Lumber Liquidators (LL) Balanced Take Research, Not Hyperbole

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Lumber Liquidators (LL) Balanced Take Research, Not Hyperbole

Lumber Liquidators (LL): Research, Not Hyperbole by “Max Vision” – Disclosure – the author of this piece has a long position in LL

“When the facts change, I change my mind, what do you do, sir?” Keynes

“The amount of energy necessary to refute bullshit is an order of magnitude bigger than to produce it.” Alberto Brandolini

I first heard about Lumber Liquidators two years ago when I read an article in Grant’s Interest Rate Observer. Technically, this was the “original short piece” (although I have since found one from 2010–that must have been a painful short). Grant’s short thesis was based solely on valuation. I followed the story closely when Xuhua Zhou’s article appeared regarding high levels of formaldehyde. That was a little more interesting. The side-show regarding Lacey Act violations never really raised my interest. Gibson Guitar had endured a similar issue and paid a miniscule fine; a blip on the radar. However, when I heard that 60 Minutes was going to air a piece, I was intrigued. After viewing that segment, my first thought was: It doesn’t matter what price the stock opens at on Monday morning, anything greater than zero is too high–and a good short.

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However, I prefer to do my own diligence rather than rely on Mr. Cooper for investment advice, so I started digging.

What follows is the first entry into what may become a series of articles regarding my observations on the facts, the myths, and what we can, can’t and may never know regarding Lumber Liquidators. I hope what I write will clarify some of the much discussed, but little understood issues in this controversy and help you decide–whether you want to stick with your long or short position or switch sides….

As for my own position, I subscribe to the quote above from Keynes, “When the facts change, I change my mind….” I am happy and open to consider new facts as they become available.

Lumber Liquidators: 60 Minutes’ lab data

My first thought was to call the labs where the tests were performed. 60 Minutes released the lab data on their testing, so I picked up the phone and starting asking questions.

I spoke with HPVA Labortories, specifically the signatory on each of the test results provided by 60 Minutes. My first question revolved around comparing the results between Home Depot/Lowe’s and Lumber Liquidators. The response from HPVA was that 60 Minutes only asked HPVA to test Lumber Liquidators’s products. The other lab, Benchmark International, confirmed this same point, that their lab had only tested Lumber Liquidators’ products. I thought this was odd. From a consumer standpoint, which I thought was the thrust of 60 Minutes efforts, one would want to test a wide variety of stores’ products to confirm the products’ safety. This was my first nudge in the opposite direction, forcing me to rethink my initial conclusions.

In this entry, I will focus on CARB 2 compliance and the testing methods used by the enforcement division of the Air Resource Board. This may be long, but hopefully it will be worth it.

The CARB 2 standard that is now well-discussed stems from a law passed in 2008 called the Airborne Toxic Control Measure to Reduce Emission from Composite Wood Products (“ATCM”). Here is a link to the law.

The final statute is 60 pages long, but not very complicated. The ATCM has two points that are important to note in this discussion. First, the focus of the ATCM is the regulation of platform materials. These materials may end up in a variety of different finished goods: furniture, doors, windows, toilet seats (yes, this example was in the law’s legislative history), or, what we are all most concerned about–laminate flooring.

Second, the ATCM is heavily biased towards a “process-based” regulatory framework.

By this, I mean the ATCM requires of Lumber Liquidators the following five items (I am paraphrasing from the statute):

  1. Use a Third-Party Certified Facility
  2. Only use platform materials that comply with the applicable emissions standards.
  3. Take reasonable precautions to ensure that the platform materials are in compliance with the applicable emissions standard. And I quote here: “Reasonable prudent precautions include, at a minimum, instructing each supplier that the goods they supply to the fabricator must comply with the applicable emission standards, and obtaining written documentation from each supplier that this is so.”
  4. Maintain records for a minimum of two years.
  5. Certain product labeling requirements.

The formaldehyde levels that are applicable to this situation vary from .11ppb (parts per billion) to .13 ppb, depending on the size of the composite panels.

These specific emission standards are very exacting and are applicable to the platform materials that make up all different kinds of “finished goods.”

Lumber Liquidators: Third-party certified labs

What follows here is how it has been described to me by certain TPCs (third-party certified labs). The list of TPCs is available on the Air Resource Board’s website and I found many, if not all, of the labs very open to discussing these issues. They are enjoying their 15 minutes of fame.

