Quarterly Trend Report

Fabricator Sales & Confidence still up in 2006 but will it last?

Sales - quarter-on-quarter

Whereas the total market is flat to down, seasonal influences and consolidation may explain why fabricators have been reporting growth in the last few quarters. In this quarter's survey, a net 36% of fabricators sold more windows in the last three months (April to June) compared with the previous three months (January to March) - see chart 1.

The smaller the firm, the more widespread the pick-up. Firms in the North (net 43%) and South (38%) were ahead of companies in the Midlands (24%).

More trade(net 51%) and retail fabricators (32%) increased sales than commercial firms (11%).

*The difference between the percentage of companies reporting an increase over those reporting a decrease is the net balance.

April - June 2006 sales compared with the previous three months - by size

SIZE	Increase	Decrease	Same	Total	Base
Small	55%	14%	31%	100%	51
Medium	47%	7%	46%	100%	30
Large	37%	21%	42%	100%	19
Total	49%	13%	38%	100%	100

April - June 2006 sales compared with the previous three months - by area

AREA	Increase	Decrease	Same	Total	Base
South	50%	12%	38%	100%	34
Midlands	41%	17%	42%	100%	29
North	54%	11%	35%	100%	37
Total	49%	13%	38%	100%	100

Sales - year-on-year

Sales are also ahead of the same period last year, when the market was depressed. A net 16% of companies sold more windows in April to June 2006 compared to April to June 2005 (chart 2). However, whilst small and mid-sized firms increased sales, large firms experienced a drop.

Significantly more fabricators in the Midlands (net 31%) and South (18%) increased sales than companies in the North (3%).

On balance, trade fabricators did best with a net 31% reporting growth. Commercial and retail firms saw little change.

Stocks

A net 8% of fabricators increased stock levels compared with three months ago.

More small and mid-sized firms (13%) built up stocks than large fabricators. The South (15%) also increased stocks more than any other regions.

While trade fabricators (27%) built up stocks, commercial (11%) and retail firms (3%) cut back.

Employment

Despite the perceived recovery, firms remain cautious with on balance only 6% of fabricators taking on more staff compared with three months ago (chart 3). Commercial companies (net 17%) were the only ones to cut back on staff.

Orders

Orders are up with a net 31% of firms reporting fuller books compared with three months ago (chart 4). More mid-sized and large fabricators (net 37%) did better than small firms. The South (41%) picked up more than the Midlands or North.

Capacity

Forty four percent of fabricators are currently working at capacity (chart 5).

Raw materials

A net 71% of fabricators reported a rise in costs compared with three months ago (chart 6). Fabricators in the North (net 81%) were most affected.

Prices

On balance only 3% of fabricators put up prices compared with three months ago (chart 6). Mid-sized companies (net 10%) and firms in the South (15%) were most active at raising prices but most fabricators reported no change.

Price expectations

However to counter rising costs, a net 47% of fabricators expect to have put up prices in the next 12 months compared with the previous 12 months, with few fabricators forecasting a drop.

Investment intentions

On balance 7% of fabricators expect to invest more on new plant and machinery over the next 12 months compared with the previous 12 months (chart 7). Large firms (net 16%), companies in the Midlands (14%) and trade fabricators (15%) are most confident in future investment.

Outlook

Looking ahead, expectations remain unaffected by the weakness in the market over the past year or so. A net 32% of fabricators forecast a rise in sales in the next three months (July to September) compared with the last three months (April to June). Forecasts are strongest among mid-sized fabricators (net 50%) and firms in the North (43%).

Not surprisingly, trade and commercial fabricators (net 46% and 39% respectively) are more positive than retail firms (21%).

A net 40% of fabricators also expect to sell more windows in the next three months compared with the same three months of last year (chart 8). Across the board, few firms anticipate lower sales.

Prospects

On balance 14% of fabricators are more confident now about the overall prospects for the window industry compared with three months ago (chart 9).

Large (net 26%) and mid-sized firms (20%) are most optimistic together with companies in the Midlands (24%) and commercial fabricators (22%).

The recovery in fabricator confidence appears founded on a perception that the market is picking up together with seasonal influences.

Profitability

With fabricators reporting better sales and forecasting growth, it is therefore not surprising that a net 21% of fabricators also expect profits to increase over the next 12 months compared with the previous 12 months.

Mid-sized (net 30%), large firms (28%) and trade fabricators (47%) are most confident.

Problems

Margin squeeze (62%), price cutting in the market (61%) and supplier price rises (54%) are the top three problems facing fabricators in April to June.

Unusually, when asked for the single biggest problem for fabricators in the last three months, three factors - price cutting, lack of confidence in the market and supplier price rises - were each mentioned by 15% of firms interviewed.

Comment

"The quarterly trends survey continues to confound the pessimist," comments Winston Duguid, Managing Director of WHS Halo, who sponsor this report. "Why when the suppliers of PVC compound into the UK Market are telling us that the sales in the first half of 2006 are down 4% against the first half of 2005 is there the optimism shown by the fabricators? The answer is partly seasonal but mostly the effect of consolidation. Databases are notoriously difficult to keep up to date but WHS Halo's own database and Research suggest that a net 200 fabrication and a net 400 installation companies have gone out of the industry in the last 12 months. If the overall market is near flat then by definition those remaining will be gaining market share.

"With the overall British market now worth less than 11 million windows a year, down from its high of 13 million plus, it is inevitable that there will be business failures. Invariably those going out of business are at the cheaper end of the market. The company without a consistent product, without on time in full deliveries and without a good relationship with its customers and clients will struggle in today's market place and have only the price reduction as a means of keeping existing business. But with business failures increasing the shrewder installers and clients are getting wary of being left high and dry. They recognise the tell tale signs when a fabricator offers its customer base a price reduction on the basis it is switching to less costly suppliers. Time and time again those fabricators fail to see the pitfall that although their percentage margin increases their cash margin will deteriorate. A saving of £10 on the cost of a window is wiped out by a reduction of £15 - £20 in the end selling price.

Interestingly the stronger companies are now getting price increases through to their customers, who in turn recognise that this is a necessary part of protecting their medium term supply chain."

The WHS Halo Report, a quarterly trends survey, is produced by Michael Rigby Associates and sponsored by WHS Halo in conjunction with The Fabricator. The aim is to keep a finger on the market pulse, and to monitor fabricators' views and expectations of market movements. The survey covers a representative sample of 100 window fabricators. Telephone interviews took place between the 6th and 14th July 2006 across a balanced spread of size of firm, geographical area and type of fabricator. For survey details or a copy of the full report call Lucia Di Stazio, Michael Rigby Associates 01 453 521 621. © Copyright Michael Rigby Associates 2006