Green all along
Throughout the downturn of the last four years or so we have seen the lumber and building materials industry shrink dramatically. Some estimates of sales shrinkage at the dealer level put it beyond 50%. In some markets, that estimate is absurdly low. There is no denying that everyone in all segments and steps in the chain is battered. Unfortunately, even the homeowner/consumer is somewhat damaged as well.
Current commentary would have us believe that newly popular saving (a supposedly unheard-of concept) has replaced spending. The army of people at the malls during the Christmas season indicates otherwise. Presuming that there is pent-up demand in residential single-family and multi-family building, I would say that there is work to be done preparing for a new era in home building. None of this will be handed to us; there’s no bailout coming, no more stimulus. Not that we’d even want it. We need to find our own way out of the woods (no pun intended), and it’s up to us to determine how to retool the industry.
One of the emerging trends of the last few years, and in fact much of the sales opportunity in the industry in that time, has been “green.” And though I challenge anyone to agree on just how to define that, there is no doubt that the buzzword has taken hold. The mainstream definition of green building might be that a consumer, product or construction endeavor emphasizes efficient use of natural resources during the life of the product or building. Of the many different players in the green movement, none has taken as large a leading role as the U.S. Green Building Council, or USGBC, with its Leadership in Energy & Environmental Design, or LEED, certification program. LEED has brought green building into the public eye and has made incredible inroads in guiding developers, architects and owners to “build green.”
The list of possible points to achieve a LEED certification is wide ranging and encourages wastewater management, HVAC efficiency and decreased energy use, among other things. There is a credit for the installation of bicycle racks and showers; there is also credit for the use of certified lumber. Both are worth one point. The entire building of lumber has “green” value equal to placing racks for bicycles. It is easy to see why the certified lumber specification is so often overridden on a project.
The requirement for certified lumber is that it must be certified by the Forest Stewardship Council, or FSC, and it must flow through the supply chain with the requisite paperwork to establish Chain of Custody every step of the way. In short, it cannot be handled by an organization that is unqualified. The qualifications are strict compliance with the Chain of Custody rules, with a costly annual audit as verification. Certainly the Chain of Custody requirements are necessary, otherwise the unscrupulous would attempt to pass off normal lumber as certified. But how could they? It’s not the same product … is it?
Commercial production of lumber is by definition green. Is anyone worried about running completely out of timberland? Will it be gone by 2030, 2050? Are there people screaming from the mountaintops about peak lumber production like they do peak oil production and metals? Or is the consensus that in some cases lumber can’t be cut fast enough — British Columbia for example? Unlike steel and concrete, the clean-looking and beautiful darlings of modern architecture, lumber is a crop — pure and simple. It has all the characteristics of corn and soy (remember biofuel?), with a longer life cycle. If there was ever a product that should be in the news for its sustainable and clean manufacture as well as its efficient transportation, often by rail (also cleaner), this is it.
The LEED requirement of FSC-only lumber hurts the industry’s ability to participate in the program. The FSC certification is a costly addition to the suffering bottom lines of the manufacturers, distributors and dealers. The single-source avenue for LEED-qualifying certified wood creates a monopoly and stifles the kind of innovation that would lead to “green” stamps and other ideas that would mainstream sustainable lumber production, as well as illustrate the point that for the most part modern harvesting is done in a planned, responsible way.
There is a wonderful opportunity to rebrand the industry as modern and clean; we shouldn’t let burdensome requirements hold us back. It is time for us to insist on change in USGBC/LEED point structure and recognize not only that forest products today naturally represent green building, but also that all certification of good harvesting and production practices should be equally valid.
John W. Steinman is VP purchasing at Forge Lumber. e
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
For senior executives, salaries rise
Economic forecasts for 2011 are a mixed bag for senior executives in retail companies. Executive compensation packages and salary increases are expected to be healthier than in the last two years, but the overall economy is, at best, in a state of stagnation.
The Society for Human Resource Management, or SHRM, based in Arlington, Va., projected median salaries across all industries would rise 3% this year, compared with the more modest 2.5% increase that was the median in 2010.
Similarly, a recent survey of more than 1,450 large companies conducted by AON Hewitt, a human resource consulting firm headquartered in Lincolnshire, Ill., predicted a 2.9% salary increase for executives in 2011, a moderate uptick from last year’s 2.4% increase but an impressive spike over the 1.4% increase that was the norm in 2009.
The 2010/2011 U.S. Compensation Planning Survey conducted by New York-based Mercer drilled deeper into specific industries and concluded the retail industry would experience average salary increases of 2.8% in the coming year.
The real opportunity to increase earnings, according to many in the industry, will be through bonuses and incentives — perks that will likely extend from the most senior executives into middle management.
The Hay Group, which has its global headquarters in Philadelphia and does management consulting for some of the largest retailers, including Wal-Mart Stores, The Home Depot and Macy’s, reported that 39% of companies have already increased or have plans to increase the proportion of variable pay in compensation packages.
For example, Sears Holdings Corp. awarded its CFO a 16.7% merit increase, from an annual salary of $600,000 to $700,000, but the executive’s total targeted cash award increased by 26.7% because the incentive plan was raised from 75% of the fiscal 2010 salary, a targeted bonus of $450,000, to 90% of the fiscal 2011 salary, a targeted bonus of $630,000.
Incentives are typically defined as “targets” because, as the Hay Group stressed, there is a renewed focus on performance-based criteria. The company conducted a survey of more than 1,300 companies and analyzed detailed data from an internal database of more than 14,500 organizations to arrive at its assessments.
Performance-based pay is definitely on the rise, agreed Bob Cartwright, president and CEO of Austin, Texas-based Intelligent Compensation and a member of the Total Rewards/Compensation and Benefits Special Expertise Panel for SHRM. The difference, Cartwright noted, is that in the current environment, incentive compensation will be based largely on the individual’s contribution to the company’s performance.
Research by the Hay Group supported this thesis, with 51% of the companies surveyed indicating they would rely on “hard” financial metrics such as revenue, profit and sales to evaluate the performance of individual contributors.
This approach presents a slippery slope for retail executives, many of whom face an uphill battle if they are to exceed expectations for the new fiscal year. One issue is that year-over-year improvements will be harder to achieve this year than in 2010, when retailers were competing against back-to-back years of dismal comp sales in 2008 and 2009. From this perspective, some may view retail executives as victims of their own successes.
Truthfully, however, the stalled economy remains the real culprit. Performance-based pay usually takes a hit when a company is unable to grow its bottom line, and the domestic market looks bleak with the U.S. GDP expected to decline from 2.6% in 2010 to an even more sluggish 2.2% this year.
This article first appeared in the January issue of Chain Store Age, a sister publication of Home Channel News. e