sohn contest wr grace
DESCRIPTION
Venkata AmarthaluruTRANSCRIPT
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W.R. Grace Corporation (NYSE: GRA)
May 4th, 2015
Mitesh Amarthaluru (Duke 17), Venkata Amarthaluru (Wharton 15, Engineering 15), Nicholas Liu (Wharton 15, Engineering 15), John Lu (Wharton 15, Engineering 15), Anubhav Maheshwari (Wharton 15, Engineering 15) Video Pitch Link: http://tinyurl.com/WRGrace
Current Price (5/1/15): $97.50 Price Target: $137.30
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Industrials Company operating in catalyst technologies, materials technologies, and construction products Exited Chapter 11 on Feb. 3, 2014 after 13 years in bankruptcy due to asbestos litigation Management has announced plan to spin-off Graces construction products business in 2016 with New
Grace retaining the catalysts technologies and materials technologies businesses Idea Generation: Circle of Competence 1. Industrials Sector 2. Special Situations 3. Engineering Expertise Operating Segments Catalyst Technologies: Largest player (33% share) in oligopolistic industry with secular tailwinds Construction Products: 2nd largest player (8% share) for concrete admixtures industry, Largest player (18%
share) for cement additives; industry fragmentation resulting from localized monopolies
I. Company Overview
Financials Current Price $97.50
Market Cap $7.0bn
Enterprise Value $8.5bn
EBITDA Margin (2014) 17.8%
EV/TTM Adj. EBITDA 11.2x
EV/(EBITDA-Capex) 13.1x
As of May 1st, 2015
2012 Sales Breakdown 2014 Revenue and EBIT Breakdown
Business Description
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1. Grace operates in an oligopolistic industry with high barriers to entry, market share stability, and high ROIC levels.
2. Grace maintains a deep competitive moat and recession resistant business due to customer captivity, specialized products, and technical expertise.
3. Consensus mispricing exists in the marketplace because of Graces post-bankruptcy status, understatement of excess assets, and overlooked margin improvement potential.
4. There are clear pathways to value realization from the upcoming spinoff, effective capital allocation, and increased investor transparency.
Recommendation: Buy Grace stock pre-spin with the intention of selling Grace Construction Products stock following its spin-off in 2016 and hold New-Grace over at least a 3 year period to realize a projected asymmetric equity upside of 40.08%.
II. Investment Thesis
W.R. Grace is a recession-resistant cash compounder with clear paths to value realization.
SOTP Equity Value 109.84$ 137.30$ Cumulative Upside 12.06% 40.08%Value CAGR over 3 Years 3.87% 11.89%
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W.R. Grace is the market leader in an oligopolistic industry where the top 4 players have 89.2% market share
Barriers to Entry Economies of Scale: 45% of cost structure is
fixed, providing high operating leverage Demand Side Barriers: Customer specific
products create high switching costs Technology Barriers: Specialized technology
with continued R&D investment necessary
III. Industry Overview: Catalyst Technologies
Oligopoly with high barriers to entry Pricing discipline in oligopoly
Catalyst technologies companies limit capacity expansion to 1-2% per year with a focus on value accretive pricing
Increasing pricing allows a more effective EBITDA lift increasing volume
Albemarle attempted volume competition in 2012-2013 unsuccessfully and recognizes importance of pricing discipline.
Anonymous, Goldman Sachs Equity Research Analyst
Current AdditionalSales Capacity
Capacity (thousand tons) 444.5 163.5(x) Utilization 85.0% 85.0%
Volume 377.8 139.0Price ($/ton) $3,300.0 $2,970.0
Revenue $1,246.8 $412.8Price Change (10.0%)
EBIT Loss ($124.7) $124.7EBIT Margin 30.2%
Price Decrease (10.0%)Additional Capacity Necessary 36.8%
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1. Market shares for oligopolistic players have shifted by less than 5% since 2010
2. Adj. ROIC (5 year average) of 31.5% for Catalyst division consistently exceeds 8.5% cost of capital
3. Value enhancing pricing industry structure where price is not sacrificed for market share increase
III. Industry Overview: Catalyst Technologies
Operational Segment ROIC: Catalyst technologies outperformance
Evidence of barriers to entry Refining catalyst market share stability
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W.R. Grace benefits when crude prices fall and experience limited effects when prices rise.
