Thursday, January 2, 2014

ICF Industry Consolidation

ARXX Building Products filed bankruptcy at the end of December . In the beginning of the month, Reward Wall announced that it’s selling its assets to Airlite/Fox Blocks.  Here’s my take on the current consolidation in the insulated concrete forms market.

Nearly all the ICF products generally available in the marketplace are considered “residential grade” and are essentially identical. Two panels of Type II EPS joined by plastic cross ties. They’re all about the same size and shape and all have about the same baseline performance.

There are only three outliers of any substance: Polycrete, ARXX Steel and Nudura (I’m not sure if the ARXX Steel line is still available). Some might consider knock-down blocks in a separate category, but their steep installation labor costs ensure they will remain a niche product.

Since nearly all residential grade ICF products are alike, since they compete primarily on price, since there is a concerted price war in the market, we can expect to see more companies like ARXX and Reward Wall being absorbed and disappearing.  There are too many similar brands chasing too few jobs. If they can’t find anything to compete on except price, consolidation is the natural result.

In this pricing environment, the best managed, structured, positioned ICF suppliers will survive. The best structured are those that control their own manufacturing. If they have a diversified product line as well, they should be better positioned to survive reduced margins. Hopefully their other product lines are profitable and can finance their price war.

Those ICF brands that have real, tangible and provable differentiators should be fine over the long term as long as management  continues to sell the unique benefits and resists the urge to leap into the price war.

Recently we lost a job to Nudura. It was a small job. They came in at half of our price. When the contractor told us Nudura’s quote, we said, “Sorry, we don’t sell our product that cheap,” and walked away. We know our costs, we don’t sell below cost, and we’re always happy to let our competitors lose money.

It’s difficult to tell where this consolidation will end. Airlite/Fox seems to be the big dog in the fight. They have their own manufacturing, a diversified product line and the financial heft to hang in for a longer time.

This type of highly aggressive pricing can be a minefield for the entire industry. One danger is that small manufacturers and those that outsource will try to hang on by cutting costs and quality. More high profile failures by inadequate products will damage the entire industry.

A second hazard to the industry’s reputation is the habit of selling material directly to GC/Owner. This may aid the supplier’s margin, but it cuts out the installer’s profits. ICF suppliers that squeeze installers are slitting their own throats. It’s a habit that reduces the installer’s margin of error and increases the likelihood of him losing money or walking off the job. It happens and we all know it.

One more hazard is overselling product or aggressively selling into an inappropriate market, which causes troubled installations. This results in disappointed customers and leaves a lasting bad taste in the mouths of construction/A&E professionals.  

If you have a residential grade product, stick to houses. This is a sword that cuts  both ways. Polycrete products work best in a commercial environment. Many of our installers do residential work as well, and we always encourage them to use the right product for the job. When presented with an opportunity that’s not appropriate for Polycrete, we don’t hesitate to hand it off.

In my opinion, those ICF suppliers that cannot survive long term should read the handwriting on the wall and cut the best deal they can with a firm that has its own manufacturing capacity sooner rather than later. Alliances, equity deals and earn-outs are easy to structure if everyone’s serious and all can be winners. That will get the consolidation over with and our industry can go on to make some money.