BUILDING PRODUCTS & CONSTRUCTION MATERIALS. Market Update Q4 2016

Transcription

1 BUILDING PRODUCTS & CONSTRUCTION MATERIALS Market Update Q MARCH 2017

2 BUILDING PRODUCTS AND CONSTRUCTION MATERIALS MARKET UPDATE Q INTRODUCTION This report provides insight into mergers & acquisitions ( M&A ), capital market activity, and market dynamics in the building products and construction materials market through the fourth quarter of Headwaters' Building Products and Construction Services team advises business owners, entrepreneurs, executives and investors in the areas of mergers and acquisitions, capital raising and various special situations. The team focuses exclusively on the building products and construction industry and understands the nuances associated with these industries. Due to our background and laserfocus, Headwaters is uniquely qualified and has an unparalleled track record of successfully representing the shareholders of: Manufacturers of building products or construction materials Distributors of building products or construction materials Contractors and sub-contractors Professional services firms, architectural, engineering, testing, etc. HIGHLIGHTS: The U.S. building products and construction materials market has outperformed the broader U.S. market over the last year. U.S. housing starts and commercial construction activity are on the rise and the South has seen the strongest growth. The 10.0 percent year-over-year decrease in building products and construction materials transactions was muted compared to the 23.3 percent decline in broader M&A market transaction volume. Middle market M&A is expected to grow in BUILDING PRODUCTS & CONSTRUCTION SERVICES COVERAGE TEAM: Darin Good dgood@headwatersmb.com Brian Krehbiel Senior Vice President bkrehbiel@headwatersmb.com Zach Vosburg Associate zvosburg@headwatersmb.com TOTAL BUILDING PRODUCTS & CONSTRUCTION MATERIALS TRANSACTIONS Down 10% Source: FactSet 2

3 BUILDING PRODUCTS RELATED M&A ACTIVITY M&A activity in the building products and construction materials industry was strong in Q after a slower Q3. There were 188 industry transactions completed in percent less than in The year-over-year decrease in building products and construction materials transactions was muted compared to the 23.3 percent decline seen in broader M&A market transaction volume. 2 FIGURE 1: BUILDING PRODUCTS AND CONSTRUCTION MATERIALS RELATED M&A ACTIVITY Source: S&P Capital IQ NOTABLE TRANSACTIONS Q Has Acquired Apogee Enterprises Acquired Sotawall Limited In December 2016, Apogee Enterprises acquired Sotawall Limited for $135 million, an EV/Revenue multiple of 1.35x. Sotawall Limited is a designer, manufacturer and installer of curtain wall systems in the U.S. and Canada. Has Acquired Dormakaba Holding AG Acquired Mesker Openings Group In December 2016, the Swiss company, Dormakaba Holding AG, acquired the Huntsville, Alabama based manufacturer of door and hardware products, Mesker Openings Group for $142.5 million. This value implies an EV/Revenue multiple of 2.13x. Has Acquired Boral Limited Acquired Headwaters Incorporated In November 2016, the Australian company, Boral Limited, announced that it would acquire Headwaters Incorporated for $24.25 per share, a 21.0 percent premium to Headwaters closing stock price at the time of the offer. The implied enterprise value for the transaction is $2.6 billion, an EV/EBITDA multiple of 14.8x and an EV/Revenue multiple of 2.60x. The transaction is expected to close in mid Source: S&P Capital IQ Has Acquired ABC Supply Co. Acquired L&W Supply Corporation In October 2016, ABC Supply Co. acquired L&W Supply Corporation from USG Corporation for $670 million, an EV/Revenue multiple of 0.47x. L&W Supply is a distributor of gypsum wall boards and other building materials. 1 3

4 MIDDLE MARKET M&A CONDITIONS The Mergers and Acquisitions Conditions Index ( MACI ) value was 53.5 in February, up 1.6 points from January s level of The MACI is computed using the surveys of executives in private equity firms, investment banks, lenders and advisor firms. It tracks activity such as leads, signed letters, completed transactions, divestitures, financing availability, M&A business activity, M&A business staffing and the availability of bidders. A reading of over 50 indicates an expansion relative to the prior month and a reading below 50 indicates a contraction. With leads for new transactions scoring a 64.4 in February compared to the low of 38.2 in January of 2016 and a current composite level of 53.5, survey participants expect growth for middle market M&A in FIGURE 2: M&A CONDITIONS COMPOSITE FEBRUARY Source: themiddlemarket.com - Mergers & Acquisitions 4