III. Industry Overview: Macro View
Crude Price v. Refinery Utilization GRA Sales v. Refinery Utilization
Crude Price v. GRA Sales 3 Year Avg. Correlation v. Time
1. Compiled using US Energy Information Administration Statistics (LWC Estimates)
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Long Standing Customer Relationships: Extended 3 year contract life for catalysts Customer renewal rate of 70% at contract
completion(1)
Largest customers have specialized products and have worked with Grace for decades
Products are non-substitutable to customers and small percentage of cost:(2)
Essential input for crude breakdown and specialized to customers
For refining catalysts, for barrel of oil refined, $0.15-$0.25 in catalyst cost
With total refinery cost of $4.75 per barrel, catalyst cost represents ~4.2% of total costs in the refinement process(3)
1% of cement producers costs are additives
IV. Business Model: Competitive Advantages
Customer Stability Leading Market Positions
Focus on core competencies has enabled Grace to become a market share leader in its products
2008 2014FCC HPC EB Resid HPC FB Resid HPC Distillate HPC Hydrocracking Polyethylene (PE) Catalyst PE Catalyst Support Polypropylene (PP) Catalyst PP Process Technology Licensing PE / PP Single Site Catalyst Chemical Catalysts Zeolite Technology Biofuels Catalysts MTO Catalysts
Legend Market Leader Strong Position Developing Position No Position
Source: GRA 2014 Investor Day Presentation
WR Grace Market Position
Fut
ure
Spec
ialty
Ref
iner
y
1. Source: The Catalyst Group 2. Source: Anonymous, W.R. Grace Finance Manager 3. PBF Energy May 2014 Presentation
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Competitive Base W.R. GraceC/O Ratio 6.9 6.4Conversion, wt% 76.0 77.4Dry Gas, wt% 1.0 1.0LPG, wt% 18.3 18.6Gasoline 54.2 55.3LCO, wt% 17.2 16.9Bottoms, wt% 6.8 5.7
Graces products are non-commodity with individual customer customization
New catalyst products have research life cycles of at least 1 year
1. Christophe Chau, Rosann Schiller, W.R. Grace Catalagram Spring 2015
IV. Business Model: Competitive Advantages
Economies of scale from R&D expenditures
Technical Barriers to Entry Technical Advantages
Technical advantages of Graces product results in economic uplift of $0.40/bbl(1)
Extensive research by my team is necessary to create superior technology that meets specific needs. Product customization is a requirement for us to succeed. Anonymous, Senior Principal Engineer, W.R. Grace
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Through the 2008 recession, Grace experienced only a 15% revenue reduction while increasing operating margins due to pricing power
Overall improvement in margins since 2010 highlights operating leverage, sustained ROIC, and nimble supply chains
IV. Business Model: Recession Protection
Recession protection Above-cycle utilization
Industry has a current utilization of 94.6% while normalized cyclical utilization is 85.0%
Above average utilization allows the business to benefit from increased operating leverage
Difficulty of supply coming online provides a favorable supply/demand backdrop (demand expected to grow 3.0% annually)
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W.R. Grace Key Operating Metrics
Revenue Gross Margin %
EBITDA Margin % EBIT Margin %
Key ValueMarket Size ($mm)* $2,622.0FCC Cost ($/mt)** $3,300.0Sales Volume ('000s mt) 794.5Annual Capacity ('000s mt)*** 839.5Utilization 94.6%Typical Utilization**** 85.0%Deviation from Norm 11.3%*A lbemarle IR Presentation**C hemical Week***Letzsch C onsulting****The C atalyst Group
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V. Value Drivers: Construction Products Spin-off
1. Spin-off of construction products provides multiple pathways to value realization.
1. Multiples normalization to industry peers results in 33.2% upside Specialty Catalysts comps trade at EV/FY14 EBITDA of 8.7-14.0x Construction Products comps trade at EV/EBITDA of 6.7-9.3x Grace trades at EV/EBITDA of 11.2x due to disproportionate drag from construction On a SOTP+NOL basis, Grace should be trading at a multiple of 13.0x, an upside of 33.2%
2. Leverage moved to Construction Products spin-off, delevering New Grace cap structure New Grace is anticipated to have Net Debt/Adj. EBITDA of 2.0-2.5x, while Grace
Construction Products is projected to have Net Debt/Adj. EBITDA of 3.0-3.5x
3. Refocused business models Spin-off will allow for investment decisions to be optimized based on each respective company,
improving management focus and cost productivity
Grace Construction Products requires significantly more capex relative to New Grace, requiring a different financing model
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2. W.R. Grace is properly incentivized to continue implementing effective capital allocation.
Activist investors own 27.7% shares
Engaged shareholder base improves capital allocation and creates value enhancement
V. Value Drivers: Effective Capital Allocation
Distressed Activist Ownership Incentivized Management
Share Repurchases Business Reinvestment
In Feb. 2014, the board announced a share repurchase program of $500mm ending Jan. 2015
In Feb. 2015, the board announced a similar program to buy back an additional $500.0mm
Graces $557.5mm cash position provides dry powder to execute share repurchases
$400mm adjusted annual FCF provides additional funds to for shareholder friendly practices
1. CapitalIQ Public Ownership Detail - Form13F 2. Definitive proxy statement DEF 14A 3. WR Grace: The End of an Empire- The Wall Street Journal
Fred Festa, CEO and Chairman of W.R. Grace, has a $14.9mm position in Grace common stock
Festas background at GE and Morgenthaler Private Equity Partners shapes his ideology of shareholder value enhancement
According to the DEF14A, key executives must maintain 3-5x base salary in the form of stock
W.R. Grace only operates in core competency businesses where they have a #1 or #2 position.
