As 2010 drew to a close, startling news

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2 DRIVING CHANGE As 2010 drew to a close, startling news came out of Castle Building Centres. It was forming a partnership with independently owned U.S. hardlines distribution giant Orgill, Inc. In one fell swoop it was able to find the hardlines solution it needed for its members. However, in a stroke of brilliance it was also able to find a solution that would auger well for 2011 when new financial crises globally and the end of the immensely successful Home Renovation Tax Credit, plus growing consumer concerns about debt were creating challenges across the home improvement retailing industry in Canada. While others struggled to hold their own in 2011, Castle was able to parlay its partnership with Orgill and its strong vendor relationships into another year of revenue growth for its members. For Castle President Ken Jenkins and Vicepresident of National Marketing James Jones, the outcome was not surprising. Since taking over the leadership of Castle in 2007, they have initiated a number of new measures and programs designed with one goal in mind, making its members more profitable. Founded in 1963 by a group of entrepreneurs who were looking for better ways in which to buy and be more competitive in the marketplace in which they served, today Castle has 283 member locations across Canada. Its formula for success is simple provide members with the product and prices they need to compete successfully in their local markets. In the pages that follow, Jenkins and Jones discuss Castle, its partnership with Orgill, and some of the challenges it faces as it continues to be the buying group for the independent in Canada.

3 SPECIALTY Ken Jenkins James Jones

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5 DRIVING CHANGE Home Improvement Retailing: How has Castle performed in 2011? Ken Jenkins: When assessing performance in 2011, it s important to understand the comparable period. In 2010, we experienced a number of demand drivers that distorted the traditional building season in Canada. We had the residual impact of the Home Renovation Tax Credit (HRTC) that spilled into Combined with the implementation of the HST in Ontario and British Columbia and the effects of an extremely mild winter across the country, this created dynamics that pulled tremendous amounts of sales volume forward to the first half of the year. In a typical year, 60 per cent of building materials are sold in the back half of the year. In 2010, roughly 70 per half of materials were sold in the first half of the year. The spillover, as every supplier or manufacturer will tell you, in the first half of 2011 was a struggle in comparison to However, over the past few months we have experienced a significant upswing in activity and our volumes are rebounding well. Our forecast is that Castle will finish the year ahead of 2010 and, compared to industry performance, this is a significant performance. Our mid-year vendor reviews indicated all segments of our supplier network were off from 8 to 24 per cent. In light of this industry performance, we are extremely happy with the success of Castle in While we still have a few months left in the year, we are confident the year will end stronger than it started. HIR: What is behind Castle s ability to outperform the industry this year? A combination of factors has fueled the success of Castle in Our membership continues to grow in all regions of the country as we have added 25 new member locations in Our growth in the Quebec market continues to accelerate as our business model continues to gain attention in that region. Castle is committed to developing a strong contingent of members in Quebec over the next few years and we are encouraged by the recent signing of members who previously resided within distribution-based groups. This underscores the advantages Orgill will deliver to Quebec-based independents. Our CBS (Commercial Builders Supplies) model continues to gain momentum as we have grown in the Ontario and Western regions in CBS provides a platform designed around high volume, urban based business models generally specializing in gypsum, insulation, steel, and roofing. We know the presence of CBS is a growing concern to a number of our competitors as there were numerous competitive attempts to stop or delay our presence in certain markets. We have attracted some great entrepreneurs to our commercial model over the past few years and believe our bullpen of talent will generate significant value for our business in coming years, especially as we move into and succeed in some highly competitive markets. Castle/CBS believes competition only makes us better and there is no greater satisfaction than our ability to partner with an entrepreneur and assist in establishing, growing, and expanding their business opportunities. Indeed, our internal team gets energized by the competition we face as we seek to grow in various markets. This has made CBS the fastest growing commercial group in the country which, in turn, is increasing the level of support for CBS from key commodity suppliers. We believe CASTLE PROFILE Castle Building Centres Group Limited (Castle) /Commercial Builders Supplies Inc.(CBS) Headquarters: Mississauga, ON, Canada Annual Member Sales: $1.4 billion Members: 283 member locations Position: Your trusted building supply partner Ownership: Member owned co-op. Incorporated in 1963 Board: 100% Member elected with equal representation geographically across Canada Ken Jenkins, President: Our focus on buying will ensure that Castle/CBS members are the most profitable of any independents in Canada. Fact: The fastest growing Retail/Commercial building materials buying group in Canada Industry-leading Castle Electronic Member Site and Evolution technology interacting with members and vendors Powerful Online Castle flyer program Castle Web4U, member driven professional custom website to drive service and sales TDCanada Trust Retail and Commercial Credit Cards and programs

