Analysis, strategy, and insights for decision makers in the building products industry.
August 2021
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Busy? Frantic? Unsure of the Next Delivery?
Prepare Your Company for More of the Same
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By Michael Collins, Managing Director, BIA
LBM operations have reached the point in our COVID-shaped economy where "the daily grind" refers to more than just the morning coffee. Numerous signs indicate product shortages and supply-chain kinks will linger into, and past, the Holiday season. Lumber prices have fallen, but so many other products are going up that dealers will continue to have to deliver unpleasant news to their customers for months to come. And then there's COVID. The virus has become more virulent at the same time that Americans have had enough of shutdowns. We've decided to live with COVID and go ahead with our lives, tolerating the consequences of infection and risking the long-term health implications. The COVID virus is moving from pandemic to endemic status, a constant presence like the flu but potentially more harmful.
These shifts in the working environment from short- to long-term factors carry implications for dealers and the M&A market. Here are three that I believe will figure both in dealers' financial health and in their attractiveness to acquirers.
How virtual are you? Contractors increasingly expect to receive and pay their bills online, to receive messages when their deliveries are--or aren't--coming, and to get real-time information on whether you have in stock the materials they need. Employees increasingly want the option of working from home and having flexible schedules. Companies that can do much of their business in the cloud will be more attractive than businesses that mail out invoices and have sales reps who never touch a computer.
How stressed are your workers? The longer we have a combination of strong demand, product shortages, and a herky-jerky supply chain, the more likely it is that LBM employees will suffer burnout. In Britain, Bradfords Building Supplies has launched workshops for its managers to help them address staffs' mental health needs. The company already has appointed mental health first-aid workers across the business. I haven't heard of any similar program at an LBM operation in the U.S., but I bet a lot of general managers would benefit from training to identify and deal with employees who show signs of battle fatigue. This matters in M&A because investors want to know there's an engaged and energized team in place, not a group operating on its last reserves.
How are you measuring success? With all the price volatility we've had, judging yourself based on revenue alone isn't enough. Dealers increasingly are looking at unit sales as well as gross margin per delivery to get a better year-over-year assessments of how they're doing. They also are reconsidering whether requests for quotes truly measure how busy they are. There's suspicion that quote work has gone up in part because contractors are turning to them when they dislike the quotes they're getting from their usual suppliers. The surge in manufacturers' prices, combined with a reduction in the length of price guarantees (seven days now appears to be the norm), also means that contractors are asking for more frequent re-quotes. Dealers experiencing all this are beginning to look more carefully at their ratio of quotes to contracts to see whether their extra quote work really is generating more business.
Phrases like "resilience," "nimble," "engaged," and "new normal" get used so often they get treated more as buzzwords than as real business objectives. But, these days, those words matter, because we're likely to have many more days like these for months--and perhaps years--to come.
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Recent News Stories Don't Give the Implications for LBM. Here's What Else You Should Know |
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The mainstream media doesn't think about the LBM community when it writes the news, but we can help you read between their lines. Here, for instance, are some recent stories in which the consequences for dealers and the M&A market will differ from what the headlines suggest.
Let's start with the Aug. 18 announcement that the annual rate for housing starts dropped 7.0% in July to a less-than-forecast 1,534,000 from 1,650,000 in June. Multifamily's decline exacerbated that number, as single-family housing starts were down only 4.5% to 1,111,000. But it's still a decline, and that might cause concern.
Stephen Kim of Evercore ISI has reported that the big publicly held companies that are responsible for most production building have been deliberately slowing their permitting and starts over the summer. He expects a re-acceleration in order trends by the public companies this fall.
The bottom line: Builders continue to face headwinds from higher prices and production bottlenecks, but some of the recent slowdown is their own doing. The nation also remains significantly underbuilt, so demand will stay strong for a long time to come.
Next, consider news reports that the Federal Reserve is heading toward slowing its monthly purchases of $80 billion in Treasury securities and $40 billion in mortgage-backed securities (MBS). This so-called tapering could start as early as November, should the Fed decide to take action at its Sept. 21-22 meeting. That buying of mortgage-backed securities is a big reason why rates for 30-year fixed-rate home loans have been under 3% for most of the past 12 months, so any change in the policy could push rates higher, thus making houses less affordable.
