AWPA Annual Meeting Economic Discussion February 19, 2018 C O N F I D E N T I A L A N D P R I V A T E S T R I C T L Y Investment Bankers Los Angeles • San Francisco Member FINRA/SIPC
Table of Contents Section Content Page I Introduction to TSG 3 II Macroeconomic Filter 6 III Competitive Outlook 23 IV Capital Markets 32 V Consolidation 39 2
I Introduction to TSG
Introduction to TSG Senior Investment Bankers: Industrial Growth and Business Services John O. Johnson John co-founded TSG and has over 25 years of Investment Banking Managing Director experience covering public and private Technology, Industrial Growth and Business Services companies Los Angeles Office (626) 204-6380 | Direct Prior to TSG, John was a Managing Director and co-founder of the (213) 706-0317 | Mobile West Coast Corporate Finance Group of Banc of America Securities Extensive Partner Experience jojohnson@spartanTSG.com John also co-founded General Finance Corporation, a public rental services company, as Chief Operating Officer in 2005 and led 14 acquisitions totaling nearly $400 million Industrial Growth OEM / Aftermarket / Performance Metals / Fabricated Metal Products Transportation & Logistics 4
II Macroeconomic Filter
Macroeconomic Filter Global Historic Recession Trends Since the end of World War II, there have been four global recessions, all lasting a year, followed by expansion cycles that lasted 120 months, on average The current cycle is 103 months long (since June 2009) We are currently in a period of harmonized global growth Historical World GDP Months of Economic Expansion following Indicated Trough 90.0 250 79.3 77.1 80.0 193 75.2 200 73.3 71.3 69.5 70.0 150 60.0 103+ 87 100 81 50.0 50 40.0 0 30.0 Mar 1975 Dec 1982 Mar 1991 Jun 2009 2012 2013 2014 2015 2016 2017 ______________________________________________________________________ Source: IMF 6
Macroeconomic Filter Metal Prices, as of 2/16/2018 Nickel Aluminum Copper $6.42/LB $0.98/LB $3.22/LB Platinum Lead $1010.60/LB $1.18/LB ______________________________________________________________________ Source: InfoMine 7
8 100 150 200 250 300 350 50 0 2000 2001 2002 2003 2004 2005 World Price of Steel Index Macroeconomic Filter 2006 2007 2008 2009 2010 Source: IBISWolrd 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Macroeconomic Filter Export Demand and Pricing For developing countries, exports are the main World Exports as % of World GDP element of production 33% Export volume and pricing are primarily 31% determined by the following: 29% Import dynamics in other countries: at what 27% price and volume are neighboring countries receiving their imports (economic health and 25% relative currencies) 23% “Hindering Factors” - Trade barriers, 21% transportation costs, cultural discrepancies 19% Exports are ergative and not always in line with 17% GDP cycles, as they are heavily dependent on other 15% 2000 2002 2004 2006 2008 2010 2012 2014 2016 countries ______________________________________________________________________ Source: Economic Web Institute, World Bank 9
Macroeconomic Filter U.S. Historic Recession Trends The technical indicator of a recession is two consecutive quarters of decreasing GDP Since the end of World War II, U.S. business expansion cycles have lasted 58 months, on average The current business cycle is 103 months long (since June 2009) A recent survey of people in the real estate industry conducted by PwC reported sentiment in the market is at its lowest value at 69%. The same survey reported an 84% positive sentiment six months ago Months of Economic Expansion following Indicated Trough 140 120 120 106 103 100 92 80 58 60 45 39 37 36 40 24 14 20 0 Oct May Apr Feb Nov Mar Jul Nov Mar Nov Jun 1949 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 ______________________________________________________________________ Source: Bloomberg, U.S. Department of Commerce, Fortune, Investopedia 10
Macroeconomic Filter International Economic Development It is likely that the U.S. is at or near its economic peak, and demand is expected to decline The question is whether this decline will correlate with BRIC economies and/or European economies China Brazil $12,000,000 40% $3,000,000 20% $10,000,000 $2,500,000 30% ($ in Millions) 15% ($ in Millions) $8,000,000 $2,000,000 $6,000,000 20% $1,500,000 10% $4,000,000 $1,000,000 10% 5% $2,000,000 $500,000 $- 0% $- 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016 GDP % Exports GDP % Exports Mexico Turkey $1,400,000 50% $1,000,000 30% $1,200,000 25% $800,000 40% ($ in Millions) $1,000,000 ($ in Millions) 20% 30% $600,000 $800,000 15% $600,000 $400,000 20% 10% $400,000 $200,000 10% 5% $200,000 $- 0% $- 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016 GDP % Exports GDP % Exports ______________________________________________________________________ 11 Source: Federal Reserve Bank of St. Louis.
