This article is Part 2 of a two-part series concerning the effects of the current economic conditions on precast concrete manufacturing. In Part 2, NPCA engineering consultant Sue McCraven interviews John Greer, Chris Pink and Dominic Girotti for the Canadian viewpoint on the recent economic and banking upheavals and their impact on precast industry business decisions and outlooks.
Part 1 of this series appeared in the January-February 2009 issue of Precast Inc., in which American representatives from large and small precast manufacturers offered their perspectives on the current economic conditions.
Q. Recent news has indicated that Canadian home sales are at their lowest levels since 2002. Has your company been affected by a construction slowdown?
A. Pink: We have really only one product line that is affected by single-family home construction, and only indirectly.
A. Greer: So far in Nova Scotia we have not felt much of a slowdown in new home construction. We do have concerns for 2009. Developers may delay projects due to market conditions, or they may not have access to capital for certain projects. Our company is a major land developer in our region, and we are certainly concerned with our inventory of serviced land heading into 2009. New home sales are an important statistic, and we will continue to monitor new housing starts in our region.
A. Girotti: We do not sell to the home construction market, so our business has been unaffected by this slowdown.
Q. It is expected that Ontario may face recession conditions in 2009 due to reduced trade with the United States and bleak global economic conditions. Are you planning for decreased business in 2009 and, if so, what steps are you taking to ensure that your company stays healthy?
A. Pink: Ontario and Quebec are traditionally the engines for (Canadian) manufacturing. The western provinces (Manitoba, Saskatchewan, Alberta and British Columbia) are much more influenced by commodities and natural resources demands and prices.
Ontario, in particular, has become heavily involved in the automotive sector, now producing more vehicles than Michigan. Ninety percent of Ontario’s automotive production goes stateside, so yes, we are going into a very difficult period for the Ontario economy. This will affect the demand in the construction industry negatively, and as most precast products are supplied to the construction industry, this will most likely lead to decreased markets for precasters in 2009.
A. Girotti: We are planning a modest increase in sales volume for 2009. I do, however, recognize that we are experiencing dramatically changing times and our projects could be thrown off by some unanticipated events. We watch our booked orders very closely and are ready to make adjustments on the fly. Major purchases have been put on hold for the first quarter of 2009 until we have a better view of what is happening in the economy.
A. Greer: Our market area, Atlantic Canada, tends to be relatively stable. We do not get big booms in construction, but we also tend to not experience huge dips either. However, we believe we will not escape fallout from what is happening all over the world, so we are operating our business cautiously. The big issue is bank credit. Banks are simply not able to lend as much money, and what money is available is being allocated to very low-risk customers working on relatively safe projects. Our plan is to manage the basics of business: inventory, receivables and cost reduction, and to stay very close to our customers. People are critical to our business, so we also will work hard to take care of our employees.
More now than ever, cash is king – and inventory and receivables are not cash. We will very carefully plan our cash usage as we head into an uncertain 2009.
Q. How has stress in the global credit market affected your short-term investments and capital investment plans? Your long-term plans?
A. Greer: Shaw Pipe recently completed an extensive five-year capital program involving construction of two new pipe plants to replace aging plants, so the majority of capital spending is behind us. We do have several key pieces of equipment that are coming due for replacement, and our plan is to replace them as scheduled. However, we will delay placing orders as long as possible in order to get a clearer picture of how the worldwide crisis will affect our market area. We are prepared with backup plans should we decide to delay the investment. We are not as concerned with having access to capital as we are in finding sales to pay for the investment.
There has been a huge drop in the Canadian dollar valued against the U.S. dollar in the past year. In November 2007, the Canadian dollar was worth $1.11 in the U.S.; in November 2008, it fell to the low $0.80. This makes U.S. equipment significantly more expensive than it was 12 months ago when we budgeted for 2008 capital expenditures. We will continue to watch pricing; possibly lower demand in the U.S. marketplace will result in price reductions as manufacturers try to move product.
A. Pink: Some or all equipment and capital purchases may be put on hold for 2009.
A. Girotti: We are not under any credit pressure at the moment. We continue to monitor our operating line and are very aggressive in collecting receivables. We have some major projects currently ongoing and are not looking for additional debt for the foreseeable future.
Q. Which markets do you look to as barometers of economic health, and why?
A. Girotti: I monitor the U.S.-Canadian exchange rate and interest rates closely. Commercial and residential contracts awarded are a good indication of private sector activity while municipal and DOT contracts awarded are good indications of public spending.
A. Greer: We look at new housing starts and particularly federal funding for infrastructure projects. Interest rates are also key, as rate increases can discourage certain construction projects.
A. Pink: For us, specifically, it is large construction projects.
Q. When do you think the Canadian economy will recover with respect to your market, and how will you know things are getting better for your company?
A. Pink: We have five or six projects that have been put on hold. When they are released for construction would be a positive indicator for us. We are just now starting to feel the downturn.
A. Greer: If I could answer that question, I’d likely be doing something else other than selling pipe and precast. Seriously though, I believe we have not yet felt the full effect of what has happened in the global markets. The U.S. has not bottomed out yet, and in Canada we tend to lag behind the United States. Atlantic Canada has several smaller plants making parts for the auto industry. Permanent shutdowns were announced this week for both these operations. We have several large mines that produce raw materials for the U.S. construction industry. Also this week, extended layoffs were announced due to the slowdown in the U.S. economy. We are not immune to what happens south of our border, so we had better be prepared.
