After leading his company from the brink of financial ruin, CEO Brad Pence shrugs off tumultuous housing conditions and focuses on a healthy future.

Brad Pence believes in complete candor. If you ask whether he’s a bit fatigued by the tremendous pricing pressure the housing market’s downturn has put on his lumber company, he’ll openly admit that he is. But the resilient president and CEO of Salem, Ore.-based Keith Brown Building Materials has already stared down a financial crisis that threatened his company’s survival several years ago, and he’s not about to back down now.

Brad Pence, CEO

In fact, Pence plans to take the 79-year-old building materials supplier, which has just under 200 employees across 12 lumber yards in Oregon and California, from $65 million projected sales in 2007 to $150 million in the years ahead. He hopes to drive that increase by making much-needed infrastructure investments, scouring the market for growth opportunities, keeping a tight rein on margins, and maintaining an open, ongoing conversation with employees and vendors.

“It’s a difficult time, but we need to figure out how to get through this. And isn’t this just business?” Pence said. “If everything ran smoothly, the company wouldn’t need us.”

Dark days
Keith Brown desperately needed Pence’s unswerving leadership style seven years ago, when it gobbled up nearly two dozen of competitor Copeland Lumber’s stores—a daring acquisition that catapulted the company from four to 25 stores but eventually proved difficult to digest. The aging stores had no computer systems, no modern marketing program, and no outside sales staff, meaning they demanded immediate attention and investment. Worse yet, they were spread across two states, making management a challenge for a company that had been relatively centralized for decades.

Just as Keith Brown began pouring dollars into the stores in 2001, the economy took a turn for the worse. “We struggled for years because of the combination of incorporating such a large acquisition and the economic downturn,” said Pence, who grew up in the construction industry and joined a small but healthy Keith Brown in 1990. “We very much questioned our survival.”

With the company’s cash flow turning into a trickle and suppliers awaiting overdue payments, Pence alleviated the dire financial situation by closing 13 stores, consolidating operations and—most importantly, at least from Pence’s perspective—having frank discussions about the less-than-stellar state of affairs.

“We provided real information to suppliers and employees about what was going on. We survived those difficult times because we didn’t try to hide things,” Pence said. “We showed them the plan to work our way out, and we were able to live up to it.”

Within two years, Keith Brown’s cost cutting, closings, and candor had returned the company to profitability, with sales of $59 million in 2003. The lingering hangover from the acquisition was over, it seemed, as sales climbed to $70 million by 2006. Emboldened by the steady progress, Pence was ready to start scouting for new facilities again and shell out $750,000 to bring the stores’ pre-Windows computer systems into the new millennium.

But then the red-hot housing market, which had been enjoying relentless growth for years, suddenly stopped growing. After having survived a near shut-down and turning things around, Pence again finds his company facing challenging times.

“We were in very good shape. We had done the right things through those difficult times and got the company into a position to look for new acquisitions. Now to have to face the same thing; it’s tough,” Pence said. “That’s why we’re here, though.”

Game plan
As demand for lumber falls, so do prices; it takes three loads of lumber to generate the same margin that one load brought just two years ago, Pence said. Unwilling to watch margins slide any lower, he recently initiated a program to reverse the trend. Pence dictated that stores start inching prices back up on select items, and he delegated a corporate employee to pore over every SKU at every store to find opportunities to increase margin. “It’s a big undertaking, and it’s resisted by salespeople and managers, but we need to get the margin that’s going to help us stay in business,” Pence said.

Another part of Pence’s plan to endure the downturn is to focus energies on high-margin products for home improvement, including cabinets, doors, and windows. Pence recently launched KB Commercial, a small but profitable division catering to the commercial market. In June, he opened a kitchen design center at Keith Brown’s flagship location in Salem, and he’s studying the possibility of launching other standalone design centers.

“We don’t plan to shift our focus totally, but for the interim, it will become a bigger part of the business,” Pence said. “In housing downturns, people aren’t buying new homes; they’re looking at existing homes, which plays into remodel sales.”
He has also trimmed his labor force by nearly 20%, reallocated some corporate employees to the home improvement ventures, and curtailed some capital expenditures. The result is that Keith Brown is on track to hit $65 million in revenue this year, and it’s shipping more board footage than last year, indicating increasing market share for the company.

Despite cash-flow constraints, Pence has moved ahead unflinchingly with the introduction of a company-wide computer system, which should be up and running by summer 2008. The system promises faster information access and more flexibility in report writing, helping corporate keep a watchful eye on its far-flung locations.

“We thought about it long and hard, but when it came down to it, we felt we needed it for the future,” Pence said. “We wanted to show our employees and the rest of the world that we’re planning ahead—we’re planning on being here for the future.” E

Mario Medina is a Dallas-based writer and editor specializing in business and technology.