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Hearth & Home January 2018

Gas Buys Wood

By Richard Wright

The acquisition of SBI by The Empire Group creates a “true” hearth company that manufactures gas, wood, pellet, and venting products; it’s a combination of two well-run and profitable entities ready to capitalize on the synergies provided.

syn•er•gy n.

The interaction of elements that when combined produce a total effect that is greater than the sum of the individual elements.

Every acquisition is fraught with excitement, high hopes, and a bit of trepidation. That may well be the case with The Empire Group’s (parent company of Empire Comfort Systems) purchase of Stove Builder International (SBI), but we suspect there is very little of the latter.

The reason can be found in the word “synergy.”

First, there is the location of each company: Empire is in Belleview, Illinois, and SBI is in St-Augustin-de-Daumaures, Quebec, Canada. Almost all of Empire’s business is in the U.S. (97% and 3% in Canada), while 65% of SBI’s business is in Canada, 30% in the U.S. and 5% is international (Australia, Czech Republic, Colombia and Brazil).

Second, Empire only manufactures gas appliances; SBI only manufactures wood and pellet appliances, and venting.

Are you starting to get the picture?

These two companies fit together like Russian Nesting Dolls.

Both Empire and SBI are family-run operations, and that has great significance for both parties.

Both companies are run by young men. Nick Bauer (33) is president of Empire; Marc-Antoine Cantin (43) is president of SBI; his brother Jean-Francois (44) is vice president.

Empire was founded in 1932 (85 years ago), while SBI was purchased in 1996.

Empire has two factories, both are in Belleville, Illinois. One is a factory/office; the other is a factory/distribution center. Square footage for both locations is about 550,000.

SBI has two factories in the Province of Quebec (330,000 sq. ft.); a distribution center in South Bend, Illinois (65,000 sq. ft.); one factory in Brazil (15,000 sq. ft.), and a distribution center in Australia (5,000 sq. ft.). The total is roughly 400,000 sq. ft.

Empire’s brands include American Hearth, White Mountain Hearth, Broilmaster Premium Grills, and Empire Heating Systems.

SBI’s brands include Osburn, Caddy, Enerzone, Valcourt, Drolet, and Century Heating.

L to R: Nick Bauer (33) is president of Empire. Marc-Antoine Cantin (43) is president of SBI; his brother Jean-Francois (44) is vice president.

Hearth & Home: Marc, our understanding is that a lot of your business in Canada and in the U.S. is through what you call home centers, entities such as Home Depot and Lowe’s.

Marc-Antoine Cantin: “Home centers, which is everything such as Lowe’s, is still 50% of our sales. When we bought this company in 1996, it was 100% through home centers. We wanted to grow the specialty hearth part of the business, so we bought Osburn Manufacturing and other companies on the hearth side to consolidate the market. We started selling in the U.S. because, with the Osburn purchase, we got their distribution network.”

You mentioned that you have international business in Europe, Australia and South America. Does that represent a significant amount of sales for you?

Cantin: “It is not a multi-million dollar business, but it is a growing part of our business, and it’s not costing us much because it doesn’t require a lot of dedicated products. In the Czech Republic, for example, we have a very good distributor so that is easy. He is committed. He buys container loads and he has been with us for years. Opportunities such as that arise and you seize them. Overall it is about a bit less than 5% of our sales, but it was zero a few years ago. It has potential.”

You sell exclusively wood or pellets and no gas, is that correct?

Cantin: “When we bought Osburn, we kept making their gas products, but at some point the market changed. I don’t know what year, but when Pacific Energy came out with its Town and Country, they were the first to come up with a large, clean-faced gas fireplace. That changed the market quite a bit.

“At that point, Osburn had maybe five or six models, very conventional stuff. We knew that if we wanted to be leaders in gas, we had to redesign the line completely. At the same time there were challenges in wood with new regulations in Canada and in the U.S., and eventually reopening the EPA regulations. We looked at other companies that had tried to be the best at both gas and wood, and there were not many.

“Since our roots were in wood we decided to focus 100% on solid fuel and venting, and if we were to do anything else in the future, it would be through acquisition or partnership, but only with the right partner. Nick (Bauer) was exactly the opposite. He was 100% gas and absolutely no overlap with our wood offering. He used the same strategy as we did, but with a different fuel.”

Nick Bauer: “What we think is so cool about this is we’ve been in gas for 85 years, and one of SBI’s brands goes back almost as long as that. So we’re going to continue to focus on what we do best, and they are going to continue to focus on what they do best. That’s what is so cool about this.”

L to R: Jane Routh (sister); Brian Bauer (father) and Nick Bauer.

