BUSINESS BRIEFING

This past June the U.S. House of Representatives passed the American Clean Energy & Security Act, commonly referred to as the Waxman-Markey bill and the carbon cap and trade bill. If its language survives a Senate debate, the law will stipulate minimum levels of energy that must be produced from renewable sources. A minimum of 4 percent takes effect in 2012 increasing to 20 percent in 2020. Any non-compliant electric power will be charged a $0.025 penalty per kWh.

Many are focusing on wind and solar power as our salvation under this law. However, most utilities and independent power producers believe biomass is the most attractive renewable energy alternative. Unlike wind and solar, burning biomass provides a steady, uninterruptable energy source and is a proven technology. Existing coal plants can easily be converted to wood, and wood biomass is classified as carbon neutral.

For example, the Southern Company, a large electric utility based in the Southeast, just announced the conversion of a 96 megawatt (MW) plant in Georgia from coal to biomass. The company is also studying the conversion of five additional coal-fired plants to biomass. Note that a 50 MW plant requires over 700,000 tons per year of woody biomass. Those who know these things believe that a plant that size will require all the biomass within a 50-mile radius of such a facility.

Until other biomass materials are available in sufficient volumes, wood is seen as the best alternative fuel. The problem, however, is twofold:

1. The amount of wood biomass required to meet the new law's targets will push U.S. forests past the level of sustainability, i.e., power generation combined with other uses of wood fiber will require more wood than is being grown annually.

2. Demand for energy purposes will require use of standing roundwood and hence drive prices of this material for OSB, pulp, and other uses higher.

So while timberland owners, loggers, and truckers applaud this potential new demand, paper and panelboard producers see supply disruptions and higher raw material costs. Most experts claim that sawmill revenues will benefit from higher demand for their by-products. Other sawmill operators are concerned about the long-term effect on sawtimber supplies as landowners shift toward shorter rotations aimed at producing more pulpwood for energy purposes.

Hopefully some of the demand for woody biomass can be met from harvest residuals that are now being left in the woods. If economical equipment can be developed for collection, this now un-used resource becomes a business opportunity for loggers and will motivate more of them to stay in the business.

For those with knowledge of the timber supply chain where pellet mills and wood burning power generating plants are located, the emergence of biomass as an energy source could present an exciting business opportunity. These facilities will undoubtedly require long-term supply agreements and will be looking for reliable suppliers.

And there are financial incentives to stimulate development of the biomass market. Under part of the 2008 Farm Bill called the Biomass Crop Assistance Program or BCAP, payments are authorized to eligible material owners who deliver biomass to certified user facilities such as utilities and match the delivered price up to $45/ton. The program is currently scheduled to last two years and has $25 million available for this year.

Note that removals of biomass from private timberland under this program require a new or amended Forest Stewardship Plan or other management plan approved by the State Forester. Theoretically there will be some oversight of the removals and the impact on timber supply.

Such programs immediately bring to mind the law of unintended consequences. Those in Washington, the state capitals, and all localities believe that everything they do stands alone and has no effect on anything one, two, or even degrees removed. In the real world you and I live in, we face the ripple effect. And even the best intentions can have bad results.

So while U.S. experts in forestry claim that our forests will no longer be sustainable if much of the alternative energy is generated from woody biomass, our governments blithely ignore these data. Sounds like the mess that lawmakers created with corn ethanol…

Bottom Line: The wood-for-energy sector is moving quickly to the center of the forest products radarscope. While the use of waste wood by-products for limited power generation makes sense, economics, as always, will govern its adoption. Ultimately the cost per kWh of this power must compare favorably to that of power generated using other energy sources. In the meantime, the equipment needs of this emerging industry bear watching.

Are the American Clean Energy & Security Act's Greenhouse Gas Targets Achievable?

The law passed by the House of Representatives and currently awaiting debate in the Senate stipulates a goal that is just slightly more than one billion tons of greenhouse gas emissions in the year 2050. The last time the U.S. had that amount of emissions was in 1910 when there were only 92 million Americans, 328 million fewer than the 420 million projected for 2050. To meet this 83 percent reduction target in a country of 420 million, per capita carbon dioxide emissions would have to be no more than 2.4 tons per person, which is one-quarter of the per capita emissions of 1910, a level probably last seen in 1875 when the population was 45 million.

Builders Downsizing Homes

Homebuilders are struggling to determine what home buyers want and what they can live without. With just 294,000 new homes sold through the first nine months this year, many housing experts are predicting that future buyers will want smaller and simpler homes. Indeed this trend may already be underway as the average house peaked at 2,507 square feet in 2007 and is now 2,392 square feet according to Census Bureau data. Average prices have declined by 16 percent.

Some builders believe this downshift reflects a change in the way people want to live. While jobs are fewer and mortgages less available, homeowners now realize that large homes come with more cleaning, more heating, and more cooling, not to mention yard maintenance.

The question for those in the value-added wood products industry is the effect of smaller homes on demand for upscale cabinetry, wood flooring, and other wood items. Stay tuned…

Panel Production Falls

North American production of structural panels fell by 33 percent in 1Q2009 versus the same period last year, an unsurprising performance given the housing recession.

Production of OSB dropped 41 percent to 2.87 billion square feet compared with 4.853 billion square feet in 1Q2008. That decline was felt equally across both U.S. and Canadian mills.

Softwood plywood production was 2.5 billion square feet in the quarter, 22 percent below the same period in 2008. Plywood's smaller loss than OSB's is attributed to its higher usage in remodeling and non-residential construction.

Sector Report

Kitchen Cabinets

According to the KCMA's Trend of Business Survey, October cabinet sales fell by 25.1 percent versus the same month last year. Year-to-date cabinet sales have dropped 30.2 percent vs. 2008. Through the first ten months of 2009 stock cabinet sales are down 25.6 percent, custom sales down 37.2 percent, and semi-custom sales off 32.9 percent.

