Americas Products experienced significant demand pressures in 2009, particularly in the important residential sector, and more significantly in the non-residential sector as the year progressed. Against this challenging backdrop and with particularly acute trading challenges in MMI, our Products businesses experienced a 91% decline in full-year US Dollar operating profit. Our Distribution business also experienced a sharp downturn in activity and operating profits were significantly lower.
Americas Products & Distribution experienced significant demand pressures in 2009 with further declines in all of our markets. While there was some stabilisation of the residential market at historically low levels, non-residential continued to weaken throughout the year.
Regionally our operations in the West and Canada performed better relative to our southeastern and northeastern markets which were noticeably weaker than in 2008.
The continuing focus of management remains on internal cost reductions, delivering supply chain efficiencies and growing revenues through product innovation and providing systems solutions to the construction market.
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Overview
Americas Products & Distribution experienced significant demand pressures in 2009, with further declines in all of our markets, particularly the important residential sector, and more significantly in the non-residential sector as the year progressed. Against this challenging backdrop and with particularly acute trading challenges in MMI, our Products businesses experienced a full year US Dollar operating profit decline of 91%. Similarly, sales revenues in our Distribution business were significantly lower and operating profits declined, despite decisive action on cost reductions. Regionally, our Products & Distribution operations in the West and Canada performed relatively better, while our southeastern and northeastern operations continued to be noticeably weaker than in 2008. Focussed cost-reduction measures helped to mitigate somewhat the impact of sharp volume declines. Overall, the Division recorded a 25% decrease in US Dollar sales and an 89% decline in US Dollar operating profit. The continuing focus of management remains on delivering internal cost reductions and supply chain efficiencies.
Architectural Products (APG)
APG, with 239 locations in 38 states and two Canadian provinces, is the leading North American producer of concrete products for the commercial masonry, professional landscaping and consumer DIY markets. The group is also a regional leader in clay brick, dry-mixes, and lawn and garden products.
APG faced continued difficult trading conditions in 2009 due to further deterioration in the residential construction sector and accelerated declines in non-residential markets. The construction markets in eastern Canada were more robust than those in the US. The Homecenter (DIY/retail) channel, which accounts for approximately one-third of APG sales, remained resilient despite weak consumer sentiment and spending. Reflecting these factors, our United States masonry and brick divisions experienced considerable operating profit declines. In contrast, our Canadian masonry business performed well and our lawn and garden and dry-mix divisions delivered significant operating profit improvement. Extensive cost-reduction actions and regional consolidations were completed across APG; however, they were only able to partially offset the negative external factors. Overall, APG recorded a decline in sales and a sharp decline in operating profit.
Precast
The Precast group is a leading manufacturer of precast, prestressed and polymer concrete products, small plastic box enclosures and concrete pipe in North America. The group has 76 locations in 25 states and the province of Québec.
Significantly lower levels of residential activity in 2009 again negatively affected demand for drainage products and plastic box enclosures nationwide. Activity in the non-residential sector also decreased considerably, further impacting sales. This trend is expected to continue into 2010, as poor business conditions and reduced access to credit weigh on demand. The group’s most steady work was in the infrastructure segment, but exposure to this segment is less significant. Overall volumes were down approximately 33% from a relatively weak 2008. In spite of the harsh economic backdrop and an increasingly competitive market, margins were similar to 2008 as a result of pricing initiatives, operational efficiencies, and second-half input cost declines. Overall operating profit was below 2008 levels. Backlogs declined throughout 2009, but are showing signs of recovery in 2010. Management’s focus will be to continue internal improvement and cost-reduction measures ahead of the challenging market conditions that are expected to extend into 2010.
Glass
The Glass group is the market-leading supplier of Building Envelope Solutions for commercial, institutional and multi-storey residential construction, including custom-engineered curtain wall, custom-fabricated architectural glass, high-performance windows, architectural skylights, and storefronts and doors. With 79 locations in 23 states and four Canadian provinces, the Glass group is the largest supplier of high-performance architectural glass and engineered aluminium glazing systems in North America.
