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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.
BUILDING PRODUCTS & MATERIALSINDUSTRY UPDATE │ JANUARY 2016
Harris Williams & Co. is pleased to present our Building Products and MaterialsIndustry Update for January 2016. This report provides commentary and analysison current capital market trends and merger and acquisition dynamics within theglobal building 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 & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
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.
Leading building products supplier focused on Northeast region
Founded in and family-owned since 1961, headquartered outside Boston in Waltham, MA
Vertically integrated window and door manufacturer and distributor
Distributes broad line of exterior building products including windows, siding and roofing to over 44,000 customers annually through its network of 33 warehouses
Woodcraft Industries: Company Description
Best-in-class cabinet door and components manufacturer with highly automated and efficient operations
Offers a comprehensive line of over one million hardwood and engineered wood SKUs in a wide variety of styles, sizes, designs, and wood species
Focus on providing high-quality components and just-in-time (“JIT”) service to large, demanding cabinet OEMs
US LBM: Company Description
Provides a comprehensive line of specialty products, including engineered lumber, windows and doors, roofing and siding, drywall, and cabinetry
Over 30,000 residential and commercial construction customers
Broad coverage, going to market through 19 local or regional brands with 150 locations across 22 states in the Northeast, Midwest and Southeast United States
Infiltrator: Company Description
Leading manufacturer of engineered plastic chambers, synthetic aggregate leachfields, tanks, and accessories for the onsite wastewater and stormwater industries
Pioneer in innovative plastic technologies for onsite wastewater management
Demonstrated ability to drive conversion through enhanced product performance and installed cost savings
has been acquired by
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WHAT WE’RE READING
3
THE U.S. ECONOMY’S LATEST GROWTH IS LOOKING INCREASINGLY FRAIL
THE YEAR AHEAD IN HOUSING
NOVEMBER CONSTRUCTION SLIDES 5%
10 CONSTRUCTION INDUSTRY TRENDS TO WATCH IN 2016
Wall Street Journal 1/4/2016
The first week of 2016 has brought sinking temperatures and stocks–and now weaker estimates of economic growthfor the fourth quarter. Before Monday, the U.S. economy appeared to have ended 2015 on solid, thoughunspectacular, footing. Many economists were estimating that the nation’s gross domestic product–or the sum of allgoods and services produced–grew at an annual pace of roughly 2% in October through December. That wouldmatch the third quarter’s pace and fall roughly in line with average growth throughout the current expansion. Butthose estimates are falling, due to weak readings Monday morning on the nation’s manufacturing and constructionactivity, two key drivers of economic growth.
Read the full article here.
NAHB 1/4/2016
Steady employment, economic growth, pent-up demand, affordable home prices, and attractive mortgage rates willkeep the housing market on a gradual upward trend in 2016. However, persistent headwinds related to shortages ofavailable lots and labor are impeding a more robust recovery. Job formation is the key to this housing recovery. Unlikeprevious recoveries when housing played a key role in the rebound, this recovery needs more jobs to convinceconsumers that the recession is over, that they will retain their jobs, their incomes will grow and that their friends andrelatives feel that way too.
Read the full article here.
Dodge 12/18/2015
At a seasonally adjusted annual rate of $563.3 billion, new construction starts in November fell 5% from the previousmonth, according to Dodge Data & Analytics. The decline represented a partial pullback after the 13% increasereported for total construction in October, as nonresidential building lost some momentum following its improvedOctober pace. Decreased activity was also reported for housing in November, while the non-building constructionsector (public works and electric utilities/gas plants) held steady. During the first eleven months of 2015, totalconstruction starts on an unadjusted basis were $597.9 billion, up 8% from the same period a year ago.
Read the full article here.
Construction Dive 1/4/2016
Now that 2015 has come and gone, construction professionals are focusing attention on the year ahead. Analystspredict 2016 will be a strong year for the industry, as Dodge Data & Analytics' 2016 Construction Outlook reportpredicted 6% growth, with the value of construction starts reaching an estimated $712 billion. We talked with expertsfrom various sectors of the construction industry to find out their predictions for 2016. Their answers varied from newtechnology trends, to workforce concerns, to homebuyer preferences. But one common thread connected all of theexperts: they have high hopes that 2016 will bring strong demand and booming business.
