Managing in Today’s Turbulent Economic Environment
NAW Executive Summit Chairman - February 2009
Chip Hornsby, Group Chief Executive, Wolseley PLC
NAW Chairman of the Board
Good afternoon, ladies and gentlemen. Thank you for attending this year’s Executive Summit. I trust you’ll find it a very productive two days.
I am sure you agree that we are today managing our way through the deepest, most challenging economic adversity of our careers. Let’s fully understand the situation. The economy has become the primary focus for all of us in 2009.
For my organization, Wolseley — which I will tell you about in just a minute — we have been dealing with a downturn since 2006.
I want to spend a few minutes discussing:
- What I’ve learned from this very challenging global economic environment, and
- Why I think it’s more important than ever — given this economic environment — for all of us in wholesale distribution to ensure that NAW will be stronger than ever.
First, let me provide you with some background about my company, Wolseley.
We’re based in the United Kingdom, which is where I spend the majority of my time. We are the world’s largest distributor of plumbing and heating products to professional contractors and a leading supplier of building materials in North America, the UK, and Continental Europe. We employ about 66,000 people in 27 countries across the two Continents.
In the three decades that I’ve been in distribution, I’ve not seen times anywhere near as challenging as we’re facing today. In the United States, housing has been declining for three years.
Annualized housing starts in this country are at unprecedented levels with the most recent figure for December falling to an all-time historic low for the home building industry. In a typical year, the U.S. demand for new housing is about 1.5 to 1.6 million new homes. At the height of the bubble, we were building 2.2 million new homes. When annualized, December’s housing starts are a paltry 550,000. I think this illustrates just how difficult conditions have become in the housing industry.
The problems in the housing and construction industry show little sign of improving any time soon. Consequently, the deterioration in some of our key markets at Wolseley continues, and it is likely that conditions will get even tougher still.
It’s really challenging for all of us in this country and across the world, and it’s going to remain so for many of us in this room throughout 2009 and into 2010.
Let’s not sugarcoat the situation facing many of our businesses — it’s as difficult right now as I’ve seen in my 30 years in this industry.
Overall, the trading conditions faced by Wolseley are not showing any signs of getting easier. If anything, the deterioration in our markets in Europe, particularly in the UK, has accelerated.
In 2007 and 2008, we had to make the tough decisions that these difficult circumstances demanded, and we’ll continue to make tough decisions this year. We’ve taken and will continue to take difficult, painful, and visible actions that ensure that whatever the market throws at us this year, we’ll prevail. And in that respect, I don’t doubt for a second that many of you in this room are facing similar decisions on a daily basis.
The actions we’ve taken at Wolseley have been in two principal areas: profit protection and debt reduction. Over the last two years, we reduced headcount across the group. It’s abundantly clear that conditions in the new residential market are going to continue to get worse before they get better.
On the debt side, we have taken a number of significant actions to improve our overall cash position. These have included:
- Suspending the dividend
- A number of receivables factoring transactions to generate cash
- Reductions in Capex
- And business and property disposals.
In addition, the emphasis on driving cash generation remains a central focus for all of our businesses. There is little doubt that Cash has returned to be King once again after leverage and debt was the theme of the recent past.
So to summarize, in these unprecedented circumstances for Wolseley, we have three key priorities:
- Driving cost reduction
- Enhancing cash flow
- And closely managing the balance sheet.
Sound familiar? I thought so.
One additional point is the financial life blood of any distribution business — Working Capital. On working capital, our primary focus has been inventory turns. When business is strong and sales are growing, inventory turns don’t draw the level of attention they must today.
What I’ve told our management team is that we need to act like we are in the Fish business — either sell it or smell it. Inventory is likely your largest asset, as well as the one we can most control.
Now, I’m certainly not in the business of giving advice, especially to such a talented group of executives as we have gathered in this room. But I do want to mention five concepts I believe every executive should live by in these unprecedented economic times.
- Realism: Let’s clearly identify problems for what they are and immediately assess them for the damage they potentially can cause us.
- Fortitude: Let’s have the stomach to do what has to be done to deal head-on with our business problems, no matter how unpleasant.
- Proactivity: Let’s address issues early, directly, and often.
- Perseverance: Let’s see problems all the way through to solution, especially now, when the trough seems very deep and the endpoint seems far away.
And last, Resilience: This business cycle will require resilience — the ability to adapt and adjust to extremely challenging circumstances.
To do all of these things, in my opinion, it’s very important that Wolseley be even more actively involved in NAW. We consider NAW a vital resource in these very turbulent times.
Whenever I’m asked what I find most valuable about Wolseley’s membership in NAW, I always say, without hesitation, that it’s the “superior networking opportunities” — as we’re experiencing here at the Executive Summit.
I know that many of you feel the same way. And, that’s because it’s true: Networking is what makes NAW the most effective organization of its kind. Because NAW is uniquely positioned across all lines of trade in wholesale distribution, it is able to successfully promote critical information exchange and targeted benchmarking among “noncompeting companies.” And the companies represented in this room are best of breed.
