Not betting on housing

With their sale behind them, HD Supply's leaders aren't worrying about the housing market but are looking for business wherever they can—even via acquisitions

By Joe Nowlan, Associate Editor -- Industrial Distribution, 6/1/2008

To say that 2007 was an eventful year for Home Depot Supply and its CEO Joe DeAngelo would be an understatement.

Early last year, HD Supply found out it was being sold—something DeAngelo admits can be “a very disruptive process when you’re running a business.” On August 30, a deal was finalized that saw HD Supply sold to three private equity investors: Clayton, Dubilier & Rice; Bain Capital and the Carlyle Group.

HD Supply is ranked second in this year’s Big 50 with 2007 sales of $12.3 billion.
Throw in a slumping economy, a credit crunch and the decline of the residential housing market, and you would think no company in America was happier to see the New Year. DeAngelo remains upbeat, however.

“We’re not dragging around saying ‘Woe is me in the residential space.’ Or being concerned about commercial going down,” he says. “If there’s a job out there, let’s figure out how we do it better than the other guy, and let’s not worry about anything else.”

In this interview, DeAngelo discusses the sale, the adjustment he and HD Supply have been making since then—and various other subjects including future acquisitions; the state of residential housing and where the talented employees come from that will keep HD Supply going.

ID: Last year was an eventful one for HD Supply, to say the least. Let’s start with finding out your company was for sale.

DeAngelo: Well, 2007 was certainly an interesting year for the HD Supply team. In the first part of 2007, we found out we were for sale—that’s always an exciting process, particularly for us because there was so much interest out there relative to buying the assets. There were three or four big players. We had the best of the best of private equity looking at us. So it was a rather hands-on, engaging process; also, at the end of that process, a lot of the debt markets had started to melt down. It required a lot of significant renegotiation to get the right deal for all the parties.

The best part is, that’s all over, because that’s certainly a very disruptive process when you’re running a business. But the thing I’m most proud of is how well all the field continued to keep their eye on the ball through that process.

We are now owned by three premier owners: Clayton, Dubilier & Rice; Bain Capital and the Carlyle Group. The good news is they are all very good folks to work with and they do understand the distribution space pretty well. That’s why I think they won their bid—they understood the asset better than anyone else, and certainly the potential for the asset.

We’re completely separated now [from Home Depot]. That wasn’t terribly difficult because we didn’t have a completed integration with Home Depot. So the distraction wasn’t as [bad] as it might have been. … Maybe the best way to say it is we didn’t have any hiccups when we separated. The team executed very well.

On the back half of [2007], like anyone else in the marketplace has who has any residential exposure, we made sure that we understood the market, what we needed to do in the market to be successful and just created a good, stable game plan that’s going to work for us in ’08.

I would characterize ’07 as a year where we got almost all the tough stuff behind us. Transactions are tough and they’re disruptive, so that’s behind us. We concluded the sale of our lumber business early in ’08 [to Pro-Build Holdings], although we were working on that in ’07. That was one part of the portfolio where we believed it would have required a significant amount of investment to become a “Number One,” which is our focus in our portfolios. It would have been capital-dilutive from investing elsewhere. So it was nice to have that behind us and put those associates with a team where we believe they’ll be successful.

ID: When you found out you were for sale, what was one of the first things you did—e.g., any hand holding with the employees?

DeAngelo: The first thing we did is we reinforced that nothing changes—day-to-day, [it’s] customer, customer, customer. Don’t forget it. Second, [we told employees] this is not instabil-ity in your life, meaning that job loss and that sort of stuff is not going to happen as a result of the sale. We are a great ongoing business and therefore if ownership changes, then owner-ship changes. But nothing should change relative to your career profile with the company and your risk profile, or lack of, with this company.

The other thing we made sure we did was get as much face time as possible with [the em-ployees] so they could ask questions. Everyone has questions and just having one person out of a 500 person audience ask it gives you the opportunity to look 500 people in the eye and give them an answer. All the senior leadership got up and did that.

ID: However, in the months following the sale, there were reports of layoffs. Could you tell us how many employees have been laid off or give us a perspective on where that stands?

DeAngelo: I won’t share any specific numbers. But I will tell you that across our portfolio we’ve had businesses that have right-sized to fit the market, and we’ve also had businesses that have continued to hire. So we do have a blend, which is the advantage to having a di-verse portfolio that services multiple end markets.