Reading your press release on the acquisition, it sounds as if both of you put your R&D departments into high gear in the past few years, and that provided a nice growth spurt in your companies. Is that pretty accurate?

Bauer: “There are many very attractive parts about this sale. SBI’s lab and engineering and the technology that they have, and whether they can be testing from an iPad, it’s just absolutely amazing. What I feel, and I’m pretty sure Marc agrees with me, the companies that are going to be here for the next 20 or 30 or 40 years are the ones that are willing to invest right now.

“Whether it is what DOE wanted to do a couple of years ago with gas products, or what the EPA wants to do now, or whatever the next thing is going to be in five or eight years, the companies that are willing to invest now for the future are the ones that are going to be here.

“I’ve been in this industry for 10 years now, and if you look at the brands that were here 10 years ago and you look at the brands that are here now, it’s a dramatically different landscape. When I walked the family through here about a month ago, one of the key points I wanted to show them was the engineering lab, the money they have invested, the youth that they have. It’s really, really impressive.”

So is it fair to say, Marc, that you are ready to go in 2020 with the EPA?

Cantin: “We have a large product offering. To think that all of our products are going to be 2020, no, because we have some models that we acquired from Osburn that are good stoves, but the look is getting a bit basic. So to invest money in research defining that, no, but to be ready for 2020 with a full range of boxes such as small, medium, and large out of which we can do pretty much all of the models we need to compete effectively, yes, definitely.

“Of course, we would like it to be postponed to 2023 because getting the product certified is one thing. You could get a full line certified by 2020. But if you don’t want to botch the job you have to have all of the gigs done for production, all your marketing lined up, all of your production and configuration. More and more we are robotized. Programming robots on a new product takes time and you need to do it right. So there are many months needed to do that.

“All manufacturers are ready. They can do it, but to do it in a short period of time just puts stress on all the organizations that they don’t necessarily need. And moving it to 2023 is not going to have any negative environmental impact. Let’s not kid ourselves. I would like it to be postponed, but if it goes faster we’ll be ready.”

When it comes to wood and pellet, Nick, I guess it’s fair to say that you just voted with your wallet and said you have a great deal of confidence in the future of biomass.

Bauer: “We have been a gas business for 85 years. When you look at it from an overall market standpoint it’s roughly 80% gas, 20% wood. If you are only in gas you’re leaving 20% of the business on the table. It’s our goal at Empire to be a full-line hearth manufacturer. A full-line hearth manufacturer has wood, gas, pellets, venting and electric. Those are our goals and we found a partner in SBI that can get us through our goals a heck of a lot quicker than we could have done it ourselves.

“It’s my job as president of Empire to protect the company and my family members and fellow shareholders from this wave. We want to have as little variation as possible, and this is a way of hedging things that we can’t control. You know we can’t control weather and we can’t control the price of oil.”

Cantin: “Venting is something that Empire didn’t have, and we’re growing in venting and it is becoming a more important part of our portfolio, so we bring that to the table as well.”

Bauer: “Consider all the product categories (gas, wood, pellets, electric and venting). SBI sold three of those five categories and Empire sold one of those five, but we sold them to the same customers. Now we have what my sales manager calls ‘portfolio selling.’ It’s our goal to sell as much as possible to our customers and partners out there. If you are only selling them gas, or if you are only selling them wood, they are buying gas or they are buying wood from someone else.”

Valcourt FP16 Linear Wood Fireplace by SBI International.

Instead of having perhaps 12 or 15 stores in Canada, a year from now you should have many more. And the reverse is true for you, Marc. You must expect to open up many of the stores Empire has in the States.

Cantin: “Yes, definitely. We can also share best practices. We have production capacity here that is pretty good, so we can help with producing in different factories, and it is never a bad thing to have factories on both sides of the border in this industry. You can be closer to your customers as well.

“If we need a warehouse out west for instance, to better serve our customers, maybe we alone wouldn’t have the critical mass to rent a warehouse of a certain size, but suddenly, with both companies, there are all kinds of projects that make way more sense.”

Who approached whom? Were you out looking, Nick?

Bauer: “I don’t really know.”

Cantin: “I think Valerie, one of our salespeople, went to the Builders Show in Orlando and she spoke with some people at Empire and got the word that they had been looking for a partnership down the road in wood. That is basically what she came back with as information and she said, ‘Marc, I met this company. They have been looking for a partner in wood and they are family run and the name is Empire.’

“So at the HPBA show I went to tour their booth before the show while we were finishing setting up. I sat down with Nick and we just started talking about our companies. That’s when Nick said, ‘We would like to have a partnership in wood because we think it’s important to be in all the categories. Would you guys be open to selling?’

