Ripe for Harvest
It’s not surprising that investors have flocked to the roofing sector. Sales are expanding at a 7.8% clip, and are projected to hit $24.4 billion by 2015, according to The Freedonia Group’s estimates. More than half of that demand is residential, and 86% is nondiscretionary spending for reroofing projects, as three-quarters of roofs in America were installed before 1990.
Consolidation, in fact, is nothing new for this sector. Ken Hendricks built ABC Supply that way, “and really changed our industry,” says Earl Ward, Nemeon’s CEO. Distributor consolidation can also be viewed as a competitive response to M&A activity among manufacturers: in 1970, 16 roofing manufacturers controlled 90% of shipments; today, four do, observes Mike Hogan, managing director for Harris Williams & Co., the Richmond, Va.-based investment bank that has been involved in many of the major consolidations of leading distributors and pro dealers.
What’s new, though, is the greater presence of private equity capital flowing into the roofing sector, and the propulsive impact that is having on the buying and selling of distribution companies. SRS, for example, started out as a management team and a private equity sponsor before it made its first deal, purchasing Suncoast Roofers Supply out of bankruptcy. Its first four acquisitions were purposely transacted in Dallas, Florida, Chicago, and Seattle, “so we could present ourselves as a national distributor right from the start,” says Tinker.
“Private equity owners do a good job of creating clear objectives and then aligning incentives to them,” says Jeff Clay, vice president of corporate development for Dallas-based Roofing Supply Group (RSG), which a year ago changed ownership hands when Clayton, Dubilier & Rice acquired the distributor from The Sterling Group. Josh Lutzker, managing director for Berkshire Partners, says his company’s investment strategy focuses on companies that have strong managements and offer growth opportunities. Berkshire particularly likes the roofing sector because, he explains, “distribution in this market plays a critical role, given the fragmentation and high service needs of contractor customers. As a scale player in this industry, SRS has the opportunity to invest in infrastructure and processes that enable it to provide superior service to this customer base.”
Serving a Fragmented Base
There are currently about 1,500 roofing distribution companies in the U.S., of which more than half operate only one or two branches, says David Luck, ABC’s chief executive. The top five distributors control about half of the sector’s annual sales, with the next 10—which include Gulfeagle Supply, SPEC Building Materials, and MacArthur Co.—capturing another 10% to 15% of that volume.
Roofing distributors large and small succeed, where LBM dealers might stumble, partly because, in Tinker’s estimation, “what we do can’t be mimicked by Home Depot or Lowe’s,” whose roughly 15% market share in roofing “isn’t growing,” says Hogan of Harris Williams.
The reasons why revolve around the unwillingness of LBM and home-improvement dealers to invest in delivery equipment that’s critical to meet local contractors’ needs. “A delivery vehicle can cost $200,000, and we have 400 of them,” says Tinker. He also points out that where a ProBuild yard might stock $20,000 in roofing inventory at cost, an SRS branch generating $10 million in annual sales will have $2 million in inventory, almost all of it roofing. Multi-state roofing companies also differ from the big, multi-regional lumberyards in two other ways. First, large lumber operations like ProBuild, Builders FirstSource, and 84 Lumber have invested heavily in component manufacturing and millwork operations. Those businesses require significant capital investment are heavily linked to new-home construction, so when the market for new homes tanked, these companies had to shutter plants, while roofing firms merely had to trim inventories. Second, roofing is much more dependent on the repair and replacement market—particularly after storms—so its base of demand is much more consistent.
Because roofing remains a localized business, well-run independent distributors can still compete against the big guys. Their customer base is feeling better about itself, too: In December, Roofing Contractor magazine published a poll of its subscribers and Allied’s contractor partners, which found 61% expecting their sales to rise in 2013, 54% of residential roofers planning to invest in production equipment, and 38% planning to invest in their fleets.
Another reason for hope among independent and regional roofing distributors is their memberships in one of the four co-ops—Nemeon, American Wholesale Distribution Alliance (with 25 members, including SRS Distribution, operating about 400 branches that generate $4 billion in sales); Select Independent Distributors of America (SIDA), and Building Suppliers Corporation—that offer a variety of services, as well as a platform where competing distributors can openly share ideas, market news, and best practices.
Nemeon, with 181 members operating 530 branches in the U.S. and Canada that generate $3 billion in aggregate annual revenue, goes a step farther when it assists members in negotiating purchasing deals with manufacturers. And every year Nemeon runs a “Next Gen” conference that strives to bring fresh blood into the business. Ward says this conference has been useful to owners who don’t want to be forced to sell their businesses for lack of someone to take over. That being said, Nemeon lost nine members to consolidators in 2012, and must constantly recruit to keep its ranks stabilized. Ward himself sold his business, Roof Depot in Minnesota, to Beacon in 2006, and notes that selling to a consolidator “is such a personal decision.” That decision gets harder to resist, he says, when an independent owner whose company generates, say, $300,000 in rebates can sell to a consolidator for eight times earnings. So while a co-op “helps members feel good about their businesses” and stay profitable, Ward concedes that some owners view membership as “a way of maximizing their payout.”
