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Letter from Ed: Financing Instability - It’s All Dollars And No Sense In Decision Making
The slow pace of growth has caused financial institutions to become leery about making loans to even stable companies; news about more cash flow problems for a prominent industry playerIn the Mid-Atlantic lumber market.
By Edward C. Brindley
Date Posted: 2/1/2012
When the global economy was rocked during the recent recession, it seems that the rules of the financial game changed. Since I have never served on a bank board and do not claim to thoroughly understand the Federal Reserve details, maybe I am a little naive when it comes to the inner workings of the financial world. Four years ago I instinctively knew that all was not good in Mudville, but how it might impact our industry was still a little fuzzy.
Friends in the pallet industry have always emphasized how important good banking relations are to a successful business, but the nature of my business and how I have developed it has not required much bank financing. I could have used deeper pockets if I had moved more aggressively, but I chose the route of investing a lot of sweat equity instead of financial equity.
Enough about me. What about my friends in the pallet and sawmill industries? What about you?
The financing crunch that has occurred in the last three or four years has had a profound impact on the forest products industry. Our December issue carried two releases about Coastal Lumber being reestablished as Eastern Hardwoods and Brunswick Box auctioning off its plant. At one time, Coastal was possibly the largest hardwood sawmill in the country. And at one time, Brunswick and its former counterpart Abell Lumber formed one of the largest one-two punches of two companies close in ownership, location, and production; both are now gone.
Everybody knows that smaller pallet companies have to manage every detail to maximize profitability in order to stay in business. It seems that profits are harder and harder to achieve, customers are more and more particular, and lumber supplies are less dependable just about every year. But larger companies can have just as many problems and require a lot more capital to keep running. I used to hear the expression “make it up with volume.” That term never seemed to make much sense to me, but today it is increasingly suspect. Everybody in our industry is looking over their shoulders to see who or what is gaining on them.
The news of the latest industry player caught in a financing crunch hit me right between the eyes because it involved a close friend. I recently learned that Potomac Supply Corp. of Kinsale, Va. had temporarily closed all its manufacturing operations as the company sought new financing or another strategy to continue operations. Potomac’s CEO, William T. Carden, Jr., who also happens to be my nephew, said, “The company has fallen on hard times due to the Great Recession and its bank advised yesterday that it will be unwilling to continue to finance the company without additional capital investment.”
Just as Coastal Lumber birthed Eastern Hardwoods when its executives could find new financial support, Carden hopes to resume operations in some form in the near future. Carden explained, “The company is aggressively pursuing multiple options to provide the capital required to continue operations. These options include new financing, private equity investment, divisional divestitures or sale of the company.”
Potomac had already closed its sawmill in December as it negotiated with its banks, resulting in the loss of 57 jobs. If the company cannot find some way to secure financing, another 168 jobs could be in jeopardy.
Why would the bank pull financing for a longstanding enterprise with a stable customer list? What does this action really mean? It doesn’t mean that the company was inefficient or that it didn’t make quality products or that it didn’t service its customers. Its closing, even if it is temporary as company management hopes, is a warning about the precarious nature of financial lending today. Banks appear less willing to take any risks. And the longer that the forest products industry faces a contracted market, the more riskier every company in this sector appears to financial institutions. What happens when a financial institution is no longer willing to supply a line of credit to cover operating expenses, inventory purchases, etc.? It can result in the downfall of even a stable company.
Every reader needs to know the importance of maintaining financial options. It is my understanding that the management at Potomac had been working for many months to resolve its banking issues, but the time came when the bank made a decision that seems to fly in the face of good business sense. Let me explain why Potomac Supply is the last company that I might have expected to endure this kind of financial situation.
I have had the true privilege of
visiting literally hundreds of sawmills, pallet plants, and entrepreneurial manufacturing facilities in our industry. None, and I mean none, are any nicer than the complex at Potomac Supply. It is a true show case. First, it is one of the largest, possibly the largest, single location companies that has a pallet
manufacturing division in North America. It was the biggest North American manufacturer of CHEP perimeter-based block pallets before CHEP started building its own pallets. For a period of time, its automated pallet assembly line ran 24/7 and built more CHEP pallets than any other nailing line. Potomac Supply was founded in 1948 and is a diversified forest products company with five manufacturing divisions – wood treatment, sawmill and planer mill, wood fuel pellet plant, wooden pallet factory, and treated fencing and decking.
Potomac’s pallet plant will not itself be missed in the market because it was no longer significantly involved in pallet construction. Having been so dedicated to CHEP pallets through the years, it struggled to replace volume when CHEP took its production in-house. But Potomac is a very large treater of lumber, supplying one of the major home improvement retailers in the Mid-Atlantic region. People familiar with the wood treating industry might know that Potomac was a pioneer in wood treating. It has a strong reputation for innovation and environmental stewardship. It has actually received a number of environmental awards – hard to believe that a wood treating plant can be recognized by environmental groups.
Every aspect of the Potomac plant exhibits a professional commitment. Its parts department looks like a hospital surgical supply room – hygienically white glove clean. The sawmill and all of Potomac’s divisions are examples of both manufacturing efficiency and attention to quality details.
Potomac’s company ownership has been active in the past by serving on the bank board. But today the financial world doesn’t run on solid relationships and a handshake. It seems to be dominated by fear and the desire to limit credit risks at all costs.
While I am not privileged to know all of the details involved in this case, I have a track record of visiting the Potomac Supply plant and knowing the Carden family that stretches well over four decades. The lesson readers should take away from this letter is that if it can happen to Potomac it might happen to many others in our industry. You must do what you can to secure multiple lines of funding, improve liquidity and keep solid banking relationships. All of us hope that the new year will bring better business conditions. While hoping for the best, we must continue to prepare for the worst.