BIA Executive Insights
Analysis, strategy, and insights for decision makers in the building products industry.

July 2019
Given What's to Come, the Amount Spent on Today’s Technologies Is Just Table Stakes
By Michael Collins, Managing Director, BIA
A slew of recent headlines has reaffirmed something we’ve long believed: A company’s value to investors will depend increasingly on how the selling company’s leaders embrace current and anticipate future technology.

These stories suggest building material dealers and manufacturers can expect to see dramatic changes over the next decade in how they deliver goods. Starsky Robotics already is recruiting people to “drive” trucks remotely (more on that below). Cargo drones are being developed that can carry up to 500 pounds . Palfinger’s smart boom control makes loader cranes safer and easier to use. Amazon’s robots are helping the company provide one-day and even same-day delivery. And Canada’s GoFor—an Uber-like potential alternative to hot runs by dealers to job sites—has started up in Charlotte, N.C., and plans to expand soon to several other U.S. markets.

Such news points to changes in the supply of construction materials that are likely to be at least as dramatic as we have experienced in the past decade’s tech revolutions involving software, smart phones, and the global positioning system. As we race forward, what seemed Jetsons-like in 2010 will be expected in 2025.

We believe this shift has adjusted investors’ attitudes. A few years ago, an investor might view the lack of a dispatch-and-delivery system as only a slight smudge mark on the company’s valuation so long as core P&L numbers were strong. It wouldn’t take much work for the buying company to install this update and reap the return on investment, the thinking went.

Consider that same investor today. This person can see where things are headed, so what should they think when the prospect’s management team regards itself as hot stuff even though its technology is way behind the times? The investor is likely to conclude that the prospect will require significant capex, and in response will reduce the offering price to cover those expected costs. Perhaps even more important, the investor will conclude that the prospect’s executives lack the vision needed to anticipate the dramatic changes likely to sweep building materials manufacturing and delivery. 

As a result, the prospect’s greatest asset—its human capital—gets devalued. And the offering price drops further.

We have seen cases in which a company reduces investments with long-term payoffs so that its current numbers look bright. Sometimes that ploy works. But going forward, we believe that investment numbers will increasingly be scrutinized as signs not only that the company is getting ready for future shocks, but that its management is aware that you either grow or die.

Four of LBM's Most Active M&A Dealers Reveal What Matters (and What Doesn't) in M&A
Should real estate be part an EBITDA valuation in an LBM deal? Is discounted cash flow still a standard metric? Can a seller negotiate a separate payout for working capital? Building Industry Advisors explored these and other issues in a panel discussion featuring four of the biggest players in LBM: (from left) Jim Drexinger of American Construction Source, David Flitman of BMC Stock Holdings, Steve Swinney of Kodiak Building Partners, and L.T. Gibson of US LBM. BIA's Mike Collins served as moderator.

Click here to watch a video of this session, recorded during the ProSales 100 Conference this past February. You might be surprised by some of the responses, particularly the ones that ran contrary to what audience members believed.

There's Renewed Debate Over Treating Workers as Employees or Independent Contractors
By Craig Webb
President, Webb Analytics
A slew of conflicting developments this spring from courtrooms, legislative chambers, and regulatory offices are sowing confusion for business owners and investors regarding whether to regard their workers as employees or independent contractors. Depending on whether state or federal law applies, sometimes they’re both simultaneously.

“The state of the law now is a mess,” Sean Burke, an associate general counsel at the University of Pennsylvania, wrote in a recent essay . In New Jersey, for example, Uber drivers should  earn  sick leave as employees. But they cannot form a union and are ineligible for overtime under the [Fair Labor Standards Act, or FLSA], because federal law considers them independent contractors. In California, they are independent contractors under federal law, and most likely the state labor code as well—but for state wage orders they  are  employees. The set of conflicting outcomes plainly makes no sense, neither as a matter of logic nor for the sake of justice or efficiency.”

A JDSupra website’s report on independent contractor counted seven different cases under way, encompassing groups as disparate as Dollar General store resetters, State Farm Insurance agents, GrubHub delivery drivers, and lots of truckers.

What to do? For now, make sure you have a lawyer who understands your state’s labor laws and is keeping up with the news.

Roots of the Problem
Untangle this knotty mess and you’ll find many threads, including labor laws based on out-of-date principles, the rise of the gig economy, perceived abuses of current rules, the transition from Barack Obama’s administration to Donald Trump’s, and general liberal-conservative disagreements over what the standards should be.

