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ReadersRespond

BY HBSDEALER Staff

Eco-stamp: A good idea


The following letter is a response to “iLevel promotes an easy eco-labeling option with SFI.” 


“[iLevel by Weyerhaeuser VP] Carlos Guilherme and iLevel have taken the simple stamp idea and acted on it and applied it to iLevel lumber by the piece. This is very important, as it is easily identifiable by the supply chain and the customer. The key being each piece of lumber is stamped — not just the wrapping, which gets torn off or disintegrates. Weyerhaeuser is to be commended for handling the situation in this manner. The fact that iLevel can do this could in time prove to the rest of the world that this is a viable solution and comes at virtually little or no cost. 


“The Sustainable Forestry Initiative (SFI) and Forest Stewardship Council (FSC), as well as the other three or four world certifying agencies, should come together and create a green stamp and make it available to the harvesters of their certified forests to use and stamp each piece of eco-friendly wood. [This way], the public can decide individually whether they want to use sustainably grown wood or wood harvested without any regard for longevity and perpetuation of the forest. Small producers may have problems certifying their wood, and exceptions could and should be made. However, large timber tracts are either certified or not, and the public has the right to know.”


— Harold Baalmann, 


President



B&B Lumber Co.



Wichita, Kan.


Still mad about MID


Home Channel News received several letters in response to a Dec. 13 editorial, “A deduction, endangered.” The editorial defended the mortgage interest deduction as the National Commission on Fiscal Responsibility and Reform called for major reform.


“Your editorial in defense of the mortgage interest deduction was as predictable as it was unimaginative. You fail to see the forest for the trees. … 


“Our government is awash in red ink. The National Commission [on Fiscal Responsibility and Reform] did a great job in providing a way to reduce the deficit to a manageable level. There is more than one way, but their way is reasonable and makes sense. All citizens of good will should support it. 


“The mortgage interest deduction encourages us to consume more house than we need. I am guilty with a large home and larger mortgage debt. I deduct the interest from my income tax. The deduction favors the top 20% to 30% only — because everybody else doesn’t itemize deductions.


“We should lower marginal tax rates as the commission recommended while doing away with most deductions and credits. (I would be happy with getting rid of 100% of them.) This would encourage folks to earn more because they could keep more — without having the government tell them to spend money on housing or electric cars or whatever. This would help get our depressed economy going again. Yes, those with mortgages who deducted interest would pay more, but this would be somewhat offset by the lower marginal rates. A simpler tax system would be a boon to all (except accountants). A credible plan for reducing the deficit would increase confidence in our country and its economy.”


— John Mensinger, 


President


American Lumber Co.


Modesto, Calif.


“I agree with your article 100%. If the MID was taken away or modified, the housing industry (sales and manufacturing) would wipe out any positive growth in the current economy. This part of the economy is already on life support. I see it face to face every day in my job meetings with business owners of lumberyards and other wood-related businesses. Keep up the good fight.”



— Jim Turner



PA Lumbermens Mutual Insurance Co.


“Loss of the mortgage interest deduction would affect every income level. No interest relief would mean little or no chance for young families to ever afford a home. Middle-income homeowners will have little or no discretionary money to save or spend — this is simply a bad idea all around. … I would like to say what I really feel — and if this happens I won’t be the only one openly expressing anger. ”



— Gary Higgins


“I realize in your position it’s tough to take an opposing view to the ‘typical’ person in our industry. I wanted to let you know that in the retail building materials and construction business there are people with differing views. Every politician and industry has its ‘sacred cows.’ Our industry stands at the altar of the almighty mortgage interest deduction. 


“The deduction is the reason people buy houses? The deduction is the reason people can afford houses? Hmmm. It seems like we just had a meltdown recently over issues like these. 


“The reality is, people need a place to live. They will buy what they can afford (that’s a novel concept). If they’re not able to buy a house, they rent. (How dare I suggest that every person is not entitled to a home at every station of life?)


“The MID will more than likely be the last of these ‘sacred cows’ to go. It will take our country to be in the shape of Ireland, Portugal and Spain to finally eliminate all our ‘sacred cows.’


“I’m probably the .01% of people in the industry that thinks this way. However, I have a bigger view of life and the economy than flexing our muscle to politicians. I want all our boats to rise.”



— Daniel Jordan



Fleming Lumber



Cleveland, Miss.

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Bullish!

BY By Brae Canlen

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

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For senior executives, salaries rise

BY By Connie Robbins Gentry

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

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