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

July 2020
For Any V-Shaped Victory Over COVID,
the 'V' Will Refer to Vaccines
By Michael Collins, Managing Director, BIA

When Stephen Dubner, co-author of the celebrated book Freakonomics , sees predictions that America’s cities will empty because of the coronavirus, he feels a sense of deja vu. Futurists were just as pessimistic about cities in the early 1900s, he notes. The only difference is that today’s fears revolve around COVID-19 and pollution, while the twin woes back then were cholera and horse manure.

We rid cholera and horse droppings from our cities through technological achievements, particularly clean water and the automobile. They made it possible for people to live in and get around cities like never before. And now, when I talk to potential investors in building material dealers, I get the sense that people are just as optimistic that the combination of health care and technology will lead soon to a vaccine that will put coronavirus in its place.

I believe this optimism helps explain why Wall Street has felt so robust lately even as Main Street wheezes, the Federal Reserve frets, and COVID-19 infection rates raise eyebrows. With thousands of scientists around the world working feverishly on potential vaccines, surely we’ll find a solution soon … right? Given all the medical advances of recent decades, the odds of discovering a workable vaccine seem pretty strong.

Such optimism is especially well-placed in LBM because numerous signs point to single-family housing construction experiencing a V-shaped recovery even if the overall economy’s chart looks more like a U (or a Nike swoosh, as some have speculated). And building material dealers that serve suburban and exurban communities will be particularly valuable. There are several reasons why.

First, the pandemic has increased interest in detached homes and damped desires to live in multifamily urban settings. Who wants to be in an elevator with strangers? Second, the percentage of work done from home—already significant for millennials and generation X—is likely to remain significant. That means homes far from the office downtown will become more appealing because short commutes will not be as critical. Third, the half-decade-long decline in new home size is likely to at least stabilize, as people working and exercising at home want more room. There will be more products in every framing package.

Perhaps best of all, this recession doesn’t resemble the Great Recession. That one was especially painful to builders and dealers, because so much of it was related to an overheated housing economy and mortgages so toxic that some people getting home loans couldn’t make even the first payment. All of that snowballed into an avalanche of foreclosed homes that, given the general economic decline, took years to burn through. In contrast, today we’re not overbuilt and mortgage rates remain relatively low. Most builders haven’t even had to adjust their prices or add sweeteners to win over customers.

Shutdowns, sheltering in place, and millions of layoffs created the left side of the letter that will describe this recession. If a vaccine gets developed, the right side of that letter will form a V and we’ll quickly return to normal spending. But if the vaccine takes time and/or the coronavirus proves hard to subdue, the letter created could be a U, in which we proceed at a subpar pace for several years, or a W shape, in which a quick recovery is followed by another quick descent before we finally emerge for good.

My money is on the V … as in vaccine. For more investors, it’s the same. They’re bullish, so you should be, too.

Expect to Work Hard This Summer and Fall,
But COVID-19 Will Slow Your Acceleration
By Craig Webb, President, Webb Analytics

Several new and ongoing surveys of the U.S. economy help explain why it's easy to be confused about the current state and future prospects for this country under the coronavirus. The surveys suggest we're seeing two very different trends occurring simultaneously. The bigger trend points to robust growth, particularly for construction work. But a smaller trend is putting dampers on that growth, making it harder for the LBM industry to progress as quickly as it would like or expect to achieve.

The trends go in opposite directions because COVID-19 hasn't affected all Americans or American businesses the same, nor has their reaction to it been universal. A recently published poll of 1,000 consumers conducted by KPMG in late April found 11% of those surveyed weren't working because of COVID-19 and 44% of the total said their income was negatively impacted. KPMG believes those varied experiences have created four different personas in the American population:

* "Hit hard and cutting deep" describes 23% of respondents. This group suffered the worst losses of jobs and income. They're in tough shape financially and are pinching pennies. Average income: $45,000.

* " Proceed with caution" covers 45% of respondents. They were hurt less by job losses and are bearish on an economic recovery. On the other hand, they haven't altered spending dramatically. I believe this is the group that has produced most of the boost in DIY purchases. Average income: $60,000.

* "Hunker down and save," a category that describes 27% of the group, includes relatively affluent people who are saving more and spending less on discretionary categories. Average income: $110,000.

* And then there's "Ready to roll," covering 5% of respondents. Younger than the average respondent, this group is actually spending more than it did pre-COVID. Average income: $65,000.

The variety in responses across these populations helps explain how dealers can report being as busy as ever with new construction work as well as welcoming a surge in DIY customers even as small builders and remodelers weren't coming by as often. Other data backs up those anecdotal reports.

In the new-home sector, the latest Census Bureau survey of small businesses found only 21.2% of construction companies with fewer than 500 workers reported they were suffering a large native impact from the pandemic. The average for all businesses was 38.4%, and in the accommodations/food service sector it was 70.6%. Forest Economic Advisors' (FEA) recent weekly survey of dealers revealed "another week of steady to sneaky strong sales" of lumber. An uptick in housing starts and permits combined with reports of increased builder confidence are leaving the timber industry with the belief "that their sales will continue to be steady to strong well into the summer building season," FEA said.

On the DIY front, The Farnsworth Group says the percentage of homeowners who reported starting a new DIY project was 12 points higher in late May than it was in late March.