The severity of the slump in cabinet sales is seen when one remembers last year's performance. In the first ten months of 2008 sales were down 12.7 percent vs. the same period in 2007. Since 2007 cabinet sales are down nearly 40 percent.

At the company level…

• Masco Corporation, the largest cabinet producer in the U.S., reported 3Q2009 cabinet sales of $434 million, down 25.7 percent from the same period last year.

• American Woodmark announced that 2Q2010 sales were off 23 percent vs. the same period last year. Gross margin plunged to 12.2 percent resulting in an operating loss of $8.2 million. Analysts note that the company's plants are running at 50 percent of capacity making the return to profitability unlikely at the current sales level.

Home Furniture

U.S. Furniture Factory Shipments Decline Again

According to the monthly survey by accounting firm Smith Leonard, shipments from U.S. furniture makers dropped 14 percent in September vs. the same period last year. One positive sign is that one-third of the respondents indicated an increase in orders.

For the year shipments are down 19 percent.

California Extends Formaldehyde Deadline

Following up on news from the October Cutting Edge, the California Air Resources Board has granted a six-month extension to allow furniture retailers extra time in selling their inventories of products that are not compliant with the new formaldehyde emissions standard. The extension recognizes the sluggish retail environment for furniture due to the economic slowdown.

The new deadline is December 31, 2010.

A bill calling for national adoption of California's rules on formaldehyde in composite wood panels was introduced in the U.S. Senate in September. If passed, the U.S. E.P.A. will assume responsibility for enforcement under the Toxic Substances Control Act.

Furniture Trade Declines

Imports of furniture in the first half of 2009 fell 22 percent as consumer demand slumped. The dollar value of imports dropped to $9.1 billion from $11.6 billion in the same period last year. Only one country, Poland, saw a gain over 2008 while 17 countries experienced double-digit declines. China, the number one source country, saw its U.S. shipments slump by 22 percent. Shipments by Canadian producers, long a leading source of furniture imports, fell by 44 percent as the weaker U.S. dollar hurt their competitiveness.

With lower demand around the world, U.S. furniture exports also fell. In the first half of this year, shipments dropped 21 percent to $1.05 billion. Canada remained the top market followed by Mexico, the U.K., Saudi Arabia, and Japan. China logged in at number six with purchases totaling $16.6 million, a far cry from the $5.4 billion of furniture her producers sold in the U.S.

China Short of Workers

Furniture Today reported that Chinese factories in the Pearl River delta, center of export furniture production, have 30 to 60 percent fewer workers than in 2007. As export orders slumped through this year, factories laid off workers. Many returned to their homes in rural areas and have not returned as factory activity has not recovered. Furniture makers are also competing for labor with higher paying industries like electronics as well as government-sponsored infrastructure projects.

Higher labor costs will undoubtedly result from this situation. The Chinese export furniture industry had its genesis when Taiwanese producers saw their labor costs rise in the mid 1990s. Will Chinese producers move their plants to other countries or to other regions of China with lower labor costs? Keep your eye on the continuing evolution of the global furniture business…

Many U.S. importers are concerned that their Chinese suppliers will be unable to respond quickly when business recovers. Those U.S. firms dependent on the import-based strategy for home furniture are now experiencing the critical disadvantages of relying on independent suppliers located far from the consumer.

At the company level…

• La-Z-Boy reported sales of $300.7 million in its 2Q2010, down 9.4 percent year-on-year. Upholstery sales fell only 6.1 percent during the period; casegoods, 23 percent. Gross profit rose to 31.6 percent from 26.1 percent last year. The company moved from a loss of 4.8 percent to a profit of 3.3 percent. Management attributed this improvement to the implementation of cellular manufacturing in their upholstery plants, the relocation of its cut-and-sew operations to Mexico, and general cost cutting initiatives.

• Furniture Brands International reported 3Q2009 sales of $293.7 million, down 28.9 percent from the same period last year. Gross profit fell by 19.3 percent, and the company lost $15.8 million on the operating income line. The company has posted seven consecutive quarters of losses. Analysts expect those losses to continue for several more quarters.

• Ethan Allen Interiors announced Q2009 sales of $136.2 million, down 33.8 percent. Gross margin dropped from 54.4 percent to 42.8 percent; operating margin, from 5.9 percent to a loss of 11.8 percent. Sales at company-owned retail stores fell 33 percent.

• Stanley Furniture, one of few U.S. furniture makers with multiple case goods plants, reported a 3Q2009 loss of $5.1 million. Sales fell 29.4 percent to $38.5 million. For the full three quarters of 2009 sales have slumped by 31.6 percent reflecting continuing slow demand for upper-middle priced wood furniture.

• Chromcraft Revington reported that its 3Q2010 were 30.5 percent below the same period last year. Through drastic cost cutting the net operating loss fell to $979,000 from $10.17 million in last year's quarter. The company sells under the Chromcraft, Cochrane, and Peters-Revington brands.

• Bassett Furniture Industries is closing its fiberboard plant in Bassett, VA, at the end of the year. The closure will affect about 45 employees.

• Orleans Furniture announced the closing of its Columbia, MS, case goods plant. The company will continue its import operations and will retain 20 to 25 workers to staff its distribution center.

• Promotional furniture producer Michels & Company, Lynwood, CA, has filed for Chapter 11 bankruptcy protection.

• Flexsteel posted a profit of $1.4 million despite a 17 percent drop in total sales in its 1Q2010. Total sales for the quarter were nearly $76 million. Revenues of its domestic furniture division fell only 9.4 percent while its commercial furniture line dropped 33 percent.

• Upholstery producer United Furniture is reactivating a former Futorian plant in Okolona, MS. The 575,000 square feet plant is being refurbished using a $1.1 million grant from the Mississippi Development Authority and $290,000 from the Appalachian Regional Commission.