Read the full article here.
CONSTRUCTION SPENDING FALLS FOR FIRST TIME IN 17 MONTHS
Construction Dive 1/4/2016
Construction spending slipped 0.4% in November to a seasonally adjusted annual rate of $1.12 trillion — the firstdecline since June 2014, the Commerce Department reported Monday. Nonresidential construction declined 0.7%,offsetting a 0.3% gain in residential construction. Within residential, single-family home construction increased 0.6%,and multifamily fell 0.7%. November's results came in below expectations, as economists polled by Reuters hadpredicted spending would rise 0.6%. October's spending rate was also revised down in the Commerce Departmentreport, from a 1.0% gain to a 0.3% rise.
Real GDP increased by an annual rate of2.0% in the third quarter of 2015, whileoverall GDP increased 2.2% since Q3 2014
Current dollar GDP increased 0.8%, or$146.5 billion in the third quarter to a levelof $18.1 trillion
The Gross Domestic Income (GDI), whichmeasures the value of the production ofgoods and services in the U.S. as the costsincurred and the incomes earned inproduction, increased 0.7% in the thirdquarter of 2015
Industrial production decreased 0.6% inNovember after decreasing 0.4% inOctober; it is down 1.2% YoY sinceNovember 2014
Capacity utilization for the industrial sectorfell 0.5% in November to 77.0% and is down2.1% since November 2014
Seasonally-Adjusted
Seasonally-Adjusted
(QoQ percentage change)
(Indexed to 2012)
INDUSTRY UPDATE │ JANUARY 2016
(2.5%)
(2.0%)
(1.5%)
(1.0%)
(0.5%)
0.0%
0.5%
1.0%
1.5%
Q32006
Q32007
Q32008
Q32009
Q32010
Q32011
Q32012
Q32013
Q32014
Q32015
Source: Federal Reserve
Source: Bureau of Economic Analysis
PAGE |
ECONOMIC UPDATE
5
PERSONAL CONSUMPTION EXPENDITURES
ECONOMIC SENTIMENT
In November, personal incomedecreased $9.4 billion, or 1.2%, whilepersonal consumption expenditures(PCE) increased $40.2 billion, or 0.3%
Wages and salaries were flat inSeptember, following a flat August aswell
Purchases of durable goods was flat inNovember compared to an increase of2.8% in the previous month; whilepurchases of non-durable goodsdecreased 0.2%, compared to adecrease of 0.2% in October
The Leading Economic Index (LEI)measures how consumers view prospectsfor their own financial situation, how theyview the near-term general economyprospects, and their long-term view ofeconomic prospects
The LEI for the U.S. improved in Novemberby 0.4% to 124.6, following a 0.6% changein October, and no change in September
For the eleven months ending November2015, the LEI increased 3.4%(approximately a 4.9% annual rate)
The continued rise in LEI suggests economicgrowth will remain moderate in 2016 withlittle reason to expect growth to pick upsubstantially
BUILDING PRODUCTS & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
(Percentage change in 3-month rolling average)
(Indexed to 2010)
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15
100
105
110
115
120
125
130
Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15
Source: Conference Board Leading Economic Index (LEI)
Source: Federal Reserve
PAGE | 6
ECONOMIC UPDATE
CONSUMER CONFIDENCE INDEX (CCI)
KEY INTEREST RATES
The Consumer Confidence Indexincreased to 96.5 in December, up from92.6 in November
Consumer confidence is currently up6.0% over the last six months, and 3.7%higher than December 2014
Consumers’ appraisal of currentconditions was mixed in December.Those saying business conditions are“good” increased from 25.0% to 27.3%.However, those saying businessconditions are “bad” also increasedfrom 16.9% to 19.8%
Consumers were more positive aboutthe labor market. The proportionclaiming jobs are “plentiful” increasedfrom 21.0% to 24.1%, while thoseclaiming jobs are “hard to get”decreased to 24.7% from 25.8%
The 30-year mortgage rate increased inDecember 2015 to 3.96%
The current mortgage rate is 10 basispoints higher than the rate fromDecember 2014
The Fed has indicated that it couldincrease rates over the next six months
BUILDING PRODUCTS & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
Seasonally-Adjusted
(Indexed to 1985)
0
20
40
60
80
100
120
0%
1%
2%
3%
4%
5%
6%
7%
8%
30-Yr Mortgage Rates 10-Yr Treasury
Effective Federal Funds Rate
Source: Federal Reserve
Source: Conference Board
PAGE | 7
ECONOMIC UPDATE
U.S. NON-RESIDENTIAL CONSTRUCTION
U.S. HOUSING STARTS
BUILDING PRODUCTS & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
