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SAM KENNEDY, SPECTUS WINDOW SYSTEMS: Welcome back. We touched on market structure very briefly before the break. One of the elements of the next session is consolidation itself. If you look at it from purely an extrusion point of view going back into the mid-1990s there were about 40 different extrusion systems in the UK. That has come down to about 14 at the moment, Mike?
MIKE RIGBY, MRA: Something like that.
SAM KENNEDY: We feel that that would, in fact, consolidate into about eight. Now, that is just on the extrusion side. If we take the machinery side we have quite a significant consolidation on that side as well, and on to hardware and even software as well, Goronwy, because I can remember you back in the 1980s and you were probably the only software company out there.
GORONWY JONES, WINDOWMAKER: We never had it so easy!
SAM KENNEDY: Suddenly we have got this consolidation. The question we ask ourselves is, is that just standard practice or is it just a factor in the industry that we are in and what effect does it have on us looking at the future, certainly from an investment point of view? Would anyone like to open on that one?
MIKE RIGBY: I think people tend to have in mind that consolidation does not happen, does not happen, and then happens very quickly and then it is over and you get on to new life. If I go back to the paint industry where I spent quite some time, I joined what was known as a mature industry and there were a handful of players there. That was consolidated. But it is actually still consolidating, so consolidation can take decades and decades and you can end up with two or three players and they can corner the market.
So I think people are imagining, when I listen into some conversations, that it happens relatively quickly with quite a bit of blood on the floor sometimes, then it is over and you’re into a new world. But, this new world we may be entering could last quite a long time, so we need to know how we can behave and run sustainable businesses in an industry which is consolidated.
NIGEL RICHMOND, FENSA & BOWATER BUILDING PRODUCTS: It’s interesting you mentioned earlier that there were no PLCs around this room. Well, they were virtually all PLCs a few years ago and most of them were PLCs who were conglomerates; who decided to become specialists and they didn’t specialise in building products so a lot of them sold off the building products. So that brought into the industry not just at the extrusions level but often at the fabricator levels a lot of venture capitalists. The first thing a venture capitalist asks when it buys a business is when can it sell it. A venture capitalist can sell to other venture capitalists but they don’t always do that. Eventually it’s going to come to a consolidation and the venture capitalist is going to sell to another trade buyer, which inevitably is going to lead to consolidation.
There are economies of scale through lots of consolidations, and even when you look at some of the businesses on the continent, some of the UK businesses are still quite small compared to some of the continental businesses. So I think it is inevitable, partly through the ownership structure, partly through the economies of scale and partly from a mature market, that consolidation both in fabrication and extrusion systems will continue.
SAM KENNEDY: Alex, you talked quite a bit about windows and I know that you’ve briefly been talking about the machinery side during the break. That is quite a phenomenal consolidation as well. If you look at what the packages were back in the halcyon years and what we are now, how does that affect you?
ALEX MAIN, PROMAC: It has a significant effect on our business. Probably about three or four years ago the number of orders we were taking was significant. They have decreased now but the order value has increased because of the consolidation that is starting to affect the business. I’ve detected a little bit of doom and gloom around the table earlier, but there are some players in the market have made major investment in automated equipment, pretty much from a flying start, that are making head roads into it, but a good contribution to profits and they are coming back to us for the bigger orders.
I touched on it earlier. As a company - and I am sure that other people in the industry - we believe that there is going to be a fallout which will help us focus on the bigger customers and bring them into a more professional arena, but they are not at the moment. Like I said before, virtually everyone around this table, from a fabrication point of view, is where they can be. There is probably a little bit more that we can go to, but there is that middle ground that have got a big decision to make: do we stay in it or do we come out and look at these guys, who then have to make the second or third level of investment, which is obviously hopefully going to involve ourselves. I feel that is where the machinery market is going. We are being hit by the Far East. We are over there now; we are doing our own thing over there. It is at an early stage, but we see that as being a further threat certainly to our side of the business.
GORONWY JONES: Every industry consolidates and it is just natural that this one does, but I think it can take very many forms. Just this week we have been working with Martin on a customer in Ireland where six or seven smallish fabricators came together, stopped fabricating, made one joint company which fabricates for all of them, and they all resorted to selling. So, consolidation isn’t just big company buying smaller company.
Ourselves, we are also involved in the Far East. We have just done a partnership with a Chinese software house, a subsidiary of a machinery company, who have already sold 2,000 copies of their own software where they were roughly trying to copy our product but they are now agreeing to sell our product at the high end because they cannot have that level of functionality. Is that consolidation? Sort of, but it takes many forms.
SAM KENNEDY: Your side, Phil, again on the machinery side, does it follow very much the same as ours?
PHIL HEAVEY, ELUMATEC: Yes, very much. We see that the business has changed from the small start-up packages, late 1970s/early 1980s, and now the main investment in machinery is CNC, automated lines, and that is how we would see it in the future, definitely. The more consolidation that happens, the bigger the companies, the more automated lines we hope that they need.
DAVID RUZICKA, SASH UK: Do you think that machinery is there to increase profit or to manufacture cheaper?
