In For The Long Haul

With a diverse and expanding portfolioin an imploding economy, HD Supply is not only built to weather an economic firestorm, but to grow as well. CEO Joe DeAngelo doesn't know any other way.

Michael J. Pallerino

October 31, 2008

T here is a big smile on Joe DeAngelo's face. In the midst of an imploding home market, a banking collapse the likes of which our economy hasn't seen since the Great Depression, and a Wall Street firestorm that has every 401K in a state of flux, the smile seems unexpected.

But that's just because you haven't sat down and talked business with DeAngelo, the 46-year-old CEO of HD Supply. Yes, that HD Supply, the very same wholesale distribution business that  Home Depot (at which DeAngelo was COO) unloaded in an attempt to refocus its efforts on the home improvement business. The HD Supply that is Georgia's second-largest privately held company, with sales approaching $11 billion.

Ask DeAngelo about the "separation," as he calls it, and he'll say the question is best left to current Home Depot CEO Frank Blake to answer. Simply put: HD Supply was not a strategic fit for Home Depot. The credit crunch, coupled with the crippling housing market, helped HD Supply's buyers negotiate the final "separation" price to $8.5 billion, down from $10.3 billion. From DeAngelo's perspective, the move gave HD Supply a degree of independence and the opportunity to be the proverbial "big fish in a little pond." (Home Depot still owns a 12.5 percent share.)


If you're asking yourself how a billion-dollar company didn't consider itself a "big fish," DeAngelo has your answer. "When you're part of a company that's worth $90 billion, you're small," he says. "Right now, we're No. 2 in the world in what we do (which includes selling everything from fire hydrants, and nuts and bolts, to kitchen sinks.) The separation afforded us a higher level of discussion with supply partners and customers."

Today, the scores of HD Supply executives and associates across each of its 10 business units enter each marketplace with a "we're in it for the long haul" approach.  "We're operating with $10-$12 billion worth of business in a $450 billion market (in the U.S. and Canadian markets)," he says. "We have control of our destiny. We have tons of opportunity ahead of us. And we have a great scale. Five out of 10 of our businesses are No. 1, with most between No. 2 to No. 7. We have endless capability and capacity to grow moving ahead."

HD Supply's strategy is simple: bundle distribution companies that serve its primary markets under a single umbrella and gain economies of scale by standardizing information technology, procurement and other functions across the businesses.

The company's breakdown is a third residential construction, a third commercial construction and a third non-construction related. With a diversified portfolio like that, any CEO has to like his chances. "The good news with a portfolio like ours is that sometimes things are up in one segment, and sometimes they're down in another, instead of just being in one spot all the time," DeAngelo says. "This gives us the advantage of being able to take a long-term view through each of these segments."

IPO? What IPO?
DeAngelo knows the question is coming so he heads it off by asking it himself. Sure, any mention - from the interviewer or interviewee - of an IPO warrants (and gets) a follow up. But when you hear DeAngelo talk about the importance people play in running and growing a business, you get the sense that putting his company in the Wall Street spotlight, especially today, is not something that's going to happen overnight - or any time soon, for that matter.

HD Supply's operating strategy is to have a small contingent of people who can work across all lines of the business and enhance their execution. Each of its businesses is tied to economic cycles.
When DeAngelo speaks of HD Supply, he talks of it being a 50- to 100-year company, not one that a group of investors are looking to flip when the time is right. Like many private companies, going public is viewed as a possible exit strategy for HD Supply's investors. "Sure, the question, before you ask it, that we get all the time is, 'Are you going to do an IPO?' To me, an IPO is a minor event. What we're doing here is creating a company with a great succession plan behind it. We're preparing for the long haul by building a company that has endless long-term value creation."

And the IPO? DeAngelo smiles and says it may happen in five years or so. "[But] we're not going to operate the business any different for that."

Being a private company - away from the bright lights of Wall Street and all those tepid analysts demanding their quarterly earnings reports - allows DeAngelo and his board to take a longer-term approach to running the business. DeAngelo says the board is more engaged in the future of the company because as owners, they have more "skin" in the game, just like management and employees.

"We have a very concentrated set of owners and they are all like-minded," he says. "They have thick skin for the game and they are all about how we are going to create this long-term value creation. There is a nice diversity - different, but relevant. We can have a great discussion on anything and be completely transparent. We have the ability to act fast."

That last point - the ability to act fast - is critical to a company operating in such as temperamental business climate. "The winners in a downturn, especially this one, are the ones who can act fast," DeAngelo says. "If it takes you time and you have to go through 1,000 approvals, you're dead. What you want is relevant help. You want advice from people who know more than you. In a public company, you have to share it with everyone. Our concentrated ownership is the difference. Ownership everywhere is a different game. And speed is everything."

HD Supply was purchased by a consortium of three private equity firms, including Bain Capital, The Carlyle Group and Clayton, Dubilier & Rice.

The private structure enables all the owners, including DeAngelo and his executive team, to have a strategic alignment. For example, following the acquisition, the owners evaluated the economic downturn, studied the market estimates and ramped the business up.

"We have a lean, but not light, cost structure," DeAngelo says. "We have an efficient series of processes that we operate in, including a major digitizing process that we undertook with Home Depot. In fact, we are the largest digitized wholesale distribution company out there. When you look at team configuration, we have a lot of leadership - 1,900 years of relevant experience, in fact."

How does that play into today's economic quagmire? "This is not our first downturn as a team," DeAngelo says. "And for those on our team who may not have experienced such toughness out there, they are getting the experience now. We feel good about that because if they can get through this, then they've seen everything there is to see."