• Upholstery maker Norwalk Furniture is rebuilding its business following its closure one year ago. The company is employing 150 workers at its 430,000 square feet Norwalk, OH, plant. During the restructuring management closed its 57 company stores and the Hickory Hill factory in North Carolina and is rebuilding its independent dealer network. Investments have been made in frame making including the addition of a CNC router.

• Canadian consumer goods giant Dorel earned record profits of $30.2 million. Sales were down only 6.1 percent to $552.2 million. The company owns the Ameriwood, Ridgewood, and Charleswood brands. Sales in its furniture segment were $125.4 million, and earnings were $12.5 million.

• Following their restructuring and subsequent acquisition by Groupe Bermex, Canadian furniture suppliers Shermag and Jaymar exhibited their products at the October High Point Market. While Shermag's ten case goods plants are now idle, plans are underway to reopen some of these facilities. Initially wood components will be imported then assembled and finished in Canada. Upholstery production will continue at Jaymar's Terrebone, Quebec, plant, which employs 150 workers.

Office Furniture

BIFMA, the sector trade association, reported a 30 percent decline year-on-year in October office furniture orders. October shipments fell by 32 percent y-o-y vs. a 2 percent increase in 2008.

Industry shipments over the past twelve months were $8.285 billion, down from the peak of $11.46 billion reached in late 2007. Unbelievably the industry is now shipping at a rate below the $8.47 billion seen in late 2003 following the dot.com bubble explosion. Remember that the industry peaked at an annual rate of $13.35 billion in early 2001.

The association's forecast, released in mid November, shows 2009 and 2010 orders declining 30.5 percent and 2.3 percent respectively. Shipments during that two-year period will drop by 30.2 percent and 4.6 percent. Positive growth is seen returning in 4Q2010. This forecast portrays deeper declines next year and a slower recovery than BIFMA's previous prediction.

As noted below, the October Architect's Billing Index came in 46.1, the twenty-first consecutive month of contraction. Office construction is a key driver of office furniture consumption.

Companies are experiencing breathtaking declines in sales…

• Steelcase reported its 2Q2010 sales at $578.1 million, down 35.9 percent from the same period last year. North American revenue fell 35.4 percent; international sales, 41.9 percent. The result was a $1.0 million loss at the operating income level.

• Herman Miller announced its 1Q2010 sales at $324 million, a decline of 32.4 percent from the same period last year. North American sales fell 31.9 percent; international, 40.4 percent. Gross margin fell to 33.2 percent while operating income dropped from 11.8 percent to 4.4 percent.

• HNI Corporation announced that its office furniture sales fell 32.2 percent in its 3Q2009. Impressively the company delivered an 11 percent profit in this product category vs. 7.2 percent last year. Management reports continued weakness in its channels for this product.

• Knoll, Inc. reported that its 3Q2009 sales declined by 36.1 percent. Despite that slump operating margin came in at 9.3 percent, the best performance in the contract furniture sector.

Wood Flooring

The Flooring Sector's Star Performer

With new home construction down 75 percent and remodeling in the doldrums, the performance of Lumber Liquidators defies logic. In its 3Q2009 the company, based in Toano, VA, increased sales by 14.2 percent to $140.5 million. Last year's sales totaled $482 million.

Featured in the November 30 issue of Forbes, the company literally started from the back of a Chevy pick-up truck in 1994. Now it's targeting to run 400 stores by 2014. These stores rely on a 7.5 acre finishing/ warehousing facility plus strong marketing. Store managers scour the company's database to discover which flooring types are best sellers in their markets and to follow up with prospects who have requested product samples. Their market research shows that those shoppers have a 30 percent likelihood of buying a floor within a month. That information also shows that homeowners typically remodel one room at a time. On that basis the company maintains contact with its existing customers.

At other flooring companies…

• Mohawk Industries, facing a worldwide slump in carpet and flooring demand, announced that sales of its Unilin laminated wood flooring fell 21.2 percent in 3Q2009.

• Armstrong World Industries reported 3Q2009 flooring sales down 18 percent vs. the same period last year. Due to lower material costs, however, earnings from this product segment grew by 31 percent.

Non-Residential Construction

The American Institute of Architects' Architecture Billings Index (ABI) rose to 46.1 in October, up three points from September, but continues to forecast contraction in non-residential construction. The demarcation line between expanding and contracting construction activity is 50.

In a good sign for store fixture and millwork producers, Building Design + Construction is forecasting a retail construction spending to rise 10 percent in 2010 and 12 percent in 2011. While the value of building in this sector is down 40 percent through August, the forecast sees no further decline in 2009. The only category to avoid the recession is big-box general merchandise retailers located outside of malls, a group that generally gains market share during tough economic times. Restaurants were the weakest category, down 64 percent.

Art Raymond is a manufacturing consultant specializing in furniture, cabinetry, millwork, and other value-added wood products. His firm, A. G. Raymond & Company Inc., develops management and technical solutions for wood products manufacturers around the world. Comments and questions are welcomed at araymond@raymondnet.com or through www.raymondnet.com

PUBLIC POLICY

The other day I read a quote from Representative Charles Rangel (D-NY), chairman of the House Ways and Means Committee, in which he said he was "eager to get to 2010 when Congress could debate overall tax reform." Earlier this year, an Administration official told me that the Administration was being pressed by outside economic advisers to provide some corporate tax relief. The pending House version of health care reform includes a 5.4 percent surtax on incomes over $500,000. There are literally dozens of tax code provisions that reduce business tax liability that will expire at the end of 2010. Then there are the big ones. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) temporarily reduced the top individual marginal income tax rate to 35 percent. It will return to its pre-EGTRRA level of 39.6 percent in 2011. Sole proprietors, partners, and S Corporation shareholders pay tax on their business income on the individual rate schedule. The Alternative Minimum Tax (AMT) continues to vacuum up more taxpayer dollars because it relies on a 1969 baseline of income at which the AMT kicks in.