ALEX MAIN: I think it is becoming a combination of both. I think now, you know yourself, you’ve got the machines that you can see will improve efficiencies, reduce the wastage, etc. It is a fact where the levels are. We might disagree on what the percentage is, but it is a fact that that will improve your business and to a lot of people it will enable them to sell cheaper, but is that necessarily the right thing?
DAVID RUZICKA: I agree.
ALEX MAIN: You should be making more margin on what you are making more efficiently.
DAVID RUZICKA: I think everybody around the table would like to make more margin, but unfortunately there is always somebody around the corner, whether it’s another systems company that will come in or whether it is another fabricator that is going to come in, that will undercut you.
ALEX MAIN: But I strongly believe that within the next 12 to 18 months a lot of that will be gone, if you can hang around.
DAVID RUZICKA: That is the key because it’s not just that middle ground, is it? There are some large fabricators out there that are struggling. I’ll be honest. As I say, we had a bad year last year, and if we had not been a pretty strong company I don’t know what we would have done. I talk to a lot of fabricators around there and I was having a conversation just outside and I will bet you now, 50% of all fabricators, if you offered them a deal to exit today, would bite your hand off. That is just another nail in our coffin as an industry.
I am proud of what I do. I am proud of what I have built up over 20-odd years, but the problem is our industry wants out and there are major reasons why these people that have been in, invested heavily, seen the good times, there are many, many reasons now that they want out. We should be looking at those reasons that they want out and try to make it an industry that people do want to get into and can make money from.
ALEX MAIN: Do you think the amount of PVC windows that need to be manufactured over a period of time would equate to the 50% drop? If you say 50% dropped out tomorrow, there’s 50% more windows to be made by everyone else, isn’t there?
DAVID RUZICKA: Well, there is, but again it is not people sat around this table, but I know there are systems companies out there that are saying, “Okay, when these big guys drop off, leaving us with a massive, massive debt as well, what we will do is because we cannot sustain another big debt like that, we will go and set these guys on that can just manufacture 40 windows a week”, and it is just perpetuating itself all the time. So, yes, some of the big guys drop out, but then we are bringing them in right down at the bottom end and unfortunately they do more harm to our industry than they do good. It is an easy sell to say to a guy, “Well, I tell you what, get yourself a little unit down the road and start manufacturing”. It is just short term; it is suicide. I was saying that if you tried to do this (debate) ten years ago, get these people sat around this table ten years ago, no chance.
The reason that everybody is sat around here is we know we are coming to the end of that road. This is not doom and gloom; this is fact. That is why people are sat around here. I take my hat off to the guys at the top there for organising this. I think it has been a long time coming. I just hope now that we do something from this because talk is cheap; walking the talk is a different thing altogether. I know we are going to go on from here and do more of these meetings and hopefully I will get invited back. I just hope we can do something from it.
So, I don’t want people to think I am just here as a messenger of death; I am not. I am a realistic business person and I know we have got to do things. I want to work with the likes of Ultraframe, Spectus and the VEKAs, the machinery people out there. I want to invest. I am a businessman. But in all honesty, if I am talking to shareholders today and I say to them, “I want another £5 million to invest in a new facility and put some kit in” they are going to look at me as though I am stupid, seriously. These are guys who’ve been in the industry for a long, long time, so I honestly don’t know where we go, but I think probably today is maybe a start.
SAM KENNEDY: We will be touching on conservatories later but, Mike, do you share those views with regard to consolidation in your particular market sector?
MIKE JACKSON, THE BURNDEN GROUP: If we look at conservatories - which is all I can talk about really, rather than windows - I think we all have to accept that there is no generic growth within the market. I don’t know if Mike has done a report this year, but I cannot see it (growth) and I don’t know if anybody would disagree with me, but it has come to a stage where business is very tough. For us to be able to compete in the future we are going to have to consolidate as a business, and I think the industry is going to have to consolidate as well. I also feel that what we sell is too cheap. That is our fault; it is everybody’s fault, really. We have driven the prices down and they cannot go any lower. We have to look at prices and look at value-added within our product offering.
As a business, I feel that we have all the components to go forward, and I still think it is a large business. I don’t think it is the end of the road by any means, and I think there is a bright future, but I think we all have to look at what we do, and diversity, I think, is key to what we are doing. When I joined Burnden nearly three years ago all they did was extrude product. We cannot do that any more. You just cannot survive by extruding product; you have to look at all routes to market, all avenues. You have to think fairly laterally these days and what we need is more thought about product offerings and routes to market.
SAM KENNEDY: Alan, again you at a very early stage took the decision to go down the route of a niche market, and very successfully, but of course when you are successful at a product people tend to copy it or emulate it. We are talking about consolidation, but consolidation and differentiation are probably alike in themselves?
ALAN BURGESS, MASTERFRAME: I have no problem with competition, bring it on. The one thing that specialisation does is it makes you really, really good at one product and you have got to put the investment in because otherwise you are just nobody. Because when you make sausages you have got to make really good sausages because there is nothing else on the plate.