Non-residential construction has laggedin recovery but has increased 10.2% sinceNovember of 2014
Non-residential construction decreasedby 0.8% from October to November, andhas decreased 0.1% over the last sixmonths
Several sectors within non-residentialconstruction that continue to seespending increases include commercial,industrial, and office / lodging
In the release of its estimates forNovember 2015, the U.S. Census Bureaurestated each of its monthly estimatesgoing back to January 2005, citing aprocessing error in the tabulation of data
Seasonally-Adjusted Annual Rate
-12%
-8%
-4%
0%
4%
8%
12%
$450
$500
$550
$600
$650
$700
$750
Non-Residential Construction MoM Change
($ in billions)
U.S. housing starts in November increased10.5% over October, and 16.5% YoY
Increases were driven by a 7.6% MoMincrease in single-family homes and a16.4% increase in multi-family homes
Rising employment and historically-lowmortgage rates are enticing buyers, whileincreasing prices induced by a lack ofhomes on the market are an incentive tostart new developments
Housing starts continue to rebound fromunprecedented lows reached in 2009,yet remain ~20% below the 50-yearaverage of 1.4 million starts per year
Total residential building spending for2015 is projected to be $382 billion, upfrom $354 billion in 2014
Residential building spending increasedat a 10.0% CAGR between 2012 and2015
FMI projects that spending will increaseat an 8.6% CAGR from 2016E through2019P
The Q3 RMI was 58 and has not dippedbelow 50 since Q3 2009
The overall RMI averages the indicatorsof current and future remodeling activity.An RMI over 50 indicates that remodelersare reporting higher activity than theprevious quarter
On a seasonally-adjusted basis, RMIposted a gain of 2.1% year-over-year inthe third quarter
*Improvements includes additions, alterations, and major replacements. It does not include maintenance and repairs.
($ in billions)
Source: FMI Consulting
2012 – 2015 CAGR: 10.0%
Source: NAHB
30
35
40
45
50
55
60
65
70
Q3 2007 Q3 2009 Q3 2011 Q3 2013 Q3 2015
Seasonally-Adjusted Annual Rate
PAGE | 9
M&A MARKET TRENDS
MARKET OBSERVATIONS
BUILDING PRODUCTS QUARTERLY M&A ACTIVITY
2015 global M&A activity reached record levels due to a buying spree from companies looking for growth
The total value of deals announced in 2015 reached $4.28 trillion, comfortably exceeding the $3.67 trillion recordset in 2007
− Q4 2015 was the third quarter in a row to post over $1 trillion in announced deal value
− Ten $50+ billion M&A deals were announced in 2015, accounting for 19% of the total announced dealvalue, the highest share on record
− Average deal size has increased for the fifth year-over-year period to reach the highest average on record
The favorable conditions in the debt markets from the first half of 2015 dissipated as the year came to a close,and second lien markets have significantly moderated over the last two months
Large corporations continue to drive M&A activity with significant cash balances and relatively cheap credit
Market volume in 2015 was driven primarily by outsized activity within a few sectors, most notably healthcareand technology, media & telecom
− North American building products deal activity was down 3.3% compared to 2014
BUILDING PRODUCTS & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
Note: Includes all building products or construction materials M&A transactions announced in the U.S. or Canada
70% of U.S. lumber demand is driven by housing, including new constructionand remodeling
Prices recovered in Q4 2015 from depressed levels in August through October
Framing Lumber Composite Price Index($ per thousand board feet)
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:
U.S. demand for roofing is projected to rise 3.9% annually to 252 millionsquares in 2019, valued at approximately $21.4 billion dollars
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 non-discretionary 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
Roofing Demand by Primary Segment
Description
Windows and doors market includes metal, wood, and vinyl windows anddoors for residential and non-residential end markets
Industry Commentary:
Window and door demand is primarily driven by new commercial andresidential construction, as well as repair and remodel spending
Quarterly remodeling spend decreased 0.8% during Q4 of 2015, following twoconsecutive positive quarters. Spend for Q4 was ~$148 billion
