Volume 40, Issue 4 April 2005
The 'Fab' Five
Fabricators Offer Insights on the Market and its Prospects
by Charles Cumpston
In recent interviews with USGlass, top executives at AFG, Arch Aluminum & Glass, Oldcastle Glass, Viracon and Vitro America said they see a recovered market that is relatively busy as it continues to go through changes.
Looking ahead at this year, Brad Austin, senior vice president of Viracon Inc. in Owatonna, Minn., summarizes, “I think everyone is going to be much busier. We are starting into a new growth cycle in the non-residential market, particularly in offices, which has been lagging the last three years. We’re optimistic coming off a pretty strong last half of 2004 and building a lot of momentum for this year.”
According to Austin, a lot of work is currently on the boards and out for bidding.
“We see our customers enjoying success this year. We see things happening now, as opposed to some time in the future.”
John Stilwell, vice president of fabrication for AFG Industries Inc., Kingsport, Tenn., comments, “The commercial segment is definitely continuing to recover. Growth should be in the 8- to 10-percent area this year. This will allow the fabricators to bring a little bit more business in, and a little bit more business is a good thing.”
Stilwell is looking for 5- to 6-percent growth for his own operation overall with commercial improving and residential holding steady.
Shawn Donovan, vice president of marketing for Oldcastle Glass, says he is “pretty upbeat about it overall.” He looks for the commercial market to be up 3 to 5 percent.
Donovan points out his company’s recently launched commercial projects group. “This is to position us better in the commercial market,” he explains. “This is a market we had not historically gone after—projects that are 25,000 square feet or more. We see a strong commercial market for the next three or four years,” he adds.
Leon Silverstein, chief executive officer and president of Arch Aluminum & Glass, Tamarac, Fla., agrees that the economy has picked up.
“I think we have a good two to three years ahead of us,” he says.
Luis Gonzalez, president and chief executive officer of Vitro America, Memphis, Tenn., also sees growth this year with a 10- to 15-percent increase in the fabricated area for his company.
“The problem is that there is not enough capacity to meet demand, which is a nice problem to have,” he states.
The capacity problem relates to the product mix the market is moving toward, according to the executives.
Leon Silverstein of Arch Aluminum & Glass agrees that the economy has picked up. “I think we have a good two to three years ahead of us,” he said (see sidebar on page 78 for more on Silverstein's industry perspectives).
In the Mix
“From a fabrication point of view, we are seeing a high conversion to higher value-added products,” says Austin. “We see a shift in the market to coated glass whether it is low-E, which is dominant, or reflective. For us, 95 to 100 percent of what we ship has a coating on it.”
In that respect, Austin says Viracon is “probably abnormal” compared to the other fabricators. “What we see for the market is still fairly low penetration in the nonresidential market for coated glass. I would say high 20 to 30 percent of the market is coated. We’ll see that market shift over the next several years to where it will be 35 to 40 percent. This is a huge opportunity for all fabricators, whether they coat glass or are a processor of coated glass supplied by a primary glass manufacturer.”
Stilwell makes the point that the energy codes are helping fabricators supply value-added products to the commercial market. And he sees changes impacting the residential market as well.
“We’re seeing a migration of people back into the city fueling construction in the condominium area particularly,” he states. “And the biggest trend in this area has been the introduction of the post-temperable soft-coat products,” he explains. “A project that in the past might have gone for high-performance sputter coating with a long lead time now will use [a post-temperable] product, giving better project management.”
This technology is different from those of the past, and that is having an effect on fabricators. Both Stilwell and Austin point out that a significant replacement of older technology with newer furnace technology is being driven by product requirement. They also note the shift to higher quality initiatives.
“There is more focus on roll wave and other aesthetic requirements. This has become even more important as the use of these post-temperable products has grown,” Stilwell states.
Austin also points to code changes and the “green building” movement as a boon to fabricators.
“There is an enormous green movement going on, certainly in the larger projects but smaller ones as well,” says Austin. “The energy efficiency component of a building today is significant and that means you have to have insulating glass (IG) and in a growing number of cases there is coated glass in the IG unit,” he states. “There is a shift from less value-added to more value-added IG. With argon-filled coated glass, for example, the value of that unit is significantly higher than it has been in the past.”
Austin also says footage is going to be up slightly, year-on-year in 2005. “We’re projecting 3 to 4 percent, but the value of that unit is going to be much greater.” How much greater? “That depends on a lot of factors and it would be different for a company that is starting from a different position than we are. We have been supplying a lot of higher-value products so it is difficult to say, but definitely the use of IG will be up 3 to 4 percent this year.”
Vitro America’s Gonzalez also notes the push toward more value-added products.
“We have had a change in the mix of products that we are selling,” he explains. “The shift has decidedly been toward value-added.”
