The prolonged housing downturn has pushed the building materials industry into uncharted waters where everyone is trying to hold their place in a shifting topography of competitors, suppliers and customers. Big or small, LBM operators are learning that the rules of engagement have changed. Here today, gone tomorrow, back next week in a reconfigured shape.
What a perfect time to try something new.
US LBM Holdings, the fastest-growing building materials distributor in the country, certainly qualifies as “something new.” On Dec. 1, the company celebrated its one-year anniversary by gathering together its six division presidents, yard and sales managers, corporate executive staff and private equity backers in Lake Geneva, Wis. It was a good opportunity for everyone to take stock of how quickly the organization has grown: 900 employees working at 30 lumberyards and component plants, most of them added through separate acquisitions over the past 12 months. And of course, the first annual meeting was a perfect time to articulate who, exactly, US LBM is.
The best person to answer that question is L.T. Gibson, the company’s president and CEO. (The L.T. stands for Larry Todd.) A former VP at Stock Building Supply, where he ran both the northern and central divisions, Gibson says he’s now “the guy who takes ideas from one group to the other.” Ask him to explain the US LBM model, and he starts with the name.
“We added ‘holdings’ at the end of the name for a very particular reason,” said Gibson.
Holdings refers to the typical infrastructure of a parent company, which US LBM provides: human resources, IT support and finance. As CEO, Gibson oversees the six different operations and their presidents, traveling from state to state and also meeting with the company’s financial backers, a private-equity firm called BlackEagle Partners.
Gibson is quick to point out that each division has considerable autonomy in hiring, extending credit and, to some degree, purchasing. He admits that it’s a delicate balancing act, but this is where the “something new” comes in.
“Some of our competitors find our business model puzzling,” Gibson admitted. But in reality, US LBM borrows heavily from the tried-and-true roll-up model pioneered by Lanoga, the forerunner of ProBuild: Keep the owner in place, don’t change the name, and tread lightly when introducing corporate-wide policies and “best practices.”
“We try to keep everything autonomous that faces the customer,” Gibson explained. “This is a relationship business, and we don’t ever want to get in the way of that. Our customers are best served at the local level by the people they’ve been doing business with for years.”
In accounts receivable, for example, each division has its own person keeping tabs on customers and their invoices. At the company’s central office in Green Bay, Wis., an A/R director oversees all the divisions, and at the top is VP finance Brian Hein. But a Chicagoland builder buying plywood from Edward Hines Lumber or a remodeler purchasing decking at Universal Supply in New Jersey won’t know this.
“We don’t have anyone in the corporate office making calls to collect money. That’s about as cold as it gets,” Gibson said.
Purchasing is another area where the company tries to strike a balance between a centralized approach — e.g., volume buying and discounts — and local autonomy.
“We know there’s an advantage in being big, and we can buy as well as anybody in the industry,” Gibson said. “But we don’t just focus on [vendor] rebates. Sometimes we’ll focus on the invoice price instead. I count on the vendor to help us find a better plan to grow sales. But we will not mandate a vendor in any market.”
The end result is national buying programs for many products, but usually with some holdouts. In engineered wood products, iLevel by Weyerhaeuser is stocked at almost all US LBM locations, but one location has Boise. Jeld-Wen is the preferred window vendor in most (but not all) yards. Much depends on who the customers are in a particular division.
While remodelers and custom builders are the bread and butter of US LBM’s business, the company also serves national builders, primarily in Chicago and Indiana. The company was formed in November 2009 when Building Industry Partners, an M&A firm that specializes in building products manufacturers and distributors, brought several former Stock Building Supply locations to the altar with BlackEagle Partners. Wisconsin Building Supply, Bellevue Builders Supply and East Haven Builders Supply came under the US LBM umbrella, covering three markets: Wisconsin, Central New York and Connecticut.
More acquisitions followed, plus some organic growth.
“We looked at 30 or 40 companies. We were able to buy some businesses that most people couldn’t because they knew they weren’t going to lose their name and their autonomy with us,” Gibson said.
Although some companies were operating in the black, others were “distressed” or having trouble with their lenders.
