How a housing-hurt company copes
Boston — When sales are slow, companies sometimes offer rebates. When business is even worse, sales managers haul out plans for a sweepstakes to lure customers.
Business is so bad at Owens-Corning Fiberglas Corporation that next month this building products company will launch both a rebate program and a sweepstakes.
''Our retailers say what they need is traffic in the store,'' marketing vice-president Joseph J. Doherty explains.
Customers have been scarce for companies whose sales are tied to the depressed housing market. High interest rates are choking both remodeling activity and new home construction. In fact, some analysts predict that in 1982 only 1 million new homes will be started in the United States, about half the number of 1978.
The changes the housing slump is forcing on Owens-Corning mirror those being imposed on scores of other companies with building-related businesses. Owens-Corning's consumer rebates and sweepstakes are short-term measures to bring in home repair and remodeling customers to help carry its insulation, roofing shingle, and ceiling tile business through the slump.
In just the past year, corporate costs have been cut, capital spending trimmed 13 percent, and employment reduced 8 percent. Along the way, the company has closed some production lines and dropped out of the solar water heater and office partition markets.
Owens-Corning did ''exactly what all 25 of the companies I follow have done, '' says Timothy L. Jones, vice-president at Dean Witter Reynolds Inc. ''They have lowered their break-even point, gotten rid of marginal operations, cut overhead, and cut personnel.''
Even when times get better, Owens-Corning officials admit the company will not return to all of its old patterns of operation. One major change is that insulation, which has been the company's bread and butter, will play a somewhat less prominent role in its long-term future, and new products and markets will need to be developed.
''If our plans, which I am not at liberty to talk about, come through, there will be different kinds of housing, different amounts of insulation (will be used), and other markets (will be developed),'' says senior vice-president Guy O. Mabry. ''It is pretty obvious that (previous levels of profitability) will be more difficult and require some change of direction,'' by management.
Equaling the previous financial performance will be no mean feat. Considered one of the best-managed producers in the housing products industry, Owens in 1978 sported a 19.6 percent return on shareholder equity and posted a 10.7 percent profit on operations. Last year return on equity dropped to 6.4 percent, and the operating profit margin slumped to 4.1 percent.
A plunge in earnings per share from $4.30 in 1978 to $1.63 in 1981 was caused by a simultaneous depression in two key glass fiber markets. One form of glass fiber is a wool-like material used as insulation in housing. The company also produces textile filaments for weaving fabrics and for reinforcing plastic and rubber used in the hard-hit auto industry.
Analysts are not optimistic about seeing a quick upturn in housing. At the moment, ''I do not see any pickup to speak of,'' says Mr. Jones at Dean Witter. ''The only area where I see a pickup is roofing materials, which have gone from a depression to a severe recession.''
''However, the reinsulation market should pick up seasonally beginning this month and next,'' says Value Line analyst Marjorie Crough.
Neither analysts nor Owens executives expect the housing industry to recover to previous boom levels. ''I don't think the new housing market will come back to the boom-year levels of the '70s,'' says Owens vice-president Doherty. ''We'll not see 2.2 million starts again; 1.5 million may be tops.'' It will be tough to get profit margins back to levels when demand was soaring and supplies were tight.
To help stimulate insulation demand, Owens is pushing the concept of superinsulation. Builders would install roughly double the normal amount of insulation to cut energy bills.
Some analysts expect that reinsulation of existing houses will taper off, given the amount of insulating activity in recent years. But Jonathan Goldfarb, a Merrill Lynch vice-president, estimates there are 23 to 25 million housing unts with 5 inches or less of attic insulation, including 6 to 7 million with no insulation whatever.
Future growth in Owens's business is expected to come ''more in fiber-glass reinforcement (used in plastics, for example) than in the insulation business,'' Ms. Crough says. And Merrill Lynch research indicates the bulk of the firm's research and development spending is going into this area.
One reason is the rapid growth that fiber-glass-reinforced plastics are expected to enjoy in the auto industry and other fields when the recession ends. Sales volumes of fiber-glass-reinforced plastic composites are expected to increase 51 percent between 1982 and '84, according to Merrill Lynch research. One promising use for glass fibers is as reinforcement in computer circuit boards.
In the shorter term, the cyclical impact of a recovery should boost Owens-Corning's fortunes markedly as the housing and auto markets rise from their depressed levels.
In the long run, Owens-Corning will face a tough battle maintaining its growth, since its key end markets - like autos and housing - are not among the economy's fastest-growing industries.
''They have all the plant and equipment they need in place,'' says Ms. Crough. ''They have tremendous leverage [for profit improvement].''