I also particularly like, and take part in, the small and highly interactive groups that NAW convenes through its many Billion Dollar Company and Large Company events. Once again, these events are opportunities to sit around a table and frankly discuss best practices with other executives who aren’t competitors, but who speak the same language — “Our language of distribution.”
Even more valuable to me are the many relationships across the industry that I’ve been able to establish with leaders from companies closer in size to my organization.
Two of these leaders are Bob Reynolds of Graybar Electric and Grady Rosier of McLane Company, both of whom I first met at NAW events. So important have these relationships been to me, that I’ve traveled to their companies and learned firsthand from them how they’ve grown their businesses. I’m happy to say that these relationships are sustained today, and we continue to share ideas and talk about what our companies are doing to improve our performance.
I encourage you to do likewise. Throughout this Executive Summit, work to go beyond individual conversations … Establish relationships … Consider setting up post-meeting personal visits with some of the people you meet here — or at least make plans for follow-up phone conversations. Trust me, you’ll be glad you did.
I strongly believe it’s even more important — now while we’re enduring an economic crisis — that our companies fully utilize this benefit of NAW membership.
Wholesaler-distributors have been described as the “shock absorbers” of our economy. By this, it’s meant that our position in the supply chain enables us to respond quickly to changes in economic conditions. We’re quick to adjust to softening demands or strengthening conditions. This capacity has served us well, in good times and bad.
However, what we have yet to learn is whether the depth and scope of the current recession can be successfully dealt with simply by calibrating our traditional shock absorber response to these factors, or whether — indeed — we are in uncharted waters — and so new responses, and strategies, are required.
I don’t know the answer. What I do know is that I’m very fortunate to be able to share my thoughts, questions, and ideas with fellow CEOs like Bob and others of you — who have become accessible to me — thanks to NAW. This is one reason that NAW is even more valuable to me today.
Government relations advocacy is a second reason that NAW is even more important today. We are witnessing unprecedented government intervention into the economy. Whether you favor or oppose this intervention, one thing is clear: it raises the danger of a much-altered business climate.
An example is from the Washington Post asking in a stark headline last October if the economic crisis would bring “The End of American Capitalism.” We face the possibility of significant government involvement in economic decision making, which was unimaginable just months ago.
Add to that, the liberal agenda of the Congressional Leadership and the campaign promises of our new President — if he attempts to keep them — of trillions of dollars in new government programs and spending with crippling taxes on wealth and capital to pay for “spreading the wealth around.” We are clearly in harm’s way.
This is where NAW comes in. NAW connects our industry with leading Federal policy makers whose decisions often impact the everyday operations of our companies. Our businesses need NAW’s direct and grassroots lobbying, and leadership of coalitions to advocate for wholesale distribution at the Federal level.
As an industry, we’re going to face a lot of challenges with our new President and Congress. As business executives, we must do our part to be fully engaged alongside NAW to prevent anti-business legislation from being signed into law under the guise of saving the economy.
At the top of the list, of course, is the dangerous “card check” bill that would remove secret ballot elections from union-organizing campaigns and force employers into mandatory binding interest arbitration in negotiating first contracts. Organized labor has made it clear that enactment of the card check legislation is its top priority, even though public opinion is clearly aligned against it. NAW’s government relations team has been on top of this issue since it surfaced; through NAW, our industry played a key part in the defeat of this legislation in 2007. Given the increased pro-labor majority in the U.S. Senate, it’s going to be critically important that we work through NAW to defeat it again this year.
Two other key issues that our companies should be concerned with are on the tax front:
- Repeal of LIFO remains a real threat and would endanger many distribution companies. We cannot let LIFO be repealed.
- The other key issue is that pro-growth tax cuts, enacted since 2001, will expire next year if Congress doesn’t act to extend them. Just take a look at the handout on your table and apply those changes to your company and your own tax return, and imagine the impact of those changes on your company and on your disposable income. As an industry that operates on very thin margins, we can’t allow the tax cuts to expire. This would suck billions upon billions of productive dollars out of the private sector into the sterile coffers of government. We must continue working to make them permanent.
In summary, business networking and pro-business advocacy are two reasons. I encourage NAW member companies of all sizes and lines of trade to take advantage of everything that NAW has to offer. As we continue to manage our companies through the very difficult financial times we’re in, let’s stay connected and involved through this great organization.
Lastly, I get questioned frequently about when the U.S. market will begin to recover. Many assume that since the United States was the first one into the recession, it will be the first one out — sort of like inventory FIFO. My response, to date, has been: we are more like FISH — First In, Still Here. There is far too much uncertainty today to predict we are near recovery.
In closing, I want to say that it’s been an honor to serve as your Chairman of the NAW Board, and on behalf of NAW, I thank you for your support this year.