I do not know if I am as eager as Chairman Rangel to have the discussion, but if you add up all of the above, one can only come to this conclusion: What choice do we have but to talk about a major overhaul of the tax code?

What weighs heavily on my mind are the trade-offs. I know there is a strong desire in the big corporate community to get the corporate tax rates down, even if it means giving up a variety of deductions and credits. In addition to the internal to C Corporation structure tax trade-offs, there are the trade-offs between the personal and corporate tax structures. Right now this Congress appears to be inclined to increase the tax burden on wealthy taxpayers, but how much more can be added? It seems to me that inclination will be a countervailing force to push corporate tax burdens upward.

As a refresher, the income of a C Corporation is taxed directly at the corporate level. Shareholders are taxed on dividend distributions of the corporation's after-tax income (the dividend is not deductible by the corporation). C Corporations are taxed at a top rate of 35 percent for taxable income over $10,000,000. The benefit of graduated rates below 34 percent is phased out for corporations with taxable income between $100,000 and $335,000, and the benefit of the 34 percent rate is phased out for corporations with taxable income in excess of $15,000,000. In addition to the regular corporate tax, the Code provides for an additional tax paid by the corporation at the top individual rate, imposed on certain corporate earnings that are not distributed to shareholders. An "accumulated earnings tax" can be imposed on certain earnings in excess of $250,000 ($150,000 for certain service corporations in certain fields) accumulated beyond the reasonable needs of the business.

Where I am going with this is a revival of a suggestion I made just about a year ago, and that is in order to make sure we are in the "winners" column and not the "losers" column, we need to know what is important to us in the tax code and to our customers. A marginal rate is the rate at which the last dollar of income is taxed. If the discussion expands to a broader discussion of tax reform, then effective rate of taxation is important. Technically, in the tax economists' world, the phrase is the "average rate of taxation" (taxes paid divided by taxable income.) When they refer to average effective rate, it is taxes divided by a broader definition of total "economic" income. We are not tax economists, and for a discussion of which elements of the tax code and structure are important to business, we use the term "effective rate," meaning taxes paid divided by taxable income.

There are countless deductions, credits, and other factors that determine a business' effective rate of taxation by virtue of their adjustment of taxable income. A big one that WMMA fought for is the one that allows manufacturing businesses to reduce their taxable income by a percentage of the income received from domestic production activity.

How about the direct expensing allowance used by our customers? If Congress was to offer corporate rate cuts, but the direct expensing allowance was eliminated, what would the impact be on our customers' buying decisions? Is it a trade-off worth making?

Tax reform is a delicate balancing act. I learned a lot of lessons from the 1986 reform debate, and one lesson is that it is not all about the rates.

Dust — Public Policy Activity

New! Report on the OSHA stakeholder meeting on December 14, 2009, "Manufacturers voice concerns at OSHA combustible dust meetings"

Wood dust has become an issue that is at the forefront of today's public policy rule makers. WMMA has formed an Industrial Dust Task Force to monitor the situation. Task force members are attending OSHA's stakeholders meetings.

In addition, WMMA is a member of the Inter-Industry Wood Dust Coordinating Committee (IWDCC), organized by the American Forest & Paper Association (AF&PA) to help ensure that the woodworking equipment and the wood processing industry and related industries are represented in these public policy discussions and decisions.

Combustibility

First, the Occupational Safety and Health Administration (OSHA) initiated rulemaking on combustible dust in October 2009. Stakeholders are currently providing feedback. In addition, the National Fire Protection Association (NFPA) has two standards currently in review cycle: NFPA 654, the Standard for the Prevention of Fire and Dust Explosions for the Manufacturing, Processing and Handling of Combustible Particulate Solids, and NFPA 664, Standard for the Prevention of Fires and Explosions in Wood Processing and Woodworking Facilities.

Health Impact

The International Agency for Research on Cancer (IARC) recently made a causal link between wood dust and sinonasal and nasopharyngeal cancer. As a start of the regulatory activity, the State of California, which has been looking at wood dust a potential item that would require labeling, is considering whether to lower permissible exposure limits.

Resources

Below are some links to materials that would be helpful in understanding the issues.

• Combustible Dust: Regulatory and Legal Challenges
  Presentation by Adele L. Abrams at the Small Business Legislative Counsel roundtable, Washington, DC, November 2009
• Combustible Dust…An Explosive Issue
  Presentation by Jamie Scott, Air Handling Systems, at The Dollars and Sense of Going Green conference, Schaumburg, IL, November 2009
• Combustible Dust Update: OSHA's Preliminary Rulemaking on Dust is Underway
  A November 2009 article by legal consultant Keller and Heckman LLP
• OSHA's Advance Notice of Proposed Rulemaking, October 21, 2009
• NFPA 654, Standard for the Prevention of Fire and Dust Explosions for the Manufacturing, Processing and Handling of Combustible Particulate Solids
• NFPA 664, Standard for the Prevention of Fires and Explosions in Wood Processing and Woodworking Facilities
• IARC Monographs on the Evaluation of Carcinogenic Risks to Humans, IARC Monograph, Vol 62

Convince Congress to Start Over!

WMMA joined with other distribution, manufacturing, and business associations to urge members of Congress to Start Over! Many member key contacts answered this public policy alert when the long-awaited Reid health care reform bill was finally released and formally introduced in the Senate in late November. Despite best efforts of the business organizations which participated for months in negotiations to produce a health care reform bill that would control costs, increase market-based competition, provide insurance reform, and make health care more available and affordable, the bill introduced in the Senate did none of those things.

