It's About Growth
By Richard Wright
On the day prior to the opening of the 2014 Casual Market, Brown Jordan International sent out a press release explaining that it had just purchased Tropitone Furniture Co. Not surprisingly, that transaction became a major topic of discussion for the next four days.
In an effort to set the record straight and answer questions on the minds of industry members, Hearth & Home sat down with company president and CEO Gene Moriarty on the third day of Market.
In 2000, Winston Furniture Company acquired the Brown Jordan Company and Casual Living Worldwide, incurring significant debt on the business. In May of 2005, Gene Moriarty entered the picture as CEO and spent the next 15 months restructuring the balance sheet. The current owners of the company arrived in October of 2006 with the completion of restructuring.
“The three owners from 2006 are the same today,” says Gene Moriarty, president and CEO of Brown Jordan International, “and they have basically doubled-down on their investment to stay in the business by making this acquisition and committing to this management team for future growth.”
|Photo: 2014© Jeremy Witteveen; R25 Productions. www.r25productions.com
Gene Moriarty, president and CEO of Brown Jordan International.
Hearth & Home: At this point they’ve been in it for quite a long time for private equity investors.
Gene Moriarty: “Yes, but our ownership is not made up of the traditional private equity firms. They are a mix of private equity and strategic financial investors. They are more patient when it comes to managing their investments portfolio.”
How did this deal begin? You previously said that you’ve known the folks at Pfingsten Partners for a long time. Did you approach them or did they approach you?
Moriarty: “We had a financial advisor, investment banking group Moelis & Company, that we hired in May of 2013 to look at strategic alternatives for our company. We looked at selling the business, and we looked at opportunities from an acquisition standpoint.
“In November of 2013 we made the decision that the opportunities to consolidate in the industry were pretty significant. Our Board and investors agreed that the better strategy was to make an acquisition and I proposed three. Tropitone was the one that we thought was the best managed company, and also allowed for some strong synergies. We had Moelis engage with Pfingsten Partners back in the first of the year. Those discussions began in January.”
Was it that Brown Jordan wasn’t really saleable at that point, that no one was coming forward?
Moriarty: “We received quite a few offers for the business, but we didn’t like the valuations. Surprisingly, everybody who came forward had done a lot of work in this industry and we were all looking at the same strategy that we ended up doing. They thought there were other businesses that should be purchased and combined.
“Our Board basically said, it’s a better alternative for us to do it versus selling and letting someone else have that roll-up strategy. We had very low debt on this company and it made it pretty advantageous for us to purchase using cash and some debt so that our leverage remains really low.”
Did you pay down that debt through earnings, or was it turned into equity?
Moriarty: “From 2009 to 2013 we paid down debt through earnings and were really in an advantageous position with cash on hand and some very attractive financing sources out there. So we took advantage of the low-cost financing and cash-on-hand to make the acquisition.”
In a conversation we had a few months ago you indicated there would be another acquisition a few months after this one. Is that still on the table?
Moriarty: “Yes. We’re very open to continuing to look for companies. Our financing arrangement gives us great flexibility to do that. We’ve identified a couple. The way our company is structured, 60 percent of our business is in the commercial arena and 40 percent today is in the retail sector. So we’re looking at acquisitions across both of those channels. We’re going to continue to evaluate that before we make our decision, but we have room to be able to do it without putting too much leverage on the business.”
In an article we wrote when Pfingsten purchased Tropitone in 2008, they were flatly saying that within a period of five or six years, “We plan on doubling or tripling the size of this company.” Now, anything said in 2008 was probably restated in 2009, but how well did Tropitone weather the downturn?
|Tropitone facility in Sarasota, Florida.|
Moriarty: “I think they did a nice job. They were able to make some changes in their organizational structure. I think they used a very conservative approach in managing the balance sheet. As an outsider looking in, I thought they were risk averse and disciplined in their approach consistent with the way we look at the industry and the business.
“So you put both of those things together and I think they did a real good job weathering the storm. That business has not come back to its peak in 2007, nor have we for that matter. But I think there are lots of compliments due that management team for the job they did.”
Well, the hospitality channel has been doing very well and that makes a major difference, correct?
Moriarty: “Yes. We see it both in our indoor business and our outdoor businesses. Hospitality has had four real strong years and, in our case, it has allowed us to grow and be able to still invest in consumer businesses even though we’re not able to see that far ahead in terms of what the growth platform is going to look like.”
The retail end of the business took quite a pummeling during the downturn, and that’s still the case today. That presents quite a challenge, doesn’t it?