The current round of confusion dates from April 2018, when the California Supreme Court adopted the so-called ABC standard. That standard, which already had long been in effect in New Jersey and parts of New England, says an individual is an independent contractor when: A) The individual is free from control and direction while performing the service; and B) The individual’s service is performed outside the usual course of the employer’s business; and C) The individual is in an independently established business.

Since then, a California legislator has sought to turn that ruling into state law . Alarmed, some Californians have sought exemptions from the proposed legislation. In late March, a U.S. District Court in Sacramento, Calif., dismissed a lawsuit filed by the Western States Trucking Association seeking to nullify the California Supreme Court’s embrace of the ABC standard. The association plans to appeal. Meanwhile, some trucking companies are said to be dropping owner-operator lease arrangements in the state out of concerns that those rigs’ drivers will be reclassified as employees, the Commercial Carrier Journal reports .

And on May 2, the U.S. Circuit Court of Appeals for the 9th Circuit declared that the state Supreme Court’s ruling applies retroactively to cases still being litigated.

The Gig Economy's Impact
On Wall Street, the initial public offerings of Lyft and Uber has ratcheted up the debate over how to regard drivers on the lift services. Deepa Das Acevedo, an assistant law professor at the University of Alabama, noted that a federal court in Pennsylvania ruled in 2018 that drivers for UberBLACK, Uber’s elite limousine service, weren’t employees, while the Commonwealth Court decided UberX drivers are not independent contractors.

In early April, the Texas Workforce Commission took the independent contractor route. It voted 2-1 to declare that people hired through a digital app to perform all sorts of tasks, from driving to handyman work, were classified as independent contractors. As a the tech companies creating those apps don’t have to pay unemployment taxes .

When Barack Obama was president, the federal Department of Labor (DOL) had been leaning toward reclassifying many independent contractors as employees. It cited cases such as one in which a construction firm forced more than 1,000 workers to leave their old employers’ payrolls and then go back to their jobs as independent contractors. The move saved the employers hundreds of thousands of dollars in payroll taxes.

The Donald Trump administration has taken a different approach. On April 29, DOL issued an opinion letter that basically said an unnamed “virtual marketplace company” (with a business model suspiciously like Uber or Lyft) could regard its drivers as independent contractors. DOL gave several reasons why:
* The service providers (i.e. drivers) set their own schedules and decide whether to accept jobs, thus making themselves responsible for their own profits and losses.
* They can choose to work outside of the software created and run by the virtual marketplace company and can even run two different companies’ apps simultaneously.
* Service providers get paid directly by the consumer via the virtual company’s platform, without any extra money coming from the company.
* The virtual marketplace company’s main purpose is to provide referral software, not the end-market service of transporting a customer from one place to another

“Who Really Is a ‘Builder?”
The question of what a company’s main purpose is can lead to some interesting existential questions . For instance, the Obama-era DOL issued an opinion letter in 2015 that said a construction company that frames residential houses should regard carpenters as integral to an employer’s business because carpentry is an integral part of framing houses. But a legislative director for the National Association of Home Builders said then that, while “framing is a necessary component to constructing a house … it could be argued that it is not integral to the builder’s business .” (Emphasis hers.) It could be argued that this means a builder can be regarded as a builder without actually having to construct homes.

“The inconsistency in classification outcomes for gig workers is caused by the thing that triggers inconsistent classification for FedEx drivers and other ‘non-gig’ workers: labor and employment law’s reliance on a single concept like control,” Acevedo wrote. ”Until and unless that changes, courts will continue to produce confusing and contradictory opinions on how to regulate this new area of work.”

Is there something that you would like to see covered in a future issue
of BIA Executive Insights? Write to us with your request.
First-Half 2019 Deals, Openings and Closures Activity Sustains 2018's Torrid Pace
At 173, the number of dealers involved in M&A transactions, openings, and closures so far this year si exactly the same as where we stood at this point in 2018, but the subcomponents are different. So far in 2019 we have seen 103 dealer locations involved in mergers and acquisitions, down from 126 at this point last year. Meanwhile, there's been a big increase in the number greenfield openings, hitting 50 compared with 2019's 31. And the number of closures is a bit higher at 20 vs. the 16 we had seen by this point last year.