Senators should hear from their business constituents, like WMMA members, on this critically important legislation on health care. You can identify your senators and find out the location for their in-state offices by going to the U.S. Senate's Web site: http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Home-state contacts from business constituents are among the most effective ways to get messages to senators. Your voice does make a difference; your employees and you vote, which every elected official understands.

INTERNATIONAL BUSINESS DEVELOPMENT

The WMMA International Business Development Committee (IBDC) was prepared to sponsor and administer a member supported consortium approach to enter the Russian market. It canvassed the members for support in the late summer and fall. The effort fell short of its required member participation target, largely due to the U.S. economy and the downturn in the Russian woodworking market over the past 18 months. The committee is prepared to re-launch the effort at a later stage.

The Russia market potential is great and in the article I highlight the unique advantages of Russia in context to the hits it has taken over the past 18 months. While I expect the market to rebound by the end of next year it is difficult to time any market, especially one as volatile as Russia. Now is not the right time to go into the market expecting to make sales within six months. Yet, it is never the wrong time to actively research and monitor this market to be prepared to enter it when conditions improve.

The Economy

Russia has a population of 142 million and it is a country that goes through wild economic swings. From 1997-2007 its real GDP growth averaged 7.5 percent. Consumer purchasing power and spending, especially in the urban areas, increased dramatically. The economy became more open and the banking sector was in full swing. This was a far cry from the mid to late 90s when external financing was required to finance a deal and barter or contra deals were common. As oil and natural resource prices rose and the global economy prospered, Russia was at the forefront of unrestrained growth.

But in 2008 the pendulum swung and the picture changed dramatically. Russia reeled from the unraveling of an oil-boom-related surge in capital inflows, which culminated in the devaluation of the Ruble in January 2009. The drop in commodity prices and a sudden reversal of capital flows led to a fall in fixed investment and shattered the nexus of high growth in investment, productivity, and real wages. As a result, GDP plummeted by almost 10 percent in the first half of 2009 relative to the same period a year earlier.

Again, a swing was in evidence during the second quarter of 2009. Per the IMF's World Economic Outlook (WEO), October 09, the contraction began to moderate: industrial production "growth" recovered to -1.0 percent in the second quarter from a trough of –40 percent earlier in the year; and the pressures on the capital account and the exchange rate have eased.

Growth is projected to recover only slowly over the course of 2010, despite oil prices that are significantly higher than previously expected. But, it will grow nonetheless.

The exchange rate has seen some wild swings as well during the past year, largely a result of the Ruble devaluation in January 2009. In October 2008 the ruble traded at about 26 to the US$; in March 2009 it rose as high as 36 before dropping to its current level of 29.1 = $1 or about 4 percent lower than a year ago.

Forest Situation/Outlook

Given Russia's forestry resources — one fourth of the world's timber stock — its role in world trade is far behind its potential. The government is trying to pursue long-term policies to improve the sector's efficiency and downstream processing by: 1) increasing the share of processed and higher-value wood and wood products; 2) curbing illegal export and trade of logs; 3) applying tariffs and other government measures to promote the export of processed products versus logs; and 4) attracting foreign investment.

The Woodworking Market

Prior to the current economic slowdown domestic demand was increasing not only for furniture but housing in general. Major accomplishments included:

• Increased purchasing power in urban areas, especially Moscow where it is five times the national norm;
• The ability for Russians to own property as of 2003;
• Increased availability of domestically produced MDF and particleboard;
• Restrictions on log exports and the threat of a crackdown on illegal logging activity;
• Increased acceptance of stick building (now accepted under Russian code) as a quicker alternative to block construction.
• Increased duties in 2004 on imported furniture.

However, by mid 2008 the woodworking market collapsed. According to State Statistics Committee of Russia, by year end 2008 the volume of timber working fell by 22 percent; furniture production dropped at 25-30 percent and wood and sawn wood production fell 40-50 percent. Many enterprises suspended production. In January-July 2009 compared to the corresponding period in 2008 there was a decrease in output of solid fiberboard (- 37.7 percent), chipboard (- 29.7 percent), plywood (- 29.2 percent), timber (- 17.3 percent), doors and windows blocks (- 32.6 percent and - 48.1 percent) and some types of wood packaging.

According to the U.S. Department of Agriculture's Foreign Agricultural Service, forestry production will continue to decline in 2010 albeit at a slower pace than in 2009.

In 2008 even though Russia was still the world's second largest exporter of rough wood and 4th largest exporter of sawn wood, exports took a hit by year end 2008. Total exports dropped 15 percent from its high of $7.5 billion in 2007 and all downstream products suffered at about the same rate, save furniture. For the first six months of 2009 overseas shipment continued their tailspin, falling over 37 percent.

Woodworking Equipment Market

The drop in wood harvesting, and wood processing naturally created a decline of imported woodworking equipment and especially from the West. The trend will probably begin to change by the third quarter of 2010.

In 2008 Russia purchased $922 million of woodworking machinery (second largest importer behind the US). The first six months of 2009 told a different story as Russia's woodworking equipment imports dropped 56 percent to $186 million. Nonetheless, Russia was still the fourth largest trade market for equipment behind the U.S., China and Germany.