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7 DRIVING CHANGE CBS is just starting to scratch the surface of opportunity and we will reward those suppliers that join us as we successfully compete for and gain market share across Canada. In addition to the Castle Building Centres and CBS models, Castle is preparing to launch Castle Specialty in This exciting new venture will fuel additional growth in key product categories. Stay tuned! HIR: Has the price gap between the cost of goods in Canada versus the U.S. impacted your business? We are experiencing dynamics today that are changing the way everyone consumers, retailers, and dealers buys product. Traditionally, spikes in the value of our currency or soft market conditions in the U.S. were brief in nature. Today, we have the possibility of a prolonged, multi-year recovery in the U.S. Some industry experts are now projecting the U.S. faces another three to five years of economic challenges. In our view, as long as the Canadian dollar remains strong, we will see continued growth of U.S. building materials in the Canadian market. At the same time, it is encouraging to see the federal finance minister becoming involved in analyzing the cost difference between Canadian and U.S. products. There needs to be justification provided by domestic manufacturers and suppliers as to why our industry faces significant cost variances for the same product sold in the U.S. I believe most would comfortably accept variances of three to five per cent, but the reality would indicate many instances where cost savings on the same product are upwards of 30 per cent when buying under a U.S. cost model. What created this situation is the prolonged period of a weak Canadian currency which allowed domestic manufacturers to create a price gap in Canada. However, once the Canadian currency reached parity and held, the ability to maintain a price gap in Canada became increasingly difficult. So while we appreciate the profitability challenges facing domestic manufacturers and suppliers as this dynamic continues to unfold, we still need to protect the competitiveness of our Castle members. This issue is well-illustrated in our relationship with Orgill. We have found there are a small number of manufacturers that will not provide Orgill the opportunity to distribute their product through the Orgill U.S. cost model in Canada. Their rationale is simple; they make too much money in the current Canadian distribution model and can t afford to allow Orgill to impact their profits. This also makes it extremely clear to us why U.S. retailers of all types are now entering Canada. Our average cost savings on hardware through Orgill is upwards of 20 to 25 per cent so it is very evident that U.S. retailers are coming to Canada to reap the rewards of the cost of goods advantage they have over many Canadian business models. HIR: Has Chalifour Canada s decision to cancel its buying agreement with Castle impacted your members? Based on the strength of our hardware purchase volume over the past few months, it appears it was the best thing that could have happened for our business. Since Chalifour s decision, Castle hardware volumes in June, July, and August reached record levels. Year to date, Castle hardware volumes are up 20 per cent over the prior year. We attribute this success to the accelerated move to Orgill by our members and the desire of our suppliers to strengthen their direct programs with Castle. Castle members are seeing the benefits of our relation- Meet Castle s Revolutionaries Castle Building Centres members have their own reasons for joining the buying group, but they share a common thread they are revolutionaries. Meet two of these revolutionaries. Jamie Adams is an independent Castle dealer who describes himself as an entrepreneur and business owner. As a result, he wants to run his business his way. He doesn t like to be controlled by head office decisions that negatively impact his bottom line and demands the FREEDOM to buy from vendors of his choice, sets his own pricing, and create and run his own promotions. On being a revolutionary, he says I get to keep all the profits I ve earned. I m livin the revolution. Henry Zacharias Jamie Adams Fiercely independent, Henry Zacharias demands that his buying group stays out of his way, but maximizes his freedom and profits. Committed to his customers and his business, he is fixated on providing both service and competitive products and pricing. On being a revolutionary, he says I don t have time to support corporate baggage. I need a buying group that runs very lean and puts dollars back in my pocket, not theirs. Castle does this better than any other buying group out there today! That s why we switched to Castle.

