The Alside division of Cuyahoga Falls, Ohio-based Associated Materials LLC, has been making vinyl windows since 1980 but this year's launch of two new product lines has been wrought with challenges for the company with 35 years of experience.
Despite commercial success since hitting the market in February, the Mezzo and Fusion window lines have been a $16 million drain to date on Associated Materials' bottom line because of early manufacturing inefficiencies and launch costs.
Problems don't end there for the company, which also makes Genteck Building Products in vinyl, aluminum and steel; Ultraguard fences decks and rails; Revere vinyl, steel and aluminum building products; Preservation windows and siding; and Alpine windows. A net loss of $276.1 million on net sales of $870.2 million was recorded for the nine months ended Sept. 27. That compares to a net loss of $32 million for the same period in 2013, according to Securities and Exchange filings for Associated Materials.
In addition to the troubled window launch, in the first three quarters of this year, the company also saw a $16.8 million decline in net sales for third-party manufactured products mainly in the roofing business, a $12.8 million drop in metal product sales, a $5.1 million drop in vinyl siding sales and a negative impact of $9.8 million due to the weaker Canadian dollar compared to the same period in 2013.
At the same time, raw material costs increased $6.1 million and freight costs went up $2.8 million.
In addition, management determined in August that the fair value of some assets was lower than the carrying value and they recorded a third quarter impairment charge for goodwill of $148.5 million and an impairment loss for certain trade names of $89.7 million. These are non-cash items but they contributed to the net income loss.
Still, it's not all bad news for Associated Materials. The company did have a better third quarter with window sales being a bright spot that's seems to be getting brighter.
“We achieved our first quarter of year-over-year top line growth in 2014,” CEO Brian Strauss said during a conference call with investment analysts on Nov. 14.
He pointed to year-over-year net sales declines of 5.9 percent and 1.4 percent, respectively, for the first and second quarters. However, that was followed by a net sales increase of 4.1 percent to $353.7 million compared to the third quarter of last year.
“Importantly embedded in this performance was 12.8 percent year-over-year growth in our window net sales,” Strauss said.
Associated Materials is about to turn the corner on one-time cost issues related to the Mezzo and Fusion production launches as well as “material inflation,” which will be addressed by price increases “consistent with the market” for all vinyl and metal products the company manufactures, according to Chief Financial Officer Scott F. Stephens.
“There's a fair amount of flex going on in the numbers given the magnitude of operational improvement we have going on in the plants,” said Stephens, who started with the company Oct. 14. “It's off the norm so it's a little difficult or murky for us to be real precise on the outlook other than to say we do expect most of that $16 million to be out of the business in 2015.”
Designed to meet new Energy Star requirements and replace the Excalibur series, the Mezzo windows in particular impressed product reviewers with their slim frame and maximized glass area and were even hailed by some contractors as one of the best updates to come out in years.
The introduction of Mezzo, which means middle, and Fusion, which targets value-minded consumers, allows Alside to expand it product mix and offer the marketplace good, better and best options when coupled with the existing higher-end Sheffield and Ultamaxx window lines.
The two new window lines helped drive that growth of 4.1 percent but margin compression and other factors hurt the overall financial performance of Mezzo and Fusion windows. During the conference call, Strauss was asked what's going wrong with window production.
“Is it a design flaw? Are you having trouble assembling the windows? Is there extruding problems? Are you having to go back and fix the windows in the field? What's happening?” one market analyst asked.
Strauss's response was essentially all of the above.
“You've got the buckets correctly,” he answered.
Basically, Alside is struggling to meet expectations for its manufacturing cost on a per-window basis, Strauss said.
“We started to see some progress toward the end of the third quarter and it continued into the fourth quarter,” he said. “…It has been slow to materialize but we're moving in that direction.”
Associated Materials made progress in other important areas during the third quarter, Strauss added. Sales were up $2.1 million for vinyl siding during the three-month period and $5 million for the Installed Sales Solution business unit as both areas benefitted from higher demand in the new construction market.
Vinyl siding and windows make up 51 percent of the net sales compared to 13 percent for metal products and 26 percent for third-party manufactured products, such as roofing materials and insulation.
Strauss said he is optimistic about growth prospects. Price increases went into effect for vinyl siding and other products in October and will be in place for windows in the first quarter of 2015. Resin negotiations for next year are ongoing. The company has a new vice president of operations and the manufacturing rate of the new windows lines is nearing expectations. And, company officials are scrutinizing the balance sheet.
“We're addressing areas of the business that have lower margins,” Strauss said. “We're looking at our stores. We're looking at roofing within our stores and certain product lines so there's a fair amount of detailed assessment of profitability by product, by store, etc., relative to the debt structure of the business.”
Associated Materials produces exterior residential building products for the United States and Canada at 11 manufacturing facilities and distributes them through a network of 50,000 “contractor customers,” 126 company-operated supply centers and direct sales to independent dealers and national account customers. The company ranked 16th in Plastics News' most recent survey of North American pipe, profile and tubing extruders.
