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www.harriswilliams.com
Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and SIPC, and Harris Williams & Co. Ltd, which is authorised andregulated by the Financial Conduct Authority. Harris Williams & Co. is a trade name under which Harris Williams LLC and Harris Williams & Co. Ltd conduct business.
Harris Williams & Co. is pleased to present our Building Products & Materials IndustryUpdate for April 2015. This report provides commentary and analysis on currentcapital market trends and merger and acquisition dynamics within the globalbuilding products and materials industry.
We hope you find this edition helpful and encourage you to contact us directly ifyou would like to discuss our perspective on current industry trends and M&Aopportunities or our relevant industry experience.
BUILDING PRODUCTS AND MATERIALS
INDUSTRY UPDATE │ APRIL 2015
OUR PRACTICE
Harris Williams & Co. is a leading advisor to the building products and materialsindustry. Our significant experience covers a broad range of end markets,industries, and business models.
BFS ANTES $1.63 BILLION FOR PROBUILD TO FORM DISTRIBUTION GIANT
AMERICA, HERE IS THE FUTURE OF YOUR HOUSING MARKET
HOLCIM-LAFARGE MERGER IS ON AGAIN
Forrest Industry Network 4/7/2015
Sawlog prices declined in many countries during 2014 and the GSPI price index in the 4Q/14 was at the lowest level intwo years, reports the Wood Resource Quarterly. For the third consecutive quarter, the GSPI price index fell inthe 4Q/2014 to the lowest level in two years, reports the Wood Resource Quarterly. The biggest price declines the pastyear have occurred in Europe, Latin America and Oceania, while prices in North America have remained stablethanks to healthy domestic demand for lumber.
Read the full article here.
Builder Online 4/13/2015
PROSALES chief editor Craig Webb has an early take on the Builders FirstSource (BFS) announcement that it willacquire ProBuild in an all-cash deal worth $1.63 billion. The acquisition creates America's biggest pro-oriented buildingmaterial supplier, a $6.1 billion giant with operations from Florida to Alaska. Just as home building companies areconsolidating to capture scale and market diversification opportunities during the early innings of recovery, thedistribution channel is now streamlining itself to simplify the flow of building materials, products, and supplies to jobsites.
Read the full article here.
Business Insider 4/13/2015
Homebuilding activity is coming back to life. On Monday, as the spring selling season kicks in, RBC Capital Marketsupgraded its forecasts for housing starts through 2017. In a note to clients, RBC's Robert Wetenhall wrote: "We areraising our forecast for housing starts in 2015, 2016 and 2017 to 1.1 MM (+10%), 1.2 MM (+9%) and 1.25 MM (+4%) ... Thisis an obvious positive for the spring selling season and leads us to believe that our preferred names (DR Horton, LennarCorporation, and PulteGroup) among the public builders can potentially meet or beat consensus estimates driven bystrong demand and solid ASP growth."
Read the full article here.
Concrete Construction 3/23/2015
A proposed $44.27 billion merger between Switzerland-based Holcim Ltd. and France's Lafarge SA, is moving forwardagain, after the two companies came to an agreement over some changes in the original terms over the stockholdershare exchange ratio and exactly who will lead the combined operation. According to the press release, Both partiesagreed on a new exchange ratio of 9 Holcim shares for 10 Lafarge shares. A new Chief Executive Officer for thecombined group, to be proposed by the Lafarge Board and accepted by the Holcim Board, will be appointed asfrom the closing of the transaction.
Read the full article here.
INDUSTRY UPDATE │ APRIL 2015
SAND DEMAND SLIPS
Aggregates Research 4/13/2015
US sand mines, including 63 in Wisconsin and six in Minnesota, are projected to ship significantly less sand to oil drillersin 2015, compared with last year, when companies like Fairmount Santrol, US Silica and Superior Silica Sands setproduction records, industry sources say. "This whole ripple effect has taken hold and it is going to continue," saidRichard Shearer, CEO of Superior Silica Sands, a Texas-based company that operates sand mines in Wisconsin. "Thereare peak cycles and trough cycles, and we have hit a trough."
