Third Bridge 专家称美国建材分销需求低迷、价格竞争和利润率压力或延续至2027年

[[00:02:32]]
What is your current perspective on the broader building materials distribution industry, highlighting 2-3 trends that you think are important to monitor?

[[00:02:45]]
I think with respect to distribution, it's so dependent on the housing market, like that's the big trend. If you're following building starts and you're following the interest rate and you're following pricing, it's been a battle to the bottom, and it's been a rock fight in that industry. That includes not just homebuilding, but I had friends in other industries like fencing supply, drywall supply, and everyone is doing that because they're all trying to support the housing market. I think it's more glaring if you go state by state and city by city. Some people are not getting, should I say, beaten down as much as others, but the tide has gone out and everyone is going down. If you are already sinking, you're in trouble. That's a very 50,000ft view trend. When I talk to some of my friends who are still in the business, they are super busy right now, but they're super busy because in the past 12 months, we've reduced force so much and closed locations that just those smaller units are almost overloaded with business.

In Dallas-Fort Worth specifically, and I think probably across Texas, another big trend is margin compression, which is translating to EBITDA. Contribution margins are really shrinking, and that's not dropping to the bottom line because these locations, the rents don't change. The amount of electricity they're using doesn't change. Taxes don't change, but the labour and all the variable expenses are what are all over the map, because pricing has been a battle to the floor, a lot of even vendors that used to be in the space, this would be another overarching trend. There were a lot of agreements with, in particular, like window suppliers where they would never go direct to the customer. They would always do two-step through distribution to get products out to the builders. That's a high-margin market. At US LBM, when we were selling windows, millwork, trim, those types of things, there were window vendors that we would normally buy from and they decided that they were just going to go direct to the builder. Those are some huge hits to the business when those vendors did that, which in the short term, I think, was a win for them because they got to pick up their top line.

It's a high-margin business but if I know anything about the building materials industry, relationships go a long way. I think that those vendors… There might be more that did that, but they really burned some bridges and made some people mad by going two-step like that. That's another big trend. I don't know how that's going to unravel itself in the long term. I'm thinking people will have to turn over and forget that that happened in the industry. That will be a big one. We'll have to see how that is going to play out. Fuel has been a big one and labour, wages have been another one. As people reduce, especially in the manufacturing segment, there's a very high use of temporary labour. When I was in manufacturing, you'd have temporary labour people and they would just leave the next day, go down the street, so they'd leave us at Foxworth, go to BFS and get a pay raise. They'd stay at BFS for six months, maybe one year, then find out that somebody else was hiring, so they'd go over to Allied and get a pay raise. There's this circular… What's the phrase I'm looking for? It's like a double-edged sword where the manufacturers need the labour and they need experienced labour because it takes so long to get somebody up to speed in manufacturing. They need them, so they'll pay them.

Those guys are like a revolving door and they run around. It's hard to keep them. That's another, not a huge trend just when I'm specifically talking about manufacturing, but labour in general, because you know you're paying a premium for temporary labour. You're typically paying them that hourly rate and then you pay a premium to whoever the labour company is servicing them. You pay them another 20-30%. There is an offset with labour as far as benefits and health insurance and 401(k) matches and stuff like that that you don't pay temps, but you pay the temp agency, but it is still more expensive. There was, in Dallas-Fort Worth, a lot of temporary labour on the payrolls, especially before 2024 because 2024 is really when it started taking a nosedive where start projections, the amount of permits that they were pulling, land that they were developing. A lot of the large homebuilders were just sitting on land, but they weren't developing the land. They're having to pay taxes on it, knowing that they're not going to be building any houses on it for the next 5-6 years and not having revenue streams to cover all of that.

[[00:09:51]]
What is your outlook for a housing market recovery that would result in a meaningful demand uptick for distributors more broadly?

[[00:10:03]]
I'm trying to think of the phrase that everyone wanted to use is, cautiously optimistic was the back half of this year, but after talking to people at the water cooler or whatever, I think the real thought is going to be probably Q2 2027. Not a lot of movement, especially with the November election pressure coming on. Everyone gets hesitant around that based on what policymakers are going to decide. Depending on who's in the majority. If you're on the wrong side of the fence, then it can hurt you. I think it will be very quiet during Q3 and Q4. Q1 is always slow, so Q1 2027, but Q1 should give us an idea of what the builders' outlooks are looking like because they'll get all their Zillow information, they'll look at what their permits are looking at. They'll start noticing what population movements are happening, and that's where they'll start deciding how many starts that they're going to do. If that answers the question.

