In This Quarterly Report, Provided Exclusively to Rock Products, Capstone Headwaters Offers Insight Into Merger & Acquisitions (M&A), Capital Markets Trends, Aggregate Production and Pricing.

By Darin Good, Brian Krehbiel and Crista Gilmore

Capstone Headwaters Building Products and Construction Services Team advises industry business owners, entrepreneurs, executives and investors in the areas of merger and acquisitions, capital raising and various special situations advisory. Due to our background and laser focus within the industry, Capstone Headwaters is uniquely qualified and has an unparalleled track record of successfully representing Building Products and Construction companies.

Public Valuation Commentary

Figure 1 includes the constituents of Capstone Headwaters Aggregates Materials Index as of 12/31/2017. Average EBITDA multiples increased from 12.6x at 9/30/17 to 12.9x at year-end.

Figure 1: Public Valuation Multiples

	US Dollars in Millions			EBITDA	Enterprise Value/
Company Name	TEV	Revenue	EBITDA	Margin	Revenue	EBITDA
LafargeHolcim Ltd.	51,851	26,547	5,328	20.1%	1.95x	9.7x
CRH Plc	37,802	28,447	3,561	12.5%	1.33x	10.6x
Cemex SAB de CV	25,117	13,653	2,569	18.8%	1.84x	9.8x
HeidelbergCement AG	34,720	19,001	3,167	16.7%	1.83x	11.0x
MDU Resources Group, Inc.	6,940	4,443	627	14.1%	1.56x	11.1x
Vulcan Materials Company	20,023	3,890	935	24.0%	5.15x	21.4x
Martin Marietta Materials, Inc.	15,557	3,966	1,007	25.4%	3.92x	15.4x
Buzzi Unicem S.p.A.	6,878	2,613	522	20.0%	2.63x	13.2x
Summit Materials, Inc.	4,907	1,933	416	21.5%	2.54x	11.8x
Eagle Materials, Inc.	6,068	1,380	400	29.0%	4.40x	15.2x
U.S. Concrete, Inc.	2,085	1,336	160	12.0%	1.56x	13.0x

*TEV = Total Enterprise Value (Market Capitalization + Net Debt)

Figure 2: 2017 Total Return Comparison

Our Aggregates Materials Index delivered a total return of 4.1 percent in 2017, substantially lagging the S&P 500 and DJIA total returns of 21.8 percent and 25.1 percent, respectively.

M&A Overview

Preliminary estimates of total acquisition activity (Figure 3) in Q4 2017 demonstrate a decrease of 39.6 percent compared to the same period in 2016 in terms of the number of aggregates related transactions completed (29) in the U.S. and Canada. Conversely, transaction activity was up 16 percent compared to Q3 2017. It is common for transaction activity to accelerate in Q4 as many acquirers want to close prior to year-end. Publicly traded aggregates producers were notably active during the quarter including U.S. Concrete, CRH plc and Vulcan Materials.

Figure 3: Select Q4 2017 Industry M&A Activity

Transaction Date	Target/Issuer	Buyers/Investors	Transaction Value ($mm)
12/29/2017	Aggregates USA, LLC	Vulcan Materials Company	$900.0
12/20/2017	Cherokee Bridge and Road, Inc.	U.S. Concrete	Undisclosed
12/14/2017	Heidelberger Kalksandstein GmbH	H+H Deutschland GmbH	$129.4
12/13/2017	Poundfield Products Limited	SigmaRoc plc	$13.7
11/30/2017	Suwannee American Cement	CRH plc	Undisclosed
11/20/2017	Cleveland Ready Mix Cement, LLC	Sequatchie Concrete Service, Inc.	Undisclosed
11/17/2017	Polaris Materials Corporation	U.S. Concrete	$247.7
11/08/2017	XI (DL) Holdings GmbH	James Hardie Industries plc	$548.0
11/02/2017	Super-Tex Products, Inc.	Parex USA, Inc.	Undisclosed
10/31/2017	Columbus Brick Company	General Shale/Wienerberger AG	Undisclosed
10/19/2017	CPM Group Limited	Marshalls plc	$50.6

Sources: FactSet and Capital IQ

Private Equity Transaction Activity and Valuations

GF Data Resources, a provider of detailed information on business transactions ranging in size from $10 million to $250 million, provides quarterly data from over 201 private equity firm contributors on the number of completed transactions. Figure 4 provides the number of completed transactions from GF Data contributors, the average Total Enterprise Value (TEV)/EBITDA multiple and the average amount of debt utilized in the transaction computed as a multiple of EBITDA. The data, although not industry specific, shows valuations increasing to record levels during the quarter.