Along with not knowing exactly when or how drastically the Fed will taper, we also don't know how it will cut back--by reducing its purchases of Treasuries and MBS at the same rate, or reducing one purchase more than another? A recent Wall Street Journal article quoted Boston Fed President Eric Rosengren as saying recent surges in home prices, along with shortages of personnel and product, are hampering the construction industry so much that keeping rates low through MBS purchases is bringing reduced benefits.
The bottom line: Tapering will come sooner or later, and mortgage rates eventually will rise. Whether your market can handle those changes depends on how robust your local economy is.
The third story involves COVID. Big companies like Microsoft, Google, Disney, Tyson Foods, and United Airlines--plus many government agencies--have generated headlines with mandates that their employees get vaccinated or agree to regular tests. But just-released results of a Webb Analytics poll of dealers shows a much different picture in the LBM community.
That Aug. 16-18 survey of roughly 140 participants found that only 2% of companies currently require employees to be vaccinated or get tested regularly. And while 17% are thinking of such mandates, 73% don't require vaccinations and have no plans to do so.
In addition, roughly a quarter of the participants estimated that no more than half of their employees have been vaccinated, while another 28% don't know the vaccination rate at their company. Nationally, 70% of adults have had at least one shot.
As for masks, 20% require customers to wear masks in stores, half because of local government requirements and half because the company chose to do so. In contrast, 45% said they have no plans to require customers wear marks.
The bottom line: LBM operations overwhelming aren't joining the vaccination mandate parade, and fewer than one in ten are choosing to require masks. This could be an issue in states with low vaccination rates, if only because getting COVID will put a lot of workers in bed when they're needed at the store.
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Atlanta area LBM facilities involved in deals since 2018 (blue pins), the BFS-BMC merger (brown), or are greenfield openings (green). Existing locations that haven't changed hands are marked in black.
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Two M&A Trends Worth Noting: Hot Markets,
and Deals with Ties to Orgill and Do it Best
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By Craig Webb, President, Webb Analytics
Before presenting the usual report on deals, openings, and closures over the past few weeks, here are a pair of underlying trends that are worth your attention.
The first, at least on its face, isn't a surprise: Buyers of and investors in LBM operations like to put their money in hot areas. What may be more intriguing is the extent to which their investments have shaken up the markets.
For instance, Webb Analytics' map above shows roughly 130 construction supply operations in the Atlanta market. Since 2018, that area has seen 19 locations change hands in deals, 15 be affected by the merger of Builders FirstSource and BMC, and six greenfield operations take root. That's 40 out of 130 locations, or 31% of the total. The latest deals involved US LBM, which purchased Junior's Building Materials of Ringgold and Rossville, GA; and Buford-based North Georgia Building Supply.
Likewise, in Charlotte, NC, and up the I-77 corridor, the market has seen 13 yards change hands in deals, nine affected by the BFS-BMC pact, and five greenfield openings. That compares with 47 locations that haven't changed since 2018. So in the Queen City market, 36% of all locations have been affected.
You can do the math with states, too. For instance, in Texas, the nation's biggest homebuilding state, 30% of all the LBM operations are brand new, part of the BFS-BMC merger, or acquired since 2018. By contrast, Ohio has only a 7.2% churn rate.
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The second trend highlights the role that distributors have come to play in M&A. The blue pins on the map above represent locations owned by Central Network Retail Group. It's part of Orgill, the distributor of hardlines for dealers, home centers, and hardware stores.
The red pins show the locations owned by Nations Best Holdings. The Do it Best co-op announced last August it had taken a stake in Nations Best, whose acquisitions have virtually all been Do it Best members. For instance, this month Nations Best took over Hipp Modern Builders Supply of Mountain View, AR. (Also this month, Nations Best purchased Panhandle Lumber of Bonifay, FL, but it doesn't appear to be a Do it Best member.)
In July, Texas-based Nations Best traveled far outside its territory to absorb Caron Building Center of Berlin, NH. Its only other venture outside the Southwest came last year when it purchased a five-store hardware chain based in Fort Wayne, IN--Do it Best's hometown.
There's logic to Do it Best's investment in an acquisitive member dealer. The relationship brings candidates to Nations Best's door that it might not otherwise have seen. At the same time, an acquisition by Nations Best means that the dealer will continue to buy through the Do it Best co-op. That's far less likely to be the case when a big independent dealer such as Builders FirstSource buys a yard.