Market Challenges

• Russia's different business practices and its uneven transition from a socialist to a market-oriented economy at times can make you feel like you are operating in the "Wild, Wild, West."
• Stiff European competition due to their proximity and their long-standing relations with Russian organizations and companies.
• Government bureaucracy, poorly established rule of law and corruption affect such areas as dispute settlement, product certification, standards, as well as Customs clearance. Something like 30 to 40 percent of Russian government revenue is derived through customs levies!
• Lack of knowledge about U.S. sources of supply as only a few U.S. brand names are seen locally (e.g., Wood-Mizer, Lenox, 3M, and DeWalt) and only a few are known through exhibiting at Ligna.
• Good after sales service, training and customer support are commonly offered by European suppliers. Lack of U.S. equipment after sales service is one of the most serious doubts raised during initial negotiations.
• Pricing as Russian consumers are attracted to bargains. While they are increasingly willing to pay for quality merchandise members should be prepared to offer competitive prices, knowing that in many areas they face inexpensive Russian and strong European, Chinese and Taiwanese competition.
• Flexible payment schemes as most buyers operate on a relatively small partial payment with the order, up to 50percent during manufacturing and the balance prior to shipment. WMMA members are also advised to work out leasing schemes (a popular alternative) or arrange export credit insurance.
• Product certification and the CE mark. Russia has its own certification standard. It is not a large obstacle but one that needs to be confronted. Having CE certification indicates you are an international player and puts you on par with European competitors.
• Metric conversion is important especially to buyers in remote areas.
• Distribution channels. The good news is that the two tiered distribution channel is evolving with more importers and more dealers. The challenge is that the five largest dealers control about 50 percent of the import market and are closely tied with European suppliers.
• Overcoming different business customs. At first meeting, Russian business people can come across as indifferent and cool and scheduling meetings can be difficult. There are other nuances that need to be understood and applied.
• Language. Russian language ability is a must and an interpreter should be hired if necessary. An increasing number of Russian businesspeople speak a courtesy level of English; however, they prefer to conduct business discussions in Russian.

Doing business with Russia may be challenging at first but very rewarding as business ties strengthen and relationships develop. Key success factors are flexibility, willingness to take on risks and focusing on the long-term.

Brazil Consortium Begins in 2010

A WMMA Brazil Consortium, championed by Allen Turk, Precision Drive Systems, begins in January 2010 and is scheduled to end in January 2011. A kickoff meeting of the consortium participants is being held in Atlanta in early January. After an enrollment period that began in August, eight WMMA members have joined to date.

A three step strategy is being implemented. The first step is the preparation of market research into the Brazilian woodworking market. The research will be presented at the January kickoff meeting. The second step is the hiring of an in-country expert, a business development liaison (BDL), to work with each consortium member on a shared cost basis. In the third step, the BDL assists consortium members in finding and negotiating an agreement with a suitable dealer, agent or joint venture partner.

WMMA members who sign an agreement to participate before December 31, 2009 will pay a $450 per month rate. On January 1, 2010, new members will pay a $500 per month rate. Non-consortium members will be able to obtain the market research study in 2010 for a fee.

For more details, please contact Association Headquarters.

BUSINESS DEVELOPMENT

Construction Put in Place — October 2009
Manufacturing and Trade Inventories and Sales — September 2009
Manufacturers' Shipments, Inventories and Orders — October 2009
Manufacturing ISM Report on Business
New Residential Construction — October 2009
Purchasing Managers Index — November 2009
Quarterly Financial Performance Indicators Report - AHFA - 3Q09
U.S. Leading Indicator — October 2009
Winter 2009-10 Economic Forecast Report

To access all of the monthly economic reports, please log on to this page: http://www.wmma.org/members/bus_develop.cfm, using your member username and password.

MANUFACTURING STRATEGIES

Over this past summer, WMMA's Manufacturing Committee had the pleasure of touring Merillat® Cabinet plants in Atkins, VA. The purpose of the visit was to witness how the application of Continuous Improvement (CI) can benefit an operation.

The yields from Merillat's 10-plus-years of commitment to CI are impressive. Over this time, the plant's throughput has doubled, yet the physical space has remained the same. Order fulfillment has improved from five days to eight hours.

The observations by members of the Manufacturing Committee are takeaways that all WMMA members can find beneficial for their own operations and customers. Click here for a copy of the four-page brochure. Contact Association Headquarters if you have any questions.

NEWS YOU CAN USE

Wood Industry, Canada's magazine for the secondary wood products manufacturing industry, is once again inviting WMMA members to submit application stories, new product releases and company news of interest to Canadian manufacturers.

Wood Industry, in conjunction with WMMA, will be featuring WMMA member companies and their customers, in the traditional WMMA Special Section, the March issue of Wood Industry. The WMMA Special Section will consist of two free opportunities, exclusively for WMMA members.

First: As a WMMA member, you are entitled to submit one referral for an application story about a satisfied Canadian customer using your product. To take advantage of this opportunity, simply provide your Canadian company's contact information to Wood Industry and flag the submission as a WMMA Application Story.

Wood Industry will contact the referred client and arrange an interview and a photo, so the client must agree to be interviewed and to have a photograph of the installation published.

For WMMA member companies with official distributors in Canada, be certain to notify your distributor of this opportunity. This notice is a service of WMMA, and will not necessarily go to distributors in Canada.

Second: as a WMMA member, you are entitled to submit up to two new product releases for the Special Section. To take advantage of this opportunity you must submit a photo or electronic image of the product, and about 75 words of text telling the name of the product, the name of the company and the product's applications, specifications and options, if any. Electronic images can be in jpeg, tiff or eps formats, and must be a minimum of 300 pixels per inch and three inches wide (high resolution). Please do not submit photos embedded in Word files or PowerPoint presentations. And please, no sell lines or digitally manipulated images in the photos. This is new product editorial, not an ad. Each product must be flagged as a WMMA Product in the Subject line of your e-mail or regular mail submission.

Send all editorial material by January 15 to: pflannery@wimediainc.ca.

Patrick Flannery, Managing Editor
Wood Industry
63 Credit Rd.
Caledon, ON L7C 3J3
Canada
(519) 451-9759
www.woodindustry.ca

In addition, be sure to contact Mike Neeb: mneeb@wimediainc.ca, (647) 290-3673 if you want to take advantage of the March WMMA Special Section advertising opportunity.