Real GDP increased by 0.5% in the fourthquarter of 2014, and overall GDPincreased 2.4% in 2014, compared to anincrease of 2.2% for 2013
The increase in 2014 reflected positivecontributions from PCE, nonresidentialfixed investment, exports, state and localgovernment spending, private inventoryinvestment, and residential fixedinvestment
Current dollar GDP increased 3.9%, or$650.8 billion, in 2014, compared to anincrease of 3.7%, or $604.9 billion in 2013
The U.S. economy seems to be slowingtowards a medium-term trend, however, astrong dollar, jobs, wages and sentimentare expected to drive consumer spending
Industrial production increased 0.1% inFebruary after decreasing .3% in January
Manufacturing output fell for the thirdstraight month and decreased 0.2% inFebruary, while the mining index fell 2.5%
Utilities output jumped 7.3% due to thedemand for heating caused by especiallycold temperatures around the country
Capacity Utilization for the industrial sectordecreased to 78.9% in February, nearly 1.2%below its long-run (1972-2014) average
Manufacturing production is forecast togrow 3.5% in 2015, due to job gains andinvestments in natural gas infrastructure, thehousing supply chain, transportationinfrastructure, factory automation, medicalcare expansion, and increasing confidence
Seasonally AdjustedSources: Bureau of Economic Analysis
Seasonally AdjustedSources: Board of Governors of the Federal Reserve System
In February, personal income increased$58.6 billion, or 0.4%, while personalconsumption expenditures (PCE)increased $11.8 billion, or 0.1%
PCE, personal interest payments, andpersonal current transfer paymentsincreased $14.2 billion in February, instark contrast to a decrease of $25.4billion in January
Proprietors’ income decreased $7.0billion in February, compared to adecrease of $11.7 billion in January afterthe holiday shopping season
The economic sentiment index measureshow consumers view prospects for theirown financial situation, how they view thenear-term general economy prospects,and their long-term view of economicprospects
The Leading Economic Index (LEI) for theU.S. improved again in February, drivenmostly by positive contributions frombuilding permits and financial components
For the six months ending February 2015,the leading economic index increased2.4% (approximately a 5% annual rate),slower than the growth of 3.7% during theprevious six months
The largest positive contributors forFebruary were the interest rate spread,stock prices, building permits, the LeadingCredit Index, consumer businessexpectations, and manufacturers’ neworders for consumer goods
The Consumer Confidence Indeximproved to 101.3 in March, up from 98.8in February
The increase was driven by an improvedshort-term outlook for both incomeprospects and employment, althoughconsumers were less enthusiastic aboutbusiness conditions
Consumer confidence is currently 8.81%higher than the year-end 2014 rate, and30.71% higher than the year-end 2013rate
The 30-year mortgage rate declined inMarch 2015 to 3.77%, the lowest ratesince May 2013
The current mortgage rate is 57 basispoints lower than the rate in March 2014
It is still unclear when the Fed plans toraise rates, but it is expected sometimelater this year through practices the Fedrefers to as “policy normalization”
BUILDING PRODUCTS AND MATERIALS
INDUSTRY UPDATE │ APRIL 2015
0
20
40
60
80
100
120
Indexed to 1985Sources: The Conference Board
Seasonally AdjustedSources: Federal Reserve Bank of St. Louis
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
30-Yr Mortgage Rates 10-Yr Treasury Effective Federal Funds Rate
U.S. housing starts in February were at aseasonally adjusted annual rate of897,000, 17% below the January estimateof 1,081,000, and 3% below the estimatefor February 2014
This decrease in housing starts wasattributable to major drop-offs in multi-family homes, as well as single-familyhomes, which accounts forapproximately two-thirds of the market
February’s drop in housing starts was thelargest decline since 2011, and primarilydue to plunging temperatures andsnowstorms across the country
Housing starts continue to rebound fromunprecedented lows reached in 2009,yet remain ~30% below the 50-yearaverage of 1.5 million starts per year andare still below the average cyclical low of1.0 million
Single family homes are ~37% below thehistorical average of 1.0 million, whilemulti-family starts are just 16% below theirlong-term average of 418,000
New residential construction is projectedto grow at a 22% CAGR from 2014 to 2018
BUILDING PRODUCTS AND MATERIALS
INDUSTRY UPDATE │ APRIL 2015