I think the issue for me is more of the question of consolidation. Is it a good thing to have fabricators being owned by extrusion companies and the installers that are going to be captive? Where dealerships kind of came and went, where is the place for the independent? Is the future going to be independent, professional replacement window installers, independent, professional fabricating units and independent extruders, or is the future going to be an extruder that has also the VCs driving the return and must have this return on capital? Any ethics go out of the window and they just turn around and go, “We need to go straight to the installation”. So, suddenly you have got that vertical integration. Where does that leave the independent?
SAM KENNEDY: It is an interesting point actually because if you imagine how the industry started on direct sell, the Zeniths and the Anglians, etc, we have always tended as an industry on manufacturing to keep our distance between extrusion, machinery, all the way through to fabrication, independent fabricators. Is it the time now to look at some sort of consolidation on a vertical basis? Is that something that appeals to anybody in the room?
TOM RITCHIE, CGI: It’s a risk. If you look at the sort of models in the glass industry, which we are very near to, there is a process with glass and I can really associate myself with the fabricators and as an independent fabricator. I think one of the risks that you have in consolidation of the provider of the raw material - float in our case or raw glass - is that there is a risk if there are too few of them. You have always got to have the competitive edge there and there have been times in the last year - and I have to be careful now about the recorded minutes - when for some people in this industry, especially the independents, things have got very difficult where raw glass price increases across the world. I am not pointing at Ron here, who is a good friend of mine, but raw glass prices have been going up with no reflected ability for that to be passed on to the market.
If you take one step on from that, if these raw material makers are also integrated and they are selling to their own companies and to the independents, there is a potential there to do a lot of damage by favouring the integrated route. So, it is something to be considered. I don’t know if 14 extruders is too many or too few, but I don’t think you want to get in a situation where there is two or three. To some extent you have got to balance the economies of scale with the potential problems that that can give you for especially the independent processors in the marketplace, especially if you get into a situation of supply shortage.
RON HAMILTON, PILKINGTON: I think I should comment on that, from a company that has just been consolidated! Pilkington has been taken over by a Japanese company which I guess to Pilkington would have been unheard of. Tom talked about the investment that is required within the industry to stay at the leading edge and we know it is a capital-intensive industry.
We know that all our raw material suppliers’ prices are escalating for all the reasons. The industry went through a very interesting phase, probably in the 1990s. What they did was screwed down all the suppliers, really took them down, and you had to do it to survive. So the issue of survival is absolutely at the forefront here and it’s a common theme for all of us because there seems to be a perception that big organisations, it is easy. Actually, when you’re elected by shareholders and you’ve got a chief executive that needs to deliver every few months, it is not easy at all. So, the same challenges are there in the large organisation as there are in the small; maybe a bit more weight.
So, what happened is the raw material prices were driven down and it was really hard negotiation. We had extensive suppliers into the automotive industry, extensive consolidation has taken place there, and we used their models. But in the end your suppliers say to you, “Well, I need to reinvest now so you have a choice. You either buy from me at this price and have open book. There’s my books. There is the customer investment. There is the return. These are our working practices. Either invest in this or I don’t supply you because we’ll go out of business”. We have had several of our suppliers decide to walk away from us.
Now, this is to our industry, but believe me it’s a common theme across the piece. So the industry has to do things. What does it do? It started with the raw materials cost because it’s obviously energy intensive there, and then we get the energy surcharge lumped into the cost of the materials that are used to fire the furnaces. Do we say, “Oh, you do not survive, you go under”? No, I guarantee you everybody in this room actually wants glass in their window because it is quite fundamental, isn’t it? We can talk about the properties that you can have within the glass, but you need glass. We need to survive. To survive there is a level of profitability that is acceptable to the organisation.
So, yes, price rises have in the recent past been pushed through. But without that there won’t be any investment in research and development to actually enable the new products to come. In the 1990s or 1980s who would have thought that you could have a glass that would help to clean itself? It was something that had value that you can sell. Who would have thought about the noise properties that we can actually build into window frames? The benefits in terms of solar gain and heat loss from buildings, and a whole new generation of products which are associated with photovoltaic cells. We talk about installations; in Europe there are kilometres of solar cells being installed in a square area, a whole new field for glass. So, I actually don’t make any excuse at all for what the glass manufacturers have done from my own company’s point of view.
The challenge for the industry, I believe, is to learn how to pass on the opportunities rather than just soaking it up and thinking you will survive without understanding your own costs. We talk about the ability to leave the industry and then start again, which is a real issue down at the ground floor, the legislation that allows that to take place, but until we understand the value of our products, which are wonderful, the value to the consumer, which is absolutely massive, and also the value to the government because we talk about sustainability and actually, if you converted our window stock into category A windows, there is something like 15 billion tonnes or million tonnes of carbon we could actually take out for UK PLC, which again stops energy being generated.
So, there needs to be maturity about how we handle it, without sounding like being patronising, because people in this room actually run very successful businesses. But there needs to be recognition that you do it for a benefit and sustainability is all about in here and planning for the next 10, 15, 25 or 50 years.
SAM KENNEDY: Michael, as you said, you have been in the industry 37 years?