This opportunity is free, and it works for you. Contact Wood Industry by January 15.

IWF 2010 UPDATE

Here's a quick overview of upcoming deadlines and what to expect from IWF in the next few months:

• Exhibit space invoices were mailed the week of December 7th detailing the third payment (25 percent of total booth cost). All payments must be postmarked by a government postal agency or overnight delivery service (not a company postage meter) by January 15, 2010, in order for any discounts to apply.
• IWF is providing a credit card payment option for booth space payments for 2010. IWF 2010 Exhibitors will be able to make payment using their credit cards for payments due. For more information about credit cards payment for booth space payments contact the IWF sales team at 404-693-8333 or sales@iwfatlanta.com.
• The IWF 2010 Challengers Award Call for Entry has been mailed to all exhibitors and the request for entry packets are streaming in! Exhibitors who have developed new and innovative products should complete this entry request and return it to IWF or go to www.iwfatlanta.com/cae as soon as possible. Once IWF has received your entry request you will be mailed a Challengers entry packet. The entry deadline for submissions is April 1, 2010.
• Buyer / Attendee Registration & Housing opens January 4, 2010.
• In February, you'll receive the Exhibitor Information Manual / Promotion & Advertising Guide CD, which will supply you with all the information you need to set-up, coordinate and promote your exhibit at IWF 2010.
• WMMA has a block of sleeping rooms for members exhibiting at IWF 2010 at the Hyatt Regency Atlanta. Click here for details on how to make your reservations.

Thank you for making the decision to exhibit at IWF 2010 and creating a successful show for attendees and buyers.

ASSOCIATION NEWS

Every February, the entire WMMA membership is invited to Washington, DC to discuss the legislative issues of importance to their businesses and to the woodworking industry. All these volunteer leaders have a common objective: securing a strong manufacturing base in the U.S.

February 8 - 10, 2010
Washington, DC

Members! Click here to register before Friday, January 8, 2010.

Forget Yesterday, It's a New Tomorrow for 2010 Woodworking Industry Conference Attendees

Industry Leaders to Discuss Succeeding in the Recovering Economy April 21-24, 2010 in Monterey, California

Industry professionals looking to network and discuss strategies for recovering from a difficult 2009 should plan to attend the 2010 Woodworking Industry Conference in Monterey, CA. Set for April 21-24, WIC 2010 is themed, Forget Yesterday, It's a New Tomorrow as a reminder that the current economic downturn will not last, and one of the keys to surviving a downturn is planning for the economy's inevitable recovery. Read more.

Here's Where to Find Woodworking Machinery

WMMA's popular Product Guide for wood industry buyers and manufacturers is one of the most comprehensive resources in the woodworking industry. It contains up-to-date woodworking machinery products and contact information on and links to more than 200 member companies. Purchasing executives and other key decision makers in all types of woodworking installations worldwide, including furniture, cabinet, sawmill, millwork and plywood plants as well as nonwood applications in ceramic, composite, laminate, nonferrous metal, plastic and stone find this guide useful.

The Latest and Greatest

Members — view your company information on the Product Guide and contact Association Headquarters to inquire about how to make changes. Member companies can include a logo, one product photo, a company description, and a selection from a database so that visitors can search by product. Contact information is pulled from the Association membership database.

How to Use This Guide to Find Woodworking Machinery

Search by company in the complete WMMA member alphabetical listing, then select and view the company's information including description, email and Web site links, location, key executives and personnel, plus a list of the wood woodworking machinery, supplies or tools it manufactures.

Search by the type of wood machinery by its general function — such as cutting, sanding, gluing, special purpose or woodworking tools or other woodworking supplies — and receive a results list of woodworking machinery companies with links to their profiles, Web sites and an option to email questions and comments.

This guide is available in eight languages. Click on the appropriate flag to receive an instant translation of this woodworking machinery catalog for wood working tools, wood working supplies and wood working equipment.

Nominations for Board of Directors

WMMA's Leadership Development Committee is preparing the slate of Directors for the Board term expiring in 2013. These individuals should be known for their character, ability and integrity. While acknowledging the strengths of the current organization, nominees must embrace change and recognize the key challenges facing the Association and manufacturers of wood machinery, cutting tools and supplies.

Nominations should be sent immediately to Leadership Development Committee Chair Jim Laster, Newman*Whitney — Division of Newman Machine Company, Inc. 507 Jackson Street, P.O. Box 5467, Greensboro, NC 27435-0467 or email him. His email address can be found here under "Past Presidents."

Seeking Outstanding Industry Contributors

Nominate an individual who has made outstanding contributions to manufacturing, the wood industry, your company and/or to WMMA. Entries for the prestigious 2010 WMMA Ralph B. Baldwin Award must be received at Association Headquarters no later than February 26, 2010. Members — click here for more information.

Membership Dues Deadline Is January 31

By now, member company key contacts have received their WMMA annual dues invoice by U.S. mail. In early January, key contacts will be emailed information on how to make dues payments online. According to the by-laws of the Association, to remain a member in continuous good standing and be eligible for the IWF 20 percent booth discount, current year dues must be paid in full.

Thank you for your continued support of WMMA!