In contrast, the percentage of big contractors (at least $750,000 in annual revenues) who have told The Farnsworth Group that their work was delayed or stopped because of COVID-19 has remained consistently in the 80s, most commonly because homeowners didn't want remodelers in their homes. As a result, remodelers who rated their confidence levels at 7.9 and 7.7 on a 10-point scale during the first and second quarters of last year, respectively, gave scores of only 5.4 and 5.9 for the same two quarters this year.
Kodiak, PBS, CNRG Deals Stand Out Among Recent LBM Acquisitions, Openings, Closures
Dealmaking in the LBM sector hasn't taken a break during the pandemic, with several recent actions worthy of special attention.

One of the most surprising moves involved R.P. Lumber, the 27th biggest company on the ProSales 100, with $281 million in sales last year. Until now, all 71 of its branches were in Illinois and Missouri. But on June 26 came news that R.P. had purchased Build-Rite Lumber of Rawlins and Saratoga, WY.

Kodiak Building Partners acquired Mandere Construction and Northwest Building Components , both based on a 12-acre site in Rathdrum, ID. Northwest produces wall panels and floor and roof trusses, while Mandere provides framing and installation services. Company founder John Mandere will continue as president, Kodiak said in a news release . The two companies will become part of Kodiak's General Lumber division and mark the dealer's 25th acquisition.

Meanwhile, Professional Builders Supply grew its revenues by roughly $100 million through the acquisition of Charlotte, NC-based SouthEnd Supply . The deal expands PBS' installed sales work outside of lumber, as SouthEnd specializes in roofing and siding installations. Theoretically, it also adds eight branches to the PBS network, including one in Nashville, TN, that would be a new territory for a PBS operations that currently is centered in the Carolinas. SouthEnd will continue to operate as a separate company, but it's possible that many of its locations will merge with existing PBS stores. That's why we didn't put them on the map above.

Central Network Retail Group made two purchases. On May 20, it acquired H&M Lumber of West Helena, AR, and then on June 3 followed that with a deal to buy Germantown Hardware , located in a Memphis, TN, suburb near CNRG's headquarters. H&M will be rebranded and operate as part of CNRG’s Home Hardware Center brand, a press release said. This is the 24th store in that brand, which is headquartered in Natchez, MS, and operates stores in five states.

Multiple changes are under way at Gordon Lumber as a result of its decision to focus on services such as components manufacturing and installed sales. Gordon closed its locations in Huron and Fremont, OH, after having sent its inventory to its Port Clinton, OH, store. That location will serve as a liquidation center prior to its scheduled closure on Oct. 31. That will leave its store in Genoa, OH, which will remain open, and the corporate offices in Fremont, which will move to Genoa before Dec. 31.

So far this year, there have been 97 locations involved in deals, 21 greenfield facilities opened, and 21 locations that closed. Those 139 transactions compare with 168 that took place in January through late June of last year. More than three dozen of this year's locations were part of one deal-- Lansing Building Products' acquisition of Harvey Building Products. Lansing's acquisition of Massachusetts-based Harvey contributed to New England being the regional leader in deals, with 44 locations in the six-state area involved in deals, opening and closures.

Among other activities:
* Zuern Building Products acquired Window Design Center , which has branches in Madison and Delafield, WI.
* Higginbotham Brothers announced plans to open a facility in Liberty Hill, TX.
* Saying it wants to increase its service to Gulf Coast towns ravaged by hurricanes last year, GMS opened a Capitol Materials branch in Panama City, FL,
* Sparr Building & Farm Supply plans by Sept. 30 to open a location in Dunnellon, FL, that previously was occupied by Nichols Supply. Nichols closed in late April.
* Bear Paw Lumber in Havre, MT, closed.
* Builders FirstSource in March closed Spenard Builders Supply yards in Eagle River and Seward, AK.
* Trio Home Center of Ellis, KS, closed.

These lumberyards are using auction pages to sell themselves:
* Sentry Lumber & Hardware in Greenville, GA, is for sale. For an asking price of $1.325 million, you get an operation with gross revenue of $1.067 million and FF&E worth $250,000. Neither the inventory nor the real estate are included.
* An unnamed lumberyard in Wilmington, NY , that claims $5.4 million in gross revenue and $456,481 in cash flow is on sale for $1.8 million. That price includes about 10 acres of real estate and $500,000 in equipment, but not $650,000 worth of inventory.
* Go to Pierz, MN, and $999,000 will buy you Loidolt Lumber . Revenues, cash flow and EBITDA weren't disclosed. Neither real estate nor equipment are part of the asking price.

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How Are Dealers Managing Amid COVID-19? My Session at This Online Summit Has Answers
The COVID-19 pandemic has intensified the stakes for operational decision-making and prudent financial management. To help you chart your course through these rough times, the recent Building Industry Leaders COVID-19 Crisis Summit brought together four distinguished building products dealers and manufacturers to discuss how they're managing their businesses. The online session featured Mike Howell, p resident and CEO of Parr Lumber ; Kendall Hoyd, president of Residential Design Services ; Tim Liester, COO at US LBM ; and Butch Reimer, president of Tru Cabinetry . I was honored to moderate the session. You can view a video of the discussion and download a PDF at https://covidsummit.buildingip.com . Look for my smiling face at panel 6.
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