Grace has demonstrated accretive bolt-on acquisitions through 22 successful investments from 2003 through 2014
Disciplined Investment Criteria: Strategic fit (technology, market access), hard cost and capital synergies, and risk-adjusted return.
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V. Value Drivers: Net Operating Loss Carryforwards - Tax Asset
3. W.R. Graces overlooked NOLs provide additional upside to SOTP valuation.
W.R. Grace has accumulated a $1.8 billion NOLs ($670mm - Carryforward from emergence of bankruptcy, $632mm - PI DPO settlement, $490mm - Warrant settlement)
Lack of significant change in ownership during the bankruptcy process allowed W.R. Grace to maintain a substantial amount of its NOLs (governed by IRC Section 382 Limitation)
The cash tax rate is anticipated to remain in the range of 10-15% through 2018 NOLs have a NPV of $0.4 billion adding an additional 5.7% upside to SOTP valuation
N O L D C F 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E 2 0 19 E 2 0 2 0 E 2 0 2 1ERevenue 3375.1 3511.3 3651.0 3793.4 3937.7 4083.3 4229.3EBIT 667.0 710.0 754.9 801.5 838.2 874.9 911.3
US EBIT 200.1 213.0 226.5 240.5 251.4 262.5 273.4Interest Payments -59.3 -59.3 -59.3 -59.3 -59.3 -59.3 -59.3US EBI (Pre-Tax Income) 140.8 153.7 167.2 181.1 192.1 203.1 214.1
Beginning US NOL Balance 1800.0 1659.2 1505.5 1338.3 1157.2 965.0 761.9NOL Carryforw ard Usage -140.8 -153.7 -167.2 -181.1 -192.1 -203.1 -214.1Ending US NOL Balance 1659.2 1505.5 1338.3 1157.2 965.0 761.9 547.8
Statutory Tax Rate 35% 35% 35% 35% 35% 35% 35%
Beginning DTA Balance 630.0 580.7 526.9 468.4 405.0 337.8 266.7DTA Change -49.3 -53.8 -58.5 -63.4 -67.2 -71.1 -74.9Ending DTA 580.7 526.9 468.4 405.0 337.8 266.7 191.7
Discount Factor 0.922 0.850 0.784 0.723 0.666 0.614 0.566Discounted Value 45.4 45.7 45.9 45.8 44.8 43.7 42.4
Discount Rate 8.46% WACCNPV of NOLs ($mn) 408.1
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Spin-off of GCP provides restructuring opportunities to reduce operating costs Improved management focus and lower corporate costs drive operating margin expansion Based on 2015 Q1 results, adjusted EBIT Margin has already increased 130 bps yoy
Further Margin Expansion Opportunities: 1. Continued investment in targeted R&D creates better product mix with improved pricing power
due to innovative product launches in an up-cycle (+100 bps) Pricing power will be further driven by secular demand growth, especially for FCC Catalysts
2. Aggressive supply chain repositioning based on flexible global operations enables margin expansion at the operating income level (+100 bps)
Grace has benefited from increase in demand in key global markets
3. Cycle-bottom prices for major inputs such as rare earth metals, especially Lanthanum Oxide, reduce production costs (+100 bps)
At $1.03/kg (2014), Lanthanum Oxide is at the lowest price point since 2008
V. Value Drivers: Margin Expansion Opportunities
4. W.R. Grace has a visible pathway and credible track-record for margin expansion.
"Improving petchem ROA should come from underlying operational improvement and better capital allocation."
Dan Loeb, Third Point, 2014 Q1 Investor Letter
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Post-Reorganization Equity Extended 13 year Chapter 11 process due
to asbestos litigation has resulted in limited coverage for Company besides investment positions by distressed funds
Excess Asset Value Sell side overlooks excess assets including
excess cash ($500.0mm) and excess investment in unconsolidated affiliate ($173.8mm)
Provides additional 8.4% upside
Margin improvement is underestimated Managements ability to improve the margin
post-restructuring is not modeled into sell-side valuation
Margin expansion by 300 basis points provides 16.7% incremental returns
VI. Mispricing and Catalysts
Mispricing Catalysts
Spin-off of Grace Construction Products Separation of GCP will provide natural
shareholder turnover, lead to normalized multiples expansion, and address double cyclicality valuation challenges
Shareholder Friendly Measures Share repurchases driven by incentivized
management and distressed activist funds Monetization of JV with Chevron provides
reclassification of excess asset into core operations
Increased Investor Transparency Increased coverage of orphan stock after
extended Chapter 11 process will increase investor demand
Simplified capital structure due to PI DPO reduces situational complexity
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VII. Valuation
W.R. Grace has multiple pathways to unlock value for an asymmetric risk-reward.