Miller to Retire from WMIA at Year's End

WMMA Year in Review

• The Second Annual Wood Equipment & Wood Processing (WP&WE) Public Policy Fly-In. For 2009, the Committee identified four legislative priorities: industrial dust collection, estate tax reform/repeal, industry-specific statute of repose, and paid leave. Attendance at February's Fly-In resulted in more than 30 percent of WMMA companies whose leadership met with their Washington legislators.
• WIC 2009. The leaders of three major woodworking industry associations declared a renewed emphasis on helping their members during the challenging business climate. WMMA, WMIA and AWFS postponed the Woodworking Industry Conference (WIC) until April 2010.
• AWFS 2009. More than 100 members exhibited in July in Las Vegas under the banner of "Tough Challenges Are Met by Tough Companies." The show brought together the home and commercial furnishings industry, including manufacturers of woodworking machinery and other suppliers with furniture, cabinet manufacturers and custom woodworkers. WMMA members also met together for Association activities.
• Export Opportunities. Seven members participated in the Promueble catalogue tradeshow in partnership with the U.S. Commercial Service. The event in March is Central America's largest furniture manufacturing, woodworking, and forestry show. Eight members have formed the core of the Brazil Consortium which will begin operation in 2010. Meanwhile, the American Center for Wood Processing in India forges ahead with new marketing initiatives.
• Business Development. Members continue to position their businesses for future success by using business forecasting tools and reports through a strategic partnership with Institute for Trend Research, a leading economic consulting firm. Check the WMMA website for the latest data and the archive recording of the latest webinar.
• Education and Scholarship. Four member companies — Accu-Router, Carter Products, Safety Speed Cut, Precision Drive Systems — have five employees who are receiving WMMA scholarships to further their professional education.
• Manufacturing Strategies. An alliance with the Association for Manufacturing Excellence (AME) provided manufacturing members with a package of benefits and programs available from AME. A tour of the Merillat factory yielded a wealth of techniques and tips on a Continuous Improvement program shared with the membership.
• Membership Services. Membership took a dip midyear but has rebounded to 2007 levels. As of mid December, membership totaled 217.
• Public Policy. WMMA joined a number of coalitions in this year with a new administration and Congress. Among them were health care's Convince Congress to Start Over!, The Permanent Estate Tax Relief Now Coalition, and the HIRE Act to promote activity in the retail home furnishings sector. The Industrial Dust Task Force, in response to increased regulatory and legislative attention, is actively monitoring developments as they emerge.

Notice to Readers

In 2010, The Cutting Edge will be published in March, June, September and December.

ASSOCIATION NEWS

Franklin Adhesives & Polymers, a division of Franklin International, has put some of its expertise in the assembly of wood products into print: The division has produced a series of free "How-To" Gluing Guides to help wood-products manufacturers achieve optimal results in edge and face gluing, assembly gluing, finger jointing and hot and cold press lamination.

To request a free copy of one or more of the new gluing guides from Franklin Adhesives & Polymers, email marketing@franklininternational.com or call customer service at 800.487.4583 or 1.614.443.0241. You can also view the guides on the Web at www.franklinadhesivesandpolymers.com.

Welcome New Members

Gemini Coatings, Inc.
421 SE 27th Street
El Reno, OK 73036
(800) 262-5710
www.gemini-coatings.com
Key Contact: Lena Schweitzer, Customer Support Specialist

Grass America
P.O. Box 1019
1202 Hwy. 66 South
Kernersville, NC 27284
(800) 334-3512
www.grassusa.com
Jan B. Fitzpatrick, Marketing/Communications Manager

Merritt Machinery, LLC
10 Simonds Street
Lockport, NY 14094
(716) 434-5558
www.merrittmachinery.com
Key Contact: Anna McCann, President

Rehau Incorporated
1501 Edwards Ferry Road
Leesburg, VA 20176
(703) 777-5255
www.rehau.com
Key Contact: Thomas Troeger, Business Team

WalzCraft Industries
2600 Hemlock Street
LaCrosse, WI 54602
(800) 237-1326
www.walzcraft.com
Key Contact: Richard Walz, President

Q & A WITH NEW MEMBERS

Please describe your business! M.L. Campbell is a leading North American manufacturer in the wood finishing industry providing a full line of advanced finishing products and systems. From full-time Lacquer and Color Specialists to trained Outside Sales and Customer Service Representatives, we are dedicated to giving our customers high-quality products and services. From kitchen and bathroom cabinetry to millwork, furniture, and display fixtures — we can provide a variety of wood finishing products to deliver outstanding results.

What are your key product lines? M.L. Campbell's Wood Finishing System is highlighted by a full selection of the industry's best clears and pigmented lacquers in both solvent borne and water borne systems

Solvent Borne Products

• Clear Topcoats: Krystal, KlearVar, DuraVar, MagnaKlear, MagnaMax, Magnalac, EuroBild, Euro X
• Pigmented Topcoats: Stealth, Resistant, MagnaMax White/Opaque Base, Magnalac, EuroBild Pigmented, Euro X Pigmented
• Primers/undercoaters: Clawlock Primer, Level Primer, MagnaClaw Primer, Magnalac Primer/Undercoater, EuroBild Primer
• Clear Sealers: Krystal Sealer, Level Sealer, MagnaSand Sealer, Water White Vinyl Sealer, EuroBild Sealer, Euro X Super Sealer
• Stains/glazes: Amazing Glaze, Amazing Stain, Microton Dyes, Vintage Alkyd Glaze, WoodSong II Stains

Water Borne Products

• Clear Topcoats: Aguabarnice, Agualente
• Pigmented Topcoats: Aguabarnice White/Opaque Base, Agualente White/Opaque Base
• Primers/Undercoaters: Agualente Stain-blocking Primer
• Stains/glazes: Azoton Water Borne Dye Stains, Water Borne Glaze, WoodSong II Water Borne Stain Base

What makes your business or products "different" or "noteworthy?" M.L. Campbell finishing products are the first of their kind to achieve GREENGUARD Certification. Each of our GREENGUARD Indoor Air Quality Certified products is ideal for kitchen, bath or general interior use and delivers a high performance finish. For GREENGUARD Certified projects, insist on M.L. Campbell's AGUA SERIES water borne finishes.

How would you describe the company's business mission or philosophy? To be the dominant supplier of wood finishes in North America, to the custom and semi-custom segments of the cabinet and millwork market, by marketing and selling on key points of differentiation through a specialized distribution network.