Building Products Sector Outlook Favorable for 2022, Rising Commodity Costs, Labor and Supply Chain Headwinds Remain

Infrastructure, healthcare, and technology of all types will drive growth in 2022.

Darin GoodManaging Director, Capstone Partners

Healthy construction backlogs, the persistence of Residential and Nonresidential Construction markets, and the low interest rate environment have fueled robust demand in the Building Products sector. The strong pipeline of near-term building activity has been evidenced by the improvement in the Associated Builders and Contractors’ (ABC) Backlog Index, which increased to 8.1 months in October, rising from 7.6 months in September, according to ABC.¹ Notably, the Commercial & Institutional segment has recorded the highest monthly backlog levels at 8.3 months, a year-over-year (YOY) increase of 0.8 months. In addition, the recent passage of the Infrastructure Bill has provided enhanced visibility to the Nonresidential markets, allocating $550 billion in new funds to transportation, broadband, and utilities infrastructure. With state and local governments leveraging improved budgets and newly infused federal funding, sector participants remain optimistic for sustained demand moving into 2022. However, building products providers and contractors have increasingly combated rising commodity costs, labor constraints, and supply chain disruptions. While industry sales have remained at an elevated level, cost pressures may begin to manifest in declining profitability, as contractors expect margins to fall over the next six months, according to ABC.

Select building products have registered substantial price increases, led by steel mill products which have increased 141.6% YOY, according to ABC’s analysis of the Bureau of Labor Statistics producer price index data.² In addition, following a series of significant price increases, softwood lumber began to show signs of price normalization in recent months, falling 19.5% YOY in October. However, the Biden administration’s recent tariffs of 17.99%, more than twice the previous tariff of 8.99%, on Canadian softwood lumber is likely to threaten this recent price stability, and further add to the appreciation of homebuilding costs. Moving into 2022, labor constraints and timely construction materials procurement will remain key headwinds for contractors and building products providers. In addition, with prospects of the Federal Reserve quickening the tapering of bond purchases, many are projecting multiple interest rate hikes next year – increasing the cost of capital for the financing of construction projects. While economic uncertainties linger, the outlook for the Building Products sector remains favorable, with nonresidential and nonbuilding construction starts soaring in October, rising 29% and 52% from September, according to Dodge Data & Analytics.³ As industry participants look to expand services and capacity to undertake larger projects, consolidation activity is forecasted to continue at the feverish pace seen through 2021.

Building Products M&A Continues at a Rapid Pace to Close the Year

Merger and acquisition (M&A) activity in the Building Products sector has maintained a healthy pace approaching year end, with 274 transactions announced or completed, which marks a 33% YOY increase. The elevated volume has been fueled by strong industry demand, favorable valuations, and the current seller-friendly tax environment. Notably, the average EBITDA purchase multiple has amounted to 9.1x through year-to-date 2021 a slight increase from 8.9x in 2020. The scale of the target company has been shown to drive M&A valuations, as many of the premium multiples paid have been for companies above $150 million in enterprise value.  Private strategic buyers have accounted for a majority of M&A volume, comprising 54% of announced or completed transactions through December 8. Private equity buyers have also remained active (30.7% of transactions), capitalizing on the low cost of capital and mounting levels of dry powder - largely utilizing add-on acquisitions to enhance the scale of portfolio company holdings. Robust private equity interest has been supported by the high valuations that can be realized upon exit, evidenced by American Securities sale of Henry Company to Carlisle Companies (NYSE:CSL) for an enterprise value of $1.58 billion, equivalent to 13.2x EBITDA. Henry is a leading building envelope systems provider that serves customers undertaking construction and repair & restoration projects within the Residential, Light Commercial, and Commercial end markets. The acquisition aligns with Carlisle's Vision 2025 initiative which aims to simplify its portfolio and build scale through synergistic acquisitions. The transaction is expected to be immediately accretive to Carlisle's growth outlook and EBITDA margin, according to a press release.⁴

Door and Window Providers Experience Strong Buyer Appetite

Sector participants offering door and window products and components have experienced strong acquirer appetite throughout 2021, as healthy construction starts and a surge in remodeling activity have contributed to elevated demand. Supply chain pressures have impacted project timelines, contributing to increased costs, although leading door and window providers continue to capture strong revenue gains. A key component of high levels of operating profitability moving forward will be the ability of materials providers to pass on elevated costs to customers. Notably, premier window and door component manufacturer Quanex Building Products (NYSE:NX) reported a YOY revenue increase of 32% in Q3, according to its earnings release.⁵ While inflation, labor costs, and production challenges have pressured margins, Quanex anticipates it will continue to pass incremental costs onto customers through index pricing, surcharges, and price increases. Many businesses in the sector have turned to consolidation to bolster offerings, scale, and margin profile. Recent select window and door M&A transactions are outlined below.

• The Cook & Boardman Group acquires Universal Manufacturing (December, Undisclosed) - Cook & Boardman, a portfolio company of Littlejohn & Co. has acquired Universal Manufacturing, a full-service distributor of commercial doors, frames, and hardware. Terms of the transaction were not disclosed. The acquisition provides a complementary product portfolio to Cook & Boardman, which is the nation's leading distributor of commercial doors, frames & hardware, electronic access control equipment, and specialty products. In addition, the transaction follows an active M&A streak for Cook & Boardman, which has acquired several companies in the space throughout 2021 including Galeno and Associates (September, undisclosed), H&H Door Company (March, undisclosed), and James Doorcheck (March, undisclosed).

