SupplyHouseTimes - August 2011

The Rebirth Of Todd Pipe

Jim Olsztynski 0000-00-00 00:00:00

Seven years after being sold, the new company is driven by philanthropy as well as business opportunity. Southern California’s Todd Pipe & Supply, our 2002 Wholesaler of the Year, was one of the most distinctive companies this reporter has covered in more than three decades of visiting supply houses. I wrote at the time that Todd’s core principles were “taking care of customers and taking care of employees,” and they did so “better than just about anyone else we’ve observed in the industry.” A sidebar to our 2002 story noted owner Karl McMillen’s extraordinary philanthropy, including an endowed chair at the University of Southern California, his alma mater, and personal donations totaling at the time $5.3 million to develop the Thelma McMillen Center at Torrance Memorial Medical Center. Named after McMillen’s late wife, the Thelma McMillen Center houses a comprehensive outpatient program to treat chemical dependency. “My wife and I lost a son to drugs and I’ve struggled with alcohol,” McMillen told me forthrightly at the time. “This issue hits so close to home for me, I felt compelled to make a difference and do something about it to help our community.” Since that interview his contributions to substance abuse rehab have grown to more than $10 million and are now funneled through a charitable foundation (“McMillen Family Foundation”). The supply business has been good to McMillen, who began his career as a plumber, although the bulk of his fortune has come from shrewd real estate and stock investments. Shortly after our 2002 coverage McMillen, then 74, began wrestling with the issue of business succession. There were no heirs to the business and his prime concern was taking care of the firm’s employees. He spent considerable time investigating an ESOP but in the end concluded it was not a viable option. Still in the heyday of industry consolidation, he listened to pitches from various suitors to buy his $220 million company, and in 2004 Sold it to Orlando-based Hughes Supply Co., then the nation’s #2 PHCP distributor in sales volume. “I wanted to sell to a company that would provide growth opportunities for our people,” McMillen told me when we met in June. “Hughes at the time was strong in the East and looking to expand in the West, so it seemed an ideal fit.” Two years later Hughes itself became a blockbuster story when it was purchased by Home Depot and revamped into HD Supply Co., which a few years later would be spun off to the private equity interests that now constitute its majority ownership. Some of Todd’s key employees stayed on in various management roles with Hughes and then HD Supply. TODD’S REBIRTH Newly retired, McMillen spent the ensuing years traveling the world and devoting himself to his charitable foundation. Also, three years ago he got remarried to a former Todd employee of many years. (Wife Carol related that their courtship began with a post-Todd phone call from McMillen saying, “Now that I’m no longer your boss, how about having dinner with me?”) McMillen figured he was through with the supply business, but in late 2009, shortly after his non-compete agreement had expired, he ran into Todd’s former Sales VP Dan Patrick. Patrick had stayed on as Hughes’ western sales vp but left the company after its acquisition by HD Supply in 2006 to take a similar position with Mueller Industries. At their encounter he said to his former mentor half-jokingly, “Wouldn’t it be fun to start another supply house?” McMillen laughed off the comment. But a few days later he called Patrick asking if he was serious, and a conversation began about putting together the right team. In McMillen’s thinking that meant more than just finding competent people. He wanted to avoid the déjà vu of grappling with business succession that led him to sell the original Todd Pipe & Supply five years earlier. And, at age 80, he wanted to assure a future for his McMillen Family Foundation. What resulted was Todd Pipe LLC, which opened a facility in Anaheim in February 2010, followed by an opening in San Diego in January of 2011 and another at Todd’s old headquarters location in Hawthorne this past March.Ownership is split into five equal parts: • Karl McMillen, chairman; He works mainly from his home and doesn’t have much to do with day-to-day operations, although all the partners treasure his advice and financial acumen. • Dan Patrick, president/CEO. He takes the lead with sales and vendor relationships; • Tom Morrow, executive vp/sales; Morrow had managed Todd’s Garden Grove facility and stayed on in executive roles with Hughes and HD until leaving in July 2009. His duties span sales, credit and collections, and he serves as Anaheim branch manager. • Jason Kemp, executive vp/sales, who manages the Hawthorne facility and assists Aaron Olsen in overseeing company operations; Kemp started as a Todd truck driver in 2000 and rose to become Hughes’ Hawthorne branch manager and eventually HD’s regional operations manager of the West prior to becoming a partner in Todd Pipe LLC. • Aaron Olsen, executive vp/operations; Olsen had started with the original Todd Pipe & Supply in 1995, working his way up the ladder from the receiving department to become vp/operations in 2004. He continued to rise in operational management with the new owners, culminating