At Edward Hines Lumber Co., which joined US LBM in March 2010 as the fifth acquisition, BlackEagle Partners saw potential in the 118-year-old company and its subsidiary, Indiana-based House & Hall, despite the fact they were in financial trouble.
“We saw a clear path to take them back to the No. 1 position in the Chicago market,” Gibson said.
An infusion of funds got the operation firing on all cylinders again. Two months later, Edward Hines Lumber announced it was adding another location in Alsip, Ill., a southern suburb of Chicago, bringing the total number of locations to four.
Gerry Wille was president of Edward Hines Lumber before the acquisition, and he still is today. Wille is also an investor in the company. Although the arrangements vary with each individual, US LBM wants all of its division presidents to have some skin in the game.
Wille is a no-nonsense Chicagoland operator; it’s hard to imagine anyone telling him which brand of windows to sell or the best way to route his delivery trucks.
“We do discuss who’s buying what from whom,” Wille said in an interview with Home Channel News.
Division presidents also discuss inventory management and other best practices on twice-monthly calls. News about purchasing discounts is shared, “but we’re free to buy for our market,” Wille said. He’s deviated several times from the rest of the chain because of customer preferences.
“We have national builders who like [a] certain product, and we’ve been buying it for several years. Had we changed [that product], we might have lost that business.”
The company has also adopted a hands-off policy on hiring, although Gibson does provide some guidance.
“The markets are autonomous,” he said.
Wille hired 13 outside salespeople between April and September 2010. Most of them were from ProBuild, which experienced a six-week teamsters strike this summer at two of its Chicago-area locations. The walk-out ended when the Denver pro dealer consolidated the two locations. By that point, area operations manager Doug Jones had already left the company to join US LBM as regional VP.
Now that he’s fully staffed, Wille is ready to go after some of the new builders who are coming into Chicago from out of state. He also has some commercial work lined up. Having a private-equity firm standing behind him gives Edward Hines credibility with new customers, he said.
“They like to know there’s a big brother in the food chain.”
It also helps him sleep better at night.
“Bankers are running from this industry so fast you can see the vapor trails,” he joked. “You have to have financing to get through this trough.”
Bryan Tolles, one of four BlackEagle partners, admits that he’s swimming against the current by investing in the LBM sector. But his firm, which gravitates toward “out of favor” companies that are restructuring, undergoing liquidity issues or underperforming operationally, is taking the long view on the building industry.
“The market will rebound at some point in time,” Tolles said. “It’s a question of when, not if.”
Tolles sees special opportunity in custom home building and remodeling, which have “significant barriers to entry,” he said.
First, there’s geography.
“The home-building industry is still a local business,” Tolles said. “There are big home builders all over the place, but many of the deals get cut at the local level. For the customers we serve, the customer builders and professional remodelers, it’s a local [buying] decision.”
As for the technology, US LBM has equipped its management team with some high-performance software to track sales, margins, costs, expenses and other metrics on a daily basis. The company uses Activant’s Catalyst solution to deliver daily numbers from these key areas to its executives. Gibson has pushed beyond these dashboard deliveries, he said, with customized forecasting tools.
“We have the ability to give everybody a picture of what things are going to look like at the end of the month, so we can make decisions early on,” he said.
Sounds like some pretty fancy stuff for local lumberyard operators, but that’s part of the US LBM model. The technology will help the various divisions compete with larger players, while allowing them to remain decentralized where it counts.
Ironically, the second “barrier to entry” that makes the LBM sector an attractive investment is technology, Tolles said. There’s no technological shift that can suddenly make lumberyards obsolete.
“The builders want to manage and house the inventory. But that’s not what they’re best at. They need to build the house,” Tolles observed.
And that’s where local lumberyards and delivery come in.
The challenge for US LBM may be how to stay small while growing large. Gibson would like to keep a Northeastern-Midwestern footprint, but he’s looked at operations in Texas and Nevada.
“We don’t want to spend any more time in airplanes than we have to,” he explained.
But the company receives a number of queries every month, many of them from good operators strapped for cash. And LBM Holdings is still on the hunt.
“We’re going to be fairly aggressive on acquisitions over the next 12 months,” Gibson said. “And we’re looking at stuff outside our [current] geography.” e