Industry growth hindered in third quarter - Statistical Data Included

Home Channel News, Nov 20, 2000 by John Caulfield

Despite lower sales and net income, industry executives remain undaunted

NATIONAL REPORT -- During its recently completed financial reporting period, Georgia-Pacific's building products division recorded its steepest-ever decline in operating profits, which fell to $40 million from $333 million for the comparable three months in 1999. That division's distribution segment saw its operating income plummet 75 percent to $1 million.

Unfortunately, G-P did not suffer alone. The third quarter was a nightmare for many of the industry's leading publicly owned companies. The deflation in the price of lumber and other building products took its toll on suppliers and retailers alike, even on the industry's two retail giants, Home Depot and Lowe's, whose managements gave investors a heads up about less-than-anticipated sales and earnings increases for the remainder of the year.

These quarterly setbacks have yet to shake the optimism exuded by many industry executives about the resilience of the U.S. economy and their own companies' sales and profit growth. Most officials rationalized their companies' recent financial performance by stating that it is being compared to last year's sizzling business.

"Commodity lumber prices continued to challenge the company during the quarter and made it difficult to match last year's exceptional third-quarter results," said Steve Wilson, chairman of Wickes Lumber. "And while lumber prices reached historically low levels during the quarter, we continued to see robust housing activity, a low supply of unsold homes and mortgage rates that in our opinion should encourage continued demand."

The dynamics affecting the viewpoint of executives about the industry's prospects have been decidedly schizophrenic of late. In the third quarter, composite prices for framing lumber fell nearly 31 percent, to an average of $298 per 1,000 board feet, according to Random Lengths. On the other hand, demand for lumber and other commodities continues to be strong, as home building holds its own (see story, page 1). Pulte, one of the country's largest home builders, reported that new home orders in October rose 15 percent, to 1,620 units, over the same month a year ago.

There are compelling arguments on both sides of the fence about whether the economy's slowdown is short term and whether its eight-year-long buoyancy is finally losing a step. For example, securities analysts polled recently by IBES International said that they expect the building materials and forest products sectors to be among the businesses within Standard & Poor's 500 companies that are least likely to sustain their sales and profit gains of previous years.

Statistically at least, the last two quarters reported by several large dealers and suppliers would indicate that business conditions have been anything but robust, especially when profitability is at issue.

For example, USG's North American gypsum business quarterly sales fell 11 percent to $509 million, and its operating profit dropped 53 percent to $78 million. The company said the lower profitability reflected lower prices for its Sheetrock brand gypsum wallboard, as well as higher production and costs related to asbestos litigation.

Canfor, the largest Canadian-based forest products supplier, told its customers on Oct. 13 that it would reduce its production in the fourth quarter by the equivalent of 30,000 metric tons, more than three-fifths of which would be specifically to curtail the buildup of inventory the company had experienced this fall.

No. 1 and 2 are humbled

The most alarming news during the last quarter was sounded when Home Depot and Lowe's said that their financial performances would be off the mark in the third quarter.

Neither company released its third-quarter data in time for this article. But last month, Depot warned investors that its earnings per share would be below analysts' estimates and had been affected by everything from lumber prices and Y2K to hurricanes. The retailer also warned that its comp-store sales and earnings growth would be slower than expected in the third and fourth quarters. Lowe's continued to struggle with its conversions of its Eagle Hardware & Garden stores, which have eroded its same-store sales growth.

As Lowe's and Home Depot go, so goes the home improvement industry, or at least some segments of it. The door maker Larson Manufacturing said it would eliminate 24 sales positions and reduce the production work force at its Brookings, S.D., plant in reaction to a forecast for next year that the company would lose about 50 percent of its sales to Home Depot, one of its three largest retail customers.

But the top executives for each retail chain managed to look beyond these downturns to remain confident that their companies would resume historical growth rates in 2001.

One company that certainly hopes that's true is Emerson Electric, which reported record sales and earnings in the third quarter, partly on the strength of its agreement to supply Home Depot with its Ridgid line of benchtop power tools. Emerson s sales to home centers increased 35 percent in the third quarter and now account for one-quarter of its total tool sales.