MICHAEL NAGLE, PROFITMAKER: If you listen to what everybody is saying here, where? Why are your companies successful and you are screwing down the prices? You think about what you said. You’ve invested in intelligence, research, development, bringing new products; that is fundamentally what you’ve done. You’ve taken all the waste out of it; you’ve forced your suppliers to take the waste; they’ve come back to you now that you’re open book. So you are now what I call a classic business model: you are now ready to run for the next 20 to 30 years. It is soundly based, it is based on good intelligence; I don’t think our industry can say the same about itself.
RON HAMILTON: Just to add to that in terms of our training - and again it sounds like I am trumpet blowing - our apprentice won the apprentice of the year this current year. So embedded within that is training the people to understand the realities of life. I would imagine that there could have been scenarios where people would be apologetic about the price. It is actually not the price; it is the value that you provide to your customer. That is incidental.
MICHAEL NAGLE: I think that is essential. If out of this meeting could come today - and the future meetings - that the industry would put more money into education within its system, whether it was supported by the extruders, just for example, say there was notionally a college you could send guys to, I am sure there is not one window company in the UK that wouldn’t send guys off for a week’s training. Not one. I guarantee it. They’d go, whatever the cost, and that would start changing this industry fundamentally, and that is the kind of step you need to take, I believe, but it is a big brave step to take.
SAM KENNEDY: Just on software itself, over the years - and the industry started off with very small manufacturers - has there been an exit of these small people and do the software companies still support the fact that if somebody is going to set up to do 40 or 50 frames a week you will still have some software program to help?
MICHAEL NAGLE: What has happened there is originally when we started building software for the systems in the early 1980s, Goronwy’s company was the only other one in the UK. We were doing it independently in Ireland. You were selling guys systems. It was all based about knowledge and intelligence. That industry has moved now in the last 10 or 15 years to profile suppliers, giving a disc, into the guy’s computer and that is what software is all about. No retained intelligence. All that it did was the breakdowns and quoting sizes. You were dealing with people then when you went to the company, if they were poorly educated, they were just pressing buttons. Everywhere you turn in the industry I think that is what you’re missing. It is the key element that is missing.
GORONWY JONES: I have got details of over 300 software companies that have targeted this industry over the years I have been active, which is 30 now, and a lot of those have gone and a lot of it is we, like everybody else, have had to make commodities off our low-end solutions. There is always the pressure for those low-end solutions to do more. So, yes, you have a start-up fabricator and he gets cutting sizes and glass sizes and then you get into costings. Oh, but we can’t do costings because we don’t know his labour times. Oh, but he wants costings. So, okay, we give him costings but he doesn’t actually get the consultancy to do it properly.
So, what is happening is, yes, there is still some activity at that end, but the price point is such that you are not giving the degree of handholding that used to be given and, for example, those companies will not probably be costing their labour properly, and maybe that is why they will price so low.
I think on the earlier topic about vertical integration and so on, I think there will be less supplier loyalty in the future and I think software will be a reason for it. We have just introduced into Windowmaker the facility for customers to store multiple sealed unit price lists. It is not our idea, but the customer is asking for it. Clearly, they can then take a contract and they can, say, price it on this supplier or that supplier or that supplier, compare the lead times and go for the cheapest or the fastest, whatever, they have more information. Yes, sadly that will put more pressure on the suppliers, but it will probably also give opportunities for the suppliers who can be innovative enough to price accordingly. You try and book a British Airways flight now and you wait an hour and the price goes up. Well, maybe the same will start happening with window prices.
SAM KENNEDY: An interesting concept.
DAVID RUZICKA: I look forward to that!
SAM KENNEDY: The industry itself, going back to a comment you made as well about the people selling it in the end had no trading, and Michael’s raised training as part of the intelligence process in trying to sell these products, but are we fooling ourselves in the fact that this industry has always been a custom industry, hasn’t it? Every window you produce has really just been custom manufactured to fit a particular window orifice. Therefore, will we always have the 40-50 frame a week manufacturer because it is so simple and it pays the food bills, etc, but they have no real idea or no real investment plans for the future?
DAVID RUZICKA: I think that is a question we should ask you.
GORONWY JONES: If I take my previous bit about software comparing, software will also compare make or buy decisions, and I think in that situation logically it is always going to come up with by being cheaper for that size of organisation. So personally I don’t see a future for the 40-50 frame a week type of case.
NIGEL RICHMOND: There are lifestyle businesses out there. There are people who are content. That is their lifestyle. Their son works in the business; when they retire their son will take it over or whatever. There are probably hundreds of those people still in existence and they will continue.
DAVID RUZICKA: We said this last year. I’ve probably talked to people doing 250 windows a week who actually are saying that they find it difficult to compete at 250 windows. I think when you get down to the smaller number it is more of a cottage sort of business. Maybe he is going to specialise in certain products that the large manufacturer doesn’t want to do at the end of the day. So, you will always get those. I don’t mind the small guys being about because we all start off somewhere. We don’t all start at the top end.
What I do have a problem with is that we need to have a structure pricing-wise that is sensible for all the industry, and that is how it has got to be. Unfortunately today it is not. We are trying to find some new markets and new builds in various areas, and you are coming across the same situations that we have with our trade people because we are selling a basic window, is that it all comes down to the bottom line. The new build people, you talk to them, you try to add value in there, “Wouldn’t you like this style of window, the interesting colours, whatever?” and the guy says, “No, what I want is something that is just fit for purpose”. That’s all; it just has to do the job. Until we set those standards higher or legislation sets those standards higher, they will not move the bar at this moment in time. So, I don’t know.
