Episode Transcript
[00:00:03] Speaker A: Welcome to AINA Insights where prominent leaders and influencers shaping the industrial and industrial technology sector discuss topics that are critical for executives, boards and investors. INA Insights is brought to you by INA AI, a firm focused on working with industrial companies to make them unrivaled segment of One leaders. To learn more about INA AI, please visit our website at www.ina.AI.
[00:00:40] Speaker B: Good morning and welcome to another episode of INA Insights. I'm Dinesh Chopra, President at INA and today I'm joined by Bob Merrill, a seasoned leader with deep experience across the building products and industrial distribution sectors.
Bob is a senior executive in the building products industry with over 30 years of leadership experience.
He served as the CEO of Kraft Masters Manufacturing for 12 years where he steered the company through the sector's toughest downturn and successfully sold it to Jelden.
Following the sale, Bob joined Jelden's executive leadership team leading a 2.4 billion North American sales and marketing organization.
Today he serves on the boards of Quaker Windows and Doors and North American Specialty Laminations and advises growth oriented companies through REM Consulting.
Bob, it is a pleasure to have you with us.
[00:01:39] Speaker C: Glad to be here.
[00:01:41] Speaker B: So Bob, thank you for taking the time just to dig right into it. Maybe we start a little bit on the macro and industry level.
As you know, the building product sector is heavily shaped by cycles in housing very globally tied to the interest rates and the infrastructure spend, remodeling spend. In your mind, how are you seeing the industry and the landscape progressing and what are the demand drivers and where do you see this happening over the next few years?
[00:02:13] Speaker C: I guess I would sum up the current environment as okay, I mean it's down. We got back to a million and a half housing starts two years ago.
You know, we're now flat this year and last year at about a million three, five, which is okay. I mean obviously during 2008, 2009 we got down to 600,000 housing starts. 2005, 2006 we got up to 2 million housing starts. Everything I've ever seen from different economists in the industry says our our required replacement rate of housing to keep just keep up with the population growth. Net immigration is about a million and a half a year.
We've been under building with the exception of two years ago since the 2008 downturn. So we've got a deficit in housing.
It's in all the articles you see.
So the macro conditions are keeping housing, you know, somewhat depressed. Higher interest rates, you've got people that are stuck in mortgages that are certainly below the current market and so they're not willing to move and that's got everything at a standstill. But the basic demand is there for housing and so I would expect it to recover more into that one five, one six in the next couple of years.
And so we will look at some fairly healthy demand for building products.
[00:03:43] Speaker B: Do you see like over the next couple of years then hopefully the industry down cycle starts or easing cycle starts soon enough and that could lead to a good 20, 26, 27. Is that how you're thinking about it?
[00:03:56] Speaker C: That's what I think. I mean, I do not think we're going to see interest rates in the 2 and a half to 3.5% mortgage rates again. I mean, I think that was an anomaly.
But you know, 5 to 6% interest rates, I mean my first mortgage, you know, 30 some years ago was at 12, 13%.
So we're still in fairly healthy rates. I think the bigger impediment to housing is kind of the dual thing of people being able to get together the, the down payments.
[00:04:34] Speaker B: Yeah.
[00:04:34] Speaker C: And number two is just the available ability of housing. Affordable housing.
[00:04:39] Speaker B: Yeah, yeah, definitely. Supply side is definitely constrained right now and, and hopefully with the, with the rates dropping, the lock in effect will, will ease a little bit so that more supply comes to the market and that can, that can lead to the demand in the housing sector.
[00:04:55] Speaker C: Well, and you're seeing the major home builders, the Pulte's, the Lennars, the, you know, my homes and the rest of it, they, they are, you know, still putting incentives in place to buy down interest rates to try to get people into homes. And that's kind of, that's, that's propping up their sales, but it's hurting them on the margin side.
[00:05:18] Speaker B: Yeah, for sure. What about, what about the repair and remodeling side then? Because definitely the new housing starts impact the new construction side. But what about repair and remodeling? How do you see that demand drivers?
[00:05:31] Speaker C: Well, I mean there's two parts to the, to driving demand of repair remodel. One is general economy. You know, so that's going to go with how the general economy goes.
