When mortgage interest rates started to rise in mid-2022 for the first time in years, it slowed what had been a hot housing market for EDCO Enterprises.
The company manufactures siding, roofing and aluminum soffits, trim and gutter products. The fall in demand was noticeable.
But as interest rates peaked and then began falling a bit toward late 2023, the market – maybe not yet so much in Minnesota, but in areas served by the siding, roofing and aluminum exterior product manufacturer – definitely started rebounding, said John Lewis, president and CEO of EDCO Enterprises.
“Our take is they’re (interest rates) likely to continue to ease a bit,” he said. “Maybe not to the good old days of 2.5% mortgages, but a kind of stabilizing and moderating that is healthy for our business.”
Lewis said EDCO expects 2024 to be good. Maybe not the best of times, but definitely not the worst of times either.
“For our business, stability and moderating interest rates are pretty helpful,” Lewis said.
Uncertainty, but no panic
Lewis may be slightly more optimistic than some in the manufacturing industry. Enterprise Minnesota, which supports the state’s manufacturing industry, does an annual state of the industry survey and in 2023 manufacturers expressed significant concerns about many issues, including new legislation around paid sick and safe time, paid leave and cannabis in the workplace and indicated that such rules make Minnesota a less attractive place to do business.
Twice as many manufacturers see 2024 as a likely time of recession than a time of expansion, the survey indicates. Yet, 86% of respondents were confident in the financial future of their companies.
Concerns around inflation and of being able to hire qualified workers have decreased as well according to the survey.
“I think the tagline would be conservative caution,” said Bob Kill, president and CEO of Enterprise Minnesota. “As much as inflation is down, it’s still real. It’s much more real in rural Minnesota than it is in the metro.”
There still are concerns for an economic downturn, as well, and there are significant concerns, he said, about the lack of exemption for small businesses on mandatory paid leave.
“It’s going to be brutal for those very small companies,” Kill said. “I predict that something will get done to relieve those very small companies, but the fact that they have the same mandates as a large company that probably already meets the qualifications is a lack of appreciation for small and very small businesses.”
That said, Kill adds that he is seeing some businesses shift their thinking a bit toward investing, pursuing growth through new customers and markets, which had slowed significantly during and immediately after the pandemic.
“Historically, the best companies make moves when there’s challenge,” Kill said. “We know of companies right now that are making small acquisitions. Our people in the area of planning and revenue growth are as busy as they’ve ever been.”
That fits the small business mentality where if companies can control their own fate, they believe they’ll be fine.
“If it’s under their control, they feel they can accomplish it and overcome it,” he said. “It’s a challenge if it’s not – that’s when they start getting nervous.”
Supply chain stabilized
EDCO has been investing in new equipment and technology in recent years, implanting a new enterprise resource planning system, adding a paint line at a coil coating facility and investing in a new siding production line.
The company is seeing the fruits of those investments starting to pay off. Another factor in its solid 2023 was continued stabilization of supply chains. The company struggled throughout the COVID pandemic and the early portions of the recovery due to the scarcity of products.
“We had difficulty sourcing some key materials, aluminum and paint, cardboard, that we need to make, package and deliver our products,” Lewis said. “Beginning in 2023 and into 2023 that all eased up substantially.”
That should continue into 2024, said Emily LeVasseur, co-founder and managing director at Waypost Advisors, which helps middle market companies with supply chain issues.
In mid-2023, LeVasseur had concerns about the potential for a bankruptcy filing by Yellow, a lower-priced less-than-truckload shipper and of contract talks among United Parcel Services (UPS) workers going bad.
Yellow did file bankruptcy and is in the process of liquidating, but UPS workers reached a contract. Labor issues that were a mess in early 2023 have also stabilized a bit, with more workers signing on and not leaving within a month of being hired.
“Manufacturers are really feeling like they’re getting back to a stable state,” LeVasseur said. “Purchase prices on materials are flattening out. We’re seeing there is still some inflation in certain markets, but for the most part things will keep up with normal inflation fees and not crazy.”