When you look at the businesses that had a lot of concentration relative to residential, the alignment and right-sizing was very important. The largest action by far was simply the exit of our lumber business, which was 100 percent residential and had a whole bunch of heads [employees]. So we had a lot of layoffs in the business and subsequently sold [it]. That’s where the bulk of the activity was.

We did have a specific event in our plumbing business where TRANE, who we’d carried for 17 year, selected to be able take that distribution and go direct with it. They then sold their business to Ingersoll Rand [in Dec., 2007]. Now that was a decision they elected to make to enhance their sales prospects and really didn’t have anything to do with the way we were ser-vicing the account. As a matter of fact, we were their premier dealer for multiple years running and the relationship and execution was superb. That was one where we ended up closing a lot of branches because of exiting that product line. But those things can happen.

Some of these markets are dropping a whole bunch and we need to make sure we have the right workforce aligned to be able to service that.

ID: Just to follow up on the sale of your lumber business to Pro-Build Holdings—can you take us through that process? When the HD Supply sale went through, did you look up and say that selling the lumber business needed to be done sooner rather than later?

DeAngelo: The first thing we did with our new owners was take a look at [our] portfolio and decide if they were the business segments we wanted to have. If so, are we 100 percent com-mitted to all these segments?

The lumber business was unique in that it serves a large end market, the largest one out there—$150 million or so. So for us, with a residential downturn compounded by a commodity price decrease of 50 percent-ish, you’re working with 25 percent of the top line that you started with. It required a whole bunch of radical restructuring, and would have required a lot of investment, particularly large acquisitions, to move ourselves to be the strongest player in that market.
When we looked at the capital requirements for that business versus the ability to take that capital and apply it someplace else, we saw that better returns could be made in other seg-ments. We don’t want to have a singular model of investing in only one business—and we would have had to invest a lot of cash in just that [lumber] business to be successful. I think [lumber] was a good strategy if we vertically integrated and did more manufacturing services for them [Then it would have been] a nice fit. But absent of that, it wasn’t where we wanted to spend all our time.

ID: The residential housing market continues to deteriorate. It’s always been a cyclical beast but this latest downturn seems pretty drastic. Do you see a light at the end of the tun-nel?

DeAngelo: I think this is a really tough, long cycle. I don’t see [any light] and we’re not bet-ting our hopes on that. Our plans are based on the markets continuing to decline significantly on the residential side. They are also plans that revolve around continuing to gain significant amounts of market share as we go through this cycle. I think it’s the perfect time, as a consoli-dator, to be either organically growing or inorganically growing via acquisition.

With the residential market, [we say] look, there’s going to be fewer lots out there. There-fore, we have to get a higher percentage of those lots and we have to get more content per lot when we talk residential.

The other thing is that with our portfolio we have the capability to shift from residential to commercial-industrial. And making that happen is something we initiated big-time in 2007 and will continue to drive in 2008.

I’m not hanging my hat on [residential] popping up anytime soon. But, when it does we’ll be there. We’re not going anyplace. We are big participants in the residential market and we love our builder customers and will continue to support them.

Look, some things are going to be up. Some things are going to be down. That’s the way it works all the time. Our job is to get our “unfair” share of any businesses out there. … You have to always deliver reliable service to your customers, so they won’t have to worry. You take their headaches off their plates.

ID: What is Home Depot Supply’s percentage of residential business vs. commercial?

DeAngelo: We were a little bit over 40 percent [residential] before we sold our lumber business. We’re closer to 30 percent now in our portfolio. … We’re about 30 residential, commercial is about 40-ish, and the balance is other stuff.

ID: HD Supply has recently entered the private-labeling market. What is it about private labeling that appeals to the company?

DeAngelo: We’ve launched two proprietary brands. One is Brigade, our heavy professional brand. That would be the hard-core construction, job-site brand. The second one is Seasons, our consumer brand, and that would be more oriented to our facilities maintenance business.

The reason we have a proprietary brand strategy is to allow us to fill any value gaps that are created from a national manufacturer perspective. It gives us the opportunity to have a unique offering in our portfolio that the other folks don’t. It allows us to make sure we’re always afforded the best value and can provide the best value to our end-user customers.

Now when I say value, I’m not talking cheap price. I’m talking the best feature, quality and certainly the opportunity to make sure there’s a good profitability associated with it.

But we are in no way, shape or form interested in getting away from national brands. That’s not our intent.

ID: You have said that acquisitions might be in HD Supply’s future. Philosophically, what are your criteria? Would you be looking at some specific product areas? And could you give us the first three names you’ll be acquiring?