And you know, we're still in a wait and see what the effect of all of the new policies are going to be on the general economy.
Hopefully it's going to be pretty benign and we're kind of coming out of the, the inflationary period and people feel a little bit more stable. But the other side of remodeling demand is, is driven by the churn in housing people moving and people aren't moving. Right. And so that's keeping it somewhat depressed. I think remodeling demand is fairly moderate right now. But you see the pickup in housing, lower interest rates, allow people to begin to put their houses on the market and move to where they want to move.
Then that will drive increase in remodeling demand too. So I would think, barring I always say this when I give these forecasts, barring some unforeseen financial event, that we're not looking at a war of some sort of financial collapse or the rest of it. We probably are looking at a relatively modest recovery over the next couple years.
[00:06:47] Speaker B: Got it. Yep. That sums it up. Well, you talked about policy, you touched on that. Maybe dig a little bit deeper into it.
How are you seeing tariffs and trade situation right now impacting the supply chain, impacting the demand and how has that impacted the building products industry in general?
[00:07:08] Speaker C: Well, it's interesting, the companies I'm involved with have taken a little bit of a wait and see with the tariffs because there were so many questions about, well, what's really going to be put in place, how are they going to be enforced first, what's that impact going to be to us? That there's a lot more clarity in probably the last 60 days on that where you know, some items ended up being exempted. Like you know, aluminum is still a little bit in flux on how big that tariff is going to be. Things coming from Canada are still a little bit in flux. We're still talking back and forth about the North American Free Trade Agreement and that, you know, some things were stayed while they worked that out. But things coming from Asia, particularly hardware from China or particularly laminates and foils and papers from Asia, those are pretty well baked in now and those prices are beginning to hit. And I'm seeing companies I'm involved with now implementing price increases and you've seen that show up in the recent press reports of PPI and that.
So it's, it's not, you know, it's certainly not back breaking, but it's flowing through the system and raising prices.
There's one other impact that I've seen in that. You know, a lot of equipment that's used in at least the door and window industry, which I'm most familiar with, is built overseas it. And so the tariffs on that has significantly impacted the price of capital projects ongoing and added significant dollars to very specific projects here. So it's getting paid.
I mean we didn't stop the projects, but that's ongoing Just. I'll make one final comment on that.
Some of the harshest tariffs have been on things like structural steel and that any company that's looking at building an addition or a new plant, that cost has skyrocketed because of the tariffs. And so that's causing projects that were being considered to be postponed.
[00:09:30] Speaker B: That could even lead to more supply shortage. Right. Because if you are pushing back, you're not expanding your capacity, which could lead to less supply and maybe more pressure on price increase.
[00:09:44] Speaker C: It could, but right now I think there's been a lot of capital in the segments I'm familiar with spent in the last couple of years in both the door and the window side. So there is some excess capacity. So I wouldn't expect in the short term that that's going to happen, but that's potential in the longer term.
[00:10:03] Speaker B: Yeah.
You spoke about, you touched on pricing. What are you seeing in the industry on the price increases across different micro segments of the building products? You've got windows and doors, you have roofing, you have siding and so on, so forth. Means are manufacturers across the board passing price increases? Have they done it this year? What do you see that moving forward?
[00:10:27] Speaker C: Yeah, I can't talk across the board and I'm not close to siding or roofing, but on the window and door side, I'm seeing prices from 5 to 10% increases. There were some initial kind of what we would call regular price increases done at the beginning of the year and those are typically in the 2 to 5% range. Those went ahead and now what we're seeing in the summer, people going out with the tariff driven price increases. I'll just give you an example.
You know, in the window industry we say a window, but they're doors. The patio doors are now much more complicated than they used to be. They're big folding things.
They carry very heavy duty hardware. That hardware is all imported and it can add hundreds of dollars to the cost of a single patio door opening. Just from the tariff effect on. On the hardware?
[00:11:29] Speaker B: Yeah, yeah. And the price increase that you have seen in the window indoor, is it across the board whether it's a vinyl, whether it's a wood window or aluminum, or is it more specific to one segment versus the other?