Imagine a production process that starts with a specific piece of platform material at point 1. At point 1 in the process, this piece will be called Eric1. (This whole process reminded me of the children’s book, The Very Hungry Caterpillar by Eric Carle). Keep in mind, the ATCM and its associated CARB 2 emissions standards are applicable only to Eric1. However, in order to become a piece of laminate flooring (or toilet seat) that ends up on the shelves of a local Lumber Liquidators store, Eric1 must go through approximately 15 steps to arrive at its final step (the number of steps is irrelevant and made up for this example). These steps include many at the manufacturing site: heating, adding decorative and protective layers, stains, glues, and a variety of other steps. Additionally, the packaging materials, shipping time, time on shelves, all are additional steps along the way before the original piece of platform material will end up in its final resting place. Each of the steps along the way from 1 to 15 have an impact on Eric1, he becomes for a brief time Eric2, Eric3, Eric4, before ending at Eric15. Some of these changes are fairly significant.

Now, fast forward a little bit to something called the “Deconstructive Method.”

The Summary of Procedure on the deconstructive method can be found here:

The goal of the deconstructive method is to turn Eric15 back into Eric1 and then test the emissions levels to see if Eric1 complied with CARB 2 at step 1.

I will provide support for this statement below, but what some individuals, let’s call them the Gotcha Camp, have done here (I won’t judge their intentions) is to mistakenly think that the deconstructive process is meant to take Eric15 and turn him back into Eric1. This is incorrect. What the process does is create Eric1A, an entirely different “platform material.” This is purely a scientific-based mistake. The platform material in its original form, Eric1, after having gone through a variety of significant changes, to become Eric15, can never truly be returned to its original state as Eric1, instead after the deconstructive process it has become Eric1A. At this point, the emissions standards applicable to Eric1 serve as rough screening guide, but not the gotcha or smoking gun that certain Brockovich-esque testers have assumed.

The Gotcha Camp will have you believe that the deconstructive method is a universally accepted procedure, whose summary of procedure can flawlessly transform Eric15 back into Eric1 after which any layman can determine if the product you bought from the store meets the emissions standards.

This is just not true. Very limited research and discussion with industry contacts will very quickly disabuse anyone of this notion.

In fact, of the 13 labs that I have spoken to in the past 2 weeks, only one lab has indicated to me that this is procedure is “somewhat reliable” in simulating the platform material in its original state. Unsurprisingly, this is the lab associated with the domestic hardwood association (read: lobbying arm).

Lumber Liquidators: Benchmark International’s statement

To further support this position, Benchmark International, one of the two labs 60 Minutes used in its testing recently put out a statement on their website. Below is the most relevant portion to this subject:

“We are not discounting the SOP as irrelevant, it can be used as a tool by technically competent and trained regulatory agencies to warrant further investigation into a product. We do not agree with the assignment of explicit ‘compliance’ or ‘non-compliance’ of a product when tested in this manner.”–Benchmark International

Let me take one step back before we go further. On July 7, 2010, President Obama signed the Formaldehyde Standards for Composite Wood Products Act into law. This legislation establishes limits for formaldehyde emissions from composite wood products: The national emission standards in the law mirror standards previously established by the California Air Resources Board for products sold, offered for sale, supplied, used or manufactured for sale in California.

Since 2010, the EPA has been trying to develop regulations for the implementation of this law. Since this process has been going on for over 4 years now, there is a robust wealth of information available in the form of comments from various industry participants.

You can read through the comments and various draft rules and presentations here:

I will share just two comments (there are over 2,000), one from IKEA and one from the Environmental Defense Fund. You can suspect what IKEA will have to say, but I will share it anyway, because I think it provides support to Lumber Liquidators statements that the deconstructive method has its drawbacks.

