The following article contains good information for our readers who are investing in building materials companies or have a vested interest in material availability and pricing. This article was made available on Oct. 3, 2011, at a time when various components of this new strategy were still playing out. AWCI’s Construction Dimensions will keep its readers apprised of any major developments.
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American Gypsum’s Sept. 20, 2011 announcement of the elimination of job quotes in the wallboard industry has turned the industry upside down. In conjunction with this announcement, American Gypsum also announced a 35 percent price increase starting Jan. 1, 2012. Since Thompson Research Group first wrote about American Gypsum’s job quote news on Sept. 21, the group has spoken to key distribution contacts about American Gypsum’s move to cease job quotes, and USG and National Gypsum have responded by eliminating job quotes effective immediately. This article clarifies why eliminating job quotes is a wallboard industry game changer, how peers have responded, how distributors have responded and their assessment of the situation, and the potential financial implications of the elimination of job quotes for American Gypsum and USG.
Job Quotes Are the “Real Deal”
American Gypsum’s announcement about the elimination of price quotes is so groundbreaking, according to TRG, because it takes the negative pricing dynamics away from the manufacturers. In “normal” times, job quotes made sense for larger commercial jobs, but over the past four to five years this practice has been abused to the point of effectively eroding any price increase effort and has put downward pressure on market prices. Eliminating job quotes shifts the pricing risk to distributors and away from manufacturers. Anywhere from 30 percent to 70 percent of wallboard pricing is protected by job quotes in the current market, according to TRG contacts. Price protection limits the effectiveness of price increases. In the absence of meaningful volume growth over the next couple of years, eliminating job quotes effectively shores up earnings through more disciplined industry pricing. Eliminating job quotes is a step in the right direction for wallboard industry pricing, TRG says.
In order to get a better idea of why this is so significant for the wallboard industry, let’s look at another industry that has made a similar move recently—the steel stud industry. The steel stud industry also has made a move to eliminate job quotes in the last several months. According to TRG contacts, the steel stud industry was even more aggressive with price quotes than the gypsum wallboard industry. The new threshold for job quotes for the steel stud industry has been set for five truckloads (versus half-truck load quotes that had become industry standard) and all other business would go to a 30-day price list. This is an industry that is more fragmented than the wallboard industry, but the largest steel stud manufacturer maintains a healthy 50 percent market share. The big three manufacturers have stuck to their guns, and regional players have countered by quoting two truckloads versus the five by the big three. The result (even without 100 percent consensus) has been a stabilization of order files. (Note: Manufacturers had so many quotes on their books, they didn’t know what they were on the hook for before.) Industry contacts tell TRG that steel stud pricing has stabilized in the market. There was a price increase Oct. 10, and this was another pricing test for the steel industry.
The basic conclusion from the steel stud industry job quote elimination efforts is that even if the entire industry doesn’t endorse the plan set by the industry leader, the overall pricing environment nonetheless still improved.
Distribution Likes the Move but Has Lingering Doubts
TRG industry distributor contacts (which account for between 70 and 75 percent of wallboard sales) are telling TRG that they fully support eliminating job quotes, and the biggest hit would be to the large, national homebuilders that have been squeezing the industry mercilessly on pricing. Here are a few quotes about the significance of job quote elimination and end market feedback:
• “This is the most significant move I’ve seen in the 30 years I’ve been in the industry.”
• “Job quotes have been so ingrained in the industry that it will be a big challenge to change this. That said, if everyone sticks to their guns, this provides a lot more pricing stability and upside going forward.”
• “… a game changer even with no new demand.”
• “We were with a big commercial contractor earlier this week—he just about fell out of his chair.”
• “Big home builders have had a truculent attitude toward suppliers—definitely will have a big impact on builders.”
Distributors remain hopeful but very skeptical about the job quote elimination announcements. The rubber will hit the road as distributors have more meaningful conversations with their contractor and builder customers and the news spreads. TRG, in the meantime, will follow up with their key distribution, construction and manufacturing contacts to determine overall market acceptance of the move to eliminate job quotes.
TRG thinks distributors will have enough incentive to hold the line with pricing with even a modest increase in volumes. This is a very important concept that TRG thinks most investors miss. Distributors are already very tightly managed, and with any increase in volumes, they will be forced to hire more people and spend money on capital purchases in order to meet demand. It’s that early stages of volume growth that will be so tricky for distributors, as TRG anticipates capacity issues arising as they work to effectively service deliveries. Knowing that there is work in the pipeline, distributors will be more selective with work in order to get higher margins. Overall, there is a strong incentive to raise prices even in an environment of modest volume increases.
TRG’s Opinion
The elimination of job quotes would result in immediate positive earnings contribution even in a flat volume environment, according to TRG distribution contacts.
At the end of the day, the elimination of job quotes is a positive move for the wallboard industry. Distributors are in favor of the move and, in general, TRG thinks most manufacturers will be in favor because in the absence of meaningful volume growth, this could generate earnings growth. Distributor margins are already razor thin, and job quote elimination could unwittingly result in putting weaker distributors out of business. With any improvement in volumes, distributors have more incentive to raise prices in order to cover the costs associated with volume resulting in increased capital spending. While it remains to be seen just how successful the wallboard industry job quote elimination will be, it clearly is a step in the right direction. TRG expects there will be a net positive impact on pricing even if all manufacturers don’t participate.
Thompson Research Group is an equity research firm offering unique, in-depth primary research in the building materials, building products, construction equipment, engineering and construction, and related industries for institutional investors and industry participants. Combining TRG’s extensive network of public and private companies, U.S. Senate and House contacts, and state officials, TRG provides a differentiated perspective on macro-economic, Washington D.C. policy, and company specific research trends.