Figure 4: Private Equity Valuations & Leverage

	Q4 2015	Q1 2016	Q2 2016	Q3 2016	Q4 2016	Q1 2017	Q2 2017	Q3 2017	Q4 2017
# of Transactions	68	50	76	36	58	62	51	49	68
TEV/EBITDA	6.6x	6.5x	7.1x	6.6x	6.7x	6.6x	7.3x	7.5x	8.1x
Total Debt/EBITDA	3.9x	4.4x	4.0x	3.8x	3.7x	3.9x	4.3x	4.6x	4.4x
Senior Debt/EBITDA	2.7x	2.8x	3.3x	3.2x	2.8x	3.1x	3.6x	3.8x	3.5x

Source: GF Data

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COMPANY SPOTLIGHT

Cemex S.A.B. de C.V.

Company Description:

Cemex experienced an increase of 4 percent in consolidated net sales for Q4 and a 3 percent increase for the full-year 2017. The increase in sales is mainly attributable to higher product prices. But, despite the increase in sales, operating EBITDA on a like-to-like basis decreased by 6 percent for the year.

Fernando A. Gonzalez, chief executive officer, said, “Although 2017 was a challenging year, our two largest markets, Mexico and the United States, performed well with like-to-like increases in their EBITDA. We also generated free cash flow after maintenance capex of close to $1.3 billion, with a 50 percent EBITDA-to-free-cash-flow conversion rate and which, together with our asset-divestment initiatives, resulted in pro-forma debt reduction of close to $2.1 billion during the year. We had important headwinds during the year: underperformance in Columbia, Egypt and the Philippines as well as increased energy costs, mainly in Mexico. As we have done in the past, we focused on the variables we control to dampen these headwinds and we continued to deliver solid results.”

In the U.S., volume for Cemex’s three core products (domestic gray cement, ready-mix, aggregates) increased during Q4 on a like-to-like basis, despite notable precipitation and the aftermath of the hurricane in Florida. A great deal of the increase was due to accelerated activity in single-family construction and improvements. Cemex also reported an increase in the industrial- and-commercial sector, boosting total operating EBITDA in the U.S. on a like-to-like basis by 9 percent.1

Ownership: Publicly Traded (Ticker: CX)

Headquarters: San Pedro Garza García, Mexico

Markets: Construction Materials

FY 2017 Revenue: $13.7 Billion

HeidelbergCement Group

Company Description:

HeidelbergCement completed a record year in 2017 with double digit growth in sales volume for cement (22.3 percent), aggregates (12.2 percent) and ready-mixed concrete (11 percent). Asphalt volume growth lagged but still outpaced 2016 with growth of 2.8 percent. Much of this growth was driven by the consolidation of Italcementi beginning on July 1, 2016. In 2016, Italcementi contributed to sales volumes, revenue and results only in the second half of the year, in 2017, for the full year. On a like-for-like basis, volume increased across the board but at a slower pace.

“We successfully completed the year 2017 despite a very challenging market environment and achieved our operational earnings target,” said Dr. Bernd Scheifele, chairman of the managing board. “The challenges were numerous: energy cost inflation, increased competition in emerging markets, especially in Indonesia, uncertainties following the Brexit decision and bad weather, especially in the USA. Nevertheless, we were able to increase our result from current operations as guided. The consistent focus on efficiency and margin improvement and the successful integration of Italcementi that led to higher than expected synergies contributed to this success. Overall, 2017 was a record year for sales volumes, revenue and result from current operations.”

In 2017 HeidelbergCement finalized the acquisition of Cemex’s Pacific Northwest Materials Business consisting of aggregate, asphalt and ready mixed concrete operations in Oregon and Washington for a purchase price of approximately $150 million.2

Ownership: Publicly Traded (Ticker: HEI.DE)

Headquarters: Heidelberg, Germany

Markets: Construction Materials

FY 2017 Revenue: $17.3 billion

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Notable Transaction

Vulcan Materials Co. Acquired Aggregates USA (Dec. 29, 2017)

Vulcan Materials Company has acquired Aggregates USA for $900 million. The transaction closed in late December and is expected to grow Vulcan’s market share in the Southeast.

The acquisition includes three granite quarries in Georgia and 16 rail distribution yards in Georgia, South Carolina, and Florida. Pursuant to its previously planned and announced agreement with the United States Department of Justice, Vulcan has divested certain former holdings of Aggregates USA, LLC relating to its operations in Tennessee and Virginia to Blue Water Industries LLC, for a sales price of $290 million. Aggregates USA, LLC produces construction aggregates including sand, gravel, limestone, and granite.

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CONSTRUCTION MATERIALS UPDATE

Construction input prices decreased slightly in December 2017 and are up 5.5 percent on a year-over-year basis, according to an Associated Builders and Contractors (ABC) analysis of data recently released by the U.S. Bureau of Labor Statistics.

“Given stronger global and domestic economic growth, elevated liquidity in international financial markets, burgeoning trade disputes and efforts by certain energy producers to limit supply growth even as prices rise, one would have expected a sharper increase in construction materials prices in December,” said ABC Chief Economist Anirban Basu. “The fact that inflation remains contained should be viewed by most contractors as very good news. Not only are many contractors vulnerable to sudden increases in certain materials prices, but faster inflation can trigger higher interest rates, which ultimately reduce the demand for construction services.”3

Figure 5: Producer Price Index

Source: US Bureau of Labor Statistics

AGGREGATES MATERIALS

Industry results in Q4 2017 showed increases in volume compared to Q4 2016 for cement (3.3 percent), sand and gravel (9.9 percent) and crushed stone (3.7 percent). Ready-mix concrete volume increased 2.4 percent year-over-year in 2017.