as general manager of HD Supply’s Western Region before rejoining his former colleagues. He is in charge of operations, purchasing, finance and the company’s IT efforts, including the Eclipse distribution management system. These individuals are regarded as the “right team” because they have all been friends for a long time, bring different skills sets and, most important, “We all get along,” according to Patrick. Moreover, the chairman’s concerns about business continuation are alleviated by the age range of the partners.McMillen is now 82, Patrick 56, Morrow 44, while Olsen and Kemp are both 34. It’s anticipated that as the elders depart they’ll sell their shares to the younger partners, with one exception. McMillen has set things up so that after his demise his one-fifth interest in the company will pass on to the McMillen Family Foundation. This will provide the Foundation a steady stream of income into the future, something that all the partners take pride in. Besides the partners, many other former Todd veterans have joined the company in key positions. More would return if they could, except the reconstituted company with 75 employees at this stage is much smaller than the hundreds employed at the original version. “The hardest thing has been telling a lot of old Todd employees when they called that we didn’t need them,” said Patrick. “We’re still going through that because everyone wants to come back and work for Karl.” “We’re proud of Karl,” Jason Kemp voiced. “He’s done a lot of favors for employees and customers over the years, and set an example for us. When he’s in the building you overhear people saying, ‘Hey, Karl’s around!’ He’s a legend in the supply business.” TODD’S OPERATIONS The market is a lot different than it was when they left the business. The collapse of home building means that about 60% of sales for the new company comes from the commercial sector, a reversal from the 60% residential business of the old Todd Pipe & Supply. What hasn’t changed is the company’s culture. It’s centered around an unmatched commitment to customer service, which has led the reconstituted Todd Pipe to incorporate into its logo the slogan, “Legendary Service.” Todd is one of the last of the old breed of “wholesale or no sale” plumbing distributors. They don’t solicit consumer business and if a homeowner walks into the door, they will try to re-direct him or her to one of their contractor customers. Like the old version, the new Todd relies on an inventory model that would put many bean counters into a straightjacket. They are wedded not only “A” and “B” items –staples such as copper fittings get bought about every 30 days -- but they also order plenty of “C” and “D” products that may not sell more than once a year, if they’re lucky. The saving grace is that when a plumber is desperate for an oddball reducing fitting, Todd often will be the only place in town to find it. Aaron Olsen told me that within three months of being open, Todd’s fill rate measured 98.2%. McMillen’s business philosophy is that the whole is greater than the sum of its parts. The three branches operate as a single profit center, sharing inventory as need arises. “This avoids arguments about who made a certain sale or which materials belong to which branch,” noted Patrick. The old Todd had a bonus plan shared by all employees that was hinged to companywide performance. Once out of the startup phase, the partners intend to institute a similar bonus program. McMillen and all the other partners arose from blue collar roots, and they never forgot where they came from. All of the partners and most if not all of the firm’s other managers started their careers in the warehouse or as truck drivers. They dress like their customers and speak the same lingo. I asked if Todd Pipe employs outside salesmen and the reply was, yes, except they’re called truck drivers! “If you want to know what’s going on in the market, ask your truck drivers,” advised Jason Kemp. “They’re out there every day making friends, seeing what’s going on at jobs and who else customers are buying from. You get a lot of market intelligence from truck drivers.” About a year and a half after rebooting, the company has a core base of between 400-500 customers. Most are veterans who patronized the old Todd and for whom the “Legendary Service” tag is more than a marketing ploy. “Some customers didn’t come aboard right away because they were being taken care of okay by other supply houses,” Olsen said. “But as soon as something went wrong, they came to us.” Quite a few contractors re-upped with Todd as payback for considerations granted to them when they were struggling during hard times in the past.The partners all have tales of personal favors granted them by McMillen, who also has rescued numerous customers over the years. “With the old Todd our collections average was 56 days versus the national average of 45 days,” McMillen told me. “But our write-offs were .4% versus the national average of .8%, because we know our customers.We do want to get paid, but we understand sometimes the GC is not paying them, so we do what we can to help them collect.” “That’s part of our ‘Legendary Service,’” Morrow chimed in. “We have rules to follow, but slow money is better than no money. Our success is built on relationships with customers and vendors. People shop where they feel comfortable.” Morrow