[[00:11:26]]
How much of a recovery do you think would be required for EBITDA margins to stabilise? Is there any specific threshold, either in housing starts or interest rates, that you would look for before that begins to happen?

[[00:11:44]]
Two answers to that. You've got home prices, number one, and then you have the interest rate. I don't think you're going to see any substantial movement until the interest rate starts with a 5%. It went down to 6.27% recently, and then it ticked back up because people can't afford the payment is the bottom line. Home values, when we went through COVID with all of the absolutely inflated prices that are built into these houses, they're building the same house, square footage-wise, for example. When they're pricing it out, I don't think they're necessarily using the cost basis that they're paying for the building materials to put it together. I think they're working off of comps, and that's where they're trying to rake back some of those smaller margins. I'm hoping that makes sense where they built a neighbourhood five years ago, and it's a 2,000 square foot house and they're paying USD 200 per square foot. It's a USD 400,000 house. They build a new neighbourhood across the street and they run a comp off what the square footage would be. They're charging for that new house USD 400,000 plus a premium because it's new. Even though the cost of goods that they spent for the materials is lower because a lot of the homebuilders when they had inventory, I think at the time, they had about four months' worth of inventory. That's another factor.

They typically want to run, I want to say, two months, like 60 days' worth of inventory. When they're at four, they've got double the amount of inventory, and they're trying to sell the homes at the same price. They have got a couple of options. They can lower the price of the house. They can throw in incentives or they can try and buy down interest rates. I think remembering the math, if they lower the price, that's more financially impactful in the negative in the long term. If they lower the price, they're going to make less money on the house in the long run. They would try and buy down an interest rate with the bank or try and throw in incentives, and whenever they're doing this, they're trying to keep their margins. They're passing on what their pricing requests are going to be to the distributors. You can see how it just cascades down, where now you've got a BFS, a US LBM, a QXO, whoever you want to call it, and everyone gets to turn their bids in. The challenge is it's 30-day pricing. That's pretty much the standard. Every month, that's where you can see where it was a fight to the bottom because if you turn to the numbers you turned in the month before, you'd get rejected.

If you were lucky, you had a good relationship and they'd say, "Hey, man, you're USD 500 per house high." You'd have to go in and chop your pricing down, and you can just see where it goes. Where until somebody says, "I can't go any lower," the other guy gets the business. It's going to be the flip side to that when… That's where you're going to see margins increase, in my opinion, is because they've cut so low, labour-wise, inventory-wise, the distributors aren't going to be able to service it the way they used to service it. That's when you see lead times start extending where I could get something in three days. Now, I got to get it in seven days. Now, I got to get it in 10 days. That's where people will start getting fired because they're behind the pace of labour and keeping up with what the service looks like. That, in turn, I think, is where you will see margins increase because the top line is going to increase.

[[00:16:15]]
The threshold you mentioned of mortgage rates falling below 6%, is that for distributor margins to recover or for builder margins to recover?

[[00:16:25]]
That's for builder margins.

[[00:16:27]]
How much of a recovery do you think would be needed for distributor margins to recover?

[[00:16:38]]
I think they're all tied together because it's tied to their inventory. The amount of inventory they have and what their margins are currently, which I don't know what builder margins look like. Once distribution gets to start charging higher prices to be able to service the builders, that's when you're going to see it pass on to distribution margins. They're going to be delayed. When you see builder margins start increasing, I would venture if you kept three months' worth of inventory on the ground. I think US LBM was trying to carry about 50 days of inventory on the ground. Once you start burning through that, getting new wood, they'll hire some people in, then you'll start to see distribution margins get better. Probably 3-4 months after that, after the builders' margins get better.

[[00:17:46]]
You mentioned that volumes might begin to recover in Q2 2027. Let's assume that is the case. Once volumes start to recover, how quickly would you expect distributors' EBITDA margins to recover once those volumes start growing again? Would it happen within a 3-4-month timeframe, or could it take longer, whether that's a few quarters or even one year?