DeAngelo: (Laughing) That would make it interesting, wouldn’t it? It would also make it more expensive for me, though. What we always look for is a great leadership team; that’s first and foremost. The definition of a great leadership team [would be] one that is a customer fa-natic and has strong, strong customer relationships built on reliability and performance.

We’ll look for good financial criteria. Typically, we’re looking for businesses that are greater than $15 million dollars, because small deals take as much work as the large deals. So we prefer to concentrate the [acquisition] work once and get it right. And we have standard finan-cial hurdles relative to being able to pass a good return on investment.

We always look for things that fit our portfolio. So we’re not out there looking for another new platform. We believe we have the platforms we really love. We love every business we’re in. It’s all about how we utilize both acquisitions and green-field, organic growth to ensure we’re a high-growth player. We believe we’re a natural consolidator within the industries we participate in, and we’d love to invite into our family similarly minded businesses that have strong track records of performance. That’s the way we grew HD Supply and we like growing that way.

ID: Down the road, there is talk of HD Supply going public. Obviously, this takes time but how as company president would you approach that decision?

DeAngelo: That will be a very collaborative decision with the [HD Supply] board. The good news is that all of the board are personally invested significantly in the business, as I am and the leadership team is. So that will be a decision we’d look at from a funding-structure per-spective.
Is the timing right to be able to take the company public? It really isn’t about taking it pub-lic. It’s about setting yourself on a 10- 20- or 30-year plan of being a great business, and then you won’t have to worry about when the time is to take it public. You can actually take it public anytime. That’s the way we’re looking at it.

We don’t talk about going public. [And] we don’t talk about exit strategy because for me there is no exit strategy. I’m in it for life. This is going to be my last job, and hopefully I’ve got a couple of years left to work it. I’m 46 years-old, so hopefully they’ll keep me around for a bit.

ID: What’s your view of the small, independent industrial/construction distributor? What role do they play in the channel?

DeAngelo: We are the product of small, independent distributors that we put together. We understand the role that those small, independent distributors have played, which is the role they continue to play when they become part of our family—fantastic local service, incredible product knowledge and the ability to be a solution provider for the folks that they work with. If you ever talk about being a large company, you’ve lost in this game. This is a local business game.
We compete against small distributors every day and we think they are the models of suc-cess. We believe taking what they have and being additive to it will allow us to be successful in the future.

ID: What do you think of the general media coverage of the recession? Does the media just report the recession or can we unintentionally add to it?

DeAngelo: The media, because of its power, will always be adding to people’s concerns. But I don’t think that today’s economic environment is one that I would understate—meaning that I always think you should plan for the worst and perform to the best.

I’ve looked at it: Are [the media] creating the recession? No. There are underlying financial things going on in the world that none of us have ever seen. None of us has ever seen large investment banks writing off billions of dollars!

Hey, it’s OK to portray that times are going to be tough, because I think in tough times, the best operators always win. They always do. They’ll latch on to their customers, help them through it. They don’t change their game. They’re consistent.

ID: What are the greatest challenges facing companies like HD Supply today?

DeAngelo: The economy is [a concern] that everybody has. The good news about the economy is my competitors have the same economy.

We [distributors] all have very low turnover of our talent. Our customers don’t turn over a lot and our associates don’t turn over a lot because that personal relationship and that under-standing and knowledge base is critical.

Everybody looks at that [employee] pipeline and loves their 35- 40- 45-year employees but they’re going to earn the right to retire. We want to make sure the 25- and 20- year employee is ready to step up and take the ball. And that’s [another] challenge: we want to make sure that [employee] pipe is always full.

I think you have to start with an exciting vision for the future that says that the entity is go-ing to have exceptional longevity. The ability to be able to offer multiple career paths [is impor-tant] because when you’re young, you don’t know you can commit to one or the other. So hav-ing the ability to be able to that [is vital].

Training programs are very important—the ability to come in and not have to just learn it all on your own. [You need] training programs that are executed by people who have been in the business forever and not folks who are external but are good at training. [We need] people who we know are engaged and are saying, “Look, this is the way to really have a successful career.” That’s about credibility.

And I think every day, just having an environment where you have values, [where] people believe it’s a good place to work [is important]. By creating that environment in any business you will keep your people and you’ll have people dying to come in and join. But if you don’t have that, it isn’t going to happen. There are no tricks to this thing.