December 16, 2013
Interviewed by: David Snow
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Doors to Growth: How FFL Added Operating Value to C.H.I.

Aaron Money and John Roach of private equity firm FFL describe how they acquired and drove operating improvements at C.H.I., an overhead-door maker. You will learn what FFL liked about the overhead-door market in 2011, how operating partners help firms extract value, and how a recycling initiative saved the company millions.

Aaron Money and John Roach of private equity firm FFL describe how they acquired and drove operating improvements at C.H.I., an overhead-door maker. You will learn what FFL liked about the overhead-door market in 2011, how operating partners help firms extract value, and how a recycling initiative saved the company millions.

Doors to Growth: How FFL Added Operating Value to C.H.I. 

PE Value-Creation Stories

David Snow, Privcap: I’m joined here today by Aaron Money and John Roach of FFL Partners. Gentleman, welcome to Privcap today. Thank you for being here.

We’ve been talking about the operating function in FFL, Aaron you are managing direction and John you are an operating partner and your roles are complimentary but different. So I’m interested in hearing how the different talent functions within your firm have worked on C.H.I. Overhead Doors, it’s a portfolio company of FFL’s. I’m interested in how you’ve built a plan to add value in this company, and who the various roles have, have been supportive of that plan. Why don’t we talk a bit about first sort of what is this company and how is it unique in the market and then we, we can get into how FFL discovered it. So question for John, what is C.H.I.?

John Roach, FFL: C.H.I. is an overhead door company, often known as garage doors. It’s a fairly tight knit industry; there are only four or five major players. C.H.I. is probably one of the minor players with about 10% market share, but they have a very unique strategy with a single facility where they distribute the product directly to the customer. Other people go through distribution centers, so it had some nuances to it that made it different. And for that reason was an extraordinarily interesting company to look at in terms of whether or not to make the investment. It then has proved to be an unbelievable performer; we can get into that in a minute. But maybe Aaron can talk a little bit more about how it came up, and how we looked at it with another company in the industry.

Snow: Sure, and on that note Aaron how did this opportunity come to FFL, and what was your pre-existing of the market in which it did business that led you to believe that it was an attractive opportunity?

Aaron Money, FFL: Sure, well we invested in C.H.I. in August of 2011, so a little over two years ago. That was after about three years of intensive work in building products, and we got to know John through that work. Had looked at a number of different investment opportunities with John. We tend to look at investments as a firm along a, a construct that involves macro, micro and deal. And so the macro environment there was was one of a cyclical rebound. We were trying to find opportunities to participate in an increase in building that would occur over some period of time. We didn’t know when, but we figured it would come.

Snow: And of course in 2011 that was in a bad part of the recession.

Money: It was. And when we started looking in, in ’08 we, we were anxious to get an investment done thinking that the, that the upturn would happen potentially very quickly. I think in hindsight I’m happy that it took us a while to, to find one. But yes we bought it, bought it far from a peak and pretty close to a trough. The company has performed very well through the, through the downturn, and so the, the macro story was one of a cyclical rebound that we were expecting to occur. The micro, when we think about micro is how a company is, is positioned within that industry. And John mentioned some of the unique aspects of C.H.I.’s business model. What that translated into was a superior competitive position. The company was, was taking a lot of market share through the downturn. We expected it to continue to take market share, and it aC.H.I.eved margins that were roughly three times that of its competitors because of its unique business model. And so at the end of the day a combination of John’s insights around the industry and the company’s positioning lead us to, to make the investment in August 2011.

Roach: It’s a really good example I think of a lot of the, the, the things that FFL does, and that there was a very intensive investigation process that wound up with a successful investment. But then I think as a matter of firm practice there is kind of a 100 day period of really getting in intensively and understanding everything, and coming up with a re-affirmation of the strategy and a set of strategic initiatives, which then is the contribution to the management of kind of how to go forward to reinforce what they were doing. Maybe sprinkle out a few ideas, and that became the game plan, the execution was great. We’ve achieved most of those strategic initiatives. We’ve added a few, and the performance has been outstanding, dramatically better than the industry.

Snow: Specifically with regard to C.H.I., what are the key metrics that you are following that to you will indicate that the company is, is on the right path?

Roach: The highest level would be sales and profit margin, EBITDA margin which is outstanding. Below that it’s where are you in the various segments commercial, residential, rolling steel. Below that it’s in strategic initiatives, west coast initiative, more business participation in commercial, improving the material scrap performance, productivity levels in 23 different activity centers in the manufacturing operation. So it, it kind of cascades down, but at the top level, I mean our sales is going much faster than the industry. Our profit margins are three times higher and we’re keeping it that way, and as we focus out to gain more share you naturally are going to get into slightly less profitable operations. And so if you balance that with cost reduction at the central facility you maintain your high level of margins and you go forward, so it’s a combination of things. But everybody speaks the same languages.

Snow: What is the scrap initiative?

Roach: Scrap, well I mean if you envision a steel garage door 50% of the sales’ cost is material cost, and most of that is steel. And so we’re major purchasers of steel, and some doors have window cut outs and things like that. So there is some kind of planned scrap, but it’s a big number. And I think there was some excitement in the operations crew in terms of how much that was, what they could do to improve that. So we just gave them some kind of loose objectives and guidelines, and they came back with a series of action plans that really did save us between $1 million and $2 million per year. So it’s a great success story, and a lot of it is just encouraging management to do things, and then patting them on the back when they do it.

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