[[00:18:18]]
I would venture to say that you'll start seeing the EBITDA margins the same timeframe as you see the gross profit margins go up. Say it's 90 days to burn through inventory in distribution, then they start getting to raise their prices, then you'll see marginal increases as their GPs increase, drop to the EBITDA line because the fixed assets should still be the same, but the variable in there is they've got to buy trucks. They're going to be using more fuel. They're going to be having to hire people. Depending on how good they do that, if they keep labour pools and their vehicle pools the same, they get to raise prices, then they're just running a bunch of assets a lot harder, but it's not costing them as much as I just add another run to a truck as opposed to buying another truck. If they do that poorly and they just start buying trucks and hiring all these people, you're not going to see that stuff drop to the EBITDA line as quickly. I hope that answers your question.

[[00:19:43]]
US LBM's EBITDA dropped 82% YoY to just USD 14m in Q1 2026. What do you think are the biggest pressures on the company's EBITDA margins in 2026 that have led to that margin compression?

[[00:20:09]]
US LBM rolls with two… What's the phrase I'm looking for? They talk out of both sides of their mouth. They're private equity-backed, I should have brought that up in the beginning when we talked about it. That's a huge player in the industry right now. We went through, the end Q3 2024 to the end of 2025, five reductions in force. They were just letting people go left and right to reduce labour to try and maintain EBITDA numbers. At the same time, they'll have a call where they just spent USD 20m to buy this millwork facility in Arizona, where we just bought another company in Dallas-Fort Worth and bolted it on to the Dallas-Fort Worth market. You're like double-taking that we have all this money to go out and buy companies and on the other side of the fence, we're laying people off left and right. We're selling off assets. We're carrying less inventory. That's the US LBM deal. At least it was in Dallas-Fort Worth, and I would venture to say all of Texas. They used to have five regions. I was just talking to a buddy the other day, and they've gone down to three. They had somebody retire and they just, instead of having five, they let him retire and they carved up the United States into four regions. Then somebody else left for whatever reason. Now, they just carved it back down to three.

Typically, there was a less flat organisation on top where you had a little bit more direct control at the regional level. They've cut that down anything. I don't know how RVPs control anything. It's really, I think, localising down to the market level and who the PGMs, which is the president, general manager of the market, they've got a lot less oversight, which that's been a continuous struggle with US LBM is they're great at writing 8-9-figure cheques to buy companies, but they can't implement operational standards, safety protocols. They can consolidate it up and print a report for, say, you to look at that was public information on their TRIR rates and safety incidents and blah, blah, blah. When you get down into the field, it's so diluted that in some instances, markets still feel like they're running as 6-7 different companies. I think one of your questions also was in there about QXO and BFS and different companies like that. What I just described is a giant competitive disadvantage for US LBM where they have this grand quote, unquote US LBM strategy on what they want to do, but when you get down to the location level and oftentimes the market level, they don't know what any of that is. You might as well write with chalk on the sidewalk because no one's paying attention, it just washes off in the next rain.

Now, a BFS, a QXO, and ABC, I've never worked with them, but they seem like they have that operational KPIs, metrics, what's important to them, way more standardised than US LBM. Like in my experience, when US LBM bought Foxworth-Galbraith and they made me the Vice President of Operations. I was literally expecting after the first 90 days for someone to walk into my office and say, "All right, here's your new employee handbook. Here's the way we do things. These are the metrics that we follow to increase efficiencies and blah, blah, blah." None of that happened. I have never written more standard operating procedures in a 20-year career than I did in the last four at US LBM to try and get everybody on the same page on what we were doing. The corporate folks would come down and basically give us evaluations on metrics that we weren't meeting or something like that. We're all in the field looking at each other going, "We didn't even know that was a thing." Then they said that we're doing bad at it. There's a big disconnect with them. I have talked to other friends that are in similar industries that are private equity-backed and they're just buying up all these companies, and their process of integration for a new company is just as bad.

[[00:25:58]]
Could you frame US LBM's positioning vs its scaled peers that you mentioned, such as BFS, QXO and ABC? What are US LBM's advantages and disadvantages, other than the ones you highlighted?