[00:11:41] Speaker C: Well, I think it's pretty well across the board because things are affecting different parts and it's more driven by the hardware, the glass, some of the other components than it is by the basic materials. So, you know, aluminum is still going to flow through and that all gets settled as well.
[00:11:58] Speaker B: Yeah. For sure. So given all these changes, right. Interest rates, housing affordability, tariffs, how the building product leaders in your mind should balance the short term headwinds and long term growth bets.
[00:12:12] Speaker C: Well, it's what I've always harped on. It means being good at the basics. It's, it's, you know, being good at execution, being prudent in your new investments, knowing when to. Well, it's time to live within what we've got and make that the most efficient. Focus on plant efficiency, focus on productivity, focus on cutting waste and focus on customer service. Making sure you are the most excellent compared to the competitors. Unfortunately, our industry, the service and execution, it's a pretty low bar, unfortunately.
So if you can be excellent at those, you can gain market share and even a down market. And that's where I would focus.
[00:13:01] Speaker B: Yeah, I like it. Focus on the basics and control things which you can. Right, right.
Makes a ton of sense. Maybe shifting gears a little bit. Talk a little bit about your experience at cmi. I mean, you led CMI through toughest housing downturn in decades.
When you were there, what strategies and you put in place which really helped CMI survive and then ultimately thrive.
[00:13:28] Speaker C: Well, thrive would be a stretch. We ended up selling the company. So as you mentioned earlier in the introduction, but we did survive and we managed to stay positive cash flow through that. We were a very capital intensive business and so a change in volume dramatically changed our profitability and cash flow. And we saw, you know, demand dip as much as 50% from, from the, the peak of the 2006 peak.
And you know, it was, it was again, you know, your most important assets really are your people and being open in communications with people, treating them right. Even when you're making the hard decisions and having to do layoffs and downsizing, doing it in the most humane and open way you could, being fair and really taking a hard pencil to everything you do and cutting it back to the most essential.
Everybody will say, well, we can't, we have to keep doing this, we have to keep doing that.
Why? What's going to happen if we don't do that? We are in absolutely survival mode. Every single thing is on the table and that's in the end. And then for us it was recognizing when, all right, this is far worse than we ever thought it was going to get.
We have to face the hard tax and look for a strategy that will reward the shareholders and ensure the survival of the people and the business. And that led to the sale to job one.
[00:15:08] Speaker B: Yeah, yeah, definitely. Navigating during that time was tough for sure.
[00:15:14] Speaker C: It was the hardest thing I ever did in my career. It was very, very, very difficult.
And you know, we, we made multiple forecasts to our bankers and every time we made a forecast, we said, well, we don't see it getting much worse than this. And then the next quarter we were making another forecast that was worse than the one we did. It was like, you know, seminal event in our industry for sure.
[00:15:39] Speaker B: Yeah, that, that was a hard one. A little bit different place we are in right now. But even if we look at where we are, I mean, building products is a mature, mature business. Right. But in your mind, are there specific pockets within that which are like certain product categories which are more growth oriented? Which once you think about.
[00:16:01] Speaker C: Well, the thing about building products and in my career, what I've seen are what I call material arcs.
And so multiple changes in materials for specific product applications. Give you a couple examples.
You know, when I first got in the window industry, most windows were wood or aluminum clad. Wood vinyl was just beginning as a, as a product line and was mostly in the replacement repair, remodel segment.
Today, vinyl windows across both new construction and repair and remodel are probably 65% of the demand.
Saw something similar happen in the exterior door business, where once upon a time they were mostly wood and steel. Today the predominant material used in exterior doors is fiberglass.
So those material arcs, of recognizing them early, jumping on them and exploiting them is probably the single biggest potential for growth.
Or unfortunately, a lot of it happens with new companies because existing companies, and I happen to work for one who said that, you know, we are not a, we're, we're a wood siding company. We are not a cement fiber siding company. And today that company no longer is in the siding business. And the leading siding company in the world is James Hardy, who makes cement fiber siding. So recognizing those product material arcs, jumping on them, exploiting them and moving, that can be a avenue for phenomenal growth in what is a cyclical, somewhat mature industry.
[00:17:55] Speaker B: Yeah, I like the point about material arc. What the natural. Next question, what material arcs are you seeing? And we can talk specifically about the windows and doors.
