from 300 million to 400 million in 35 years, due to immigration, he said.

"This is tremendous pressure on the housing industry. Are we set up to take advantage of that increase?" asks Collins.

Looking at major transactions and expansions in 2006, there have been 18 major transactions the investment firm has looked at.

Between 2004 and 2006, there's been a cooling down of transactions in the marketplace.

"Clearly the direction of a cooling off is a reflection on the housing market."

Vinyl products are the number one product category to be acquired, followed by all other window products and aluminum doors and windows.

The largest acquisition was Georgia Gulf Corp.'s acquisition of Royal Group Technologies, followed by Fortune Brands which bought Simonton Windows. Another significant acquisition was Andersen buying Silver Line, which was unusual because it was a wood window company buying a vinyl window company.

The main reasons listed for the transactions were to expand the product lines of the buyer, geographic expansion and access to new market segments.

Looking at plant expansions, there were 20 that were analyzed for the update.
"We've seen a steady uptick in plant expansions."

Major plant closures in 2006 so far have included Group Bocenor, Hurd Windows and Kohler Windows and Entrance Systems.

Collins also looked at PGT Inc. because he said there were insights to be gained following the initial public offering.
"PGT has had great growth," said Collins.

They have executed well on higher-margin impact products, raised prices - aluminum hedge ended and improved manufacturing efficiencies, he said.

Reviewing capital markets, Collins said, "There is excellent availability of capital at present."

He listed the following as industry trends and issues: strong demand for living on the coast; labor shortages and need for efficiency are driving demand for production equipment; manufacturers are getting into installation to control quality and diversity revenues; transaction expectation is still high; and those door and window distributors focused on remodeling have been doing well.

Collins then switched gears to talk about the coming wave of competition from Chinese companies. He said he gained interest in this topic when he attended GlassBuild America in September.

"I was immediately struck by the sheer number of Chinese suppliers. There was a great deal of denial from door and window manufacturers of how big of an issue this could become. It might not be a huge problem right now, but it's going to be," Collins added.

He went over some statistics on the current situation of Chinese exports, saying that it is believed that China will surpass the United States this year as the number-one exporter of manufactured goods, and Chinese companies are projected to export $1 billion in doors and windows in 2006.

He said that their prices can be 30 to 50 percent less than equivalent U.S. products.

The firm looked at Chinese window company products and analyzed the products of 14 companies that export to North America. The companies produced 37 aluminum windows and frames, 22 vinyl windows and frames and three wood windows and frames. The majority of products were intended for commercial applications.

"They're producing the same types of products we'd produce here."

The Chinese door companies are more mature than the window companies, but "they have plenty of room to grow."

The Chinese door companies export 21 percent to Africa/Middle East, 21 percent to Europe, 10 percent to the European Union, 9 percent to the United States and 12 percent to other countries. The remaining 27 percent of doors stay in Asia.

"We [United States] are a relatively small market for them right now, but they'll get to us eventually. That's the point."

What kinds of doors are being exported out of China? The majority (52 percent) is security doors, 26 percent are solid-wood doors and 22 percent are engineered wood doors.

Collins pointed out product categories that have a chance of being dominated by the Chinese market. These products that have long, uniform product runs, high labor and material content and a high ratio of value to weight and volume are products that have a high threat level. He identified the product segments most at risk. They are door and window hardware, architectural flat glass, extrusions (aluminum and vinyl), curtainwall and window and door production machinery. The product segments that are at a moderate threat are high-volume commercial windows and high-volume residential windows. Those product categories that he said were at a low risk for being impacted right now were low-volume commercial and residential remodeling, impact-resistant, blast-resistant/bullet-proof, acoustical, fire-resistant, moving/automatic doors and niche products like skylights and basement windows.

Collins said that the Chinese lack a solid understanding of the U.S. marketplace, U.S. testing requirements, value-added services such as installation and how to effectively communicate with Western businesses.

He said to compete effectively, door and window manufacturers must focus on the strength of their brand, ensure that they have a motivated workforce, consider bringing in an outside consultant to help redesign the organization and spend as much time as possible interacting with their distributors and end customers. He also advises companies to train employees to cater to customers with frequent changes and short lead times. He also said to research radical product innovations and make existing products better and more affordable. On the manufacturing side, embrace lean manufacturing, eliminate inter-departmental conflicts, focus on short runs and fast delivery and decrease set-up and change-over times. He also suggests considering consignment pricing, focusing on installation and field service and educating distributors regarding how to sell the manufacturer's products.

He said that three years from now, the non-innovators will be at a significant disadvantage.

"Are they going to eat your lunch now? No. But it's coming [three years from now]."

Jordan, Knauff and Company Investment Bankers will also be releasing its Industry Benchmarking Survey and results will be distributed to contributing companies near the beginning of December.

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