8 DRIVING CHANGE ship with Orgill. Evidence of this can be seen by the fact more than 250 Castle members attended each of the past two Orgill dealer markets in Orlando, FL; and Boston, MA; far surpassing our expectations. And the benefits are not being seen by just Castle members, at the most recent dealer market in Boston, we began to see members of other Canadian groups exploring the Orgill model. Based on this evidence, we expect Orgill s opportunity in Canada to accelerate quickly over the next year. James Jones, national vice-president of marketing at Castle Building Centres, shares his thoughts on its members, brand, vendors, and growth in 2012 and beyond in the interview that follows: Home Improvement Retailing: How does Castle/CBS (Commercial Building Supplies) differentiate itself with its brand and banner? James Jones: We actually let our members decide what s right for them in their marketplace. IT S YOUR BRAND THAT MATTERS! Research reveals that a store s local brand and reputation have a far greater impact on consumer shopping decisions than any national brand affiliation. The Farnsworth Group Studies on lumber and building materials stores, performed by third-party research consultants, come to some clear conclusions. When assessing brand and banner in the lumber and building materials and hardware channels, these studies, which used 10 different measurement metrics prioritized to each business segment, show price, location, experienced staff, and product availability are the top four drivers to success in our business. Of the 10 metrics that measured the stores, brand and banner association were deemed the least influential reason for shopping a location by both contractor and consumer customers. This fits with our strategy like a glove. A store s local brand and reputation have a far greater impact on consumer shopping decisions than any national brand or affiliation. As a result, we focus on buying as competitively as anyone in the industry and let our members take care of the customers in their markets. In the contractor segment, we found they shop the location where they get the best service in town, knowledgeable competent staff, the right price, and the right quantities to do the job. These are what brings them to the Castle store. HIR: How have vendors supported Castle/CBS? We have the best vendor partners in the world supplying Castle/CBS. With them, we have seen more new products, higher quality products, and improved programs to ensure our members are competitive in the marketplace. We work with them to introduce new products as building codes and the needs of our customers change. Today, in 2011, Castle/CBS has more vendor partners than at any time in our 50-year history. Simply put, we would not be successful without the support of our vendor base. A store s local brand and reputation have a far greater impact on consumer shopping decisions than any national brand or affiliation. As a result, we focus on buying as competitively as anyone in the industry James Jones, Vice-president of National Marketing; Castle Building Centres HIR: Where do you see your growth coming in 2012 and beyond? Our growth will come from our core business areas: lumber and plywood, roofing, gypsum, insulation, siding, and millwork. We will continue to grow this core and ensure we have the best vendor support in these core areas. However, we also listen to our membership. They told us we need vendors who can supply us with solar power systems. They also told us we needed appliances and we now have a full line of appliances available to all Castle/ CBS members across the country. The bottom line is we endeavour to do everything possible to support our members in their efforts to accommodate their customers.

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10 DRIVING CHANGE In my past, I experienced what all other groups provide with the buying show format in Canada and I can tell you there is nothing that remotely compares to the size and scale of the Orgill dealer markets. Our members are being exposed to products, services, and pricing that enable them to accelerate the growth of the hardlines segment of their businesses as does Orgill s World Wide Sourcing business segment which is unlike anything we have experienced in the Canadian market. So, while we did not agree with Chalifour s decision, in hindsight, it was a great catalyst for our members to find new solutions to their past hardware challenges. In my past, I experienced what all other groups provide with the buying show format in Canada and I can tell you there is nothing that remotely compares to the size and scale of the Orgill dealer markets. Ken Jenkins, President of Castle Building Centres HIR: Specific to the Orgill relationship, are you concerned with the potential fluctuation in the value of the Canadian versus U.S. dollar and the impact on the cost of goods? Great question and one I am glad you asked. I would start by asking all members or customers of hardware distribution based groups one question: Over the past four years, as the Canadian dollar reached parity by escalating roughly 30 per cent in value compared to the U.S. dollar, did your costs of hardware reduce accordingly during that time? Chances are, they didn t. However, if the Canadian dollar experiences future devaluation, your costs will escalate to compensate for the variance. Why? Canadian hardware distribution models buy in

