Why Brad Jacobs Is Spending $11 Billion on a Roofing Supply Business | Odd Lots

Tracy, it's great to be here.

Yeah, so before we even did Beacon we were looking at 55, as you know, because I was on the podcast, looking at 55 different industries and trying to pick the one that matches our skill set, that matches our playbook the best — the things that worked for us at all the companies that you mentioned before. And then we settled on building products distribution because we liked it a lot: the size, the growth, the fragmentation, the opportunity to apply technology. And then we zeroed in on Beacon and we said Beacon is the one, that's the girl I want to marry. Beacon. And we said this is a perfect match for what we do. And unfortunately they didn't want to sell, so we had to do a little hostile there. But we're past that and now we have a friendly deal and really looking forward to closing it.

So Beacon's a distributor. It's a distributor of mostly roofing, but they also do waterproofing and other ancillary products. But it's mostly roofing. And what I like about that is everyone has a roof. The roofs aren't going anywhere. They're not going into the metaverse, they're not going away to AI. I mean all structures are going to need a roof, and there's going to be more roofs needed next year and the following year and the following year. In 10 years from now there's more. So this underlying growth — I love the simplicity. Everyone needs a roof.

Not only does everyone need a roof, but everyone has to fix their roof every once in a while. So roofs break — you know, 15, 20 years you need a new roof. And you have hurricanes and storms, and if your roof is leaking it's not a discretionary choice, you have to fix the roof. So 80% of Beacon sales is non-discretionary. If someone needs to fix their roof — that's what I like about the business. It's largely non-discretionary.

The footprint is North America. So it's 97% United States of America, 3% in Canada. Almost everything is manufactured and sold in the US, and the stuff that's in Canada is manufactured for the most part. So there's not a tariff issue. Interesting. So it's an interesting business, it's a well-positioned business.

I'm going to double the profit. The same thing we did — the same thing we did at Conway, at XPO, we doubled the profits in three years. Same thing we did with Norbert Dentressangle in Europe, which is a very well-managed, premier company — there we doubled the profits again in three years. We're going to apply the same playbook. We're going to start with communicating and talking to all the people. And we announced the deal on Thursday morning at 11 o'clock, we had an all-employee Zoom. And I had the privilege and the honor and just the wonderful experience of doing a Zoom with thousands and thousands of Beacon employees. And it was less me lecturing and giving a speech and more asking questions and starting to learn the business.

Well, it does make it a harder start — for about 10 seconds. But after everyone realizes, okay, this is done, we're buying, we're getting married here, we're engaged, we have to make this work — that's history, that's past. And the resistance is more on the senior levels. I've been doing Zooms since that Thursday, all-employees Zoom. One of the reasons — the only reason my voice is hoarse is because I've been doing non-stop Zooms. I've been doing Zooms with 15 or 20 branch managers and salespeople and others at a time for an hour, two hours, learning the business and reaching out and really understanding two things: which are, one, what's going great in the company that we'd be crazy to change. Like, help us understand what's the strengths of the company that is fantastic. You know, it's a 97-year-old company, it's a serious company. What are the good things about it that we got to keep? And then the second question is, what can we improve? What can we do better? What are your needs, what are your gaps, how can we help you? And we try to keep it simple. In all these Zooms and town halls we're having, trying to just ask those two questions. And we sent a survey to every employee at Beacon who has an email address, and we asked them those two questions. We asked them what's working really well and what's your single best idea to improve the company. We're going to read all those thousands of responses. And we asked them another question — we asked them rate your job satisfaction on a scale of 1 to 10, with 10 being the most, 1 being the least. And we track that. So that's the baseline. So we're going to keep surveying the employees, figure out are we doing our job in terms of making people happy, are we doing our job of making people want to come into work every day and really loving being part of this organization. And if we take care of that, if we get the morale up, if we get the engagement up, usually everything else falls in place.

I don't like the word weakness.

Because you don't want to go into a company and demoralize people, say what's wrong with you. You want to talk about where can we do better. What's working, okay, where can Beacon do better under your management. So the honest answer is I have a lot of hypotheses. I have a lot of ideas of things that have worked in other companies that we've run and did so well. But I don't totally know yet.