Moriarty: “When I look at California and Florida in particular, the business that was there in 2008 that doesn’t exist today is substantial. When I look at customers that we did business with in 2008 and what we are dealing with today, I see declines where the dealer isn’t in those markets any longer. We have been unable to make up that kind of business, not just on Brown Jordan, but across any of our businesses.”
Brown Jordan International Companies
Our sense is that when there has been a decline in the retail base through the years, eventually new people come in and make up some of that loss. They see an opportunity, a void. Anaheim Patio closes three stores and one is gobbled up immediately. My guess is that the other two slots will get filled as well. Do you feel any of it is coming back?
Moriarty: “I think it has held and continues to improve in certain markets. I think the opportunity is there for the entrepreneur to do that and open up a new store.
“Financing costs are low, so it’s not like the expansion that a lot of these guys did in 2006 and 2007 when Robb & Stucky tried to expand throughout the entire country. The cost of capital and leases was pretty expensive then. I don’t see that being a deterrent today.
“There is a difference today that wasn’t common in 2007 and 2008 and that’s the market disrupters. The 45,000 sq. ft. Restoration Hardware stores didn’t exist in 2007 and 2008. Today they are prominent in major markets. I think the Frontgate model has been helped tremendously by the home shopping network purchase.
“That has allowed them to be front and center in the consumer’s face. I think Sonoma Home, Pottery Barn Home and Crate & Barrel Home make it easy for the consumer to purchase. All of those factors are changing dynamics that are hitting the market today.”
Some relatively new arrivals, such as Wayfair, are growing like Topsy. Twenty years ago it would have been unheard of for someone to start from zero revenues and end up at a billion dollars in a decade.
Moriarty: “Yes. That is impressive. But there are still some very strong dealers. I was recently in Texas and there are some very strong dealers in Texas, doing very well.”
I’ll bet a number of them are doing outdoor kitchens, Outdoor Rooms, because Texas appears to be the number one state for those amenities.
Moriarty: “I was in Houston and Dallas and talked to a number of retailers and the desire to be the source for the entire Outdoor Room was top of mind for all those businesses.”
Explain for our readers how and why Tropitone and Brown Jordan are a great fit.
Moriarty: “First of all, here are three well-established brands with Brown Jordan at 70 years old, Tropitone at 60 years and Winston approaching 40 years. I also think they are very complementary because they allow for a good, better, best in terms of branding. We now have what might be the lowest cost North American labor force of anybody in the industry, with diversification with two facilities in Mexico and two domestic facilities in the east and west corners of the U.S. That is an important piece because it allows for lots of flexibility from a manufacturer standpoint.
“When I look at the commercial side of the business, our Winston & Texacraft product is the market leader in multifamily. Tropitone is the market leader in hospitality and lodging. We think that is very complementary and allows for lots of growth in both areas as you consider how to go to market both from a product and from a selling aspect. We also have a company called Wabash Valley, which is the market leader in site amenity products (benches, tables, chairs, sandboxes, swings, tree grates and bicycle racks), and we think that’s underdeveloped in the hospitality and lodging segments.
“There is some great cross selling and some synergy to fill up the offering with a commercial representation from both of those channels. We do that very effectively today with our Winston & Texacraft business in multifamily.
“On the retail perspective, I think it gives us clout. It gives us scale. It gives us the ability to have favorability in sourcing and/or manufacturing on a comparative basis that will allow us to improve lead times, improve quality. We think we can be just-in-time as a source for our customers. As we work through some of the complexities in this acquisition, we’re not looking to do anything quickly.
“We bought a very well-managed company. The opportunity is to understand some of where the opportunities are and then be able to execute that effectively so the customer base can benefit from it. That to us is the most important part. There is no desire to rush in and do anything different. Tropitone is a stand-alone company and that’s the way we want it to stay.”
Have you figured out how you’re going to use each factory?
Moriarty: “Yes. I don’t see any change in either facility from the current way they operate. Tropitone’s western facility (in Irvine, California) operates very effectively and services the western half of the U.S. Its Sarasota, Florida, facility does the same thing in the east. We just extended the lease on the Sarasota facility another two years. So we think they are both very strategic in terms of Tropitone’s go-to-market strategy and we don’t see any change to that.”
Is the Sarasota facility up to speed?
Moriarty: “Yes. They’ve actually invested quite a bit of money in the last few years in upgrading that facility. The manufacturing footprint is updated and is very, very up to speed in terms of appearance and machinery. The only place that needs to be updated would be the offices and that is already underway.”
But that’s a lease and not ownership of the factory?
Moriarty: “Yes. They are both leased. We extended that lease until 2016 and the Irvine, California, lease runs to 2019.”