IKEA:

“There are today several technologies on its way as well as some existing where addition of foil, melamine laminates, sheet metal, glass fibre and more, being integrated in the production of board panels. i.e. the panels are created with a surface layer which is not in the scope of the regulation. In the current writing of the CARB regulation and that of the EPA regulation such materials can’t be tested unless the surface material is removed which will affect emission in an unpredictable way. Most of these surface layers will have a positive effect on the emission”

“IKEA suggests that material where the lamination is added in the creation of the panel, i.e. at the same time as the wood fibres, is tested and certified as it is produced including the lamination. For boards which are first pressed and then laminated the testing is to be made on the raw board.” Source: IKEA Comment

Other industry trade groups are even more specific about the unreliability of the deconstructive method as it relates back to Eric1. The following link provides an industry statement, however, there is understandable bias in presenting this statement from the trade groups.

To show that this is a “contested” area, I would point you to the minutes of a meeting before the EPA titled, “Review of Recommendations on the Treatment of Laminated Products.” At this meeting, groups from various groups, including Lynn Baker, head of California Air Resource Board, voiced their thoughts and suggestions regarding the regulation of laminate flooring and emission standards.

Deconstructive testing made a strong showing among among all groups, but I will quote from the comment letter that Tom Neltner of Environmental Defense Fund, submitted to the EPA after testifying before the committee:

–I should note that Mr. Neltner is a chemical engineer and an attorney.

“For many of CARB’s consumer products standards, such as low- volatile organic compound paint [think nail polishes and hair products], the product can easily be tested with reproducible and verifiable results. However, for laminated wood, the test would involve sanding the veneer to remove the stain, varnish, or other coating to determine the extent of formaldehyde off-gassing from the veneer itself. This “deconstructive” testing is controversial with the industry with respect to its reliability and validity for enforcement purposes. Therefore, a 0.13 ppm standard would likely be challenged or may only be enforced when the levels are far over the limit.”

Source: EDF Comment Letter.

You can read more about the Environmental Defense Fund here.

Lumber Liquidators: Controversial deconstructive method

This isn’t exactly Lumber Liquidators’s spokesmen, who is going on the record to the EPA that the “deconstructive method” is “controversial in the industry with respect to its reliability and validity for enforcement purposes.”

I use this statement as a good example because I don’t think anyone would argue that the EDF is a shill for “industry” of hardwood and laminate importers. However, there are numerous other comments in the link I provided above from industry trade groups that go into great details on the problems with the reliability of setting an emission standard for Eric1 and then after the deconstructive process, trying to apply that standard to what is now Eric1A.

By far the most complete and substantive is an experiment conducted with Ashley Furniture and the American Home Furnishing Alliance. These groups engaged an approved Third-Party Certified Lab, SGS Laboratories, to try to determine if one could accurately take a composite panel from steps 1 to 15 (in this experiment, there were actually fewer steps to reduce the amount of variables in the process) and determine if they could create accurate, verifiable and reproducible results that show a correlation, using my terminology from above, between Eric1 and Eric1A–in other words the composite panel in its original form and a composite panel after it had been processed to its “finish goods state” and then brought back to its “original” state through the deconstructive process.

You can read about the testing and in-depth results here.

However, if you want the cliff notes, here is their conclusion:

“We have shown in this Experiment that there is a significant mean shift between all Phases of the sample data. Deconstruction significantly alters the emissions characteristics of Composite Panel, regardless of whether the panel is finished or not. What we can conclude is that making inferences between a panel in Raw or Finished State and Panel in Deconstructed State will be difficult to accurately determine.”

In other words, Eric1 and Eric1A are different products and the application of emissions standards set forth to regulate Eric1 are not necessarily applicable to Eric1A.

This article is becoming long. However, the next article will feature evidence from the Enforcement Division of the Air Resource Board that support the conclusions above regarding the “severe limitations” (this is ARB’s language) and reliability of the deconstructive method as its relates to enforcement. In case you thought this was a dull subject without any humor, I thought I would provide a little evidence to the contrary. See this link for the best comment submitted to the EPA, from Kip’s Koffins.

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8 COMMENTS

  1. The point about Loews, Home Depot, etc not being tested is irrelevant. LL’s wood was and it measured off the charts. The author further ignores the fact that the Chinese manufacturers making the product said that the labeling on the product regarding CARB compliance was not true. The labels were put on without the product ever being tested and without the manufacturers being paid to make it CARB2 compliant. They specifically said that if they were asked to make it CARB2 compliant it would have cost more. Finally, the author can criticize the test methodology all he wants but it is an accepted testing method by both the scientific and regulatory (EPA) communities.