I. Sum of the Parts II. Net Operating Loss Carryforwards
III. Share Repurchase
IV. Margin Expansion
Incremental Return
16.1%
+ 5.7%
+ 1.6%
+ 16.7%
40.1%
Cumulative CAGR
5.1%
6.8%
7.3%
11.9%
11.9%
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1. Spin-off of construction materials business may not receive approval. Panelist of distressed and activist funds will help push through a vote Management under Fred Festa will focus on value accretive shareholder measures
2. Cyclicality of construction end markets could result in depressed sales. Spin-off will help separate out cyclical construction from non-cyclical specialty catalysts/materials Improving non-housing construction provides favorable backdrop for construction business
3. W.R. Graces Defined Benefit Plan is underfunded by $473.1 million. Margin of safety even with additional funding contribution provides asymmetric risk-reward Shift to Defined Contribution Plan will provide more feasible course of action
4. Asbestos lawsuit result in excess payments to Property Damage claimholders. Management incentive is to provide accurate, if not aggressive, estimates of asbestos liability to avoid
loss recognition in later years Hard cap of $80mm on amount of additional liability that can be payable to claimholders
VIII. Key Risks
Key Risks & Mitigants
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Current Employees Anonymous Senior Principal Engineer Rosanne Schiller Director of Marketing David Joseph Investor Relations Tania Almond Investor Relations Competitors Matthew Juneau Albemarle Investor Relations Consultants Anonymous The Catalyst Group Sell-Side Anonymous Goldman Sachs Anonymous Credit Suisse
Primary Research
IX. Thank You!
Special Thanks To: Justin Ang Sahil Khetpal Dominic Waltz
Important Disclosures: Certain accounts managed by us are currently long W.R. Grace. We may buy and/or sell shares of W.R. Grace in the future for the accounts managed by us without notice, and we are under no obligation or agreement to take, or not take, any action or restrict our actions in any manner. This is not a recommendation to buy or sell shares. Our views are subject to change without notice and we may trade in any manner, whether consistent or inconsistent with this recommendation. The information provided is from public sources. We have not independently verified this information and we make no representations as to the accuracy or correctness of any such information. We undertake no obligation to update any information below.
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W.R. Grace filed for voluntary Chapter 11 on April 2, 2001 as a result of asbestos litigation
On February 3, 2014, W.R. Grace emerged from bankruptcy
Effects: 1. Two asbestos trusts under Section 524(g) of Bankruptcy Code
1. PI (Personal Injury) Trust-no further obligations 2. PD (Property Damage) Trust broken into non-ZAI and ZAI (attic insulation product) claims
2. Company has accrued unresolved non-ZAI PD claims that are probable and estimable 1. Non-fixed claims 2. Obligated payments to PD trust every 6 months based on non-ZAI PD Claims allowed by bankruptcy
court during preceding 6 months + interest + PD Trust expenses
3. ZAI PD Claims obligated for fixed payment of $30mm February 3, 2017 and 10 contingent payments of $8mm per year to ZAI PD Account during 20 year period beginning on February 3, 2019, with payments due only if assets of ZAI PD account fall below $10mm during preceding year
1. Liability recorded for fixed deferred payment 2. Not recorded for contingent payments 3. Secured by 77.4mm shares of new issuance common stock
X. Appendix: Bankruptcy Overview
Chapter 11 Reorganization
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Extended Chapter 11 process has resulted in extended financial and reputational damage to Company
