Running Lean

Precasters offer their strategies for survival during uncertain economic times

By Bob Whitmore

Run lean. Know your costs. Find new opportunities. Get close to your customers. And by all means, follow up aggressively on your bids.

Those are some of the key strategies precasters around the country are following as the new construction season unfolds in a year of uncertainty.

After 2007 brought the first decline in overall construction spending in the United States in 15 years, forecasts for 2008 pointed to a flat year with NPCA predicting a decline of 0.5 percent in new construction spending in 2008. Other forecasts for construction spending in the United States range from a decline of 2 percent to an increase of 3.8 percent. The construction market dipped about 8 percent in 2007, dragged down by the subprime lending crisis that gutted the residential market.

The good news for most precasters is that the commercial and public works sectors kept humming along in 2007, and that’s where many precast companies do the majority of their work. Signs of a slowdown are ahead in 2008, though, as credit tightens for commercial work and state budget deficits threaten to shelve public works projects. In the transportation sector, funding remains a mishmash of uncertainty.

Precasters around the country have a variety of strategies for coping with a trough in the U.S. construction economy.

Kurt Burkhart, president of Arrow Concrete Products in Granby, Conn., saw residential construction declining in other regions and knew it was headed his way. So Burkhart and his team looked for ways to supplement a projected downturn in their residential business and added additional products in their stormwater line.

“With new regulations that are coming out continually, we feel there will still be money spent in stormwater,” Burkhart said. “By pushing that effort we will compensate for housing. When housing rebounds we’ll be in position to handle it, and we do see that happening in mid-2009.”

While material costs are expected to moderate in 2008, Burkhart hasn’t seen that in his region. “We’re still in a cycle of escalating raw materials. I think steel will stay up, but cement will eventually go down,” Burkhart said. “You just have to adjust on the fly, but it is a lot tougher to do business in this climate when price increases are coming at you. If you push more toward government or municipal work and your contracts are out there longer, you’re kind of taking a risk, unless you can get an escalation clause in your contract.” Clauses to protect the precaster in the event of rising material prices are rare and difficult to obtain in a competitive bidding market, Burkhart said.

Burkhart added that follow-up on quotes is more important than ever when the forecast is uncertain. “I think you have to go through the jobs you’ve been quoting – really search them out and then follow them up. Before, when there was plenty of work, you may not have followed up on everything as much as you’re going to have to in the future.”

Double whammy
Steve Rodgers, general manager of Contractors Precast Corp., Davidsonville, Md., has never seen the double whammy of rising material prices during a downturn in the construction economy.

“I’ve been in this business 40 years and I’ve been through these things before, but this is the first time during these downturns that we’ve still got all kinds of price increases. Steel is going crazy,” he said. “Cement is the one exception. But I’ve had price increases on cement every year, and it’s 5 to 10 percent a ton every time they do it.

Precasters who bank on public works jobs are often bidding work that won’t take place for one to two years, which makes quoting difficult, Rodgers said. Several years ago, Contractors Precast bid a multi-year project for the Woodrow Wilson Memorial Bridge in the Washington, D.C., area. “We bid that project before rebar and wire mesh started going up, and that’s a four-year contract. When the cost of steel started rising, we could not get any increases. I’m almost through with that job, thank goodness.”

Residential work is easier to bid, Rodgers said, because the timeframe is shorter. “In a subdivision, you’re in and out pretty quickly. In 60 days you’ve got the stuff made and delivered and you’re through with it. But these state projects are long-term. It’s hard to predict. You never know the way things are going.”

While the picture is mixed in the D.C. area, the overall trend is down, so Rodgers has taken measures to find efficiencies in his operation, including cutting back production to four days per week. “If you’re in a slowdown and you can do it in four days, you can save a lot by not pouring that fifth day. You save on electricity and everything else. It’s one of the things you’ve­­­ got to look at.”

Keeping close to customers
Located about 350 miles south of Rodgers’ plant, Permatile Concrete Products serves Southwest Virginia and the eastern region of Tennessee, an area that has not experienced the economic boom that other regions have. That, coupled with transportation funding shortfalls, has meant fewer new roads, less commercial construction and less of an increase in tax receipts that could potentially fund public works construction.

