Attendees at the ProSales 100 Conference this month were the beneficiaries of thoughts and guidance from four of the most active acquirers in the LBM industry over the past three years. Together, Jim Drexinger of American Construction Source (ACS), Dave Flitman of BMC, Steve Swinney of Kodiak Building Partners, and LT Gibson of US LBM are responsible for leading four LBM companies with revenues in excess of $7 billion. Attendees submitted questions in advance, ensuring that these industry leaders were focused on questions that matter to senior leadership at other LBM suppliers.
The session began with the question of whether the currently depressed EBITDA multiples for publicly traded, multibillion-dollar companies really matter when valuing, say, a $50 million revenue company. All of our panelists agreed that public multiples are an important factor in overall private valuations. Swinney pointed out that public trading multiples reflect the ease with which you can immediately sell a publicly traded stock, as opposed to the long-term commitment and illiquidity when buying a private company. Swinney states that difference results in private valuation multiples hovering below those of publicly traded companies.
When asked about areas in the LBM industry where efficiencies that have proven effective in other industries are being underutilized, technology was the thread running through most of the responses. “I think this industry is going to change more in the next ten years than it did in the last hundred,” predicted Gibson. He went on to say that, while distribution optimization software has replaced clipboards in dispatch offices, we have a long way to go. Swinney added that inventory management software and continuous improvement will be key to the industry’s future. Flitman, a newer entrant to the building products industry, shared that BMC’s ongoing investments in technology and automation were among the key reasons he was excited to join the company. Drexinger rounded out the discussion by mentioning the LBM industry can benefit from increased investments in employee training, development, and satisfaction to improve retention and address historical turnover rates as high as 30 percent to 40 percent.
When asked about their outlook for the future, the panelists essentially agreed that, while we are far into this recovery cycle, they are optimistic about the next two years and excited about the future of our industry. Predictions of a soft patch two years from now, rather than an enduring recession, were common to their market views. Gibson hastened to add that it didn’t mean a company had to shrink if the market did, adding, “When they lose their tailwind, great companies reach for the oars.”
The panelists were unanimous in indicating that acquisitions are a key to their strategy now and will continue to be in the future. While their core operations supply the majority of earnings, acquisitions are vital for growth. The panelists agreed that, with so much competition for acquisitions, they often pursue the same transaction.
Increased emphasis on lean manufacturing was a common focus among the panelists. Gibson pointed out that, at US LBM, roughly 5,000 of its 8,000 associates companywide have received formal training in lean operation methods. He maintained that bringing an acquired business into the fold on lean techniques is a key way that sellers can see their companies improve from being part of a larger organization. Drexinger reported being very focused on making improvements to the supply chain side of companies ACS acquires. Centralized sourcing should allow the acquired companies to benefit from the greater buying power of a larger organization.
ProSales and BIA deal statistics show that, during 2018, an LBM supplier was acquired roughly once per week. When asked if they thought the strong pace of M&A would continue, the panelists all predicted that it would. Flitman pointed out that his two previous industries were much more consolidated than LBM: the top three chemicals companies in his segment held 40 percent of the market and the top three food companies in his most recent industry accounted for a third of the market. In the LBM segment, he estimates that the top 10 providers together have only 25 percent of the market. This fragmentation will be fertile ground for acquisitions for some time to come.
Given that LBM dealers and specialty roofing and drywall dealers dominate M&A in our industry, an attendee asked our panelists whether they predicted the convergence of these three segments. The panelists agreed that customers prefer a one-stop provider who can give them access to more materials. Drexinger pointed out, especially in more rural locations, it is critical to offer a wide range of product categories. Gibson shared his belief that, if broad-lines LBM dealers learn and deliver the product segments as well as specialty dealers, the one-stop shop model will be highly successful for them in the future.