Alternative fuel sources provide tail risk for
WR Graces operations
Bearish outlook on energy-related industries
Market is focused on short term EPS vs. earnings quality
Sell-side operates in sector specific pigeonholes of chemicals vs construction
X. Appendix: Summary of Variant View
Market Perspective Our Perspective
Reorganized Company has minimal exposure to asbestos litigation and long term contract redemption rates are steady
Secular tailwinds from renewed focus on heavy oil refinement will drive volume sales due to inelastic demand
W. R. Grace benefits from lower crude prices due to increased catalyst demand by refineries
Due to FIFO Inventory accounting, there is a lag until low input costs are realized in COGS, which increase gross margin
SOTP valuation provides valuation clarity
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Commercial construction recovery in US and emerging markets infrastructure build-out creating demand for specialty building materials
Increasing quality and sustainability of construction projects relies on advanced products
Waterproofing Systems Roofing products
1. BCC Research
X. Appendix: Specialty Building Materials & Packaging Industry
Demand Driven Building Products High Value Packaging Products
Conformation to Food & Beverage industry regulations
Focus on design for convenience and sustainability
Solutions address shift away from BPA epoxy resins towards green products
Products are integrated into customer plants and supply chains
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Consumer Packaging Sealants Market Size
CAGR: 4.1%
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Primary products are Cement Additives and Concrete Admixtures
Fragmented industry with few dominant players Grace has manufacturing facilities across
the world, creating high quality global brand
X. Appendix: Specialty Construction Products Industry
Highly Localized Ongoing Secular Global Growth
Specialty cement products are critical for cement manufacturers to enhance quality
Expansion in cement capacity from NA construction revival, emerging market growth
Matching Supply/Demand characteristics imply stable, growing prices
Graces advanced products cater to efficiency, environmental concerns
18% 6%
5% 71%
Cement Additives Marketshares
Grace Sika BASF Othes
15%
8%
7% 70%
Concrete Admixtures Market Share
BASF Grace Sika Others 0.00
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X. Appendix: Valuation
Sum of the Parts Base Case
Segment 2015E EBITDA Low High Low High
New Grace 652.3$ 10.0x 12.0x 6,523.1$ 7,827.7$ New GCP 177.3$ 8.0x 10.0x 1,418.1$ 1,772.7$
Core Enterprise Value 9.6x 11.6x 7,941.2 9,600.4 Plus: Excess Cash 500.0 500.0 Plus: Excess Investments 173.8 173.8 Plus: Value from NOLs 408.2 408.2 Adjusted Enterprise Value 9,023.3$ 10,682.4$
Less: Debt 2,015.8 2,015.8 Total Equity Value 7,007.5$ 8,666.6$
Fully Diluted Shares Outstanding (MM) 72.6 72.6Less: Share Repurchase Program 0.0 0.0
Total Shares Outstanding 72.6 72.6
SOTP Equity Value 96.52$ 119.38$ Cumulative Upside -1.53% 21.79%Value CAGR over 3 Years -0.51% 6.79%
Multiple EV
Base Case + Share Repurchases
Segment 2015E EBITDA Low High Low High
New Grace 652.3$ 10.0x 12.0x 6,523.1$ 7,827.7$ New GCP 177.3$ 8.0x 10.0x 1,418.1$ 1,772.7$
Core Enterprise Value 9.6x 11.6x 7,941.2 9,600.4 Plus: Excess Cash - - Plus: Excess Investments 173.8 173.8 Plus: Value from NOLs 408.2 408.2 Adjusted Enterprise Value 8,523.3$ 10,182.4$
Less: Debt 2,015.8 2,015.8 Total Equity Value 6,507.5$ 8,166.6$
Fully Diluted Shares Outstanding (MM) 72.6 72.6Less: Share Repurchase Program 5.1 5.1
Total Shares Outstanding 67.5 67.5
SOTP Equity Value 96.41$ 120.99$ Cumulative Upside -1.64% 23.43%Value CAGR over 3 Years -0.55% 7.27%
Multiple EV
Base Case + Share Repurchases + Margin Expansion
Segment 2015E EBITDA Low High Low High