Macroeconomic Filter Weakening U.S. Dollar The U.S. dollar has already decreased more than 1% in 2018, and it saw a 10% decrease in 2017 The weakening of the U.S. dollar will lead to a rise in commodity prices, having a negative impact on wire producers As domestic rod prices go up, a margin compression for the wire producers/converters, especially the those that do not own their own rod mills This decrease is due to several factors, including higher wages, U.S. political uncertainty and higher economic growth in in the BRIC Countries and Europe, particularly Germany and France Estimates show that world GDP grew 3.75% in 2017 However, it is important to put this in perspective: developed economies are growing at a slower pace of 2%-2.5% World GDP ($ in trillion) 100 90 80 70 60 50 40 30 20 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018P 2020P 2022P ______________________________________________________________________ Source: U.S. Census Bureau, U.S. Bureau of Labor Statistics, Forbes 12
Macroeconomic Filter Weakening U.S. Dollar The BRIC economies experienced significant growth, fueled by the E.U.’s and the U.S.’s increased demand for BRIC’s manufactured goods From the years 2015 to 2017, Brazil, Russia, India, and China GDP experienced a compounded average annual growth rate of 7.5%, 3.7%, 8.0%, and 3.1%, respectively With China focusing on manufacturing (25%+ of country’s GDP) and India specializing in the service industry (61% of GDP), both countries’ middle classes are doing exceptionally well As of 2015, 8% of India’s population is middle class, an eight fold increase from 15 years ago U.S. National Average Minimum Wage BRIC Countries Annual GDP ($ in trillion) 30,000 $10 25,000 $9 20,000 $8 15,000 $7 10,000 $6 5,000 0 $5 $4 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018P 2020P 2022P 2024P Brazil Russia India China Total BRIC ______________________________________________________________________ Source:IBISWorld, Trading Economics 13
Macroeconomic Filter U.S. 2017 Construction Employment and Costs As of December 2017, construction employment increased in 75% of metro areas (“MSA’s”) in the U.S. The largest increase occurred in Riverside-San Bernardino-Ontario, CA, which saw 14,300 added construction jobs (15% increase); the second largest was Las Vegas-Henderson-Paradise, which saw an increase of 10,800 construction jobs (18% increase) Construction employment hit an all time high in December 2017 for 38 MSA’s, and no MSA’s saw an all time low in employment; however, 89 MSA’s saw a decrease in construction employment Highway construction prices increased 4.2% from March to June 2017 and 3.4% from June to September 2017 These are the largest quarterly increases since September 2014 National Highway Construction Cost Index Federal Funding for Transportation ($ in billions) 2 100 1.8 90 1.6 80 1.4 70 1.2 1 60 0.8 50 0.6 March September March September March September March September March September March September March September March September March September March September March September March September March September March September March September 40 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018P 2020P 2022P 2024P 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ______________________________________________________________________ Source: Federal Highway Administration 14
Macroeconomic Filter Historical Infrastructure Spending U.S. State and Local Capital Spending as % of GDP 3.00% 2.51% 2.38% 2.38% 2.50% 2.34% 2.19%2.12%2.14%2.25% 2.17%2.06% 2.11% 1.94%1.91% 2.00% 1.50% 1.00% 0.50% 0.00% 2000 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ______________________________________________________________________ Source: Federal Highway Administration 15
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