Isn’t that a very expensive way of doing it – for a company such as Tropitone to have leased for all these years?
Moriarty: “It’s different from our strategy. I mean our facilities are owned, with one exception. We have one lease in our Brown Jordan Juarez facility, but other than that we own everything. With Tropitone, the lease rates are pretty reasonable. From an operating performance, it doesn’t appear to be anything that has affected their ability to grow their margins.”
That’s probably the first time I’ve heard that rates in Southern California are reasonable.
Moriarty: “That lease is a long lease but, surprisingly, it isn’t a huge burden. We have two facilities in Juarez, Mexico. We have a Winston facility that is company-owned. That’s a cast foundry and extruded aluminum operation, and we have a leased facility with Brown Jordan that has been there for more than 25 years.”
|Photo: 2014© Jeremy Witteveen; R25 Productions. www.r25productions.comGene Moriarty with the Urth, one of many Brown Jordan Fires.|
Do you do all your castings for Brown Jordan in that Winston facility?
Moriarty: “We don’t do all of Brown Jordan’s castings. We do some of them. Winston has a heavy number of collections with cast components. So we do all of Winston’s castings in that facility and we do some of Brown Jordan’s small parts in that facility. But we don’t do tables for Brown Jordan today. It’s done overseas.”
Multifamily. Now that’s a word we seldom hear in this industry. How large a market is that?
Moriarty: “I wouldn’t want to venture a guess on dollar volume, because it’s hard to determine. What I can tell you is that the economic environment for more people, younger people, wanting to rent as opposed to being homeowners has spurred development in multifamily projects. The large REITs across this country are all investing heavily in updated facilities, updated buildings.
“What was traditionally strap furniture at poolside, is today high-design furniture at poolside as well as multiple expansion into outdoor seating and outdoor living with fire pits and grills and much higher-end furniture as they try to create an atmosphere that will allow for better convenience. We’ve found that the designer is playing a prominent role in multifamily and the business has changed tremendously from what it was in 2008.”
So my vision of relatively inexpensive chaises around a pool is rather dated.
Moriarty: “It still exists in certain areas, but I would say most of the new developments that are coming up are all going with much more design-focused product and a much higher-end product.”
We’ve recently written about major builders adding Outdoor Rooms to their show houses and offering that amenity as an option. We’ve also written about private companies putting up higher-end high-rises for college students and the opportunities both of these areas offer.
Moriarty: “Yes. Both of those are on our radar screen. We’ve done some colleges with one of our businesses and the profit element has been successful. The cruise line business and golf clubs also have been pretty successful. We are chasing the school business as well. So clearly that is a big, big opportunity as we go forward.”
It seems like the stars are aligning for the outdoor furniture industry, doesn’t it? The minute housing comes roaring back at some point, and we begin to get many more Millennials into the market, it’s going to be a heyday. A number of manufacturers I’ve talked to say that’s going to happen, and when it does this industry won’t have the capacity to keep up with it.
Moriarty: “We think the future looks pretty bright. To prepare for that we have re-opened our Haleyville, Alabama, facility. Last year we put in a brand new oven and paint system and new capital equipment. So if demand increases we have another facility of 250,000 sq. ft. that is readily available.”
Both companies target the specialty retail channel, as well as designers, but which company, Tropitone or Brown Jordan, has the strongest presence in either one of those areas – designers or specialty retail?
Moriarty: “It’s interesting when we look at their customer lists. They are selling a lot of customers that we are not selling. We’re selling a number of customers that they aren’t. We think that may lend itself to some opportunities on both sides. There are some parts of the country they are very strong in that we’re not, and the same thing on Brown Jordan’s side. There are certain parts of the country in which we’re very strong but they aren’t.
“Getting a handle on the retail marketplace will take us some time to be ready for the 2016 season, and there is some shuffling that can be done there. But we will take the time and analyze it effectively so that both businesses can maximize the opportunities.
“To your question, both companies are equally strong in the retail channel. With the design business, Brown Jordan has had a long history with designers as it relates to residential. Tropitone has had a strong history with designers as it relates to hospitality. We can both benefit from those two strengths with some complementary strategies across both of those channels. So I think as you talk about moving forward, to me that’s where the opportunity is, blending complementary skill sets and customer bases to grow both businesses.”
How many employees does each company have right now?
Moriarty: “Brown Jordan International has about 1,550. Tropitone is running just under 500. So it puts us approaching 2,100 employees across North America and China.”
That obviously would tell me that Brown Jordan International is about three times the size of Tropitone, just based on number of employees.