5 PUBLIC MARKET SUMMARY The table below includes financial results and valuation multiples for select publicly-traded, U.S. based building product and construction materials companies. The U.S. building products and construction materials market has outperformed the broader U.S. market over the last year with building systems companies experiencing the highest year-over-year growth. Consensus analyst estimates for public companies (shown in Figure 3) predict a 6.3 percent increase in sales and a 13.8 percent increase in EBITDA for calendar year FIGURE 3: PUBLIC VALUATION MULTIPLES Stock Price All $'s in Millions EBITDA Enterprise Value/ Company Name 02/28/17 TEV Revenue EBITDA Margin Revenue EBITDA Plumbing / HVAC A. O. Smith Corporation $ ,474 2, % 3.15x 16.1x AAON, Inc. $ , % 4.57x 18.9x Lennox International Inc. $ ,062 3, % 2.21x 16.3x Masco Corporation $ ,148 7,357 1, % 1.79x 10.6x Average 7,860 3, % 2.93x 15.5x Decking / Siding / Drywall Trex Company, Inc. $ , % 4.16x 16.8x Continental Building Products, Inc. $ , % 2.62x 9.0x USG Corporation $ ,575 3, % 1.85x 10.1x Average 2,926 1, % 2.88x 12.0x Building Systems Apogee Enterprises, Inc. $ ,575 1, % 1.48x 10.3x NCI Building Systems, Inc. $ ,499 1, % 0.89x 9.6x Owens Corning $ ,774 5,677 1, % 1.55x 7.9x Armstrong World Industries, Inc. $ ,292 1, % 2.67x 14.4x Average 3,785 2, % 1.65x 10.6x Window / Door Ply Gem Holdings, Inc. $ ,058 1, % 1.09x 9.2x Quanex Building Products Corporation $ % 0.98x 8.8x Masonite International Corp. $ ,829 1, % 1.43x 11.8x Average 1,931 1, % 1.17x 9.9x Lumber / Wood Products Universal Forest Products, Inc. $ ,012 3, % 0.62x 9.7x Louisiana-Pacific Corporation $ ,144 2, % 1.41x 10.2x Boise Cascade Co. $ ,389 3, % 0.36x 9.0x Average 2,181 3, % 0.79x 9.6x Building Product Distribution GMS Inc. $ ,893 2, % 0.91x 12.5x HD Supply Holdings, Inc. $ ,637 7, % 1.70x 14.0x Beacon Roofing Supply, Inc. $ ,801 4, % 0.92x 10.2x Builders FirstSource, Inc. $ ,257 6, % 0.51x 9.4x Watsco, Inc. $ ,262 4, % 1.25x 14.4x Average 5,370 4, % 1.06x 12.1x TEV - Total Enterprise Value or company s total value calculated as the market capitalization plus debt, minus cash. EBITDA - Earnings before interest, income taxes, depreciation and amortization. An approximate measure of a company's operating cash flow. Enterprise Value Multiples - Metrics for deriving the value of a business. Total Enterprise Value divided by Revenue quantifies the value of the company to its total revenue while Total Enterprise Value divided by EBITDA quantifies the value of the company to its operating cash flow. Source: FactSet S&P 500 Dow Jones Industrial Average FIGURE 4: ONE YEAR RETURNS AS OF MARCH 1, 2017 Plumbing / HVAC Decking / Siding / Drywall Building Systems Window / Door Lumber / Wood Products Building Product Distribution 19.8% 24.2% 37.2% 23.7% 53.0% 30.5% 34.5% 43.1% 5

6 CONSTRUCTION INPUT PRICING UPSTREAM SUPPLY The following table summarizes the month-over-month and year-over-year price changes in staple building product and construction material inputs. Source: U.S. Bureau of Labor Statistics FIGURE 5: PRODUCER PRICE INDEX-COMMODITIES CONSTRUCTION OUTPUT PRICE INDEX BASE YEAR: 1982 January-16 December-16 January-17 1 Month % Change 12 Month % Change Softwood Lumber % 7.7% Hardwood Lumber % 2.5% Plywood % -3.0% Plumbing Fixtures and Fittings % 0.1% Hardware % 1.5% Iron and Steel % 17.6% Fabricated Structural Metal Products % 2.3% Nonferrous Wire and Cable % 2.5% Glass % 1.9% Concrete Products % 3.0% Asphault Felts and Coatings % -0.2% PLYWOOD Boise Cascade Company provided commentary on the decline in plywood prices in its 2016 annual 10-K filing. Plywood prices were negatively impacted by a strong U.S. dollar and economy relative to other countries, resulting in foreign producers, particularly from South America, selling more of their plywood products into the eastern U.S FIGURE 6: PLYWOOD PRICE HISTORY Source: U.S. Bureau of Labor Statistics IRON & STEEL A recent Forbes article addressed the increase in iron and steel prices in In China, state support in the form of subsidies and tax breaks enabled Chinese steel producers to maintain elevated levels of steel production in 2016 in spite of subdued market conditions. Elevated levels of Chinese steel production propped up the global demand for iron ore a raw material for the steel industry, since China accounts for the purchase of close to two-thirds of the global seaborne iron ore supply FIGURE 7: IRON & STEEL PRICE HISTORY Source: U.S. Bureau of Labor Statistics 6

