- Feedback to date from public and private companies points to relatively resilient Q1 performance – nevertheless, the general consensus for Q2 is for 20%+ year-over-year sales declines.
- We expect protracted challenges for select end markets such as automotive and oil & gas, while businesses catering to personal care, cleaning/sanitation, packaging, and water treatment, among other sub-sectors, remain relatively well positioned.
- As conditions improve in the coming quarters, the chemicals and specialty materials industry should continue to benefit from growing M&A interest across buyer categories.
Despite significant near-term challenges stemming from the COVID-19 crisis, the chemicals and specialty materials industry continues to offer compelling M&A opportunities for strategic and financial buyers alike. While the majority of current industry efforts are rightfully focused on employee safety, liquidity management, contingency planning, and other protective measures, leading industry participants are also strategizing about post-crisis dynamics and opportunities. Our goal in this update is to provide insights from real-time news and data as well as prior economic disruptions – we hope you find the takeaways helpful and encourage you to contact us if you would like to discuss our perspectives or capabilities.
Learnings from Prior Economic Disruptions
Chemicals and Specialty Materials Benchmarks Through Crises
The chemicals industry generally outperformed the broader market during the Great Recession, but has experienced a more pronounced decline amid the COVID-19 disruption largely due to the added impact from depressed oil prices.
Chemicals and Specialty Materials: Key End Market Performance
Relative to the Great Recession, post COVID-19 stock performance points to similar challenges for highly cyclical sub-sectors, albeit with some optimism for a more rapid recovery given stronger consumer and financial system balance sheets.
Additionally, given the virus-driven nature of the current crisis, we see better prospects for pharmaceuticals and non-durables, the latter including household and personal use products.
The last few weeks have seen multiple sectors recover meaningfully from trough COVID-19 levels, though the near-term sustainability of those gains remains uncertain.
“This is a very unusual situation, so I think discipline is now with capital letter D in our vocabulary. So we keep our eyes and ears open if there is a good M&A target, but it’s probably a little bit too early in that whole dynamic for somebody to raise their hand or be even open for such conversations... But I can assure you our M&A team is keeping their eyes and ears open.”
Thierry F. J. Vanlancker, Chairman of the Board of Management and CEO, Akzo Nobel
“The current demand backdrop is the most challenging we have seen in over a decade. The current downturn is different than the recession of 2008-2009, primarily because we are not facing a true peak to trough reset following the already challenging demand landscape in 2019.”
Lori Ryerkerk, President and CEO, Celanese Corporation
“Evonik has had pandemic plans for many years. They determine how to proceed in the event of a pandemic or epidemic. Catalogues of measures and expert staff enable us to react to new developments, including at short notice. Evonik has largely suspended business trips. Most events have been cancelled or postponed. Personal social contact in daily work is being kept to a minimum, in order to keep the risk of infection as low as possible.”
Public Announcement, Evonik
“Since early March, in China, we have seen a measured recovery in demand patterns. Our factories in China have been running at 70% to 80% of capacity utilization for several weeks, moving closer to our 2019 levels and mirroring the needs of our customers’ demand. We’ve also learned a lot for the restart in China, which we’ll be able to leverage and optimize as other countries are beginning to restart their economies over the coming weeks.”
Michael H. McGarry, Chairman and CEO, PPG Industries
“The entire global supply chain has been impacted due to the COVID-19 outbreak, which has led to disruption in marine container shipping services. To allow adequate booking time in the current environment, we are asking all customers to provide an additional lead time for non-marine based shipments and 2-4 weeks lead time on all marine orders.”
Mark Costa, CEO, Eastman Chemical Company
“Nutrien continues to expect solid demand for crop inputs for the spring season, despite some recent wet weather in the US, which has caused modest delays in field activity in some regions of the country. Our business is deemed essential by governments around the world, which underscores the criticality of the agriculture sector.”
Chuck Magro, President and CEO, Nutrien
“We fully understand that a key measure for containing the spread of COVID-19 is to limit contact with others and reduce time spent in public places. For these reasons, we are temporarily closing our store sales floors and driving customers to order products online or via phone for delivery or curbside pickup at the stores.”
John Morikis, Chairman and CEO, The Sherwin-Williams Company
“In today’s highly uncertain macro environment, we are reducing capital spending, working capital, and operating costs to ensure we continue to generate strong free cash flow. We are adjusting our manufacturing operations to match lower near-term demand.”
Hudson La Force, President and CEO, Grace
“Fully recognizing the severity of the ongoing crisis on the chemicals and specialty materials industry, we see a wide range of opportunities and expect robust M&A activity in the industry once conditions stabilize,” says John Lautemann, director in the Harris Williams Industrials group.
Patrick McNulty, managing director in the Harris Williams Industrials Group, agrees. “We expect the industry’s resiliency and strong long-term fundamentals will continue to spur investor interest – this crisis will require discipline and patience in the coming months, but there is still a lot of optimism about the sector’s outlook over the broader horizon.”
Published May 2020
Investment banking services are provided by Harris Williams LLC (“Harris Williams”). Harris Williams is a registered broker-dealer and member of FINRA and SIPC. Harris Williams & Co. Ltd is a private limited company incorporated under English law with its registered office at 8th Floor, 20 Farringdon Street, London EC4A 4AB, UK, registered with the Registrar of Companies for England and Wales (registration number 07078852). Harris Williams & Co. Ltd is authorized and regulated by the Financial Conduct Authority. Harris Williams & Co. Corporate Finance Advisors GmbH is registered in the commercial register of the local court of Frankfurt am Main, Germany, under HRB 107540. The registered address is Bockenheimer Landstrasse 33-35, 60325 Frankfurt am Main, Germany (email address: email@example.com). Geschäftsführer/Directors: Jeffery H. Perkins, Paul Poggi. (VAT No. DE321666994). Harris Williams is a trade name under which Harris Williams LLC, Harris Williams & Co. Ltd and Harris Williams & Co. Corporate Finance Advisors GmbH conduct business.
The information and views contained in this presentation have been prepared in part by Harris Williams. This presentation does not purport to be comprehensive or to contain all the information that a recipient may need in order to evaluate any investment or potential transaction. This presentation is not a research report, as such term is defined by applicable law and regulations, and is provided for informational purposes only. Any and all information, including estimates, projections and other forward-looking statements, presented in this document may involve various assumptions and significant elements of subjective judgment and analysis which may or may not be correct. Harris Williams has not independently verified, and neither Harris Williams nor any other person will independently verify, any of the information, estimates, projections or forward-looking statements contained herein or the assumptions on which they are based. The information contained in this document is made as of the date hereof unless stated otherwise. Harris Williams does not expect to update or otherwise revise this document nor provide any additional information, nor correct any inaccuracies herein which may become apparent.
The information contained herein is believed by Harris Williams to be reliable but Harris Williams makes no representation or warranty as to the accuracy or completeness of such information, and information contained herein that is based on material prepared by others may involve significant elements of subjective judgment and analysis which may or may not be correct. Opinions, estimates and projections in this presentation constitute Harris Williams’ judgment and are subject to change without notice.
This presentation is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular transaction, nor shall this presentation form the basis of any contract.
No part of this material may be copied or duplicated in any form or by any means, or redistributed, without Harris Williams’ prior written consent.