ALAN BURGESS: I was just going to say, I think if everybody is stuck on price and nobody is going to move on price, we are going to maintain equilibrium. You can’t think we are going to have anything different if you all stay by what you do, and I really do challenge the question on price. The conversation we have with our installers is trying to get them to understand. We all want to buy cheaper. There is one part of you, the accountant’s part of you, that says if you can buy that a little bit cheaper then you are going to make more margin, great. But it is all about the price that you are getting.
The point that we try and communicate with our installers is if you cut your prices by 5% in order to get a deal, most businesses have got to get 33% more business to make the same amount of cash. If you put your prices up by 5% you can lose 25% of your custom and still make the same amount of money. Now, as business people out here we can go, “Well, you might have the numbers wrong. Let me just work that out”. Go back, work it out, it works. But that message doesn’t seem to get across to the installers because somebody has got a special offer, we will shift it over there, and if it just stays on price I don’t think it is a very rosy future.
DAVID RUZICKA: I totally agree. I have always said, and I am sure you are all the same, we really want to have partners, suppliers, whatever you call them, I want whoever supplies me to make profit because he is going to stay in business and he is going to invest and we are going to have a good relationship. I want to make a profit to do exactly the same. I expect the guy that I sell to to make profit. I don’t want him working for nothing because if he is working for nothing he is going to go bust. We have all got to do it, but it comes back to what someone earlier: we have got to train these people. We have the white van man turn up in one shape or form talking to you about some machinery. Grahame’s comment last night about in our industry it is almost a badge of honour to go bust. We go, “He went bust for 2 million. He was supplying us, but I’ll supply in cash”, but does that get rid of the problem? No, it does not. You not giving him any credit doesn’t actually stop the guy from going out there and doing exactly the same again. Systems companies are exactly the same. I had two guys went bust on me last year. I tried to set a deal up, and it was Grahame again saying because you’re not making money you try and work through debt, whereas if you’d been making profit before you’d go, “Phew, that hurt, but let’s move on”. What you try and do now is you try and talk to these crooks, don’t you, and go, “Look, any chance that if I keep supplying you, you will pay me a little bit back?” You are almost begging for your money, aren’t you? This guy has had it off. We look at these people and the systems companies still supply them, conservatory companies still supply them, machinery people, software people, we all do it. You’ll be sat around this table going, “What’s the problem”. That is our problem.
MICHAEL NAGLE: Ease of entry. What other industry could you do it in?
DAVID RUZICKA: That is what I am saying. But we are all sat here --
MICHAEL NAGLE: Stick your hand in their pocket again and have another go.
DAVID RUZICKA: Well, what I was saying to you is these two guys took me for a large amount of money, two different companies. I tried to set the deal up with them to sort of work their way through. It was never going to work; I got a bad feel for it. They actually went back to XXX and XXX recommended two other fabricators to supply them. When I went back and said, “Guys, what are you doing?” They said, “Well, you know, he’s been around the industry for a lot of years. Maybe he’s just had a bad time”. I said, “He’s having a bad time? I can tell you how bad it is for me”.
So, it is at all levels. I take your comment earlier about getting the consumer to understand what we are selling as a product, but unless we do it right from top extrusion level down, “I want you to make money, I want me to make money, and I want the installer to make money”, and somehow we have got to get that rhythm in there that people are making money. Make money, we invest. Without money ... I remember some years ago that extrusion companies had R&D departments which were quite well staffed. I bet there are not many of them nowadays - well, with the exception - and that is just another problem that we have as an industry.
MIKE RIGBY: But I think some of these problems are addressed because it is a point in time in the development. A good deal of the problems are to do with the structure at this point in time. If you look at different levels within the industry, you might look at the level of PVC raw material suppliers and say maybe there are too few of them. If you look at system companies, maybe there are still too many of them. When you come down to fabricators you have got to look at different levels because I do agree that at the bottom end I can’t see those guys going away because there is a pride in, “I make windows. I might not make many windows, but I make windows. I might not make a lot of money at it, but that is me”.
I think if you look at the systems companies, I see the same thing. I see an urgent need to invest in a lot of product. We were having an interesting conversation out there about some of the things that prompt me to buy a new car. You look at all the things, this is built in, that is built in, you can lock it from a distance, unlock it from a distance, boot flips up, all the rest of it. It does everything, absolutely everything, sound, vision, you name it, it does it, and it is safe. If you go back 20 years, you had cars which were absolutely clapped out, breaking down, they couldn’t even do the basics. They certainly didn’t have much in the way of add-ons, but consistently over that time the (auto) industry has been investing in development to make people say, “Blimey, I want that. I am going to shell out for that. How do I pay for it?” “Fine, sign here.” People want it and they want to refresh it and so on.
If you look at windows a part of it is the structural stuff, window energy ratings and so on. Part of it is, “Blimey, I would love that. I would like that.” There are actually things around which might make people think about it, but they are not available in windows at the moment; you are not selling them.
