Updated: Jul 9, 2021
If deeds matter more than words, then three acts in recent weeks by Builders FirstSource (BFS) have revealed much about how America’s biggest pro LBM operation intends to operate.
That trio of moves saw BFS acquire a software company for nine times its annual revenue, pay $400 million for a powerhouse operation in Phoenix that generates $330 million in annual sales, and sell 21 gypsum specialty yards to ABC Supply's drywall specialty division.
Of those, the $450 million acquisition of WTS Paradigm caused the biggest short-term confusion--why buy a software company when you can just rent its products? Because, just as the enormous cat above shows how 3-D technology and a 4K screen can transform a billboard, BFS plans to employ a slew of tech advances provided by WTS to do construction supply in a more advanced way. The move ups the pressure on all other LBM operations to follow suit.
Start with manufacturing. WTS is best known for writing code used by window and door manufacturers to manage their production.* Those are businesses in which mass production occurs on a custom-order basis. BFS believes that what WTS has learned can apply not only to those product lines (and BFS makes windows) but to other materials, too.
"What we see with Paradigm is to take their capability--which is fairly narrow in terms of their product focus around millwork--and expand it two ways," BFS CEO David Flitman said in a recent interview with investor and Seeking Alpha columnist Bradley Guichard. "... Through the course of time, we see the opportunity to take that same capability well beyond millwork into other product categories at the highest level."
BFS says roughly 100 of its 550 facilities make or add value to products, from its ReadyFrame system and truss plants to window making and door shops. BFS' presentations to analysts regularly emphasize the company's manufacturing and value-added capabilities, which the company says provided 37% of all revenues in the first quarter. (See figures at right.) That's nearly as much as it made from lumber in a quarter that saw record prices for wood.
While it may be a leader, BFS certainly isn't the only company that makes stuff. Webb Analytics' Construction Supply 150 report found that half of the 150 companies on its list did some type of manufacturing, and many plan to expand. For instance, 84 Lumber just opened a new truss plant in Statesville, NC, and US LBM has long sought to set itself apart through technology; it was an early adopter of apps, for instance, and its Elevations unit employs 3-D goggles to help show off its designs. But for many other dealers, it has taken a crisis like the COVID pandemic to push them into adopting core services like online bill presentation and payment. More than three out of every four Construction Supply 150 companies that offered numbers said they planned to spend less than 1% of their revenue on technology in 2021.
WTS' manufacturing services wasn't the only reason BFS decided to buy the company. WTS also has created a sophisticated take-off and quoting service as well as high-definition design software that permits highly customizable visualizations in a flash. Both of those can be useful at all BFS locations and for all customers, from production builders to simple remodelers.
"We have more than 700 designers who come to work every day ... estimating, doing the takeoffs of the materials, and ultimately configuring that capability for the home builder," Flitman said in the Seeking Alpha interview. "You know all of that is a little bit clunky, right? It's very manual, although there's digital capability around the design work that we do as you move through those steps, that I just described, it's very inefficient. (It is) fraught with errors and it's not very productive, ... And as we improve those interfaces from design to estimating to configuration to the home builder interface, we believe that will actually happen, so that's why we're excited about it. We're not here to revolutionize the way home building is. We're taking the existing processes and, through technology and digitization, making it better."
You also can see a glimmer of this philosophy in BFS' decision to sell 21 gypsum specialty facilities in the Eastern U.S. Drywall is a 100-year-old product that hasn't changed much in recent years aside from the creation of a much lighter version. It requires special equipment to deliver gypsum, and the competition is tough: GMS, Foundation Building Materials, and L&W Supply dominate the business. BFS faced head-to-head competition with L&W in nine of the 21 markets where its specialty stores operated, and at $8 million per store, revenues weren't spectacular.
There's one potential sidelight to this news. Back before BMC merged with BFS, it had an arrangement with ABC Supply in which BMC yards that didn’t sell roofing could get what they needed from a local ABC Supply and then present the customer with a combined invoice. BFS might find it advantageous to seek out a similar arrangement with L&W.
More generally, it appears that BFS doesn’t see drywall being a vital part of its future. What is important to it? The building envelope and the frame, particularly in new construction. There’s an abundant need for both in Phoenix, a region where BFS had a relatively light presence. That’s why BFS' purchase of the Alliance Lumber group of companies makes so much sense. Observers have commented that BFS paid an enormous price for Alliance, but the deal fits BFS' strategy of being a powerhouse in every major housing market in the country.
And once it absorbs WTS, it thinks it will have something special to sell.
* — Disclosure: I have written for WTS Paradigm’s website and have given presentations at its events for customers.