• US LBM acquires Professional Builders Supply (December, Undisclosed) - US LBM has acquired Professional Builders Supply, a provider of residential and commercial building materials including lumber, siding, trim, doors, windows, and decking, for an undisclosed sum. The addition of Professional Builders Supply enhances US LBM's presence, now operating across 31 locations in the Carolinas. "The addition of a preeminent operator in Professional Builders Supply to our existing successful network in the Carolinas puts US LBM in a leading position in the rapidly growing Housing markets of Raleigh-Durham, Charlotte, Charleston, Wilmington and Greenville-Spartanburg," L.T. Gibson, US LBM President and CEO, said in a press release.⁶

• Janus International acquires Doors & Building Components (July, $168 million, 12.0x EBITDA) - Janus International (NYSE:JBI) has agreed to acquire Doors & Building Components (DBCI) for an enterprise value of $168 million, equivalent to 2.0x revenue and 12.0x EBITDA. DBCI is a premier manufacturer of steel roll-up doors and building products for the Commercial and Self Storage Industries. The acquisition expands Janus' customer base and geographic footprint and will drive operational synergies.

Roofing Products Providers See Increased Consolidation

Roofing product providers have also experienced strong acquirer demand amid healthy Residential Construction market dynamics that have persisted through much of 2021. Leading public companies have demonstrated strong improvement in operating results, lending to increased flexibility in M&A pursuits. Notably, Beacon Roofing Supply (Nasdaq:BECN), which generates 80% of its business from residential or commercial roofing, reported a 12% increase in sales in its fiscal year 2021, according to its earnings release.⁷ In addition, Beacon Roofing completed its first acquisition since 2018 (see below), demonstrating the strong financial standing of industry participants and the emphasis the sector is placing on inorganic growth in the current environment. Select recent roofing M&A transactions are discussed below.

• Cornerstone Building Brands acquires Union Corrugating Company (November, Undisclosed) - Cornerstone Building Brands (NYSE:CNR) has agreed to acquire Union Corrugating, a leading provider of metal roofing, roofing component, and accessories. Terms of the transaction were not disclosed. The acquisition bolsters Cornerstone's presence in the $2 billion Residential Metal Roofing market, a sector experiencing solid demand due to its low maintenance and environmentally sustainable solutions, according to Cornerstone's earnings release.⁸

• Beacon Roofing Supply acquires Midway Sales & Distributing (November, Undisclosed) - Beacon Roofing Supply has acquired Midway Sales & Distributing, a premier provider of residential and commercial exterior building and roofing supplies for an undisclosed sum. Midway serves customers through ten locations across Kansas, Missouri, and Nebraska and has achieved approximately $130 million in annual sales, according to a press release.⁹ The addition of Midway is expected to enhance Beacon's presence in the Midwest markets.

Endnotes

1. Associated Builders and Contractors, "ABC’s Construction Backlog Rebounds in October; Contractor Confidence in Sales and Profit Margins Falls," https://www.abc.org/News-Media/News-Releases/entryid/19088/abc-s-construction-backlog-rebounds-in-october-contractor-confidence-in-sales-and-profit-margins-falls, accessed December 9, 2021.

2. Associated Builders and Contractors, " Construction Input Prices See Largest Monthly Increase Since June, Says ABC," https://www.abc.org/News-Media/News-Releases/entryid/19097/construction-input-prices-see-largest-monthly-increase-since-june-says-abc, accessed December 8, 2021.

3. Dodge Data & Analytics, " Total Construction Starts Soar in October," https://www.construction.com/news/Total-Construction-Starts-Soar-in-October-2021, accessed December 9, 2021.

4. Carlisle Companies, "Carlisle Companies to Acquire Henry Company," https://www.carlisle.com/investors/news/press-release-details/2021/Carlisle-Companies-to-Acquire-Henry-Company/default.aspx, accessed December 13, 2021.

5. Quanex Building Products, " Quanex Building Products Announces Third Quarter 2021 Results and Reaffirms Full Year 2021 Guidance," https://investors.quanex.com/news-releases/news-release-details/quanex-building-products-announces-third-quarter-2021-results, accessed December 9, 2021.

6. Cision, "US LBM Acquires Professional Builders Supply," https://www.prnewswire.com/news-releases/us-lbm-acquires-professional-builders-supply-301434930.html, accessed December 9, 2021.

7. Beacon Roofing Supply, " Q4 2021 Earnings Call," https://ir.beaconroofingsupply.com/financials-and-presentations/financial-summary/default.aspx, accessed December 9, 2021.

8. Seeking Alpha, " Cornerstone Building Brands, Inc.'s (CNR) CEO Rose Lee on Q3 2021 Results - Earnings Call Transcript," https://seekingalpha.com/article/4468005-cornerstone-building-brands-inc-s-cnr-ceo-rose-lee-on-q3-2021-results-earnings-call, accessed December 9, 2021.

9. Business Wire, " Beacon Announces Acquisition of Premier Roofing & Exteriors Distributor Midway Wholesale," https://www.businesswire.com/news/home/20211101005751/en/Beacon-Announces-Acquisition-of-Premier-Roofing-Exteriors-Distributor-Midway-Wholesale, accessed December 9, 2021.