7 CONSTRUCTION MARKET DYNAMICS DOWNSTREAM DEMAND HOUSING STARTS U.S. housing starts have been rising steadily since April 2009 when the annual rate hit a low of 478,000. The January 2017 Monthly New Residential Construction release from the U.S. Census Bureau reported annual housing starts of 1.25 million (seasonally adjusted). This is up 8.2 percent from the January 2016 level of 1.19 million. 2,500 2,000 1,500 FIGURE 8: ANNUAL RATE FOR U.S. HOUSING UNITS STARTED 1,246 As shown in Figure 9, the largest concentration of new housing starts is in the South region of the U.S. with 690,000 of the 1.25 million total or 55.4 percent. The Midwest region experienced the most growth with a 21.3 percent increase in housing starts, year over year. 7 1, Units in Thousands Source: U.S. Census Bureau FIGURE 9: HOUSING STARTS BY REGION YEAR OVER YEAR GROWTH (JAN VS. JAN. 2016) Midwest % YoY Northeast % YoY West % YoY *Units in Thousands South % YoY 7

8 REMODELING MARKET INDEX FIGURE 10: REMODELING MARKET INDEX (RMI) Current Market Conditions Future Market Indicators The Remodeling Market Index ("RMI") is based on a quarterly survey in which remodelers are asked to rate a variety of aspects within the remodeling market as higher or lower than the prior quarter. An index number of 50 indicates equal numbers of remodelers reporting activity higher and lower than the prior quarter. Any number over 50 indicates that more remodelers view remodeling market conditions as higher than the previous quarter Source: NAHB Remodeling Market Index The Q release of the index reported the Current Market and Future Market components of the index at 53 and 52 respectively, averaging 53 overall. The RMI has recorded levels above 50 consistently since Q1 of THE AMERICAN INSTITUTE OF ARCHITECTS ARCHITECTURE BILLINGS INDEX (ABI) Architecture firm billings saw an unexpected surge in December, generating an ABI score of 55.9 for the month. This was far and away the highest monthly growth of the year and brought the average monthly reading for 2016 up to 51.3, almost equaling the 2015 average monthly score of Project inquiries and new design contracts both had positive readings but experienced lower growth rates than billings suggesting firm billings are likely to see more moderate growth moving into AIA s monthly Architecture Billings Index (ABI) is a leading economic indicator for nonresidential construction activity, with a lead time of approximately 9 12 months. The index is derived from AIA s Work-onthe-Boards survey, which has gathered data on shifts in billings from architectural firm leaders for over 20 years. 9 Billings Current 55.9 Design Contracts Current 51.2 Last Month Last Month Source: The American Institute of Architects Above 50 Below 50 X 50 (no change from previous period) 8

9 DODGE MOMENTUM INDEX FIGURE 11: DODGE MOMENTUM INDEX (YEAR 2000=100) Source: Dodge Data & Analytics Feb-16 Feb-17 % Change Dodge Momentum Index % Commercial Building % Institutional Building % FIGURE 12: DODGE MOMENTUM INDEX (YEAR 2000=100) Source: Dodge Data & Analytics The Dodge Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning (excluding manufacturing), which have been shown to lead construction spending for nonresidential buildings by a full year. The index uses the year 2000 as its base. The Momentum Index rose 1.6 percent in February to (2000=100) from its revised January reading of and is up 22.1 percent year-over-year. Growth in commercial building is responsible for the majority of growth in the index and is up 28.2 percent year-over-year. 10 COMMERCIAL AND INDUSTRIAL CONSTRUCTION BACKLOG The Associated Builders and Contractors ("ABC") Construction Backlog Indicator ("CBI") is a forward-looking national economic indicator that reflects the amount of work that will be performed by commercial and industrial contractors in the coming months. The December release of the CBI reported that the national average backlog was up slightly in Q to 8.7 months from 8.5 months in Q2. The growth of the national average was led primarily by a 3.7 percent increase in backlog for commercial and institutional construction and a 2.3 percent increase in backlog for infrastructure. As shown in Figure 14, average backlog in the South remains the longest at 10.7 months and has grown by 0.4 months year over year while backlog in the West sits at 6.7 months, down by 1.1 months year over year at the other end of the spectrum FIGURE 13: NATIONAL BACKLOG AVERAGE Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Associated Builders and Contractors 9