In 2009, the architectural glass business experienced unprecedented declines in demand, as sales volumes decreased 24% compared to 2008. Pricing was intensely competitive in all North American markets and the group’s largest privately-held competitor filed for bankruptcy reorganisation in November. Also the group experienced competition from non-traditional sources as many smaller glass fabricators directed underutilised residential capacity to serving commercial markets. In this difficult trading environment, the Glass group focussed on building market share, tightening cost control and closing 11 operating locations to better balance capacity with depressed market demand. Operating profit fell steeply.
While the engineered products business experienced a 26% decline in sales compared to 2008, operating profit was near 2008 record levels due to a strong performance from our Canadian locations, favourable backlog pricing and lower aluminium costs. 2010 is expected to be a much more challenging year for the engineered products business as project backlog continues to decline.
MMI
MMI has 76 locations, 16 of which are manufacturing, across 29 states and a plant in Mexico. Although its fencing products are often used in residential applications, most of MMI’s products (construction accessories, welded wire reinforcement and fencing products) are used in non-residential-oriented projects, particularly in conjunction with the use of concrete.
The accelerating decline in non-residential construction activity led to a 40% decrease in MMI’s sales from 2008 levels. The combination of high-priced steel inventory, lower sales volumes, and dramatically falling sales prices contributed to a significant operating loss for the year. Management modified its steel purchasing strategy to reduce future volatility and reacted to declining volumes by instituting extensive cost-reduction measures across all businesses and scaling back the size of its distribution network.
Distribution
Oldcastle Distribution, trading primarily as Allied Building Products (“Allied”), has 184 branches focussed on major metropolitan areas in 31 states. It comprises two divisions which supply contractor groups specialising in Exterior (roofing and siding) and Interior (wallboard, steel studs and acoustical ceiling systems) Products.
Exterior Products is the group’s traditional business and Allied is one of the top four distributors in this segment in the United States. Demand is largely influenced by residential and commercial replacement activity with the key products having an average life span of roughly 25 years. This repair, maintenance and improvement aspect provides a solid underpinning of baseline roofing demand.
The Interior Products division, being relatively immune to weather, has low exposure to replacement activity and demand is therefore largely dependent on the new commercial construction market. Allied is the fourth largest Interior Products distributor in the United States.
Both segments of the business declined greatly in 2009, roughly in proportion to the overall market. In the Exterior Products business, overall US asphalt roofing shingle shipments were down 15% in 2009, a level of decline that was somewhat offset by storm activity in a number of regions. Allied did not specifically benefit from these storms, but out performed competitors in its market areas. For the Interior Products business, gypsum wallboard shipments are a barometer of activity and these declined by about 7 billion square feet or 28% in 2009, comparable with a decline of 31% in Allied’s Interior Products sales.
Acquisition activity for Americas Distribution was limited to the addition of one small interior products distributor in Salt Lake City.
South America
The South American group faced difficult economic conditions in 2009, particularly in Argentina, and management focussed on initiating significant cost-reduction programmes. Operating profit from our Argentine ceramic tile and glass businesses was at break-even for the year. The start-up of a greenfield floor and wall tile manufacturing facility in Cordoba was completed in October.
Our Chilean glass business experienced a more moderate decline in operating profit. The Santiago-based distribution business acquired in early 2008 was negatively impacted by the adverse economic conditions and operating profit declined.
Outlook
While there are signs that the overall US economy appears to have stabilised, the growth outlook remains weak. Homebuilding appears set to make a slightly positive contribution in the second half of the year. Further declines are however expected in non-residential construction due to continuing stresses in financial and credit markets. While residential repair, maintenance and improvement activity is historically less cyclical, constrained consumer spending because of high unemployment, sluggish income growth and declines in household wealth will translate into weak private domestic demand. Against this backdrop, our businesses will continue to focus on new and ongoing cost-reduction initiatives and the generation of strong cash flow, as we leverage further the benefits of our extensive location network and the Divisions’ product diversity and broad sectoral exposure