Where do you see that?
Where are the pockets there?
[00:18:09] Speaker C: Yeah, well, it's interesting. Exterior doors is still on, you know, kind of the middle range of the fiberglass arc.
And so you know that that's continuing. You've seen some new entrants in the fiberglass. It's much more fragmented than they say, interior doors or some other segments. So that's still some potential and there have been some imports and new startups. So that's there.
On the window side of the business, surprisingly, we're seeing a resurgence in material in aluminum driven by a couple of things. One is that the advent of being able to put a thermal break in the aluminum to allow them to allow it to meet energy codes. And the other is housing design which is requiring much bigger expanses of glass and the windows to be both larger and be able to be structural.
Well, neither vinyl nor wood with aluminum flap really fits those bills but aluminum with a thermal break will.
So we're seeing that resurgence in aluminum and then energy codes. We've continued to see increase in in the requirements and energy codes and that's driving, you know, different materials especially on the windows side of the business.
[00:19:35] Speaker B: Got it. Yeah. So in addition to so there's a material arc and thinking resurgence of aluminum, an existing window company, what can they do to differentiate the window and door company can. What can they do to differentiate themselves from the competition, to get more from their current customer or win new customers?
[00:19:57] Speaker C: Well, it's twofold.
It is one, it is constant product development to meet the emerging trends. Whether it's operating style, whether it's appearance, whether you know, it's design or whether it's that material and then it is, you know, just excellence and execution is again I go back to our industry is not known for fantastic execution and so being being good at that is going to put you head and above in game market.
Got it.
[00:20:33] Speaker B: Product and execution. What about M and A? Where does M and A fit into this strategy?
[00:20:38] Speaker C: Well, I'll give you a recent example in the industry and it goes right along with what I was just talking about. So you know, hello windows, great company, great product line, a unique go to market strategy and they produce windows across three, three material platforms. They do vinyl windows, they do aluminum wood clad windows and they have a fiberglass window line.
They did not have a pure aluminum offering so they were looking at. This is in their press release zone. I've not talked to anyone at Pella myself, so I'm just an observer.
But I am familiar with weather shield windows and they brought out a new line year before last called the View series which was a pure aluminum with a thermal break window designed to go in, you know, bigger openings with structural and give better energy performance.
Pella looked at whether they should build, you know, build one from scratch or acquire and they acquired Weathershield specifically to get that View product line. I'm sure they got other things along with it, but to get. To get the View product line. Yeah. When we were at, when I was at JELB1 we saw the emerging trend of bigger and more complicated patio doors.
We didn't have one and so we went out looking for companies that would fill that void and we ended up buying La Cantina Door.
So M and A can fill a smart M and A that for that's very targeted can fill a product gap more quickly.
You know then you. You're faced with all the other challenges. How is it assimilated, how is brought into your product line in your sales organization and so on and so forth. But the. The company can bring the product that you need that and save you time in developing it yourself.
Yeah.
[00:22:37] Speaker B: Smart product driven M and A can definitely take the company to the next level.
That makes sense.
[00:22:42] Speaker C: That makes sense.
[00:22:43] Speaker B: Maybe shifting gears a little bit and talk about would love to pick on your experience around leadership and transformation building products companies typically often run with lean margin.
Going back to the point you made around execution is key to ensuring that and have a lot of operational complexity in your career. What, what leadership lessons did you learn specifically around execution discipline? Would you like to share?
[00:23:11] Speaker C: Well first I'll start with building products. Companies don't have to have lean margins so they. They should. I mean we have examples in the industry of people making 20 plus EBITDA margins. Right. So PGT before they were sold to First Western and then or the MI and then whether with mi so when they were still a public company.
So but you know the, the leadership issues are. I mean there's a, there's a balance first in the talent and industry veterans can become have blinders on to what's available out there, what can be done.
But they also have relationships and expertise in the product lines and so on and so forth. So finding the right balance between bringing in talent that can increase your expertise in areas that maybe an industry parts are again the door and window industry has been somewhat backwards compared to say the lighting industry or others. But on the other hand our industry tends to be somewhat parochial and relationships matter.