So, when I look at structure I could see a need for more, whether it is through consolidation, through mergers, acquisitions or something, or whether it is a combination, whether it is a common standard for new things or something like that. Not ones that are forced upon us, but to make people want it. So, that is one thing you might like to comment on.
People are talking about mega fabricators. Are we going to see lots of 10,000 a week? I don’t know whether that makes sense or not.
SAM KENNEDY: It is interesting as well, I was going to throw this one back to Michael again, because two of the big mega fabricators are in Ireland. Is there a reason for that, why it should start over there, a different way of approaching the market?
MICHAEL NAGLE: One of them is a £1 unlimited company. You can’t really find out anything about them, but they were located on the borders of a certain county. It was a Gaelic speaking area where they spoke only Irish. They got a bit of machinery incentive investment originally. They have gone all the way back. They own the forest in Africa, right up, they extrude, they do everything. You can’t really find anything about them, but their whole model was built on price. Also where they scored heavily was whether the guy wanted PVC, hardwood, softwood, it didn’t matter, the guy was there to take the order. There was no issue relative to the material type, so that is why they are successful in that sense. Now, whether their quality is good I am not going to comment on, but if you look at this market here, going back to the structure of it, you keep mentioning, David, there about the price. You don’t have that conversation in relation to wood windows. Wood windows have been pitched into the market at a much higher price. Those window companies don’t go bust the way they do. They can’t go back to the timber suppliers and do the same things that you see going on in PVC.
So, the PVC industry has a peculiarity, a structural flaw in it, because it was built to extrude and then all the segments are in place, again going back to what we were saying about poorly educated. The only way you can change that, if the answer is to get the price up, somehow or another you have got to go away from here and pretend that your PVC window is a wooden window and then your price will jump up, and that is your problem.
ALAN BURGESS: Can I wholeheartedly support that because I think part of the issue is the language that we use. We call ourselves fabricators. It has been used a dozen times this morning already. Can I just ask a question? Who else fabricates things? The only people I can think of are thieves because they fabricate the evidence. They fabricate something; it suggests it is artificial. Something which is fabricated is not the real thing. We do not fabricate anything. We manufacture and, like you, David, I am very proud of the company. We are manufacturers of the finest sash window that there is in the UK. It is because of the perception out there in the general public that somehow a plastic window is the cheap alternative to the real thing. We have got to change that.
MICHAEL NAGLE: One way of changing it is ironically to stop selling white PVC windows. If a deal could be done tomorrow with the profile suppliers that they were all foil-based, they were all colour-based - hear me out - so they were landed on the market and you could then turn round, “No”, then the argument would disappear. Now you’ve suddenly got your price way up there. You’re shaking your head there, Dave, and the reason you are is you’re not going to sell the difference. It is the cooked sausage you would be selling, not the sizzle.
DAVID RUZICKA: No. I am just thinking of stocking implications at this moment in time.
MICHAEL NAGLE: We can sort that out with software. We have been saying that for years.
DAVID RUZICKA: I will tell you what I am thinking, though, because one of the things we are looking at is that we may well go back to our old roots. We used to be joinery manufacturers. We used to actually build small developments, so our background is builders. We are currently looking at going back, or possibly setting up a new side to our business, which would be an aluminium timber-clad style of window, which gives us something sexy and nice to sell to our customers.
When I was working for Anglian some 30-odd years ago, when we’d sold a customer a full house of windows we would actually say to them, “Look, here is an amount of money. Have a cheese and wine party and show your neighbours the windows”. You would not dream of suggesting that today to a consumer to go and show PVC windows. They would look at you as though you were nutty because, I have to tell you, I think a PVC window is so boring it is beyond belief. It has nothing that I can find sexy at all in it. Vertical sliders, I find those very, very nice windows, but I honestly think our PVC product is crap. It has nothing to it. We were talking again outside and saying, “Why don’t we have remote control locking windows that when you set the alarm, remote control, lock all your windows at the same time?” Why as an industry are we not delivering?
JAMES HURST, WINKHAUS: No, you can. You can do that today, but no one will pay the £200 or £150 or whatever, and who would actually install it to make sure it worked? The window fabricator, electrician and so on, we are not structured for that.
MICHAEL NAGLE: Training and education.
JAMES HURST: Absolutely.
MICHAEL NAGLE: I spend six months of the year in Spain and the PVC industry down there, they are selling their PVC at a premium of 30% on top of aluminium.
JAMES HURST: But the aluminium is very different there.
DAVID RUZICKA: Yes, it is actually. We have the same situation where we do actually sell a very nice sexy window to our American buddies in America and they love the fact of the PVC. It almost reminds me of 30 years ago when we actually sold this product here. The Americans actually love it and are willing to pay a good premium for it because it is way above anything that they have got in their marketplace at this moment in time. But as I say, here, today, that PVC window is degraded.