The desire to keep things in the family also may apply to R.P. Lumber, one of the biggest Do it Best members. After decades of focusing on Illinois and Missouri, last year it suddenly bought two Do it Best-affiliated stores in Wyoming. It has since expanded to Iowa as well. In late July, R.P. Lumber secured only its second and third locations ever in Iowa when it purchased Malcolm Lumber, which has facilities in Grinnell and Oskaloosa.
Orgill's venture, meanwhile, resembles Ace Hardware's purchase of two major hardware store chains: Westlake Ace Hardware and Great Lakes Ace Hardware. Those two chains operate 212 stores today; sales last year totaled more than $704 million.
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... And Now to Other Recent Deals |
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A third major LBM operation has been growing in Maine since Pleasant River Lumber bought five-unit Ware-Butler Building Supply last November. Just since April, Pleasant River has purchased three more Pine State dealers--Phinney Lumber of Gorham, Pulia Lumber of Mexico, and Jordan Lumber of Kingfield--as well as custom cabinetry maker Woodsmith's Manufacturing of Oakland, ME. And by summer's end, it plans to open a new location in Greenville, ME, in the same spot as a log cabin home builder that Pleasant River bought and moved to another location. The Greenville location will give Ware-Butler nine yards across the state.
SRS Distribution is also branching out, but in its case it's entering an entirely new line of business. SRS, which began as a roofing specialist and then launched a division called Heritage Landscape Supply Group, announced Aug. 6 the creation of Heritage Pool Supply Group. The group's first acquisition is Aqua-Gon, a wholesale distributor of pool and spa products with one store each in Illinois, Missouri, Wisconsin, and Minnesota.
"SRS believes the opportunity in pool and spa to be vibrant and intends to invest in a similar strategy that has been utilized to grow two national networks in the roofing and landscape supply industries by building a family of independent companies working in unison from coast to coast," SRS said in a news release. "The strategy will include acquisitions, opening new greenfield locations, and delivering best-in-class customer service and employee engagement."
Similarly, GMS is taking steps to expand beyond its core products of drywall, insulation and acoustical ceilings. On Aug. 9 it announced it had purchased two EIFS/Stucco specialty dealers: DK&B Construction Specialties of La Vista, NE, and Architectural Coatings Distributors of Cleveland. It also expanded its ceilings business in the Denver area by opening a new branch of Pioneer Materials. And it added three more branches of its traditional stores: Watson Building Materials in Scarborough, Ontario; Colonial Materials in Wilmington, DE; and Cherokee Building Materials in Jackson, MS. This will be GMS' first operation in the Magnolia State.
Tibbetts Lumber normally doesn't appear in this report, but on Aug. 17 it announced the acquisition of Florida Forest Products, a truss manufacturer in Largo.
Massachusetts' Arlington Coal and Lumber bought the two Friend Lumber yards in Burlington, MA, and Hudson, NH. Locals Tom Dwier and Keli Lynch purchased the Tuckerton Lumber facilities in Tuckerton and Surf City, NJ. And in Texas, the owner of Ennis Door and Trim bought Main Street Hardware, also based in Ennis.
Along with its Georgia purchases noted above, US LBM acquired Massey Builders Supply of Richmond and Saluda, VA.
Portsmouth, NH, residents learned in mid-July that local institution Ricci Lumber had been acquired by Kodiak Building Partners.
SRS Distribution's Heritage Landscape Supply Group acquired Atlantic Mulch & Erosion Control of Apex, NC. Another SRS landscaping arm of Heritage, Silver Creek Supply, opened in Middleton, ID.
Openings include ABC Supply's L&W Supply, which now has a drywall outlet in Beltsville, MD.
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We Can Answer Your Most Pressing M&A Questions
* How do the most active buyers in today’s market value my company?
* What parts of the business should I change to improve its valuation?
* When is the right time to sell?
These are questions that are commonly asked by the owners of building products manufacturers and distributors. Our work in selling and raising capital for companies puts us in a unique position to help answer these important questions. Regardless of when you might decide to approach the market, please contact me to have a confidential discussion about your company and ways to maximize its value for the owners.
Michael Collins
Work 312-854-8036
Cell 312-282-5462
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