10 FIGURE 14: YEAR-OVER-YEAR CBI MAP OF REGIONS & BACKLOG MONTH (Q VS. Q3 2016) NORTHEAST Q3 2015: 8.54 Months Q3 2016: 7.60 Months 0.94 Months WEST Q3 2015: 7.78 Months Q3 2016: 6.66 Months 1.12 Months MIDDLE STATES Q3 2015: 6.48 Months Q3 2016: 8.33 Months 1.85 Months SOUTH Q3 2015: Months Q3 2016: Months 0.41 Months Source: Associated Builders & Contractors, Construction Backlog Indicator CONCLUDING THOUGHTS Although M&A activity was down slightly in 2016, the overall level of M&A would still be considered robust and market conditions point towards continued strength. This is particularly true for the building products and construction materials market. Ongoing growth in demand for new construction and signals that the Trump administration is going to invest in infrastructure and construction are positive signs driving the building products and construction materials market to outperform broad market indices over the past 12 months. For business owners considering selling their business, making acquisitions or raising capital, market conditions are currently favorable. The construction industry is cyclical and the time to maximize value is when the industry outlook remains bullish, which it does today. 10

11 CITATIONS: 1. S&P Capital IQ 2. PitchBook, 2016 Annual M&A Report 3. Mergers & Acquisitions' M&A Conditions Index (MACI) February FactSet 5. Boise Cascade Company, Form 10-K for Fiscal Year ended December 31, High Iron Ore Prices to Persist in 2017, Forbes.com, January 11, U.S. Census Bureau, New Residential Construction 8. NAHB Remodeling Market Index, Quarterly Survey of Remodelers, Q The American Institute of Architects Architecture Billings Index, December Dodge Momentum Index Increases in February, Dodge Data & Analytics, March 7, Construction Backlog Rebounds in Third Quarter, Associated Builders and Contractors, Inc., December 13,

12 Our team has extensive operational and transaction experience for middlemarket companies in the Industrials sector. Arthur J. Bentley Agricultural Products x 211 abentley@headwatersmb.com Grant Garbers Horacio Facca Darin Good Industrials / Manufacturing hfacca@headwatersmb.com Building Products & Construction Services dgood@headwatersmb.com Samrat Karnik Industrial Technology x 208 skarnik@headwatersmb.com Len LaPorta Industrial Technology x 10 ggarbers@headwatersmb.com Peter Nam Doug Usifer Michael Schumacher Industrial Technology pnam@headwatersmb.com Chemicals & Plastics dusifer@headwatersmb.com Industrials / Manufacturing x 203 llaporta@headwatersmb.com Industrials / Manufacturing mschumacher@headwatersmb.com About Headwaters MB: Headwaters MB is an independent, middle market investment banking firm providing strategic merger and acquisition advice, capital raising and special situations advisory. Named Investment Bank of the Year by major industry organizations in , Headwaters MB is headquartered in Denver, CO, with seven regional offices across the United States and partnerships with 18 firms covering 30 countries. For more information, visit Disclosure: This newsletter is a periodic compilation of certain economic and corporate information, as well as completed and announced merger and acquisition activity. Information contained in this newsletter should not be construed as a recommendation to sell or buy any security. Any reference to or omission of any reference to any company in this newsletter should not be construed as a recommendation to buy, sell or take any other action with respect to any security of any such company. We are not soliciting any action with respect to any security or company based on this newsletter. The newsletter is published solely for the general information of clients and friends of Headwaters MB, LLC. It does not take into account the particular investment objectives, financial situation or needs of individual recipients. Certain transactions, including those involving early-stage companies, give rise to substantial risk and are not suitable for all investors. This newsletter is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Prediction of future events is inherently subject to both known and unknown risks and other factors that may cause actual results to vary materially. We are under no obligation to update the information contained in this newsletter. Opinions expressed are our present opinions only and are subject to change without notice. Additional information is available upon request. The companies mentioned in this newsletter may be clients of Headwaters MB, LLC. The decisions to include any company in this newsletter is unrelated in all respects to any service that Headwaters MB, LLC may provide to such company. This newsletter may not be copied or reproduced in any form, or redistributed without the prior written consent of Headwaters MB, LLC. The information contained herein should not be construed as legal advice. 12