Cement

• Portland cement consumption (21.1 million metric tons) increased by 3.3 percent in Q4 2017 compared to Q4 2016.
• The average selling price per ton has increased 26.3 percent from 2012 to 2017.
• 2017 volume (84.3 million metric tons) increased 2 percent over 2016.

Ready-Mix Concrete (RMC)

• RMC prices increased 4.5 percent in 2017 but were down 0.8 percent when compared to Q3 2017. Price data is computed from the average RMC net selling prices of U.S. Concrete, Vulcan Materials, Martin Marietta and Eagle Materials.
• Ready-mix concrete volume increased 2.4 percent year-over year reaching 351 million cu. yds.

Sources: NRMCA Industry Data Survey, Average RMC selling price of U.S, Concrete, Vulcan Materials, Martin Marietta Materials & Eagle Materials

Asphalt

• Asphalt prices increased 3.7 percent in 2017 as measured by the average net asphalt selling prices of Vulcan Materials and Martin Marietta. Asphalt prices rebounded in 2017 from the 4.3 percent decline experienced in 2016.
• According to the Freedonia Group, asphalt volume is forecasted to grow 3 percent annually through 2021, which would result in an estimated 350 million metric tons produced in 2017.

Sources: EAPA Asphalt in Figures, Vulcan Materials & Martin Marietta Materials average of net asphalt selling prices

Crushed Stone

• An estimated 339 million metric tons of crushed stone was produced and shipped for consumption in the U.S. in Q4 2017.
• 2017 volume (1,352 million metric tons) was down 0.6 percent from 2016 while the average price per metric ton increased 2.8 percent to $11.45.

Source: US Geological Survey

Sand and Gravel

• Production in Q4 2017 increased 9.9 percent compared to Q4 2016.
• 2017 total volume of 906 million metric tons is 1.6 percent higher than 2016. The average price per metric ton increased 1.5 percent to $8.70.

Source: US Geological Survey

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CITATIONS

1. Cemex 2017 Fourth Quarter Results, https://www.cemex.com/documents/20143/21624997, accessed March 7, 2018.

2. HeidelbergCement reports preliminary figures for Q4 and the full year 2017, https://www.heidelbergcement.com/en/pr-20- 02-2018,
accessed March 9, 2018.

3. Associated Builders and Contractors, Inc., https://www.abc.org/News-Media/News-Releases/entryid/12747, accessed March 9, 2018.

4. US Geological Survey, https://www.usgs.gov/, accessed March 15, 2018.

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About the Authors

Darin Good, managing director

Good is a recognized expert witness and speaks nationally regarding merger and acquisitions. Courts and clients appreciate his ability to synthesize large amounts of complex business information and present it in concise terms that are clearly understood by all parties. Trade groups and national publications have recognized Good’s business acumen and technical knowledge. Prior to joining Capstone Headwaters, Good started, operated, made acquisitions and sold three successful companies in construction, import and distribution, and commercial real estate management. Over a two-year period, he implemented the turnaround of the underperforming business units of a publicly held national franchisor. Two sell-side transactions that Good performed are published and taught in business schools around the globe. Good teaches these cases at the University of Denver, where he received his Bachelor of Science in Finance.

 

Brian Krehbiel, senior vice president

Prior to joining Capstone Headwaters, Krehbiel spent five years with a boutique investment bank performing sell-side transactions, financial modeling and value‐add client services. At Capstone Headwaters, Krehbiel is a member of the Building Products & Construction Services team assisting clients with sell-side, buy‐side and debt and equity raise transactions. Prior to his career in Investment Banking, Krehbiel developed construction industry and operations experience owning and managing a successful family-owned residential construction company. His education and industry expertise are resources used in all aspects of the transaction process. Krehbiel graduated from the University of Northern Colorado with a BS degree in Finance and he is a CFA Charterholder.

 

 

Crista Gilmore, vice president

Gilmore started her career at KPMG LLP where she audited a wide range of businesses from small non‐profit to large Fortune 100 companies. Gilmore then accepted a senior associate role with a $12 billion multi‐strategy hedge fund managing the monthly PnL close process for several funds. She was promoted to vice president, valuations responsible for pricing the portfolio of more than 8,000 securities monthly, as well as reporting to the Valuation Committee on a bi‐monthly basis. At Capstone Headwaters, Gilmore works with clients to improve their financial metrics and reporting capabilities. Additionally, she performs research, valuation analysis, prepares marketing documentation, manages client data rooms and responds to due diligence inquiries. Gilmore graduated summa cum laude from Drake University with a degree in Finance and Accounting. She also earned a Master’s of Accounting degree from Drake University.