JAMES HURST: This price thing is very interesting. About six years ago I met a German fabricator - manufacturer of windows - and his father and his father before him had been doing it. He had been going really gang busters because the east of Germany was demanding windows right, left and centre, and then suddenly the Germans pulled the plug on it and the market was dying and everybody knew about it. I said, “What are you going to do?” He said, “Well, I am going to put my prices up”, and I said, “Really?” He said, “Yes, because I need to make a profit”. I went away thinking he was a mad man, but I met him a couple of years ago and he is doing fine, and I am actually going to meet him again next week.
What he did was he realised that if the market is all disappearing in one direction, if you disappear in the other you might end up winning. What he said to me the second time I met him was, “Yes, I put my prices up and yes, I lost a lot of volume …”, exactly as you said, Alan, “… but the customers that I kept were the ones who appreciated the value that I give them”. Windows were in his blood when he was born and this is the long-term view that they have quite often in the continent, which we do not really have all that often in the UK, I think, sadly.
SAM KENNEDY: We touched on consolidation earlier on as well and we are into differentiation within itself. From an extrusion point of view I keep using the word “convergence” because all of the systems are converged and they all look similar. I think we would all be struggling if we had different windows on a wall just to figure out which one was which, but I was interested to know, certainly from the new build side, Alan, we were talking about differentiations here and Michael has got quite a radical view of it - make everything wood grain - but how do you get your differentiation across in the market?
ALAN TREVETHAN, K-BAN: About what we do at K-Ban?
SAM KENNEDY: Yes, with you at K-Ban.
ALAN TREVETHAN: Well, I have been in PVC into the new build for 12 years, since it really started, and to me it is about service. Because we don’t see ourselves selling windows, we see ourselves selling a service. We are actually providing a service. If you look at some of the other suppliers into the new build, the people that fit the plumbing and heating are plumbers; they are not the manufacturers of the boilers and the radiators. The builder will go to the plumber that he believes will do the job and provide the service and have the guys turn up on time and service them if there is a problem afterwards. That is the way we treat it. We say we will work with your site managers to differentiate ourselves by the service we give those guys, and we take it upon ourselves to actually plan their work for them. So, we visit their sites on a regular basis, but we don’t do it by telephone. We actually go and walk the site and see what is going on. I think whilst ten years ago we got a premium for that, now all we get is the phone call to tell us how much we have to drop our prices to keep the business, but at least we get the telephone call. So, that is where the market has gone in the new build.
DAVID RUZICKA: Yes, I totally agree with that.
ALAN TREVETHAN: Because there are so many people who will always undercut. I have to be a bit careful of what I say. The buyer is under an awful lot of pressure to reduce the build cost all the time. It is not easy to go in and tell your financial director or your managing director or even your construction director that you want to spend £10,000 more on a site to have these people do the windows versus those people when the product itself is no different, or it is perceived to be no different. When you actually boil it down to the cost per house it might only be £50. Now, you go to the site manager and say, “Do you think your company should spend £50 a house to use us rather than XYZ?” I know the answer but he is not making that decision.
So, I think there is another issue I would mention on market structure in the new build. I think when you talk about consolidation in our industry, obviously the new build market, particularly at the higher levels, have gone through an awful lot of consolidation over the last four or five years to the fact that I am not exactly sure of the numbers but I suspect that the top three house builders now build probably 50% of the UK houses, something in that region. The one thing that brings is that they will not be able to do a single deal with any of you guys, probably because you will not want to do the deal because you will not want that much volume on an annual contract that could go away next year or that you have to fight for, and the price is only going to go one way. I suspect that the consolidation in that market is actually going to lead to more opportunity for the smaller local supplier of the service. Now, whether that is a fabricator who also fits, whether it is like ourselves, a specialist installer who buys in, or whether it is a completely vertically integrated company I do not know because at the end of the day I don’t think the house builder will care because I think it will become slightly more about actually having that window turn up on time and less about the last penny in it. You still have to be very, very close, but I think service will start to become more important here.
GRAHAME HALL, ULTRAFRAME: Sam, one aspect of consolidation we’ve not talked about is the role of distribution, and probably specifically SIG. Some of you may be aware that in my previous life I ran a chain of merchants. So I have sat as a manufacturer and as a distributor, and I think you just touched on new house build there. I can see increasingly that the supplier of new houses could be a distributor and I think that is going to drive a huge amount of consolidation. They suddenly become much more important. You only have to look at builders’ merchants. You go back ten years ago, the main three players had about 35% of the market. Now the main four players - because Grafton have now come in as a major player - have nearly 70% of that market. That has completely changed, and anybody who supplies into that builders’ merchant sector will know how it has completely changed the way that business operates. I just wonder if SIG and there might be one or two of the other merchants - because they are a bit like sheep if somebody sees an opportunity - whether that is going to be a big aspect in terms of driving consolidation because suddenly it is going to be much harder for small fabricators to be able to scale up, and that will in itself change the way we do business.
SAM KENNEDY: Kevin, you have got some, shall we say, history with SIG?