Moriarty: “It’s about three and a quarter times the size. The combined entity is going to be a $400 million business. The Brown Jordan International component of this has been growing in strong double-digits over the last three years and by itself it’s over $300 million.”
A few years back you made a major effort to expand overseas. Which countries is Brown Jordan in right now, how well are they doing and has Tropitone ventured overseas?
Moriarty: “Post recession we pulled back a little bit in Europe; our presence in Europe is much more design-focused than it is residential. Our growth areas have been South America and the Caribbean. We’ve established a very nice business in Australia, and we’re doing business in 24 countries. The international component of our business is growing, but it has not been the main focus over the last few years.
“On the Tropitone side they have a little bit of an international presence, but it has not been a major focus on their part. I’m not sure, as we go forward, if it will be a big part of our initiatives.
“Our focus is going to be continuing to develop the best products that we can for both commercial and residential. We think there are market-share opportunities domestically in North America for both Brown Jordan and Tropitone that will be a better return on our investment than trying to expand on an international basis. I think the opportunity is there domestically.”
You’re saying that overseas is bigger for BJ, and in effect that’s because it’s design oriented more than Tropitone is?
Moriarty: “Yes. In Europe we had a very strong relationship with Harrod’s, and when Harrod’s sold the business, they downscaled the outdoor furniture. That was an important piece for us to watch. Once that decision was made, we took the focus away from international. Our key dealers in the U.S. and our branded retail store strategy are the two key things that we are designing for.
“The international business that we get is from Australia and South America. For the most part it’s going to be design and commercial, but it’s not going to be one of the key priority areas for us. North America is a better platform to grow for the next few years.”
With your new Brown Jordan stores, are you going to bring Tropitone in?
Moriarty: “Right now that is not part of the strategy and I’m not sure it will be part of the strategy. Our strategy for the Brown Jordan retail stores is to be somewhere in the six to 10 stores over the next five years and to focus on the Sunbelt areas. As we closed our own designer showrooms, we’ve opened up a hybrid store that will deal with both the consumer and the designer.
“We think that model is much more viable for us. It’s a larger piece of revenue, but we do not see opening any more stores than that. It’s just not going to be on our radar screen. We know the markets in which we think we can gain business. We know the (showroom) leases that we want to run out and let expire. Six to 10 stores is going to be the maximum that we plan to open at this time.
“Our first store has already opened in Costa Mesa, California. The second store will be in Miami in the Design District. That store will be open in April 2015. We have a couple of other leases being negotiated, but nothing to announce yet.”
|Locations of the six Brown Jordan International facilities.|
But all the stores have more to do with the design trade than anything else, correct? They are replacing showrooms?
Moriarty: “Miami is replacing the Ft. Lauderdale showroom. Costa Mesa replaced the Laguna showroom. In the Houston market there are plenty of good specialty dealers that we are not doing business with today; we would prefer to develop the specialty dealers in the Houston, Texas, market than open our own store. In Dallas we have a design showroom that is doing really well and we intend to keep that one.”
How are you set for upper and middle managers at the six companies you now own?
Moriarty: “We recently made changes in our senior management team. I believe we have the strongest management team running our businesses in my tenure with the company. We’ll be announcing at the beginning of October a number of promotions within the company, which will reflect that management depth and allow people who have done really well running the business to have more responsibility. I’m very happy with how we’ve developed the depth of the management of the company.”
If I’m a rep, should my knees be knocking at this point? Are you going to combine the two product lines into one rep force?
Moriarty: “That question came up at a number of meetings that I’ve done this week and I think the answer is no. There may be some markets where that would make sense, but as a general rule of thumb, we think three sales forces – Brown Jordan, Winston and Tropitone – is the right way to go to market.
“We also think that’s the right way to go to market on the commercial side. However, there are territories today where there are reps that have two of the three brands. So could there be three? Possibly, but I think that will be the exception and not the rule.”
Let’s get back to finances. You just bought Tropitone and are actively looking for another acquisition. How much leverage do you presently have on the company?
Moriarty: “When I joined the company it was over leveraged. When we restructured the company we made an acquisition, Sunisle, on the same day we completed our restructuring. We were only 4.5 times leveraged at that point. With this deal we are 2.5 times leveraged and our cost of capital is less than five percent.
“So we can do the right things to grow the business without having to worry about what we’re going to do with the banks. That message is important because I don’t want anyone thinking that there’s all this debt on the company, or that we’re going to be cutting people. We don’t have to do that.
“Well before this acquisition we were almost debt free. When I go to bed at night I don’t want to think about leverage; I want to think about doing the right things for the business. It’s important that we grow the business. This is a growth play. This acquisition is all about growth and the low leverage allows us to do that.”