From HD Supply's vantage point, the market will stay tough. The HD Supply team has mapped out the cycles of past economic downturns all the way back to 1963. What they uncovered was that the longest cycle was 56 months, with the average cycle at about 30 months.

"You could say we're going to come out pretty soon or we're halfway there," DeAngelo says. "We're not betting on any recovery anytime soon. That's the way we've positioned our business and the way we've arranged our structures and people. We want to go out there and try to win in a very tough environment."

DeAngelo says this is the time that a company must define itself as an operating company. Can you go out there and service your customers? HD Supply believes it all plays into its strengths and fits into the company's strategy.

"Most companies are in a survival mode; we are not," he says. "We had competitors saying that we were going to go out of business. No. We're No. 2 in the world. We have liquidity positions of well over a billion dollars. Nothing can knock us over. We invested a ton of time and money making sure that we have the best systems, the best safety, the best facilities. We are playing full offense. These are momentum-based businesses, and when your sales people are out there doing well and they're hitting your numbers, it's good times. [Right now] it shows."

The People Company
DeAngelo says that HD Supply focuses 100 percent of its strategy on making things simple. The key is people. The company focuses on three succinct principles every day: the team, the customer and value creation.

 • The team - How does HD Supply together, within its business units and across its entire portfolio, behave in a fashion that makes everyone successful? DeAngelo says it seeks individuals who put the team first, and themselves second. That's a big element of its culture.

• The customer - The HD Supply executive team and its associates discuss customer success every day. The company's business model determines how much it can integrate into its customer base; how its business units can take work off its customers' plates; and help make them overall successful.

DeAngelo says this could be as simple as using digital technologies to make sure its customers have the right products available so they don't have to shut down a job. Or maybe it's where HD Supply comes in and take over the whole business.

•  Value creation - How do you create value for your customers, associates and shareholders and make sure it is always focused on removing wastes from the operation and become a value enhancing experience for everyone ?

"If you can't sit here and think what a customer is feeling, then you don't know your business," DeAngelo says, "and you cannot run your business. It has to be better for the customer than the alternative. Somebody is always walking in the door and wanting to do more. You cannot ever let that happen. At the end of the day, all you have is people."

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Snapshot on HD Supply

•  Employs 20,000
• Operates in 45 states and eight Canadian provinces
• Has 10 divisions, 500,000 customers and buys from 28,000 suppliers
• Sells fire hydrants; nuts and bolts; kitchen sinks; sprinkler systems; electrical transformers; patented resin utility poles; pipe fittings for chemical plants and oil refineries; maintenance products for large apartment and hotel chains; concrete additives; and large power and grading tools.
• Owns Creative Touch Interiors (which was recently featured in two "Extreme Makeover: Home Edition" shows), which builds decked-out showrooms for builders to entice buyers to upgrade their finishes.
• Business portfolio includes
• infrastructure & energy: Comprises products and services used to build and maintain water systems, oil refineries and petrochemical plants, and for the generation, transmission, distribution and application of electrical power. HD Supply businesses
• Serving customers in this sector include: waterworks, utilities, electrical, industrial PVF
• Maintenance, repair & improvement: Comprises products and services needed to fix and upgrade facilities across multiple industries. HD Supply businesses serving customers in this sector include facilities maintenance, repair and remodel, crown bolt.
• Specialty construction: Comprises distinct, customized products and services used in commercial, residential and industrial applications. HD Supply businesses serving customers in this sector include: white cap, plumbing/HVAC, Creative Touch Interiors

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What Makes A Leader
You could call DeAngelo a disciple of Jack Welch's School of Management, having worked with the business  legend while at GE. Following are some of the key traits DeAngelo feels every leader should have to be successful:

Significant / relevant experience - You either have it or you're working hard to get it. You control that by selecting what kind of experience and where you want and need.

Results-oriented - Getting the results despite the curve ball thrown at you.

Initiative - Having the ability to handle crises and seize the opportunities when you have the chance.

Teamwork - Being an individual who puts the team ahead of yourself.

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Joe DeAngelo on ...

Home Depot
Home Depot is one of our largest existing customers. Our job is to keep the home improvement giant filled at 95.5 percent capacity in fastener needs, builder hardware, AV equipment, and rope and chains. Having been inside Home Depot and being a supplier, it's a relationship we understand. Being in the same town, we have a great relationship. But we have 600,000 customers and 900,000 products to sell, so everybody has to be satisfied. Our customer is the business to business professional in small and large entities. We have to have all the components in place and have all the field expertise in place to apply it. The bottom line is to supply what is needed to get the job done. They get paid. We get paid. It's win-win.

Today's Economy
The separation from Home Depot came as a surprise. We woke up in the morning and said, "It is time to sell."  The team took it in stride and said, "Let's get on with it." Everybody wanted a piece of us - the 10 to 12 largest private equity groups in the world were all looking at us at the same time the housing market was imploding. Our largest challenge was how to focus on the day-to-day things - customer, customer, customer - and do it with excellence.

Leadership
The important thing for every leader to walk away with is how do you build a culture. There are three ways to do this: doing, learning and winning with integrity.

What It Takes To Be Successful
You must be relentless and you must be able to listen. Where leaders go wrong is when they stop listening and start talking. Listening involves immediate action on what needs to be done.

His Favorite Business Book
"Good to Great" by Jim Collins - The book hit the essence on how to lead: be humble, be focused and be relentless.

His Role Model
Jack Welch. The one thing I learned from Jack was the amazing ability he had to observe. He showed me how to create a message, reinforce it and create passion around what you are doing. He was also great at talent management. He always surrounded himself with good people.

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