I'm going to, but I will know in a month from now. And the reason I'm going to know in a month from now is I'm going to get the input from thousands of Beacon employees who are in the game every day and have been running it. I was on a Zoom with branch managers yesterday from the Northeast where I grew up, and some of those branch managers were there for 30 years, 35 years. They're very long in the tooth in this business. They get it. They've been through all the trials and tribulations. They've run the business in good times and bad times, etc. I'm learning from them. So we're going to modify it. But let me answer your question. So when we go into a company — how did we double the profits at Conway, how did we double the profits at Norbert? It starts with the people. It starts with creating an atmosphere, a culture, a vibe in the organization where people genuinely, sincerely feel they're valued, they're respected, they're part of it, they're an important part of it, and they're an essential part of it. And that there's feedback loops, there's two-way communication between us and every part of the organization. So we're a very highly self-aware organization. That's very critical, that's really the first step. The second step is figuring out, okay, so like Beacon for example has a little over 8,000 employees — who wants to stay? So we'll get all this input from everybody, from all the town halls and the Zooms and the surveys, and then we'll give a first iteration of what we heard and what we think we should do to double the profits of the company. And then we'll get more feedback and we'll get more iteration on that, and then we'll have a final plan. That'll be the plan. Then we ask everybody: are you on board? Do you like the plan? Is this something you have your heart into? Is this something you want to spend your next many years of your life doing? Is this something that gets you inspired and motivated and uplifted and engaged? And if so, come on in the pool, let's join the party. And if it's something like, you know, I don't want to be part of a high-performance culture, I don't want to move that fast — well then you know...

Well, I don't know that yet. I mean, it sounds like that's sort of what's applied — see, really wants to stay — no, no, no. I want to be clear about this. It's a mistake for me if I would go into a company that I bought with final conclusions before I have the information. And most of the time you can pare back the headcount, mostly in the mid and upper, not in the field. The field often is understaffed because companies do these RIFs, they do these reductions in force, which basically is HR speak for firing people, and they bear the brunt of the cutbacks. And sometimes you have to actually add people — you don't have enough salespeople, you don't have enough drivers, you don't have enough of basic functions. But we're not a private equity firm that goes in and just slashes and burns to try to get short-term profit improvement, because that doesn't work, that's not sustainable long-term. There'll be places where we need to add, there'll be places we need to subtract. And we will do a zero-based, blank-slate analysis of every single position, every single person, every single function and say: is this a headcount that we must have? Like we need safety people — you can't cut back safety people. Is this — you need a branch manager, they have 600 branches almost, so they need 600 branch managers, you can't reduce branch managers. Or is this something that's a nice-to-have, so then, you know, if we have some big extra profits maybe we can have this. And then the third category is like, we really don't need this, this somehow got into the organization, really doesn't belong there. And then we'll modify the organization structure. Now, I really don't know whether that'll be a radical restructuring or a minor restructuring. Almost nothing — I don't know yet. We got to get into it. We've been outside-in until last Thursday, but we'll find out. So to answer your earlier question — people is the first thing. We figure out what is the plan, who wants to be part of this. Then we figure out, okay, what are the levers, what are the steps, what are the things we got to do in order to double the profits. And then who's going to be in charge of what. And then we take the compensation programs and we align the incentives to achieving those metrics for very objective, very concrete things. So that once we know the plan and we know the levers, we can attach owners to different levers and pay them if they succeed. It's the most satisfying thing to be paying huge bonuses, because the only way you're paying those huge bonuses is if you're succeeding. So that's what we're trying to do — we're trying to win. So the first step is all this people stuff. The second step is the actual blood and guts of the business. So we're a distributor. Beacon is in the middle between a manufacturer who makes shingles and other building products and on the other side the general contractors and the home builders who buy these things. So when you just step back and look at the business model, it's a pretty simple supply chain. So what do you have to do? You have to figure out a way that you can optimize your procurement. You have to go to your vendors and say — you can't just go to your vendors and say, hey, give me X% discount. They're going to say, well, why? Why should I give you better? So you have to really understand what would they value, what would the OEMs, the original equipment manufacturers, what would they appreciate and what would help them save money, so that you earn a lower price, you get a bigger rebate. And so for instance in United Rentals, when I bought United Rentals, we started buying hundreds of companies. We went to the manufacturers of the skid steers and the generators and the light towers and so forth, and we said, what do we got to do to get big discounts on the price? Because we really want — you know, we're bigger, how can we get a bigger discount? And they said, well, one thing you could do is you could consolidate your vendor base so that you have bigger orders with us. And the other thing you could do is you give us more advanced notice so we can plan more, because that would save them cost. So we said, good, that's a great partnership. We reduced all those vendors. So for instance in aerial lifts, in booms and scissors, we reduced it down to two — Genie and JLG. I think they're still the only two main vendors for United Rentals 20-some years later. So we got big discounts, and the manufacturers like doing this. We're going to have to do a similar process with the manufacturers here. And then you have on the other end of the equation selling. So we're selling to all those customers — are we pricing them right? Are we pricing it methodically, scientifically? Are we using algorithms? Are we using technology to figure out elasticity, to figure out if we raise pricing this is how much business we'll lose but this is what it'll do to profit, if we lower pricing this is how much we'll increase volume, this is what it'll do to profit, and so forth. And the third category of stuff to do, Joe, is everything in the middle — making sure our cost structure is appropriate. Not too lean, but not excessive.