[[00:26:19]]
Whenever we used to do rankings on that stuff, it was always BFS was number one. Depending on the category, like ABC, they're primarily roofing. US LBM doesn't do a lot of roofing. We would fall behind them on that kind of stuff, but we would always be… 84 Lumber is up here also. If you just took them, BFS, 84 Lumber and US LBM, which are, call it, the larger players in the market. US LBM was always third. There might be a category that we did better at, like if you said, windows, okay, we do better in windows. Overall, to answer your question, US LBM is always third in the Dallas-Fort Worth market. With all the acquisitions, they're buying up all the local players. When I took over my spot at US LBM, we had Hart Lumber, Foxworth-Galbraith Lumber and Oldham Lumber. Oldham Lumber, just three years before that, was McKinney Lumber. You really had four separate companies that had never really been integrated. Big D is a local player in Dallas, which would probably fall behind US LBM, but that's privately owned, and a guy named Garret Cockrell runs Big D that's going to have four locations in 2027. They'll become a big player in DFW. US LBM will be third. I think they'll be third for a long time.

[[00:28:30]]
What defines US LBM's competitive positioning in any given market? Is it just sales volume, or are there other metrics by which you would measure it?

[[00:28:42]]
Sales volume is a big one. Just because BFS, number one, they're publicly traded. They're essentially forced to make their numbers for the shareholders, but BFS is in everything. They're in components, they're in trusses, they're in windows, millwork, regular building materials, they're in roofing. They're a player in every category. That helps their top line. In my opinion, they suffer on service because they're trying to do so many things. 84 Lumber, they do some of that, but a lot less than BFS. They've got just really good locations. They're privately held, so they can move a lot quicker than a BFS can. US LBM is just operationally… Still struggles to get their stuff together. They can't get people aligned. I think they're working on it. We're combining things into quote, unquote shared services. When I started with them, everyone had their own accounts receivable department that did however they did it. Smartly, US LBM is trying to package those where accounts receivable or pricing or purchasing or any of those are all coming under bigger umbrellas and buying for more people. I think that's a win.

How fast they can make that happen is… I mean, who knows. Especially they've laid off tons of people with a lot of experience. Technology-wise, they're way behind the eight ball. I went through, call it, three ERP conversions in two years, and they were all disastrous. The last one we did was worse than the first one that I did with them. It just causes chaos through the entire market. I don't know how they're going to get over that. I think that goes back to what I was telling you earlier about how they integrate new companies because they'll bring on a new company and just go, "Let's do it however you want to do it," until the company gets called to the carpet on performance and then they either can't measure it, they can't find the rocks they need to turn over. That's like a huge struggle that they cannot seem to get their arms around. It's really like a boat anchor trying to hold them back. Those are the things that I don't think that BFS and 84… I'm sure they have it. Every big company has it, but just me witnessing that and being a part of that, it was just a struggle daily to try and operate.

[[00:32:01]]
Regarding the competitive environment, how distinct a threat is QXO specifically, given its recent acquisitions of Kodiak Building Partners in April 2026 and TopBuild in July 2026? Where do you see the greatest competitive pressures manifesting from QXO as it expands beyond roofing into LBM [living building materials] and insulation?

[[00:32:26]]
Roofing for US LBM is a huge category that they don't even touch. Like QXO, ABC, BFS might be in there a little bit of that. I'm not very familiar with TopBuild. Those huge guys, QXO, for example, I think they're just buying themselves into the industry. For example, Home Depot just bought SRS. We were competing with SRS anyway. The fact that there's now a little Home Depot logo on the bottom of SRS is a non-factor in the short run. Now, I'm assuming because… I still talk to people, they're like, "Hey, Home Depot really hasn't done anything with us." Home Depot is very smart operationally. I think what they will do is they will integrate a lot of stuff behind the curtain, but as far as competitiveness, I don't think they're going to see that competitiveness for, say, 3-5 years, where, I don't know, their routes are more efficient. They're using continuous improvement to make things better. They will realise margin increases because Home Depot is buying power. They'll get to leverage that, but like I said, when my truck drives down the road and drives past a BFS truck, we're still just competing with them. It's the relationship, it's the pricing because we're all buying the stuff from the same people.