“They are gas only. They are a manufacturer with scale. We can do other deals with them in the future, and they are family run where they are going to do business long-term and this is good for our employees and it’s good for our suppliers; it’s good for everyone. It’s not very often that you see a deal like that with the perfect conditions, so when it passes you, you jump on the bandwagon or you pass. The train was leaving the station so we had to make a move.”

Bauer: “I was here (in the SBI factory) in May and I saw their machines and their factory; they have a nicer factory than we do. We’ve been in the same location since 1937. Our oldest building is 1863. They have a dream manufacturing facility up here. In 2010, they moved in. What they have is like my dream.

“They probably produce better than we do. And they have a better IT system than we do. We are going to learn a lot and we’re going to improve Empire’s business because they have some better tools than we do and that is what is really exciting.”

How do you both go to market? Marc, it sounds as if you go through distribution. Is that correct?

Cantin: “No, we do both. When we bought Osburn Manufacturing we maintained their distribution network. Of course, good distributors are not everywhere. There are some regions where there are no good distributors. In those few regions we just go direct with Osburn because there is no distributor.

“Now we also have lines like Enerzone, for instance. That is a line we make for United Buyers’ Group, which is the largest buying group of hearth retailers in this industry. We are their exclusive supplier of wood stoves plate steel. So of course that whole group is all dealer-direct, so that is a good dealer-direct business that we do with them. So we do both, but with different brands.”

Boulevard linear fireplace from American Hearth.

Is it similar for you, Nick? Do you do both or is it primarily distribution?

Bauer: “The vast majority of our sales are through two-step distribution. But every market is different. St. Louis is different than Florida, which is different than Texas and Utah. So there are certain markets such as the bigger metro areas were you have to go dealer-direct, and there are certain markets that you go through two-step. We’ve built our business on two-step distribution, and the vast majority of our sales are through two-step.”

Now will you both be exhibiting in Nashville?

Bauer: “Yes.”

Are you going to bring your two booths together or not?

Bauer: “We are not. We are a little late in the game this year and, even if we weren’t, we plan on running the companies pretty independently at least for the first couple of years. The great thing about this is both companies are doing well. They are growing; they are successful; they are making money. There are not any massive fires we have to put out. We don’t have to cut 20% of our overhead to turn a profit, so we can afford to take our time. We can afford to do this right.

“Keep in mind that my sister and I and our parents are the only shareholders, and our parents are retirement age. When you look at it from their standpoint, they are asking, ‘Is this a deal worth taking? Is it worth the risk?’ All deals come with risks and this one didn’t have that much from our standpoint because we’re really in a good position. But as my sister said it so well, ‘There is a risk to not doing this deal.’

“We could have continued to just do gas fireplaces and we could have continued to do that for the next 10, 15, 20 years. Who knows how long? Or we could take this risk and could reach our goal of being a true hearth manufacturer. A true hearth manufacturer is one who has wood, gas, pellet, and perhaps exempt wood and nonexempt wood. There aren’t many left. There are maybe only two or three true hearth manufacturers left.

“I have been in this industry for 10 years now, and I’m 33; Marc and his brother are 43 and 44, and this is our way of doubling-down for the future. We want to be the company that is going to be around in 20, 30 years, and we still want to be a family-owned company.”

I think you have a very smart sister, by the way.

Bauer: “She is very smart, and that is a great quality. Every time I bring it up she blushes, that’s the best part.”

Cantin: “One other thing. I’ve been asked the question through some people who e-mailed me, ‘Oh, Marc, I’ve enjoyed working with you and will miss you.’ Well, you don’t get it. I’m not going anywhere. Our buyers have an investment in SBI and it is a big investment, so they want to make sure they recoup their investment. That’s one of the things they like about this deal. This is not a small deal, it’s a big deal, and one of the things a buyer doesn’t want is to have to run a business in Canada and be stuck with a business where the management is leaving. SBI is independent and it has its own directors. The management team is intact.

“My brother is 44 and I’m 43 and we like this industry. Our goal is to make this investment grow. I’ve been here longer than Nick Bauer so my brother and I feel that we can be the bouncing board that he might need if he wants to make some decisions. We think that we have the judgment and the knowledge to help the group, whether it is SBI or Empire, with some of the stuff we’ve seen in the industry for the last few years.”

Bauer: “We’re very excited about Marc-Antoine and Jean-Francois, his brother, staying on board and they also have another 13 employee shareholders. They are the ones that are showing up for work every day.

“They are the ones that are coming up with the ideas and putting in the effort. That was a big plus for us because Empire has been owned by the Bauer family for 85 years. We’ve never had any minority, non-family members. So this new structure is very exciting for us.”

L to R: Pamela (mother), Henry (great grandfather), Jane (sister), Henry (godson) and Nick Bauer.

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