For laminated glass, the fabricators agree that a lot of new capacity is being brought into the market. This is being driven by the code requirements that are shifting non-laminated product into laminated usage.
Security is also a big driver.
“We see hurricane and security as growth areas,” states Donovan. “We have specialists who are focused on these segments. They are areas for value-added products, where we like to concentrate our efforts.”
Austin makes the point, “The added capacity has given the market an equilibrium in terms of supply and demand. We had been short as the codes were adopted. Today you see the laminators crossing borders. [In other words] a laminator that might have only done non-residential might be supplying the residential market. So the added capacity is going into growing markets and it is creating equilibrium.”
Stilwell also sees balance.
“Supply will keep up with demand in the short term, unless there is something that accelerates laminated growth,” he states. He also notes that a lot of autoclaves are being installed, not only by the fabricators, but also the larger window manufacturers.
He says that his company is looking at the possible expansion of its laminated glass operations. “We’re working on several government building projects, and with security concerns, laminated glass is being specified whereas before it might have been a traditional IG unit.”
Shake ‘n Bake
Given all that is happening in the commercial glass industry, are fabricators expecting a shakeout in the market?
“What the soft-coats and post-temperables have done, because of the long cycle times, is reduce the capacity on the secondary side,” says Stilwell. “There are certain facilities in which we thought we had capacity for two or three years and now we see that we are going to have to invest in additional tempering capacity for the soft coats.”
As far as a shakeout, though, Stilwell says no. “But the furnace manufacturers are in a good position because of all this, not only for new furnaces but also replacement units.”
He adds, “All the fabricators will want to participate in this high growth soft-coat, post-temperable market and they will have to do something to do that.”
Austin agrees that a shakeout is not likely now. “I think you will continue to see consolidation in the industry. You might have thought that was behind us, but bigger companies continue to make acquisitions. And some of the bigger companies, even on a regional basis, have significant growth initiatives. You’re going to see expansion of the bigger players and consolidation of smaller players by bigger players as opportunities present themselves,” he states.
Echoing Stilwell’s comments, Austin adds that while the drive for quality itself might not drive any players out of the market, “those who do not make the necessary changes for a higher quality product will become less competitive.”
Overall, Austin sees the fabrication industry changing at a very accelerated pace. “Fabrication today (in terms of product offerings) to meet specifications, to meet quality requirements, to meet codes is very different than it was a few years ago. Certainly the five largest fabricators have these quality products, but many don’t and their market growth opportunities become much less. I think that, coupled with the demands of the market today in terms of service, quality and just getting paid, it’s a very tough industry.”
“There is continuing consolidation going on in our industry,” agrees Stilwell. “Oldcastle, Arch and AFG continue to make acquisitions of independents.” His own company’s recent acquisition of InterEdge Technologies is an example. “Fire-rated products with luminescent interior (non-wire), we think, is something that is going to grow. We’re picking up value-added companies.”
For Oldcastle Glass, Donovan explains, “Acquisition is part of our on-going strategy. We’re continuing to look for good, solid companies that fit our profile.” He adds that he doesn’t think that companies are going to be forced out of the market.
“I think we all continue to look at ways to differentiate ourselves so that we don’t become a commodity in the marketplace,” he states. “I think the challenge is to continue to develop ways to better serve the industry, whether it is at the architectural level or the glazing contractor level.”
Some in the industry have stated that the fabricators are reluctant to raise prices.
“It is difficult to raise prices,” Donovan states. “If we can’t differentiate ourselves—who we are and what we offer—it becomes a price game. We try to stay out of that, but it’s part of this industry. You have to create value with the customer beyond the products themselves.”
“Historically there is seasonality in our business and we want to keep our factories busy,” Stilwell explains. “Things can be very competitive out there. We have long imposed an energy surcharge but I believe as business picks up the market fundamentals of supply and demand will take place.”
Austin sites other conditions.
“The challenge is that when your work is in the contract arena … once you bid a job you are committed to that job for a period of time. How you are able to recoup price increases, if you have them in that period of time, is very difficult. The timing of projects relative to when we are bidding them and the ability to gain back cost increases is a challenge.”
According to Stilwell, however, one area in which the industry is not lacking, is in glass supplies.
“Right now, our plants are operating at a pretty high level, and supply and demand are in good balance, though late in the second quarter and in the third and fourth quarters we could get into capacity constraints,” he states. “It depends on the economy and how healthy it is.
With commercial up 8 to 10 percent, even with residential being down it is still possible to see tight supply.”
All of the executives interviewed for this article cited rising costs, whether it be the cost of glass (Austin said there has been a 15 percent increase over the past 15 months or so) or internal costs of benefits and overall labor costs. “We’re all challenged by increasing costs, and getting our pricing in line to cover that cost is always a challenge,” Austin states. He adds it is tougher in the glass industry than some other commodity businesses.