I am also concerned about private developers’ ability to attract capital. I am optimistic that the government will continue to invest in infrastructure projects to boost the economy, because in Canada, there is so much infrastructure in need of repair and replacement. In order for our business to be successful, both sectors need to be investing in civil construction projects. We will know when things are getting better when our customers in both the private and public sectors talk with optimism about projects being built. The primary indicator is when our trucks start rolling across our scale.
A. Girotti: Economists I’ve listened to are projecting a recovery in the last quarter of 2009. I believe much depends on what happens in the domestic automotive sector.
Q. Have you made adjustments to your operations as a result of the current economy and predictions for continuing problems through 2009?
A. Girotti: Our sales force has been directed to look beyond our traditional markets and uncover new opportunities. By offering an expanded product range, we can further diversify and reduce the impact of any single poorly performing product.
A. Pink: We have had two layoffs of production personnel already and expect a third. This will probably mean a reduction of drafting and engineering as well.
A. Greer: We have made adjustments to our operations, in fact during our business planning sessions in January and February of 2008, we saw signs that 2008 would not be business as usual; our plan for 2008 was to approach the year with caution. We made the decision to be prepared for an economic downturn and will be happy if we are wrong or it is not as bad as many predict. In either case, we will be ready (for 2009).
Our biggest adjustments have been directed toward making sure our capital spending went toward the most necessary items, our inventories were not excessive and making sure we were on top of receivables. A credit crunch can quickly affect a contractor’s ability to pay us, so we are very diligent with respect to collection of receivables.
Q. How are you positioning your company for the future? What do you see as changes that will occur in the precast industry as a result of the current economic crisis?
A. Greer: We continue to believe in our industry and, as our company is almost 150 years old, we have a long history of dealing with crises of many types. We continue to position ourselves for long-term growth while making sure we are “right sized” for the current situation. The precast industry will thrive after we get through the current crisis. Houses will still need to be built, sewers installed and bridges constructed. Likely the demand for precast will grow as contractors look for faster and better ways to build infrastructure. Historically, a delay in infrastructure spending is followed by pent-up demand and increased spending.
A. Girotti: I expect there will be an increase in infrastructure spending. Hy-Grade will increase its participation in infrastructure projects. I still believe that precast has distinct competitive advantages and am confident that there continues to be opportunities to grow.
A. Pink: It depends on the duration of the downturn. If it is fairly brief, I don’t see too many changes except probably layoffs. However, if it drags on, we could see some paramount changes, maybe fewer players in some markets.
Q. How can precasters best prepare for downturns in the economy? Are economic slumps opportunities for calculated investments? Are there any upsides to current economic conditions?
A. Pink: Downturns always present opportunities for aggressive, stable companies to improve overall company performance and eliminate ineffective parts of the company.
A. Greer: I believe when operating a business one should have contingency plans if things change. In our market area, they can change very quickly, so I always have an operating plan, and in my drawer I have a second plan for what to do if Plan A is not working. We watch our financials very closely, so if we are not operating that close to our plan, we know it right away. I would suggest that business is not magic and that there are fundamentals that need to be adhered to, especially in tough economic times.
Economic downturns can be opportunities, especially for those with cash. For example, equipment becomes cheaper as manufacturers want to move inventory, weaker competitors may close or become available for acquisition, deep discounts may be available for cash purchases. There can be lots of opportunity for those who have cash. Have I said how important cash is yet?
A. Girotti: Talk to your customers regularly. They will be able to tell you sooner about changes in the marketplace. If you are flush with cash, this might be a buying opportunity. However, with the sudden fall of the Canadian dollar, U.S. purchases are a lot more expensive now than they were in November. One benefit of this current economic slowdown is that it forces us to look inward and make decisions to tighten up controls and minimize waste.
Q. What advice can you offer precasters, from large to small operations, going into an uncertain economic future in 2009?
A. Girotti: Rule No. 1: Manage your cash flow daily. If you run out of cash, you’re in big trouble. The banks are not aggressively looking to lend, so a cash shortfall could be fatal.
Look to participate in publicly funded projects. I anticipate that local and provincial governments will accelerate projects in an effort to stimulate the economy.
A. Greer: There are always ups and downs in the business cycle. Those companies with healthy balance sheets and who stay close to their customers and employees will survive and prosper when the economy improves.
A. Pink: Cash is still king – good times, bad times, large operation or small operation. We have to do whatever we can to ensure that our companies are in a stable cash position.
Q. What is the best economic news you could hear in the next six months and why?
A. Greer: I believe a significant piece of good news would be for the Canadian banks to begin indicating that they have capital available for investment. Another important piece of news is for the federal government to make key infrastructure commitments and actually getting projects out to tender. As exports to the U.S. are a large component of the Canadian economy, we also need to hear that the U.S. has moved out of recession.
A. Pink: Companies that are expanding or hiring instead of hearing about companies that are laying off. People will not buy big-ticket items if they are not working or are afraid they may lose their jobs.
A. Girotti: That we have to hire more people to meet the increasing demand for our products.
Sue McCraven, NPCA senior technical consultant, is a civil engineer, technical writer and editor, and environmental scientist who has contributed numerous articles and studies to prominent scientific journals.