And so finding that balance between new talent that brings in new expertise and industry expertise I think is a key one and one I've experienced of where companies have lost their way and resulting in loss of market share.
I would guess the other is that is that constant product development.
You know, it all starts with product.
If you don't have the right product at the right price, with the right features, with good quality, then all the other stuff doesn't matter.
And so you've got to be on top of and talking to your customers. What do you need, what's new, what's missing and bringing the next iteration out because that also helps on the margin side. New products can be brought out at higher margins.
[00:25:16] Speaker B: Yeah, yeah. You, you touched on talent. What, what, how have you approached developing and even retaining your best talent?
[00:25:29] Speaker C: Well, I've actually written about this a little bit.
You know, I spent almost six years in the army.
When you're in the army, you don't get to choose who's in your unit, who works for you.
You're assigned a unit, there's a bunch of people there and it's your job to lead them and get the best out of that team.
And then people come and go with transfers and you get the new ones and you assimilate them.
I've always taken that same approach in business is that there are a bunch of people there who want to do, for the most part, want to do good. They want to succeed both in their personal and professional lives. They want to see the company succeed and that generally, if you ask them, they probably know what's missing or what needs to be done.
And so, you know, getting the people together, listening to them, providing guidance and then being willing to make decisions is part of it. Right. But, but listening to people and providing some leadership to what, who you've already got there. Now there's always someone that doesn't fit and you have to make a decision to make a change or someone's not performing. They have personal problems.
But to me those have always been more the exception than the rule.
There's been a whole cadre of management type that have come out of some of the big companies that. Oh no, no. If you're not churning 10% of your people every year, you're not managing. Right. And we need to bring in new people that came from our old company to run the company. They don't know the business, they don't know the industry, they certainly don't know the internal systems.
And so that, that I would say my biggest lesson has been that total disregard for the people that are already there and doing the job and understanding the company.
I've always felt you're better is an evolution in the company as opposed to a revolution.
Whereas a lot of managers will come in from outside and they feel there's, you know, a year or two, they've brought in all their own people and they've changed all the key positions and all the long term employees are going and results for the most part, diminish accordingly.
Right, right.
[00:27:57] Speaker B: Yeah. I think that you also lose the tribal knowledge which is also critical as you think about in these companies.
[00:28:03] Speaker C: Yeah, yeah. You know, tribal knowledge can be, can be a problem too because that becomes an excuse. Well, we've never done it that way. Why would we do that? So that, that's, you know, it takes high level leadership, you know, evolved leadership to take tribal knowledge but also be able to challenge tribal knowledge and take it to the next level. And that's an art, that's not a science.
[00:28:31] Speaker B: Yeah, it's always about the balance, balancing the two things.
[00:28:33] Speaker C: Right? Yeah.
[00:28:35] Speaker B: What have you touch on a little bit on the digital and where are you seeing the impact of digital, even AI in transforming or implementation in the building product space?
What are you seeing as something which has been done well and what, where are the opportunities?
[00:28:56] Speaker C: Well, one, one of the things I done in my retirement age is I ran for a while and import businesses and building products.
It was entirely sold online through Home Depot.com, amazon.com, Wayfair.
We even did some business in Canada on Walmart.com and the volume of material that could be sold online in our space.
Now selling the Pro Builder, Pro Dealer online, that's a different animal. I can get that in a minute. But the amount of direct to consumer that could be sold with the right level of information on how to use it and how to install it was amazing. Absolutely amazing. So companies that are embracing that, understanding it, either working with partners like Home Depot or Lowe's or Menards is doing it as well and marketing that way or going through other channels, non traditional channels, even setting up their own websites to be able to sell online, that's number one. And then number two, the amount of information that's out there that is helpful about your products and keeping all that up to date and making sure it's, it's easily accessible, it fits in to the right formats that are needed for your channel partners. And I'll just give you an example. The, you know, Windows and to a lesser extent doors, but Windows especially are high information content products. They're very specific. Especially for more complicated applications. There may be an architect involved and architects are using AutoCAD and other other design tools. Having the file formats and the materials and things ready for those people to be able to incorporate those easily into their designs is extremely important. And if you're not doing that and not doing it well, you're not going to succeed.