No more dire predictions
Michael Rosow, a financial services attorney at Maslon LLP and member of the Global Executive Board at the Turnaround Management Association, represents clients in loan workouts, creditor remedies and bankruptcies, primarily on the lender side.
The turnaround industry, he said, has been predicting the next recession “is right around the corner since about 2015,” he said. “They, including myself, have been wrong for five to eight years.”
From about 2011 through the pandemic, there were historically few loan workouts and bankruptcies. A blip during COVID was mitigated significantly by government programs that assisted companies. That money has been running out at the same time interest rates have increased, so he expects to see an increase in distressed companies in 2024.
Small businesses, for example, that were paying 3% on a $1 million loan that are now paying 8% might not have the extra $50,000 they have to come up with to make their payments, he said. The multiplier effect will start to take place as that company backs up payments to other small companies who, in turn, will have to do the same to their vendors.
“It’s going to hurt the next tier of companies just as those companies are having increased borrowing costs too,” he said.
Now, that said, such an increase in distressed companies would really be bringing that back up to a historically normal level.
“We’ve been at such low levels of distress, money has been free,” he said. “You could always go down the street to get a new loan. You could always get more equity financing. We’re going to be returning to an environment where a more normal number of companies go into economic distress.”
And, Rosow said, despite the gloomy picture, he is not predicting doom and gloom for small businesses overall.
“I would say back in 2017, 2018 people in my industry were talking about a tidal wave or a tsunami being right around the corner,” he said. We were certainly talking about that in April of 2020. I don’t hear people talking about that kind of situation nearly as much anymore.”
The distressed deals he is seeing are happening tend to be with companies that already have other issues exacerbating the increased lending costs, such as construction companies with cost overruns from a project, a service company that took on a job they didn’t have the experience to manage or any business that was overleveraged with debt.
In general, he suspects companies that are doing fine will probably be fine throughout the year.
“I think it would be overly pessimistic to say that a significant economic downturn is inevitable,” he said. “A pause, a period of slower growth and a taking of temperature and resetting of expectations are likely to occur. But I don’t know that a recession is inevitable.”
Conditions improving for funding
Interest rate decreases toward the end of 2023 helped increase demand for lending, said Susan Anderson, senior vice president at VisionBank. She’s hopeful those rates will remain at least flat and maybe decrease a bit more.
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“The interest rate has really limited the affordability of properties for investors, for owner-users,” she said.
The venture capital funding pipeline was significantly slowed nationwide throughout 2023 due to a slow market for companies filing initial public offerings. That clogged every level of the equity funding cycle.
But Reed Robinson, founding partner of Groove Capital, said this will drive favorable terms for firms with capital to invest. He cited Berkshire Hathaway Chair Warren Buffet, who once said “Be greedy when others are fearful,” Robinson said. “Now is the time to be greedy.”
“If you are in the game, now is the time to acquire positions at suppressed valuations,” he said, adding that Groove is poised to make deals when terms are favorable. “The goal is to buy low, in teams that can produce a lot with limited resources and hold until conditions begin to thaw.”
Better times ahead
There’s some sense that if companies can make it through a good-but-not-great 2024, that better times may be ahead in 2025.
LeVasseur sees some additional bankruptcies and consolidation in the trucking industry starting to push rates up through the latter part of the year, so she advises companies to lock in contracts now to the extent possible.
A lot of companies are spending some time stabilizing inventory issues that had gotten out of whack in recent years.
“We could be looking at maybe not a tremendous year in 2024, but we’re not expecting the sky to fall at this point,” she said. “And things might stabilize enough where 2025 could actually be pretty good. I’m hearing that in a lot of different places.”
EDCO remains optimistic heading forward, as well. The company is pretty conservative financially, Lewis said, but will continue making investments out of its cash flow to remain debt free. Coming off of one of its best years ever in 2023, the company thinks it’s setting itself up to do even better as economic stability improves.
“Sometimes the market doesn’t work in your favor,” Lewis said. “But I think if you stay on offense and keep trying to fight to improve your business and improve market share in tough times and go with the flow in good times; that tends to be a reasonable recipe for continuing to grow.”