That hasn’t necessarily meant lean times for Permatile, due to its longtime strategy of diversification, good product quality and providing good customer service, according to Mimi Rainero-Coles, one of Permatile’s sales managers.

“We started manufacturing concrete pipe in the mid 1960s and expanded our product line to include drainage structures, bridges, box culverts and retaining walls,” she said. “Our product line also includes pump stations, housing foundations and commercial wall panels. Diversification has helped to keep us busy. We’ve been pretty steady.”

Permatile has always kept a close watch on business operations and expenses and has survived more than one economic slowdown in its 40-plus years in business. “We’re always looking for better efficiencies, but as a family-owned independent company, we operate pretty lean as it is,” Rainero Coles said. “We don’t have a great big staff. We’ve invested in good equipment, buildings with room for growth, and good employees. We keep our forms in good condition. We try to keep our employees happy. Everyone just hustles and gets the job done.”

And while diversification has been a big part of Permatile’s success, it is just one part of the formula. “We pay a lot of attention to quality, customer service and on-time delivery,” Rainero-Coles said. “Being an NPCA-certified plant has helped us maintain excellent quality and operate most efficiently, and we believe very strongly in it.”

Quality and personal service are two of the value-added components that are part of the Permatile culture, she said. “We try to keep our customer happy, because happy customers tend to come back! When we first started manufacturing bridges, we were saying, ‘we’ve got to sell more bridges.’ But you don’t just knock on somebody’s door and say, ‘Hey, do you want a bridge?’ It’s not like selling Krispy Kreme donuts – there has to be a need for the products we manufacture,” she said.

“We work with departments of transportation and with engineers and contractors to help with design and installation,” added Rainero-Coles. “We offer on-site technical assistance during installation, if they want help. We continue to listen to our customers and listen to the industry and see how we can fit our products and service into the industry needs.”

Vernon Wehrung, CEO of Modern Precast Concrete in Ottsville, Pa., echoes those basic principles of good business. “It’s back to the basics,” Wehrung said in describing his advice to precasters who are fighting through leaner times. “Treat the customer with the attention and respect he or she deserves. Communicate constantly to every stakeholder in your business. Watch expenses, but don’t be ‘penny wise and dollar foolish.’”

Like Permatile, the focus at Modern Precast is on the customer. “Call your customers back,” Wehrung said. “We are still told by customers that we were the only ones who contacted them after a request came in. Then, of course, follow-up, follow-up and then follow-up.”

While good customer service may be seen as the qualitative side of the business, Wehrung mentioned the quantitative side as well. “Know your costs and bid accordingly,” he said.

“Our equipment is expensive and wears out regardless of the price we’re charging. This is a very difficult decision when there is more supply than demand. But we need to ‘sell’ our quality and service against those competitors who don’t have that same level. Maybe we can’t get as high a premium during these times,” he added, “but most customers will pay you something more if you truly have a higher-quality product and service.”

After the boom in Florida
In Florida, housing prices and new construction rose in meteoric fashion in the late 1990s and early 2000s. After the subprime crisis of the past 18 months, the decline has been just as dramatic. But it hasn’t impacted business for J.E. Hill Precast in Leesburg, Fla. Wylie E. Hill, president, said J.E. Hill had only a small percentage of business devoted to residential work and hasn’t experienced a slowdown in the Orlando and mid-Florida region – yet.

“I think we will see a trickle down eventually, because our primary market is highway and transportation work.” As a result of the slowing economy in Florida, tax receipts are down and, under Florida’s funding formula, highway work could eventually dip. “We’re expecting less work in the next three years than we have had,” Hill said.

For now, though, the company is still benefiting from the trailing edge of the housing boom, thanks to its line of precast modular buildings. “Our primary market for those buildings is parks and recreation departments,” Hill said. “There was tremendous growth and urbanization, and now the parks and recreation departments are playing catch-up. They’re building new green space and having to expand and upgrade facilities. We have a line of modular restrooms – and we can deliver them very competitively – usually less expensive than a site-built building,” he said. “We take advantage of the speed of precast concrete.

They get a site leveled off and we’re in and out in two to three hours, and they have an operational restroom. It takes longer for the PVC glue to dry on the plumbing connections than it does for us to set the building.”