New Grace 716.4$ 10.0x 12.0x 7,164.3$ 8,597.2$ New GCP 210.4$ 8.0x 10.0x 1,683.5$ 2,104.3$
Core Enterprise Value 9.5x 11.5x 8,847.8 10,701.5 Plus: Excess Cash - - Plus: Excess Investments 173.8 173.8 Plus: Value from NOLs 408.2 408.2 Adjusted Enterprise Value 9,429.8$ 11,283.6$
Less: Debt 2,015.8 2,015.8 Total Equity Value 7,414.0$ 9,267.8$
Fully Diluted Shares Outstanding (MM) 72.6 72.6Less: Share Repurchase Program 5.1 5.1
Total Shares Outstanding 67.5 67.5
SOTP Equity Value 109.84$ 137.30$ Cumulative Upside 12.06% 40.08%Value CAGR over 3 Years 3.87% 11.89%
Multiple EV
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X. Appendix: Valuation
Multiples Valuation Comps
Company Enterprise Revenue (USD) EBITDA (USD) EV/EBITDAName Value 2013A 2014A 2015E 2013A 2014A 2015E 2013A 2014A 2015E
New Grace Comps 0
Albemarle Corporation (NYSE:ALB) 6,505.5 2,519.2 2,394.3 2,445.5 705.4 428.7 899.7 9.22x 15.17x 7.23xJohnson Matthey plc (LSE:JMAT) 11,512.2 16,071.3 16,710.0 15,661.9 781.0 860.7 863.0 14.74x 13.38x 13.34xClariant AG (SWX:CLN) 8,112.6 6,390.2 6,432.3 6,261.8 820.3 833.0 894.4 9.89x 9.74x 9.07x
New GCP Comps
Forbo Holding AG (SWX:FORN) 2,021.6 1,199.7 1,226.8 1,192.6 172.1 183.9 186.5 11.75x 10.99x 10.84xSika AG (SWX:SIK) 9,419.4 5,408.1 5,859.4 5,833.3 697.8 823.3 901.3 13.50x 11.44x 10.45x
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X. Appendix: Valuation
Operating Model Base Case 2 0 10A 2 0 11A 2 0 12A 2 0 13A 2 0 14A 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E 2 0 19 E 2 0 2 0 E 2 0 2 1E
RevenueRefining Catalysts 742.0 1077.5 986.8 832.4 845.5 873.6 903.5 935.6 969.8 1006.4 1045.5 1087.3
Growth Rate % 45.2% -8.4% -15.6% 1.6% 3.3% 3.4% 3.5% 3.7% 3.8% 3.9% 4.0%Polyolefin and Chemical Catalysts 240.3 269.8 281.3 291.6 401.3 445.4 489.2 531.6 571.5 607.7 639.1 664.7
Growth Rate % 12.3% 4.3% 3.7% 37.6% 11.0% 9.8% 8.7% 7.5% 6.3% 5.2% 4.0%Catalysts Technologies 982.3 1347.3 1268.1 1124.0 1246.8 1319.0 1392.8 1467.2 1541.3 1614.1 1684.6 1752.0
Growth Rate % 37.2% 1.0% -11.4% 10.9% 6.1% 5.6% 5.3% 5.1% 4.7% 4.4% 4.0%Materials Technologies 819.4 872.6 862.6 878.5 890.6 914.9 939.8 965.4 991.7 1018.7 1046.5 1075.0
Growth Rate % 6.5% 1.0% 1.8% 1.4% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7%Revenue 1801.7 2219.9 2130.7 2002.5 2137.4 2233.9 2332.6 2432.6 2533.0 2632.9 2731.1 2827.0
Construction Revenue 873.3 992.0 1024.8 1058.2 1105.6 1138.8 1172.9 1208.1 1244.4 1281.7 1320.1 1359.7Growth Rate % 13.6% 3.3% 3.3% 4.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Total Revenue 2675.0 3211.9 3155.5 3060.7 3243.0 3372.6 3505.5 3640.7 3777.4 3914.5 4051.3 4186.8
EBITDACatalysts Technologies 288.3 441.3 447.8 381.7 444.6 483.5 524.5 567.2 595.9 624.0 651.3 677.3
Margin % 29.3% 32.8% 35.3% 34.0% 35.7% 36.7% 37.7% 38.7% 38.7% 38.7% 38.7% 38.7%Materials Technologies 191.8 189.6 191.5 213.2 217.3 224.7 232.3 240.1 248.2 256.6 265.2 274.1
Margin % 23.4% 21.7% 22.2% 24.3% 24.4% 24.6% 24.7% 24.9% 25.0% 25.2% 25.3% 25.5%Corporate -108.1 -89.1 -81.2 -68.4 -60.6 -63.4 -66.2 -69.0 -71.9 -74.7 -77.5 -80.2
Margin % -6.0% -4.0% -3.8% -3.4% -2.8% -2.8% -2.8% -2.8% -2.8% -2.8% -2.8% -2.8%New Grace EBITDA 372.0 541.8 558.1 526.5 601.3 644.8 690.6 738.3 772.2 805.9 839.0 871.2Construction EBITDA 18% 199.3 205.3 211.4 217.8 224.3 231.0 238.0Total EBITDA 844.1 895.9 949.7 990.0 1030.2 1070.0 1109.2
Margin % 25.0% 25.6% 26.1% 26.2% 26.3% 26.4% 26.5%Consensus Margin % 23.7% 24.6% 25.3%
Difference 1.3% 1.0% 0.8%
EBITCatalysts Technologies 239.6 388.8 393.8 327.5 378.3 409.4 442.1 476.0 510.8 534.9 558.3 580.6
Margin % 24.4% 28.9% 31.1% 29.1% 30.3% 31.0% 31.7% 32.4% 33.1% 33.1% 33.1% 33.1%Materials Technologies 160.0 158.7 162.0 181.8 185.2 191.8 198.7 205.7 213.1 220.6 228.4 236.5
Margin % 19.5% 18.2% 18.8% 20.7% 20.8% 21.0% 21.1% 21.3% 21.5% 21.7% 21.8% 22.0%Corporate (New Grace) -109.9 -90.9 -82.9 -72.1 -65.2 -68.2 -71.2 -74.3 -77.3 -80.4 -83.4 -86.3