KEVIN HILL, JOHN FREDERICKS: Yes, in my previous life I was a supplier to them. I am talking specifically windows now. If you think about what SIG does as a business, or did do as a business before it got involved in building plastics, it supplied builders’ merchants and it supplied local guys who installed and fitted basically insulation and plasterboard. But if you broaden that out to private RMI distribution of building products, when you think about buying things for your own home the only place where you would go or where your plumber or your builder or your contractor goes is to a distributor. When it comes to windows it doesn’t exist, and I think there is a huge opportunity for SIG to clear up on that. It is doing it with Window Fitters Mate, and we’re a supplier in there from a strategic point of view because to be an early adopter in there we are going to be shifting frames into that nascent distribution arena.
I think it will be very difficult for the traditional builders’ merchants to do that in the same way that SIG do because I think they shift SKUs; they shift boxes, they have got a computer system that says that if you want a valve for a combination boiler, you might be talking double Dutch but plug it in the computer and it comes up with a 10-digit SKU and the guy goes and picks it off the shelf. You can’t do that with a window in private RMI because they are all different. There are no standard sizes and I think that is the niche opportunity: USP for WFM/SIG in window distribution. Whether anybody else will see that and jump on the bandwagon remains to be seen. I think St Gobain would possibly be the next likely company to do that for the simple reason that it is very good at setting up sub-branches within the distribution sector, for example, Minster is their specialist insulation distributor. They could not sell insulation through Jewsons because it was a timber merchant, for example. So, they have got previous experience in doing that and I think when Wolseley Group and other people see what SIG are doing at building plastics and in windows they may decide to have some bright MBA have a look at it, but I do not think it is on their radar at the minute.
GRAHAME HALL: No, I would agree with that. I think it is an extra factor and certainly what I think SIG have already started to understand is there is an opportunity there and I think their ambitions in that area will accelerate. I think that will impact on the fabrication network because they need to make their minds up whether they are going to take on some of that fabrication because they have other manufacturing businesses. You could say, “Oh, no, SIG is a distribution business”, but I do not think it is as simple as that. They could conceivably start to consolidate and become super fabricators and then zip things into there. That would make quite an interesting scenario.
KEVIN HILL: If you imagine what a large distributor of window frames might do in that area, basically it does the work of the 40 to 50-frame fabricator, and it claims it does it better because it has got what? It has got economies of scale, it has got quality control by smacking its large suppliers over the head, and it has the locality and the buying power to be able to out-perform and out-price the 30 to 50-frame-a-week fabricator in that local area. I think there are plenty of conurbations in the UK where SIG/WFM do not have branches, and I think basically they look at a map and see who are the 40 to 50-frame fabricators in that conurbation, we can do it better with our portfolio of products that are on the shelf, we have premium products, loss leader products, and it is a very, very simple model and I think their growth is amazing. They bought WFM, which had 23 branches. They are going to be at 50 by the year end.
Now, at the minute I think what is interesting is you have a conversation with these guys - they probably will not talk to me after this - I don’t know how many people get involved with SIG as a business or WFM, but it is not hitting the radar of lots of people.
GRAHAME HALL: It certainly is falling under the radar at the moment.
KEVIN HILL: It is, and I don’t think SIG know it’s under the radar to that extent either because they are busy doing this but they’re thinking, “How come we have this bit to ourselves?”
SAM KENNEDY: Just to finish up on this section, does anybody else want to make comments with regard to consolidation in itself, the industry?
KEVIN HILL: I just have one point. We mentioned earlier about the involvement in the VCs in the sector at systems level and at window manufacturer level. It seems to me again being quite new to the industry that we are now into a phase. I don’t know if it is the second or third phase. I don’t know how many phases there will be. But the first phase seemed to me you had the guys in Masco coming along looking at it, a huge American conglomerate; Therma-Tru, part of Global Brands, are involved in the UK as well. Then the VCs piled in sort of late 1990s/early 2000. That I suspect for all of them was not a happy or as fulfilling an experience as they first thought in that period, and some of these funds are looking to wind up over the next two to three years, so how they exit will be interesting. We are VC-owned so we have a vested interest in that.
When you have a look at what is happening in the States, and you mentioned that there, a lot of the window manufacturing companies are consolidating both in terms of taking smaller, inefficient businesses out, but horizontally as well. You are seeing businesses that were traditionally timber buying aluminium and buying PVC. You are seeing Global Brands, which owns Therma-Tru, buying a PVC window company called Simonton in the USA. You are seeing Therma-Tru in the UK with a door business. Is it going to buy a trade fabricator in Europe? Where is it going to go? You see Masco are probably not having a great period, I do not know, but has that worked for them? I don’t know.
So, the key thing for me is not the 40 to 50-a-week fabricator and what is happening there. It is at one end who is going to be the next consolidators because private equity is looking in the other direction. I think with the exception of two wealthy entrepreneurs, Jim Rawson and Brian Kennedy, nobody else seems to have an appetite for that. Huge trade buyers in other building products industries which you have seen the past - the Lafarges, the Blue Circles - all those people who’ve come together in building products, they don’t exist in this industry to that extent, certainly at fabrication level. So, who is going to do it? My personal view is there is a great opportunity for a number of fabricators at that level to do it. Interesting who will provide the venture capital in its broadest sense to allow those businesses to that, because I don’t think traditional private equity will probably stick its hand in its pocket.
SAM KENNEDY: Thank you for that, Kevin. We will break for lunch now and get on to the other subjects later on. Thank you.