You know, then there's the whole aspect of social media and using that as a marketing tool, one, it's make marketing much less expensive on an impression basis. But it requires sophistication and constant monitoring of what you're doing, how you're doing it and, and what message you're putting out there and making sure.
I just had an instance of this with a company I'm involved with where an employee thought they were doing the right thing and shot some pictures or something and posted them on LinkedIn and you know, and wasn't what the company really wanted out there as a message. And so it got cleaned up and it wasn't serious, but it was, it wasn't optimal either. Right. So having a good digital strategy with, with the, the right people creating content, monitoring what's going on and moving forward so that, you know, there's digital marketing communications and then there's E commerce and they're two different things. Yeah. For the pro and products that are high information content. And for the pro, it's more providing the resources in the information as opposed to the transactional part of it. Though I'm sure the major, you know, pro retailers like Builders First Source and rest of it are making their websites very sophisticated so their customers can order and check status of orders and things like that on those. So it's very, very important. As for AI, I'm too old, a little removed for AI. I gotta imagine that's helping analysis and planning and all of that immensely, but I'm not involved with that.
[00:32:42] Speaker B: Yeah, you spoke about DTC direct to consumer. Right. Many of the, let's say building products company, let's say window and door companies. Right. They're selling through distributor channel, they're selling through dealer channel.
What are your views on if they set up a direct to consumer channel? Is that a channel conflict and how to manage that?
[00:33:03] Speaker C: Well, yeah, it is a channel conflict. So if you have distinct discrete products that could be sold online directly to the consumer, then that would work. And then it requires price discipline so that you're not disrupting your channels of distribution.
So your dealer, for example, couldn't get mad if a consumer bought it direct online because it's at a price that they can sell at every day and make a lot of money. So the other part, it could be very distinct on what they're selling. For example, when I was at Jelbom, we were working on being able to just sell repair parts to consumers directly so that they could fulfill and repair their own products easily or, or buy the products and then hire someone to make a window repair or door repair and doesn't really disrupt the channel. In fact, dealers and distributors would find that helpful because then they don't have to deal with you. So there are certain avenues for that.
Most of the door products are pretty a little bit hard to do direct. However, I've seen examples, for example, where you could go online, order a complete front door entry unit assembled with glass and hardware and have it delivered to your home from wherever it was coming from.
And it's direct to consumer. Now whether they're successful, whether that's growing, I don't know but I've seen it. Yeah, just to that's helpful.
[00:34:45] Speaker B: Looking forward. Right, let's do wrap this up. What excites you the most about the building product space. As you look forward. You talk a lot about material innovation, distribution and customer engagement.
How do you bring this all together?
[00:35:00] Speaker C: Let's see. I would say the biggest thing is one, there is a growing recognition across both the platform, political and social spectrums that, you know, housing is extremely important, that we have a shortage of housing and that we put up a lot of barriers, mostly politically. There were some financially to supplying the housing stock. So I see an appetite to kind of right that ship dealing away with some of the blockages and regulation, making you know, mortgages a little bit easier to get and more affordable. Not getting back into where we were in the 2000s that created the crisis, but making things a little more affordable. So I think the demand side is going to improve and the ability to supply side. And then the other thing that gets me exciting, it always gets me excited is product. I've just seen such great innovation on the product side and new products on the window side, huge patio doors.
They've offered great vistas that also though much improved energy performance.
So you're getting bigger expansions of glass that are much more energy performing higher energy performance or better sound performance.
The new products always get me excited.
[00:36:23] Speaker B: Yeah, well, definitely innovation and product. So product and hopefully some macro tailwind with the interest coming down are going to be good for the industry.
So that's, that's great. Well Bob, thank you so much for spending time with us. This is, this is really helpful. Very glad to be able to carve some time out and our viewers are definitely going to get a lot from the, from the insights you shared. So thank you very much.
[00:36:48] Speaker C: Well, thank you Dinesh. Thanks for having me. It was fun to have this conversation.
[00:36:52] Speaker B: Yeah, thank you.
[00:36:59] Speaker A: Thanks for listening to Aina Insights. Please visit Aina AI for more podcasts, publications and events on developments shaping the industrial and industrial technology sector.
