In response to disappointing results for its plumbing group in the third quarter, Hughes Supply is accelerating efficiency measures and evaluating the idea of branch consolidation within the group.

In response to disappointing results for its plumbing group in the third quarter ended Oct. 31, Hughes Supply is accelerating efficiency measures that include reduction in inventories, receivables, headcount and other operating costs. The wholesaler is also evaluating the idea of branch consolidation within the group.

Hughes reported a 7% decrease in net earnings for the third quarter, $18.8 million vs. $20.2 million for the same period last year. Net sales of $863 million were 10% above $786 million last year.

For the nine months, net income rose 2% to $55.6 million compared with $54.5 million for the same time last year. Net sales for the nine months were $2.57 billion, up 13% compared with $2.27 billion last year.

David Hughes, chairman/CEO, and Steve Zepf, treasurer/CFO, discussed the wholesaler's third quarter and the outlook for fiscal year 2001 Nov. 10 in a teleconference call.

The primary cause of its lower earnings is isolated to one product group, plumbing supplies, which accounts for about 30% of Hughes' total sales, said David Hughes. "Overall sales growth has slowed as a result of lower commodity prices," he said.

The other four business units, which represent 70% of its sales, are meeting earnings expectations. The water and sewer group continues to be very strong, he said.

The impact of commodity pricing on the plumbing group has been magnified by aggressive price competition in some of the wholesaler's major markets, Hughes said.

"The pricing situation has cost us about 100 basis points of gross margin, or about $3 million in gross profit dollars," he said.

PVC products are a major commodity item in the plumbing/HVAC group, he said. As examples of the lower commodity pricing he cited 3/4-in. PVC used for irrigation, which was selling at about $16 per ft. in July vs. about $12 per ft. in November; and 3-in. plastic PVC pipe for drainage and waste, which sold for about $85 per ft. in July vs. $70 per ft. by the end of October.

More reductions planned

The wholesaler has eliminated 60 positions in the plumbing group since June, mostly by attrition, and expects to reduce the work force by another 240 people by the end of December, Zepf said.

"Our sales volumes and market share remain healthy in the plumbing area, and we are not cutting out the sales and service people necessary to remain successful," he said.

Also, Hughes is reducing inventory levels from many plumbing and building material products by making changes in basic purchasing routines and requiring the use of its distribution centers for restocking of affected items. Through September, inventories in the plumbing group have been reduced overall by 12%, or about $22 million, from a high of about $178 million in inventory, Zepf said.

"By year-end we expect to cut plumbing inventories by another $5 million to complete a 15% reduction program," he said. This will be achieved through improved inventory management, including directed purchasing from preferred vendors, the opening of a new distribution center in Texas and better use of existing central distribution centers.

The wholesaler has been looking at branch consolidation as part of the plumbing group's restructuring, he said. Currently Hughes has about 180 plumbing/HVAC branches across the country. Multiple branches serve overlapping territories in several regions.

"We are evaluating where we might be able to consolidate certain branches and still compete effectively from the remaining locations," Zepf said. "We expect to complete any closures by year-end, with the cost savings impact showing up in the first quarter of the new fiscal year."

Investment in technology

Spending on information technology remains at the level projected for this year, between $30 million and $31 million by year-end, Zepf said. The number of software vendors has been whittled down to two, and final demonstrations are underway.

"We will have a signed contract at the end of this year and start migrating at the end of next year," he said. "We are running just under 1% of sales on our IT spending."

At this time Hughes still has 17 software systems, although its objective is to reduce that number to as few as possible that can run the company effectively. The 17 systems will remain until the migration begins.

"Once we select which systems to go on, it will take a number of years to migrate all the branches," Zepf said.