weighed in with an episode that happened a few days before my visit. A contractor had a problem with a tub and wanted $200 for his labor in fixing it. “I made a decision on the spot to give it to him,” he related. “I’m going to try to get it back from the vendor, but whether or not I succeed, the customer is taken care of. Is a customer worth $200?” Said Patrick: “Something Karl has always said is do the right thing, no matter what it costs.” HIT ‘EM WHERE THEY AIN’T! “Hit ‘em where they ain’t,” is an expression attributed to a Hall of Fame baseball player from antiquity named “Wee Willie” Keeler, so named because of his stature. It came to mind while discussing the counterintuitive decision to start a new business amid the worst recession most of us have ever witnessed. Actually, it’s always been McMillen’s business model to expand in down markets. That’s when the old Todd chose to open new branches.“Competitors are cutting back on inventory and service, so it’s very easy to pick off customers,” he explained. Patrick elaborated: “In a good market you overpay for trucks, you overpay for racking, you overpay for employees. Another thing is that when manufacturers are shipping everything they’ve got, they don’t want to open a new distributor. Right now Karl’s ‘Man of the Year’ with a lot of reps because we’ve bought millions and millions worth of their inventory in this terrible market.” “We also dodged some bullets, like the no-lead law in California,” Olsen added. “While other distributors are scrambling to get rid of old inventory, we don’t have any product with a stitch of lead in it. So instead of dumping inventory, we’re bringing it in.” Patrick advised that Todd Pipe is tracking to about $40 million in sales this year, with a goal to be a $100 million company in five years. They will be opening a couple of other branches in the near future. “Our original plan was three branches in five years, but now it looks like there will be five branches in three years, so we may be a little dyslexic,” Patrick joked. Turning serious, he added: “The reason we’re back in business is Karl’s passion for drug rehab. It’s like a dream come true knowing that 20% of our profits are going to help recovering addicts. Being around Karl is something to aspire to.” I asked McMillen to contribute any final thoughts. He paused to reflect, then said: “I look back on my life as having three phases. The first was to study hard and learn. Then came working hard and making a lot of money.Now it’s time to give back.” TRAVAILS OF A STARTUP Todd Pipe had a lot going for it in starting anew, drawing from 36 previous years in plumbing distribution and a veteran leadership crew, plus a ton of goodwill with contractors and vendors. Yet nothing worthwhile comes easy. They had no records of their previous business life except what was stored in human memory banks. Customer and transaction records had all been turned over when they were acquired seven years before. They had to build a customer base and inventory skus from scratch. Databases were available but sorting the wheat from the chaff was a painstaking process. Todd’s partners had to scroll through tens of thousands of names on contractor lists to identify those that had been previous customers or worthy of attention as prospects. Once they identified a core group, they worked the telephone making thousands of calls to inform people Todd was back in business. “The reality was we were starting a brand-new supply house with no data on who’s buying what today,” Aaron Olsen said. “We had to build inventory from scratch. So we bought a Modern Trade product manual with 3 million skus, which we had to narrow down to 10,000 we needed to stock. Then we had to determine what levels, and then load it into our computer system.” “Actually, it worked out better than we thought,” offered Tom Morrow.“We did a great job coming in with zero information and ramping up almost overnight.” Olsen related a tale of an inside salesman who shortly after coming to work at Todd began laughing with glee being able to fill a large order complete. “He had been working for five years in a different wholesale world with a big company that hardly ever could do that,” said Olsen. Of course, there were glitches. Patrick recalled the night before they opened in Anaheim. “We all looked at each other and asked, ‘You ordered solder, right?’” The former Kohler distributor had to switch to American-Standard due to a glut of Kohler distributors in the market when they reopened. Otherwise they had not much difficulty obtaining coveted lines. They inquired about joining a couple of buying groups but found doors closed at the ones they targeted due to competitive conflicts. Patrick regards the networking aspect as even more valuable than the buying clout, which is why the new Todd Pipe has enthusiastically joined the American Supply Association. I asked Patrick to identify the biggest obstacle faced in reopening Todd Pipe. His response: “The hardest thing for me was that customers didn’t view us as a startup. In their minds it was, ‘Karl’s back in business, everything will be exactly the same as before!’ In the six years we were out of business, our legend grew. However, we are a startup with some growing pains. Living up to our legacy is not an easy task, but we’re determined to get there.”

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