“Steel went up 75 percent in the past year. We could not have done that. There’s too much competition out there that does not allow this to happen,” he explains. “That’s one of the challenges of our industry: To make sure that we’re all being paid for the risks that we take on, particularly in the project business. We’re in business to make a profit.”
Five Questions for Leon Silverstein
Leon Silverstein, president and chief executive officer of Arch Aluminum & Glass, is a man of many opinions who isn’t afraid to express them. We asked him five questions to get his thoughts and views on the industry, and here are his responses—pure Leon.
1. What is the biggest problem in the industry?
There are a lot of fabricators that, if they don’t change the way they do business and get stronger during good times, are not going to make it. People are complaining that they’re busy but they aren’t happy with the bottom line. Even the bigger guys aren’t strong. I don’t think people understand the bottom line and they are using it as an excuse for why they’re not performing. In the fabricating industry it is always that costs are too high. It’s never that they are selling it too cheap.Our view is that the industry is not getting stronger.
2. What is your business plan?
Our current plan is to continue to grow. We plan to double our size every five years. This is our goal. It becomes more challenging because the more you grow the harder it is to grow.
3. Does the demise of Interpane put you in a bind?
No. If anything we look at it as an opportunity. We’re looking at the possibility of coating our own glass. I don’t think it is any secret that the ad in the back of USGlass [for a coater] was us.
4. What is your assessment of the industry?
If companies were more aware of how to be healthy, strong companies it would be a stronger industry. If you look at other industries, ours is relatively weak.
There will be a lot of change in the next two or three years. A lot of the change will be affected by the individual companies and where they are going and whether they stay in business and whether they become part of someone else. It’s tough. But I think the good, smart businesspeople will do well.
As an industry, I don’t think my competitors know what their costs are. And it’s funny because I was accused of that for the first 10 or 15 years of my glass career.
5. Were those critics right?
I’ve learned a lot. And in some cases they were.
Transit: In or Out for the Long Haul
When it comes to shipments and deliveries of commercial glass products, recent changes by the Department of Transportation (DOT) on how many hours drivers can drive and soaring fuel costs have dealt a double transportation whammy to glass fabricators.
“Transportation has always been a significant part of our business, a vital part,” states AFG’s John Stilwell. “We run a tremendously large fleet of trucks every day to supply our customers. Fuel prices are quite high and that is having an impact on how we run our routes and how we evaluate how frequently we go.”
Arch’s Leon Silverstein agrees.
“Freight is a big cost,” he says. “There is no reason to ship product to a location if you’re not going to make any money.”
Viracon has a fleet of trucks that services about half of its weekly requirements, according to Brad Austin. The other goes on contract carriers.
“We service the national as well as the international arena out of our two facilities [in Owatonna, Minn., and Statesboro, Ga.].” Austin says he is finding it is easier to go to certain markets than to others because more available trucks are going to certain markets.
“Certainly the DOT regulations on the number of hours a driver can drive is having an effect,” says Austin. “Much of our delivery is on-site and those types of deliveries are not as attractive as picking up a full load of product and delivering it to one stop. You’ve got to coordinate a job-site delivery and the driver might be stuck off-loading for a longer period of time.”
Drivers today, Austin points out, are making choices as to what deliveries they want to make.
“Where glass used to get a lot of attention, it is tougher today to get the driver interested in taking the product. Austin adds that his company increased its fleet and is adding more new trucks this year.
AFG also increased its number of drivers. According to Stilwell, the company added 6 to 8 percent more drivers to comply with the new DOT driving regulations.
“Transportation is a bigger part of our pie structure than it was in the past.” AFG owns the majority of its trucks. “We’ve gone back and forth from a lease to buy based on what our accountants say is good for the company. We have maybe 10 percent leased trucks,” Stilwell says.
“We’re looking to get more trucks and do our own hauling from the float manufacturers,” states Silverstein. “We’re looking to hire a logistics manager so that we can take a look at freight differently than we have in the last 15 years to see if there is a better way to haul our products around.”
Stilwell reports that primary manufacturers experience a shortage of carriers to haul glass last year. “The demand for drivers continues to be high. People are not attracted to this job,” he explains. “We are being challenged to find good employees to hire and then there are all the background checks that are required. It’s a difficult profession to just walk in to and say ‘I can get behind the wheel,’ compared to a decade ago.”
So, as far as being a difficult job, on a scale of 1 to 10 with 1 being really hard and 10 not too difficult, where does transportation fall?
“I would put it just over the midpoint on the hardness scale and part of that involves the juggling of the costs,” says Austin. “We are constantly seeing cost increases so it’s the management of the costs and the management of the equipment. It’s not an easy job any more. It’s not the most difficult thing that we do, but it’s over half way.”
The Author: Charles Cumpston is a contributing editor to USGlass.
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