Leading Indicator of Remodeing Activity –LIRA ($ in billions)
BUILDING PRODUCTS & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
$100
$200
$300
$400
$500
Residential Reroofing
44%
Non-Residential Reroofing
37%
New Residential11%
New Non-Residential
8%
$80
$100
$120
$140
$160
Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
Source: Random Lengths
Source: Freedonia
Source: Joint Center for Housing Studies of Harvard University
PAGE |
SELECT SECTOR OVERVIEWS & TRENDS
11
WALLBOARD AND PLASTER
HVAC
PLUMBING FIXTURES AND FITTINGS
Description
Primarily made from gypsum, products include wallboard, plaster,plasterboard, molding, ornamental moldings, statuary, and architecturalplasterwork
Industry Commentary:
Industry executives are uncertain on ability to continue price increases into2016, though confidence in demand remains high
Gypsum product demand is primarily driven by new commercial andresidential construction, as well as repair and remodel spending
Over the past two years, rising wallboard prices and cost-saving measureshave improved industry profit margins
New home inventories remain near historically low levels and as demand fornew homes grows, builders will respond by increasing their stock
U.S. Wallboard Demand Outlook($ in millions)
U.S. HVAC Demand Outlook($ in millions)
Plumping Equipment Industry Revenue Outlook($in millions)
BUILDING PRODUCTS & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
Description
Residential, commercial, and industrial heating, ventilation, air-conditioning,and refrigeration equipment
Industry Commentary:
U.S. shipments of central air conditioners and air-source heat pumpsdropped modestly in 2015 compared to 2014
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
Description
Plumbing fixtures, bathtub and shower fixtures, and indoor pipes constitutethis segment
Industry Commentary:
Through 2018, U.S. demand for plumbing fixtures and fittings is projected toadvance ~3% annually to nearly $55 billion
Primary demand determinants are repair and remodel spending, new homeconstruction, and non-residential improvement and repair
Rising demand for higher-margin products such as hydronic heating systemsand insulated pipes have expanded overall profit margins since 2010
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
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
2007 2009 2011 2013 2015 2017P
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
2007 2009 2011 2013 2015 2017P
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
2007 2009 2011 2013 2015 2017P
Source: IBIS World
Source: IBIS World
Source: IBIS World
PAGE |
0
4,000
8,000
12,000
16,000
20,000
SELECT SECTOR OVERVIEWS & TRENDS
12
AGGREGATES
ASPHALT
CEMENT AND CONCRETE
BUILDING PRODUCTS & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
Description
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 is derived from total construction spending, which is based onglobal, national, regional, and local economic conditions. 25 billion tonsof aggregates are used per year globally, roughly four tons per person
On July 9th 2015, Congress passed a bill to ease permitting for domesticmines, which included aggregates
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
On December 4th, 2015, Congress passed The Fixing America’s SurfaceTransportation (FAST) Act, a comprehensive five-year, $305 billion highwayspending bill
MAP 21 regulations extend and fund federal highway programs, includingover $120 billion for infrastructure programs
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.
OUR FIRM
BUILDING PRODUCTS & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
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HARRIS WILLIAMS & CO.
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BUILDING PRODUCTS & MATERIALS
INDUSTRY UPDATE │ JANUARY 2016
Bloomberg
Builder Online
Building Design & Construction
Building-Products.com
Bureau of Economic Analysis
Concrete Construction
Conference Board
Construction Dive
Dodge Data & Analytics
Eurostat
Federal Reserve
Floor Daily
FMI Consulting
Freedonia
Global Industry Analysts
IBIS
NAHB
New York Times
PNC Economic Outlook
S&P Capital IQ
S&P Leveraged Commentary & Data
The Wall Street Journal
Thomson Financial – SDC Database
Thomson Reuters
U.S. Census Bureau
U.S. Energy Information Administration
U.S. Geological Survey
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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