Margin % -6.1% -4.1% -3.9% -3.6% -3.1% -3.1% -3.1% -3.1% -3.1% -3.1% -3.1% -3.1%Construction Products 89.9 97.3 125.2 151.7 161.7 168.2 174.9 181.7 188.6 195.5 202.5 209.3
Margin % 3.0% 4.0% 5.0% 5.0% 5% 5% 5% 5% 5% 5% 5%Corporate (Full) -163.1 -131.5 -122.8 -110.2 -99.0 -103.0 -107.0 -111.1 -115.3 -119.5 -123.7 -127.8
Margin -3.1% -3.1% -3.1% -3.1% -3.1% -3.1% -3.1%Total EBIT 626.2 666.5 708.6 752.3 797.2 831.6 865.5 898.7US EBIT 30.0% 199.9 212.6 225.7 239.2 249.5 259.7 269.6EBIT on New Grace 289.7 456.6 472.9 437.2 498.3 533.1 569.6 607.5 646.6 675.2 703.4 730.8
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25 1. Tax Savings = Change in NOL Balance * Regular Federal Tax Rate
X. Appendix: Valuation
Operating Model NOLs
N O L D C F 2 0 10A 2 0 11A 2 0 12A 2 0 13A 2 0 14A 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E 2 0 19 E 2 0 2 0 E 2 0 2 1ERevenue 2675.0 3211.9 3155.5 3060.7 3243.0 3375.1 3511.3 3651.0 3793.4 3937.7 4083.3 4229.3EBIT 667.0 710.0 754.9 801.5 838.2 874.9 911.3
US EBIT 200.1 213.0 226.5 240.5 251.4 262.5 273.4Interest Payments -59.3 -59.3 -59.3 -59.3 -59.3 -59.3 -59.3US EBI (Pre-Tax Income) 140.8 153.7 167.2 181.1 192.1 203.1 214.1
Beginning US NOL Balance 1800.0 1659.2 1505.5 1338.3 1157.2 965.0 761.9NOL Carryforw ard Usage -140.8 -153.7 -167.2 -181.1 -192.1 -203.1 -214.1Ending US NOL Balance 1659.2 1505.5 1338.3 1157.2 965.0 761.9 547.8
Statutory Tax Rate 35% 35% 35% 35% 35% 35% 35%
Beginning DTA Balance 630.0 580.7 526.9 468.4 405.0 337.8 266.7DTA Change -49.3 -53.8 -58.5 -63.4 -67.2 -71.1 -74.9Ending DTA 580.7 526.9 468.4 405.0 337.8 266.7 191.7
Discount Factor 0.922 0.850 0.784 0.723 0.666 0.614 0.566 Remaining ValueDiscounted Value 45.4 45.7 45.9 45.8 44.8 43.7 42.4 94.4
Discount Rate 8.46% WACCNPV of NOLs ($mn) 408.1
Note: Assumption Justifications Discount Rate We use WACC as w e believe it reflects the riskiness of generating shieldable income
US EBIT We assume that US operations represent 30% of Total EBIT going forw ard, in line w ith recent historicals
Interest Payments We assume Debt Load as specified by Management Guidance and assume no debt paydow n over forecast period
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26 1. Tax Savings = Change in NOL Balance * Regular Federal Tax Rate
X. Appendix: Valuation
DCF Base Case
Key DCF MetricsEquity Beta 1.066
Beta After Mean Reversion 1.044
Yield on 10% Treasury Note 0.023
Equity Cost of Capital 9.6%
Debt Cost of Capital 4.05% L+350
Market Cap 7218.8Total Enterprise Value 8683.2Net Debt 1464.4
WACC 8.46%
Note: Assumption Justifications Refining growth "Petroleum refining market expected to grow at 2.7% according to HIS Chemical". We estimate Grace's competetive advantages to enable stronger market share capture
Polyolefin/Chemical Catalysts growth "Propylene Market grow ing at ~11% CAGR and longer term at 5% according to Nexant Technologies Prospectus"
Materials growth "Grace CEO on Q4 call: seeing strong signals in Materials tech". Our conservative estimates used here at ~ developed economies GDP Grow th
Operating Margins Based on strong pricing environment and low input costs w e are estimating persistance in margins going forw ard for the value-added new Grace segments
Taxes Savings 49.2 53.6 58.2 62.9 66.6 70.1 73.6 0.0 0.0Marginal Tax Rate 35% 35% 35% 35% 35% 35% 35% 35% 35%
D C F 2 0 10A 2 0 11A 2 0 12A 2 0 13A 2 0 14A 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E 2 0 19 E 2 0 2 0 E 2 0 2 1E C VEBIT on New Grace 289.7 456.6 472.9 437.2 498.3 533.1 569.6 607.5 646.6 675.2 703.4 730.8
Tax Rate 35% 35% 35% 35% 35% 35% 35%EBI After Tax 346.5 370.2 394.9 420.3 438.9 457.2 475.1
Catalysts Technologies 48.7 52.5 54 54.2 66.3Materials Technologies 31.8 30.9 29.5 31.4 32.1Corporate 2.6 2.6 2.6 5.7 7