Sources: Census Bureau; projections are derived from census of 11 reputable sources
0
500
1,000
1,500
2,000
2,500
1960 1968 1976 1984 1992 2000 2008 2016P
Single Family Multi Family50-Year Average Average Recesion Low
(units in 000’s)2014 Housing Starts: ~30% below 50-year average
Feb. 2015 Total: 897M-o-M Δ: (17%)Y-o-Y Δ: (3%)
Non-residential construction has laggedin recovery compared to otherconstruction markets, and is stillsignificantly below historical peak levels
Non-residential construction decreasedfrom January to February by .1%, anddecreased by 1.9% from the same perioda year ago
Several sectors within non-residentialconstruction that continue to seespending increases includemanufacturing, amusement andrecreation, office, and sewage andwaste disposal
Repair and remodeling spend reachedover $155 billion in 2014, and continuesto experience significant growth ashomeowners invest in their homes
Repair and remodeling spend is lesscyclical than new construction andprovides stability to the overall market
R&R spend dropped just 10% from 2007to 2009 as consumers chose to invest inrepairs and remodels in lieu of makingsubstantial investment in new homes
Growth for 2014 – 2018 is projected at aCAGR of 4.4%
In the fourth quarter of 2014, theRemodeling Market Index (RMI) posted arecord-high result of 60, the seventhconsecutive quarter for an RMI over 50.
An RMI over 50 indicate that remodelersare reporting higher activity than theprevious quarter. The overall RMIaverages the indicators of current andfuture remodeling activity.
All four subcomponents of the RMI futureindex, bids, commitments for threemonths, job backlog, and appointmentsfor proposals saw increases over the priorperiod.
BUILDING PRODUCTS AND MATERIALS
INDUSTRY UPDATE │ APRIL 2015
Sources: McGraw Hill
40
45
50
55
60
65
Q1
2012
Q3
2012
Q1
2013
Q3
2013
Q1
2014
Q3
2014
Index values greater than 50 indicate activity higher than
Global M&A deal volume in 2014 was $3.5 trillion, a 47% increase from 2013 levels and the strongest annualperiod since 2007
− Deal volume in the Americas increased 51% over 2013 totals, accruing $2.1 trillion in activity from 15,734announced deals
− European M&A activity increased 55% over 2013 levels, and Asia Pacific M&A accounted for the strongestannual period in the region since 1908
North American building products deal activity in 2014 increased by approximately 20% from the prior year
Credit conditions remain issuer-friendly, and leveraged loan multiples remain robust, with average debt multiplesapproximately 4.8x EBITDA for issuers through February 2015
Large corporations continue to drive M&A activity with bloated cash balances, soaring stock prices, andrelatively inexpensive credit
BUILDING PRODUCTS AND MATERIALS
INDUSTRY UPDATE │ APRIL 2015
Note: Includes all building products, construction materials, or forest products, for M&A transactions announced in the U.S. or Canada
Broad category of materials such as crushed rock, manufactured sand,natural sand, and gravel
Most-used material in the world, after water
Industry Commentary:
Markets are local in nature due to high shipping costs
Major players include Lafarge, Cemex, CRH, Heidelberg Cement, MartinMarietta, Vulcan Materials and a large number of independent operators
Demand derived from total construction spending, which is based onglobal, national, regional and local economic conditions. 25 billion tons ofaggregates are used per year globally, roughly four tons per person
U.S. Aggregates Consumption (values in millions of metric tons)
Description
Paving and roofing materials include asphalt and tar-paving mixtures andblocks, shingles, roofing cements, and coatings
Industry Commentary:
Asphalt is used over 85% of the time in U.S. highway and road construction
MAP 21 regulations extend and fund federal highway programs, includingover $120 billion for infrastructure programs
Industry planning for the next highway bill is underway and will developfurther in 2015
70% of U.S. lumber demand is driven by housing, including new constructionand remodeling
This year’s first-quarter lumber price slide was significant, Random LengthsFraming Lumber Composite Price lost $47 due to poor weather and slowerthan expected start to 2015
Dealers’ three-month sales expectations surged with warmer and drierweather, Random Length surveys matched or exceeded record high levels
Framing Lumber Composite Price Index
($ per thousand board feet)
Source: Random Lengths
Description
Roofing market includes bituminous, wood, and tile roofing used in residentialapplications and metal elastomeric, and plastic roofing used in non-residential applications
Industry Commentary:
Demand for roofing is closely linked to building construction expenditures, buthas been more sheltered than other building products markets from thehousing slump due to the nondiscretionary need for roof repair andreplacement
Houses need to be re-roofed every fifteen years on average and the agingU.S. housing stock will drive continued demand for replacement
Additionally, renewed strength in new housing construction and a generallystronger economic climate will support growth
Source: Freedonia
Roofing Demand by Primary Segment
Description
Windows and doors market includes metal, wood, and plastic windows anddoors for residential and non-residential markets
Industry Commentary:
Window and door demand is primarily driven by new commercial andresidential construction as well as repair and remodel spending
Annual home improvement spending is expected to decelerate from 6.3% inthe first quarter of 2015 to 1.6% by the third quarter due in part to amoderating house price gains
As first-time buyers begin to return to the market home improvement andhousing starts should make a strong push back towards long-term levels
Leading Indicator of Remolding Activity ($ in billions)
Source: The Joint Center for Housing Studies of Harvard University
Primarily made from gypsum, products include wallboard, plaster,plasterboard, molding, ornamental moldings, statuary, and architecturalplasterwork
Industry Commentary:
Gypsum product demand is primarily driven by new commercial andresidential construction as well as repair and remodel spending
Over the past two years, rising wallboard prices and cost-saving measureshave improved industry profit margins
New home inventories are at historically low levels and as demand for newhomes grows, builders will respond by increasing their stock
U.S. Wallboard Demand(billions of square feet)
Source: National Gypsum Forecast and Gypsum Association
Description
Residential, commercial, and industrial heating, ventilation, air-conditioning,and refrigeration equipment
Industry Commentary:
HVAC demand is primarily driven by residential and non-residentialconstruction, HVAC replacement, and weather patterns
Aging domestic buildings (75% of buildings were built before the 1980s) arefueling the demand for replacement equipment
New minimum energy efficiency standards for air conditioning andcorresponding tax credits are driving replacement demand
Number of World-Wide A/C Units(millions of units)
Source: BSRIA Market Intelligence
Description
Plumbing fixtures, bathtub and shower fixtures, and indoor pipes constitutethis segment
Industry Commentary:
Primary demand determinants are repair and remodel spending, new homeconstruction, and nonresidential improvement and repair
Domestic manufacturers are facing strong headwinds from cheap importswhich have increased from 69.9% of the market in 2008 to an estimated78.4% in 2013
Increased demand in this segment will be driven by increased repair andremodel spending
Residential Remodeling Index (RRI)
Source: Remodeling Magazine – RRI Points to Speedup in Remodeling Activity March 2015
Harris Williams & Co. has a broad range of industry expertise, which creates powerful opportunities.Our clients benefit from our deep-sector experience, integrated industry intelligence andcollaboration across the firm, and our commitment to learning what makes them unique. For moreinformation, visit our website at www.harriswilliams.com/industries.
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INDUSTRY UPDATE │ APRIL 2015
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BUILDING PRODUCTS AND MATERIALS
INDUSTRY UPDATE │ APRIL 2015
Bureau of Economic Analysis
Capital IQ
Eurostat
Freedonia
Global Industry Analysts
IBIS
PNC Economic Outlook
S&P Leveraged Commentary & Data
The Wall Street Journal
Thomson Financial – SDC Database
Thomson Reuters
U.S. Census Bureau
Harris Williams & Co. (www.harriswilliams.com) is a preeminent middle market investment bank focused on the advisory needs of clients worldwide. The firm has deep industry knowledge, global transaction expertise, and an unwavering commitment to excellence. Harris Williams & Co. provides sell-side and acquisition advisory, restructuring advisory, board advisory, private placements, and capital markets advisory services.
Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and SIPC, and Harris Williams & Co. Ltd, which is authorised and regulated by the Financial Conduct Authority. Harris Williams & Co. is a trade name under which Harris Williams LLC and Harris Williams & Co. Ltd conduct business.
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