Lumber comes from… There's four mills on the West Coast. They come from Canada. It's all the same mills. They're all buying the same lumber. Those categories, we're paying the same amount unless they're getting rebates on the back end. The rebates on the back end on how much they're buying, that can drop down to the EBITDA line if they're doing it smart. You might see a BFS, because of their volume, dropping more money to the EBITDA line as opposed to a US LBM that doesn't have the volume, cannot produce the rebates. You're not seeing that on the bottom line. The competitive parts right now is the price. No one can demand a higher price based on service right now. You can be doing great service, delivering your stuff on time, delivering it in full, delivering it when the customer needs it. Everybody can do that. Right now, it's all about price. It goes back to our conversation about when I think the housing market is going to come back, it's tied with interest rates, and that's when you'll… When people can't keep up with the work, then I think you'll see it get a little bit more competitive, but right now, it's just a rock fight on price.

[[00:36:01]]
Do you see any scenario in the near-to-mid-term where US LBM becomes an acquisition target for QXO? If so, how could that play out? If not, why not?

[[00:36:17]]
I wouldn't narrow it down to QXO by themselves. I think US LBM could be an acquisition target. If somebody wants to buy locations in volume, I think that there is a huge rush at the corporate level at US LBM to go public, but back to my comments a little bit earlier, they're so disorganised operationally and structurally. If you think of the org charts and who's got what, that's really messy. If you're going to try and go in and buy that and you look under the hood of the car, that might be something where you're like, "What? I don't know if I want to pay a premium to basically buy a bunch of dysfunction." I think that's really what's hampering that. If QXO wants more presence in DFW, by all means, if they come up with a big, old USD 3bn cheque, then they can buy locations and sales in DFW. If they're looking to really scale it the way that they want to scale it, it's going to take them a while. I don't know if the ROI is going to be in there. If they're looking for a 2-3-year return on that investment, I don't see it happening. It's going to be a longer term, or US LBM gets their proverbial S together and becomes more attractive for that, but when I talk to my buddies, they're just like, "Same old, same old. Same old stuff."

[[00:38:27]]
We discussed the demand environment. What is your near-term organic growth outlook for US LBM? Is there any hope for the company to outperform the broader market or grow revenues organically?

[[00:38:46]]
I don't think so. It depends on what market you're in and what they offer, meaning what services or what materials that they're offering because they do have roofing locations that they bought. If you go up into… Where was that? I think like Minnesota, they've got a huge roofing location. They've got a huge siding location and I think a couple of lumber locations, but then you look at a component manufacturing and trusses, do they have any of that up there? I don't think so. When you come down to Dallas-Fort Worth and you go, "Okay, we want to get into the roofing category." My last boss tried to do that, and it was an epic failure before he quit. He came from Beacon and really wanted to get into roofing to grow a category. The problem is no one did roofing in DFW. Particularly with roofing, there's so much rebate activity and volume levels.

We would be paying essentially list price for a long time or the company would have had to say, "Hey, we're going to lose margin to get into the business because we can't compete," because their rebates, they get to have a lower price and still make money. Not to mention having to buy new trucks, having to have new facilities and also the kind of stuff to store roofing, whereas like a QXO is already big in that. I think I started talking sideways on that one.

[[00:40:50]]
What levers exist to increase revenue organically through US LBM's existing customer base? How can the company increase its share of wallet with homebuilders of different sizes and types, whether larger tract homebuilders or smaller custom homebuilders?

[[00:41:08]]
I think the differentiator for US LBM is the custom homebuilder. They're a core group of homebuilders because the people they're building for have money to spend. They're building second homes, they're building lake homes, they're building stuff like this, but just like the broader housing market, it's slow. A lot of them have been sitting on the sidelines where someone would do 9-10 custom homes a year was doing three or four. Circling back all the way to the beginning of the conversation, the relationship part, there's a lot of outside sales guys that have great relationships with those custom homebuilders. When the custom homebuilders get off the sidelines and they start getting essentially more customers to build houses for, whoever has got those relationships, that's going to help you grow organically. DR Horton, Perry Homes, Grand Homes, they're like a plant only gets as big as the pot it's in. A DR Horton is never going to give all of their business to US LBM. They're going to say, "One-third, one-third, one-third. BFS, you get one-third. US LBM, you get one-third. 84 Lumber, you get one-third."