SRS Distribution's plunge into the world of irrigation equipment was the biggest single deal so far this year; On Feb. 1, it announced the acquisition of a 13-store operation in Colorado and a four-store company in Indiana to create a new operation called Heritage Landscape Supply .

Among lumberyards, two deals netted seven facilities each: Carter Lumber bought DuBell Lumber and US LBM acquired Bailey Lumber and Supply . The specialty side also saw a seven-location deal when L&W Supply, the drywall-centric division of ABC Supply, acquired Delta Gypsum.

It's worth noting that 36 of the 50 greenfield openings involved roofing companies. SRS did 17 of them. And 13 of the sites purchased in the first half of 2019 were components (particularly truss) or millwork operations.

Here are some other notable deals to have taken place in the second quarter:

Kodiak Building Partners bought Christensen Lumber , the No. 69 firm on the 2018 ProSales 100. Christensen is headquarters in Nebraska and has three operations in that state as well as a showroom serving the Kansas City market.

GMS bought the three Hart Acoustical & Drywall facilities in Texas. The yards were part of J.P. Hart Lumber .

L&W Supply , a unit of ABC Supply , bought Metro Building Products of Denver.

Professional Builders Supply entered upstate South Carolina with the opening of a facility in Taylors, SC. Contract Lumber also expanded into the Palmetto State by opening a yard in Clinton, SC. Meanwhile, Chinook Lumber expanded to a new yard in North Bend, WA.

Salt Lake City-based Sunroc bought Sierra Truss of Willard, UT. Parr Lumber also expanded its truss capabilities by purchasing a pair of Trus-Way plants in Vancouver and Sunnyside, WA.

Homewood Holdings , a unit of Building Industry Partners , purchased two millwork operations in the Phoenix market: The Door Mill and Valley View Window and Door . It also continued to expand in the Seattle area by purchasing Custom Choice Door.

Rasure Lumber , based in Goodland, KS, with a branch nearby in Colby, has been sold. The new owners already own Herman Lumber in Burlington, CO, and Cheyenne Wells (CO) Lumber . Plans are to rename the Rasure yards as Hoover Lumber , after new owner Cody Hoover.

Erickson Lumber in Hibbing, MN, was purchased by a local contractor and renamed Yoder Building Supplies . In Texas, Higginbotham Bro s. purchased Mineola-based Cade's Building Materials .

Gulfeagle Supply snapped up four facilities in one deal: the Square Deal Building Supply locations in Sterling Heights, Wyoming, Almont, and Ludington, MI.

A contractor in Cedar Rapids, IA, bought both Ogden & Adams and Cedar Rapids Lumber in separate transactions and then renamed Cedar Rapids Lumber as a branch of Ogden & Adams. The deals closed on Feb. 28 but weren't reported until early May.
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From Mary Meeker's Data Extravaganza,
Three Notable Slides for LBM M&A
Few presentations in the tech investment world--or all the investment community, for that matter--are as eagerly anticipated as Mary Meeker's annual report on the state of the world's technology. This year's presentation covered 338 slides and dozens of topics. Of those, we spotted three slides that are worth your attention when you judge LBM deals.
First, e-commerce figures in more than one out of ever seven dollars spent on retail purchases in the United States. The share is nowhere near as big for construction supplies, but the upward trend signals two things: That Americans increasingly see e-commerce as a natural way to shop, and their experiences online shape their expectations when dealing with brick-and-mortar stories, including building products manufacturers and dealers.
Second, social media is a daily feature for vast numbers of Americans, but no one service has a majority of the eyeballs. This suggests that manufacturers and builders have to use a number of platforms if they want to reach the widest possible clientele
And third, we have nearly as many foreign-born people in America as we did in the days of Ellis Island. This means immigrants typically didn't grow up using a particular manufacturers' products, and they certainly don't have childhood memories of passing by some long-standing lumberyard. To these customers, heritage doesn't matter. What counts is what those companies can do for them now.

Update: Unmanned Trucks May Be on the Road
Even Earlier Than Some Experts Think
You might recall this graphic from our April newsletter in which McKinsey gave its predictions on when you could expect certain advancements in autonomous trucking. Now comes news that, on June 16, a Starsky Robotics robotics truck "driven" by a person located 150 miles away successfully traveled 9.4 miles down the Florida Turnpike. It was the first time one of Starsky's fully unmanned autonomous vehicles had been tested on a public road in regular traffic. ( This link has video. ) Starsky owns three of these trucks now, but plans to have 25 of them by next year.
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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