(+) D&A 83.1 86 86.1 91.3 105.4 111.8 121.0 130.8 125.7 130.7 135.6 140.4NWC 289.3 387.8 353.6 240.7 379.2 394.4 409.9 425.7 441.7 457.7 473.7 489.6
% of Revenues 11% 12% 11% 8% 12% 12% 12% 12% 12% 12% 12% 12%(-) NWC (49.70) (98.50) 34.20 112.90 (138.50) (15.16) (15.54) (15.81) (15.98) (16.04) (15.99) (15.84) (-) Capex -83.8 -90.8 -98.1 -94.2 -98.0 -101.7 -105.3Cash Flow Before Tax Refund 359.3 384.9 411.8 435.7 455.5 475.1 494.3 '21Tax Refund 49.2 53.6 58.2 62.9 66.6 70.1 73.6 Terminal Value GrowthFree Cash Flow 408.5 438.6 470.0 498.6 522.1 545.2 567.9 11843.1 3.50%Discount Factor 0.922 0.850 0.784 0.723 0.666 0.614 0.566 0.566Discounted Value 376.6 372.8 368.3 360.3 347.8 334.9 321.6 6706.4New Grace EV 9188.7New GCP EV 1893.9 *Based on multiplesExcess Investments 673.8 *Unconsolidated affiliate and excess cash Debt 2015.8Total Equity Value 9740.7Shares Outstanding 67.5Value Per Share 144.31$
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27
X. Appendix: Valuation
DCF Downside Case D C F 2 0 10A 2 0 11A 2 0 12A 2 0 13A 2 0 14A 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E C V
Total Revenue 2675.0 3211.9 3155.5 3060.7 3243.0 2762.0 2615.3 2759.2 3200.6growth % 20.1% -1.8% -3.0% 6.0% -14.8% -5.3% 5.5% 16.0%
EBITDA 372.0 541.8 558.1 526.5 601.3 275.3 375.5 401.9 511.2margin % 13.9% 16.9% 17.7% 17.2% 18.5% 10.0% 14.4% 14.6% 16.0%
EBIT on New Grace 289.7 456.6 472.9 437.2 498.3 185.6 285.8 312.2 421.4margin % 10.8% 14.2% 15.0% 14.3% 15.4% 6.7% 10.9% 11.3% 13.2%
EBIT on New Grace 289.7 456.6 472.9 437.2 498.3 185.6 285.8 312.2 421.4Tax Rate 15.0% 15.0% 15.0% 15.0% *NOL Projection
EBI After Tax 157.7 242.9 265.3 358.2(+) D&A 83.1 86 86.1 91.3 105.4 89.8 89.8 89.8 89.8
% of Rev 3.1% 2.7% 2.7% 3.0% 3.3% 3.3% 3.4% 3.3% 2.8%(-) NWC -49.7 -98.5 34.2 112.9 -138.5 56.25 17.15 (16.82) (13.10) '18(-) Capex -89.8 -89.8 -89.8 -89.8 Terminal Value GrowthFree Cash Flow 214.0 260.1 248.5 345.1 7197.2 3.50%Discount Factor 0.922 0.850 0.784 0.723 0.723Discounted Value 197.3 221.1 194.8 249.4 5200.4New Grace EV 6062.9New GCP EV 1820.3 *Based on multiplesExcess Investments 673.8Debt 2015.8Total Equity Value 4720.9Shares Outstanding 67.4Value Per Share 70.07$
Key DCF MetricsEquity Beta 1.066
Beta After Mean Reversion 1.044
Yield on 10% Treasury Note 0.023
Equity Cost of Capital 9.6%
Debt Cost of Capital 4.05% L+350
Market Cap 7218.8Total Enterprise Value 8683.2Net Debt 1464.4
WACC 8.46%
Note: Assumption Justifications Revenue Growth Recession metrics from 2009 and 2010 Applied to FY15 and FY16
EBIT Margins Recession + Post Recession margins applied to projection period
Tax Rate Estimates tax rate using NOL Carryforw ards to shield income. Based on Management guidance
Perpetuity Grow th Reasonable perpetuity grow th of global GDP
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28
X. Appendix: Valuation
DCF Sensitivities
Base Case SensitivityTerminal Grow th Rate
WACC 2.5% 3.0% 3.5% 4.0% 4.5%9.5% $108.9 $114.3 $120.5 $127.9 $136.89.0% $116.8 $123.3 $130.9 $140.0 $151.18.5% $126.1 $133.9 $143.3 $154.8 $169.18.0% $137.1 $146.7 $158.5 $173.2 $192.17.5% $150.2 $162.3 $177.5 $196.9 $222.9
Terminal Grow th RateWACC 2.5% 3.0% 3.5% 4.0% 4.5%
9.5% 11.1% 16.6% 22.9% 30.5% 39.5%9.0% 19.2% 25.8% 33.5% 42.8% 54.2%8.5% 28.6% 36.6% 46.2% 57.9% 72.5%8.0% 39.8% 49.7% 61.7% 76.7% 96.0%7.5% 53.3% 65.6% 81.1% 100.9% 127.4%
Bear Case SensitivityTerminal Grow th Rate
WACC 2.5% 3.0% 3.5% 4.0% 4.5%9.5% $45.3 $49.3 $53.9 $59.5 $66.19.0% $50.5 $55.3 $60.9 $67.6 $75.98.5% $56.6 $62.4 $69.3 $77.7 $88.28.0% $63.9 $70.9 $79.5 $90.2 $104.07.5% $72.6 $81.3 $92.3 $106.3 $125.1
Terminal Grow th RateWACC 2.5% 3.0% 3.5% 4.0% 4.5%
9.5% (52.7%) (48.5%) (43.7%) (37.9%) (31.0%)9.0% (47.3%) (42.3%) (36.4%) (29.4%) (20.7%)8.5% (40.9%) (34.9%) (27.7%) (18.9%) (7.9%)8.0% (33.3%) (26.0%) (17.0%) (5.8%) 8.6%7.5% (24.2%) (15.1%) (3.7%) 11.0% 30.6%