Now, that mix might change a little bit depending on people's performance, where they award new subdivisions. A lot of that has to do with the pricing game. Some of it does have to do with relationships and then a lot of it has to do with service also. Anyone that fumbles on any of those three for a production builder, you're going to lose a percentage of their starts. That's every homebuilder. The custom builder is not like that. If the custom builder uses you, he's using you because he's got a relationship. You're the person that gets beat about the head and shoulders if you mess up and you're the person… They don't have the time and they're spread too thin to keep running around looking for all these different suppliers, but if you don't have the relationship with the custom builder, when they do get off the sidelines, you're going to be hung out to dry.

[[00:43:59]]
Has US LBM maintained its outside sales representatives and custom builder relationships in such a way that it is well-positioned to take advantage of custom builders returning to the market, whenever that may happen?

[[00:44:18]]
That's a big question mark for me. We lost a lot of good custom sales reps. The guys, the sales reps that had relationships with the big homebuilders, they all took a hit. When you're getting paid commissions off of custom homebuilders not building homes, that's a problem because they're not making any money. The sales reps aren't. They're not selling anything, or they're frustrated. That's another thing that is a thorn in US LBM side is because they had, what I was telling you earlier, four different lumber companies that they've tried to squish together and let everyone do whatever they wanted, then realise it's a problem. They tried to standardise commission programmes. They tried to standardise pay levelling for hourly employees. That was a huge, huge problem because the spectrum was so big on what everyone was paying everybody at the different companies. That was a huge one where we lost a bunch of sales guys because they were making anywhere from, at one company, 20% of gross profit down to 6% of gross profit. If I'm the sales guy making 20%, and I've got a huge customer or a custom builder base and you tell me now I'm going to get 12%, I'm out. They're making 20% because they're great sales guys. They left.

They either go to a smaller company where they're going to get paid that 20% or they go to a BFS and take their book of business with them. Let's see, that was probably 2023. I think they put that in place, 2023. That's still fresh. The new people coming in don't know the difference. They just think this is the programme, but those people who left that were making that kind of money or those percentages, they're not coming back for 12% unless they get fired or something, I don't know.

[[00:47:06]]
How would you characterise US LBM's relationships with upstream suppliers, such as manufacturers, two-step distributors or others? To what extent do those suppliers and vendors impose unilateral cost pressures on the company?

[[00:47:29]]
I don't think there's anything specific just on US LBM. Typically, a vendor for whatever it is, whether it's roofing, lumber, they're giving the entire industry what the cost is going to be. If they're going to have a 10% increase in pricing, they send it out to everybody and they say, "Hey, our pricing is going to go up 10% starting in three months," or for right now, they might say September. Everyone is getting that same cost number. Going back to the volume, if there are rebate tiers in, then some companies will have an advantage where supply chain went through so many changes in the past four years, and US LBM is hard to keep up with it. There were some people, in particular to Dallas-Fort Worth, that had great relationships with those vendors. That comes through when supply gets tight. When the market gets bad and the mills start producing less or they start shutting down for extensive periods of time because they've got too much volume or not enough volume. If you've got the relationship, then you can get the product. With all the changes that have gone on in purchasing for US LBM, I don't know who they've got managing those relationships. That's another double-edged sword.

When you're a smaller company, you can make those relationships. When you all of a sudden get bucketed into a giant shared services organisation, that's just a department that does the purchasing. They're purchasing for so many different people. They're trying to figure out how to purchase it. I don't know how much time they get to spend on the relationship with the vendor.

[[00:49:45]]
With input cost pressures and rising energy costs, is US LBM able to pass those costs on to its customers?

[[00:50:01]]
They can. I think in Dallas-Fort Worth in 2022 or 2023, they came out with new energy codes, which was frustrating because one of the… There's like codes 1, 2, 3 and 4, which is the energy rating that's required by that… I wanted to say time zone, it's not time zone. It's like based on latitude and temperatures and all that kind of stuff. There's a line right through the middle of DFW where South Dallas and south Fort Worth are on code 2 and then North Dallas, north Fort Worth fell into a code 3. The code 2 requires less energy-efficient stuff than code 3. If as a market, you can deal with… DR Horton will build something in North Dallas and they'll build something in South Dallas. If you, once again, a relationship and just say, "Hey, this might cost you a little bit more, but make all your houses code 3 because then we have to carry less material to cover 2s." You can build a 3 in a code 2 area, but you can't build a code 2 house in a code 3 area. Does that make sense? That's one way that you could be able to charge a customer more just because it really makes sense. Just because the code says, "Hey, you're just in a code 2 area, so you only have to build it with these materials."