My teams and I have done over 500 acquisitions. We've never had one deal blocked. We've had a deal here or there where the regulators say, why don't you promise not to raise pricing on this category of customer, or can you divest this little part of the business. But generally speaking, we haven't had a problem with that. Here it was very easy to get antitrust clearance. And by the way, it was with the previous administration too, because we don't have any existing distributors. So it's not like we had a roofing distributor and we're buying a roofing distributor and now we're going to get twice the market share — in a market we're entering for the first time. So there really weren't any antitrust considerations.

You know, it's just the way it worked out. It worked out over time that American manufacturers figured out a way, even though we have higher labor costs than overseas countries, to produce shingles that the American consumer wanted, which is a little bit different. You go country to country — in Europe even they have different specs for the shingles. You go in Asia, they have different specs because there are different environments, there are different climates, there's different cultural, there's different appearances, there's different colors and textures and so forth. And American manufacturers did a real good job at that. Now maybe that's a good model — maybe that's a good model for other manufacturing that went overseas over the last few decades. That maybe those manufacturers need to up their game and figure out what is it that's our specialty, what's our strength, what is it that even with higher labor costs here in the United States we can please the customer more. And the other advantage of American manufacturers selling in America is you don't have all this transportation cost. It costs a lot of money to move goods thousands and thousands of miles, and you also have shorter lead times because you're right here. So I actually am bullish about American manufacturing. I think American manufacturing forward, 5 years from now, 10 years from now, I think it'll be a lot more here onshore.

Well, we never confirmed that we were talking to that company publicly. Somehow some reporter got that through good darned reporting and actual journalism. But when we were reportedly looking at that French-based company — which has a lot of its biggest countries, the United States actually — when we were reportedly looking at that, this was still in the previous administration. There wasn't tariffs, wasn't really in the air. So it really wasn't about tariffs. It wasn't that some other company was not good — that mentioned is actually a really good company and has great prospects. But Beacon was perfect for us. I mean, Beacon is absolutely perfect for our particular skill set, the kind of things we do to increase the profits of a company. This applies to Beacon, which is why I did what I did, which is something I've only done once before in my life out of more than 500 acquisitions — which is I did an unsolicited takeover. We proposed an alternative slate and we did a proxy solicitation. And it was because it was such a good match. It was a match made in heaven that we should just not run away from.

Well, I'm not in the weeds of that deal because that's a manufacturer, so I don't follow it as closely. But from what I've read it looks like they paid something like 19 times EBITDA and we paid 10 and a half times EBITDA. So, you know, if you pay very high multiples for companies, that affects shareholder value. Now I'm not condemning that deal because I'm not knowledgeable enough to condemn it. But generally speaking, the price you pay matters. It matters a lot, because the ROIC — return on invested capital for acquisitions — the IC is the purchase price. And if you have a high purchase price, that lowers the ROIC. Your stock price is a function of your return on capital. Investors give you money, debt and equity, now you got to get a return on that. And if you overpay for acquisitions — and I'm not saying they did because I don't know enough about it — but if you're perceived to be overpaying, then your stock's going to go down.

I love the price we paid. The price we paid is a fair price. It's not a terribly low price, but it's certainly not a high price. This is a price that, when you're paying 10 and a half times EBITDA and that's before you double EBITDA — you know, you're paying like mid-single digits for a nice business that's growing, that's got long-term growth to it, that 80% of it is non-discretionary, that's tariff-immune. And is the main reason why, out of the 55 different industries we looked at, we picked building products distribution. Which is — this is an industry that's got growth to it because there's a shortage of something like 4 million homes in the United States. That's a big shortage. And it's one of the few things that both Democrats and Republicans completely agree on, that we need to solve this housing crisis, this housing shortage has to be solved. So there's going to be more construction. It'll be cyclical, but over the long-term arc it's going to be more and more building. And then they're old — there's 40 million homes that are over 40 years old. By the way, they're all going to need to change their roofs. They're all what's called prospective customers for this business. So it's exposed to growth just for showing up and being in the game. And that's a good thing because you can do a thousand things right, but if the underlying trend is in your face coming the wrong way, that's tough.