That catch-up is still going on in the transportation area, even with the uncertain funding. Hill said he has written “significant” amounts of bids for median barrier this year, indicating that opportunities are still there in transportation. On the commercial side, work is lagging, he added. “I think it’s still at a reasonable rate – it’s just down from where it has been the last two years. There’s still a good bit out there, just not the glut of work like there was a few years ago.”

Old-fashioned recession?
If there is any area of the country where the word “recession” is tossed about regularly, it’s the Upper Midwest. It’s an “old-fashioned” recession related more to job layoffs in the auto industry combined with job losses from secondary industries that supply products to the autos shipping manufacturing overseas.

Jeff Rasmussen, vice president with Andry Rasmussen and Sons in Cable, Wis., in the northwest region of the state, said he’s anticipating a continued sluggishness in his market area. “I anticipate that the 2008 season will continue to be slow,” he said. “We are getting fewer calls than in previous years.”

The cost of materials and continued downward pressure on pricing has been an issue. “Rising costs may make the difference,” he said. “We expect the market to be much tighter with contractors undercutting each other.”

Rasmussen isn’t getting into that game. “We do not do that. Never have and never will,” he said. “Let’s hope for a better 2008 than we all expect.”

Catching up in Phoenix
In Phoenix, Bonnie Wasson, general manager with U.S. Concrete Precast Group, does business in a once-hot market that after several years of tremendous growth started cooling off toward the end of 2006. While U.S. Concrete Precast Group-Phoenix has a wide-ranging operation, it has felt the effects of a drop off in the areas residential work.

The Phoenix area experienced a 200-plus percent increase in housing starts in the last few years, Wasson said, from 30,000 to 65,000. “We have a lot of investors here with two, three or four homes, and now there are a lot of foreclosures taking place. The next six months will be a good indication of what we can expect for the next 5 years.”

Housing starts have dropped back to the 30,000 range, which is actually a more realistic level, Wasson added. “It’s not gloom and doom. We need healthy growth, not out-of-the-box growth. Still when you build your business up to support those 65,000 housing starts and now that it’s down to 30,000, you definitely need to make some changes.”

As in Florida, the Phoenix area is playing catch-up from rapid residential growth, leaving U.S. Concrete Precast Group with plenty of opportunities as infrastructure continues to build up around new residential areas. “Commercial and highway work is better. We have a lot of catching up to do, which is probably going to mean a pretty strong 2008, although not as strong as 2007.”

Wasson has two words of advice for precasters concerned about the economy: “Get lean,” she said. “When I talk about getting lean, it’s not just your staff and your processes. It’s also with your material suppliers and other vendors. It’s across the board. Look around and get focused with your quality and safety. Those are items that can cost you a lot of money. Look at your various departments and your company overall and get lean.”

California backlog
Our cross-country economic journey ends in California, where Brent Dezember’s StructureCast company does business in Bakersfield, near the southern end of the San Joaquin valley, about 120 miles north of Los Angeles.

The housing bust in California hasn’t adversely affected StructureCast because it sells very little to the residential market, but Dezember has noticed an overall slowdown. “Our backlog for this year is the same or a little better than last year, but we are noticing fewer opportunities are hitting our desk at this time,” he said. “So I think that means that there is probably going to be a slowdown, but most of our business is commercial construction and it really hasn’t slowed yet. That’s the good news. The bad news is that most of those projects are on the books for a year or two before they get to us, so if they’re not getting on the books now, that means next year or the year after is going to be slow.”

As a result, Dezember said he is grabbing as much work as he can. “I don’t know if this is the right approach, but that’s what we’re doing now,” he said. “We’re trying to build up as much backlog as we can and do whatever we can to get backlog. We’re looking at jobs a little farther away than we generally haul the product, and maybe jobs a little bigger than we normally would do. We’re going to shoot for two to two and a half years of backlog and see how we weather the storm.”

Like most precasters in our sample, ­­Dezember remains fairly optimistic about 2008 but a little guarded about what lies beyond. “I think in 2008 we’re going to have a good year,” he said. “I’ll call you back in 90 days if I’m wrong, and maybe ­­­you’ll have some floors I can sweep ­­­down at the office.” ­­­