The people you're selling to still might want those materials. They want the thicker drywall. They want the cement siding as opposed to wood siding. They want 2x6 stud insulation as opposed to 2x4 because you can put more insulation in the wall. It gives them better energy efficiency. That's one way to do it. US LBM knows that where that's you're just selling it to the customer. It's easier on their designers when you're putting the house together. It's easier on pricing. US LBM can do that. They're poised to be able to make those sales distinctions for those customers. It's not everywhere. Once you hit code 5 for energy efficiency, that's everything north of Oklahoma. All those people with US LBM up there, they're not dealing with it. It's when you have these energy code differentiations through a specific market like in Dallas-Fort Worth. I think Phoenix is similar to that, where if a builder is smart, then they'll know their customers are going to want that because they don't want to build a house and somebody goes, "Oh, the energy rating is not that great on your house." No one's going to buy it.

[[00:53:19]]
You mentioned temporary labour. To what extent can US LBM reduce or flex labour costs and SG&A in the short term to adjust for reduced demand?

[[00:53:38]]
Specifically with temporary labour?

[[00:53:43]]
Even more broadly.

[[00:53:48]]
When I was on my way out, we had cut temporary labour about 70%. They're not really a quick fix per se to move the needle. You can, but it depends on what skillsets you can pick up. What it can do is bring on temporary labour in a really short term. Say, a location is a mess. If you're having to use your labour in the location to service customers and to clean the location up, they're being inefficient. If you can bring in some temporary labour and be like, "Hey, this is what you need to do. You need to clean up the location," and then you have the guys service, then the guys can service. If you're trying to use temporary labour to do the more skilled aspects of distribution, that takes longer. It takes probably just as much as hiring somebody. You could bring a temp labour person on, but they can leave tomorrow or you can fire them tomorrow and let them go. They're easy to come in and they're easy to go out, but it depends on what you need them to do.

The hardest part is they were some of the best workers that are out there and they stick around in locations for a long time. US LBM never… They may have changed since, but they never forced locations to completely get rid of temporary labour, replace them with permanent employees. They just let the temporary workers hang out.

[[00:56:08]]
Can US LBM flex its non-temporary labour force in line with demand, or is that not an option in the short term?

[[00:56:16]]
They will, but that's, once again, US LBM talking out on the side of their face. They'll say, "We need to get all this done, but no overtime, and you can't hire anybody." I even told my former boss the same thing. I said, "Listen, it takes the same amount of energy to move a 2x4 from this side of the location to the other side of the location or put it on a truck. That all takes the same amount of hours. When demand increases, and you don't let me hire and you don't let me have any overtime. The only thing that can sacrifice at that point is lead times because I can't get the loads pulled and delivered fast enough because of all the restrictions on it." Then you're going from three days to five days to 10 days. We even got to a point where it was 2-3 weeks for a customer to get their stuff. You can see that from the customer's point of view, you're just like, "Man, I can't wait three weeks to get a house package." They go, "Thanks, but no thanks," and they call somebody else who can do it. If it's allowed to get overtime or to hire people, then they'll be in good shape. They just have to do it smartly. The problem for US LBM is there's no staffing standard.

When I was at Home Depot, they had all these great algorithms and all the mathematical calculations that would take into account the sales for the department, the average ticket for the department, the total sales of the store, and they would calculate all that and it would generate… You're allowed to have three people. You're allowed to have five people in these departments. You knew where your staffing levels were. If you were over hours, you had explained it. If you're under hours, you were getting crushed all the time. US LBM doesn't have any of that. When I was running it, I had to build my own scheduling programme to try and calculate based off of their budgeted sales, how many people and how many hours they were supposed to run, if that makes sense. I tried to take my Home Depot experience and put it on to US LBM, but there's nothing company-wide that does any of that. There's nothing that generates a schedule for anybody. It's like just, "Hey, if the work needs to get done, let's get the work done, but we can't hire anybody, we can't get any overtime." That's been an Achilles' heel for them for 18 months because they're trying to make the EBITDA number for the private equity people.

[[00:59:21]]
Thank you very much for all the detail. I do want to end this Interview by saying thank you very much for the insights that you've shared with us today. I do hope you have a great rest of your week ahead of you.

[[00:59:34]]
You bet. You too, my friend.

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