  2. Okay. So, you spoke to some people. I get that. Can we assume from your answer that you have no scientific qualifications whatsoever? Is that reasonable? I have some money on line and if somebody is going to be spouting off monologues about how to test formaldehyde levels then I think it’s important for everyone to know how qualified you are, in that area.

  3. This example, in various forms, was described to me by multiple labs, Benchmark, NTA, and others. Once I learned of the analogy that people were using, I would discuss its appropriateness with the next lab I called. –Max Vision.

  4. I can see that you’ve gone to great lengths to describe what happens to “Eric”.

    For the record, could you please remind us which particular scientific qualifications and training you have, that enable you to teach, discuss and/or carry out the procedures in question?

  5. I like your analogy of Eric1 and Eric1A to describe the process as of my analogy to describe Mr. Whitney Tilson. If Whitney Tilson1 was sent to the re-education camp to do hard time for making up sh!t, then I bet when he completed the re-education and he would be Whitney Tilson1A. Right? Because he will not be the same Whitney Tilson1 after they torturing and brainwashing the sh!t out of him. Lol

  6. (full disclosure, I owned LL long ago – got out with first media attack due to having experience with same media mouthpieces”) They are relentless until they do their damage. If they are so concerned about formaldehyde why not to a real “concerned” piece on how it is in almost all products most use. (worst decades ago) but as the link below shows, (and other trade names) included in many baby products (with their less developed immune systems greater harm)… why not do a piece on baby wipes as well, toothpate (in most reason why most have poison control information on back, along with other toxic chemicals).
    60 minutes is often horrific in their reporting – (not fair and square)…(having a background in research it is horrific – and not even statistically significant – if memory serves from CNBC lab guy – four items were tested!!! How many viewers have statistics or even toxicology in their background.)
    At least you did some serious research. (background in biochemistry, arts chemistry and chemically injured. Formaldehydes is in many common products – including most toothpastes – and is so toxic it should be in nothing. (that said it is naturally occurring in nature but quickly disputes with sun, heat). (while I did raw data research/statistical analysis per my background) this sums the problem up nicely. As well note that many products are not even labeled (like synthetic “fragrance” products, perfumes, household, personal that are actually made out of toxic chemicals including petro sludge.
    The dangers as well are not just short term but these chemicals accumulate in the body, co combine with others, and damage delicate enzyme systems. Like taking small amoutns of cyanide over time.

    http://www.globalhealingcenter.com/natural-health/formaldehyde/

    This was a hit piece (I was in a stock pre sub prime crash) and did research on why the same media outlets would target the same stock (turns out Dow Jones publications included the same media outlets at the time, or was affiliated.) Now Rupert Murdoch owns it. Same players (can’t mention names that attack other fine companies as well).

    It does not matter to be long when they pile on, The Street, Market Watch, Wall Street Journal (CNBC) all target again and again. We found a certain mad dog medial talking head was aligned with a major hedge fund who was informing (insiders came forth to disclose this information when a CEO of major company filed suit)… an independent rating system (then on MSNBC web site) what to come out with per the rating after he positioned his option puts.

    The independent analyst rating sight has a name change – former version of its self, the hedge fund quietly retired… and the game goes on as before. Only that I and others were working with SEC staff and my NYC (then) Senator to stop naked shorting and other abuses – two people still on media outlets targeting companies with bogus information, were given subpoena’s then the head of the SEC came out on TV stating “we don’t’ do that” (all archived). Major mad dog mouthpiece tossed his back at the tv stating the “SEC is to stupid to do anything about it” – I would say not stupid, as the head of the SEC ignored work of lower level SEC employees. Many wall street types end up working in Government.

    Later SEC “investigation” is mentioned, stock goes down further with NO results of their investigation, and lawyers come out in droves (many fine esp. small cap players – from my research, are ruined in this manner – they simply can not compete).
    The lawyer in this case was a huge prominent lawyer who was later charged with illegal activity in the form of gaining lead plaintive with people he planted. (never owned stock) He was famous, but elderly and begged not to be prosecuted due to his age. Been doing it for decades and as I recall even major companies had been involved in his scandal.

    I tossed two huge boxes of files. Not only is the markets highly rigged with media outlets providing “news” that moves.

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