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12 Canadian dollars that are benchmarked against the U.S. currency. If our dollar devalues in the future, the buying power of Canadian based distributors weakens and those costs will be passed on to the members. The effect is the same as our members buying in Canadian currency from a U.S. supplier. However, the big difference is Orgill operates in a U.S. market where the starting point on the cost of goods on the same products sold in Canada is 10 to 35 per cent lower. They also have the advantage of buying in the currency most heavily utilized in global trade. Regardless of the currency fluctuation, their core cost advantage gap does not change. To finish the question, in many ways our support of a U.S.- based distribution model is a natural evolution in today s global economy. Globalization enables us to source products from anywhere in the world in our continuing efforts to assist entrepreneurs to achieve the best cost position available thus supporting their business, fueling their growth, profitability, and the strength of their value to the markets they serve. HIR: What do you see as Orgill s long-term aspirations for the Canadian market? DRIVING CHANGE While I will not speak on behalf of Ron Beal, president and CEO of the Orgill organization, I believe they intend to be the hardware distributor of choice for the independent in Canada. Granted, that is a generic statement, however, the pace at which they continue to ramp up in Canada is impressive. As well, when you interact with its senior management, you see firsthand the discipline that has propelled Orgill to become the fastest growing independent hardware distributor in North America. The best descriptions of Orgill are that it is methodical, professional, and focused on ensuring it delivers a new reality to hardware distribution in Canada. We realize it has received significant exposure over the past few months as it continues to grow in Canada. However, while it is providing significant cost savings and service enhancements to our members, there is one example that resonates with how it does things differently. Castle has several members in the cottage country region of southern Ontario. Orgill has developed regular delivery to a number of our members in the region over the past THE CASTLE TEAM Quebec Robert Legault, (514) Atlantic Sandy Welsh, (902) BC Les Gillespie, (250) Commercial Ron Craighead, (416) Midwest Alan Schoemperlen, (204) Central Bruce Holman, (647) hardware SPECIALTY

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14 four months. On a recent delivery to that region, an Orgill truck driver (virtually all Orgill drivers are employees, not contractors) created a unique relationship opportunity. While en route to his customer in the Kawarthas region, he decided to make a quick detour and stop in on another Castle member. What makes this unique is the Castle dealer he stopped at did not have a delivery scheduled for that week. The driver s sole purpose for making the short detour was to stop by, say hello, and make sure everything was working to the member s expectations. In leaving, he asked if there was anything else they could do to support the member s business. In speaking with the Castle member, it was the first time in his 40 years in the industry where he could recall such an experience. In our due diligence with dealers in the U.S. over the past three years, these stories were common in our conversations. While Orgill still has work ahead in delivering an overall Canadian solution, we are confident in the leadership of Ron Beal and the value Orgill will deliver to independents in Canada. My advice to independents in Canada is don t let that Orgill truck drive past you without seeing what it can do for your business. DRIVING CHANGE HIR: What s next for Castle? We are actively engaged in a number of initiatives aimed at enhancing the relationship between Castle and our members. We have great flexibility in our business model that operates in a debt free, self-financed environment. Our focus will continue to be placed on strengthening the buying aspect of our business and the relationship with our members. It is members like Wayne, Brent, Cluny, Harold, Carl, Debbie, Vicki, Dave, and many others who provide the backbone to our success at Castle. Our supplier relationships are held in the highest regard and we will continue to grow our relationships with those suppliers that support all facets of our growth. We have an amazing talent pool at Castle that includes our employees and members. I am truly fortunate to have the industry s most progressive and professional management team. Our growth over the next few years will continue to challenge the comfort level of our competitors. It should, we have a great formula at Castle.

15 To find out how you can work with Castle and Orgill, call Peggy Cuff

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