Professional Documents
Culture Documents
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
May 4th, 2015
I. Company Overview
Business Description
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
Financials
2014 Revenue
andBreakdown
EBIT Breakdown
2012 Sales
Current Price
$97.50
Market Cap
$7.0bn
Enterprise Value
$8.5bn
17.8%
11.2x
EV/(EBITDA-Capex)
13.1x
$ 109.84 $
12.06%
3.87%
3
137.30
40.08%
11.89%
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
Current
Additional
Sales
Capacity
444.5
163.5
85.0%
85.0%
377.8
139.0
$3,300.0
$2,970.0
$1,246.8
$412.8
(10.0%)
($124.7)
$124.7
30.2%
Price Decrease
Additional Capacity Necessary
(10.0%)
36.8%
Refinery
Specialty
Future
Legend
Market Leader
Strong Position
Developing Position
No Position
Source: GRA 2014 Investor Day Presentation
7
2008
2014
Technical Advantages
C/O Ratio
6.9
6.4
76.0
77.4
1.0
1.0
LPG, wt%
18.3
18.6
Gasoline
54.2
55.3
LCO, wt%
17.2
16.9
6.8
5.7
Conversion, wt%
Dry Gas, wt%
Bottoms, wt%
W.R. Grace
Above-cycle utilization
40.0%
3000
35.0%
$mm
25.0%
2000
20.0%
1500
15.0%
1000
10.0%
500
5.0%
0.0%
EBITDA Margin %
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Revenue
Key
Market Size ($mm)*
FCC Cost ($/mt)**
Sales Volume ('000s mt)
Annual Capacity ('000s mt)***
Utilization
Typical Utilization****
Deviation from Norm
30.0%
2500
Gross Margin %
EBIT Margin %
Value
$2,622.0
$3,300.0
794.5
839.5
94.6%
85.0%
11.3%
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
10
Incentivized Management
Activist investors
own 27.7% shares
Engaged shareholder
base improves capital
allocation and creates
value enhancement
Business Reinvestment
Share Repurchases
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
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 $0.4 billion adding an additional 5.7% upside to SOTP valuation
2 0 15 E
2 0 16 E
2 0 17 E
2 0 18 E
2 0 19 E
2020E
2 0 2 1E
Revenue
EBIT
US EBIT
Interest Payments
US EBI (Pre-Tax Income)
N O L D C F
3375.1
667.0
200.1
-59.3
140.8
3511.3
710.0
213.0
-59.3
153.7
3651.0
754.9
226.5
-59.3
167.2
3793.4
801.5
240.5
-59.3
181.1
3937.7
838.2
251.4
-59.3
192.1
4083.3
874.9
262.5
-59.3
203.1
4229.3
911.3
273.4
-59.3
214.1
1800.0
-140.8
1659.2
1659.2
-153.7
1505.5
1505.5
-167.2
1338.3
1338.3
-181.1
1157.2
1157.2
-192.1
965.0
965.0
-203.1
761.9
761.9
-214.1
547.8
35%
35%
35%
35%
35%
35%
35%
630.0
-49.3
580.7
580.7
-53.8
526.9
526.9
-58.5
468.4
468.4
-63.4
405.0
405.0
-67.2
337.8
337.8
-71.1
266.7
266.7
-74.9
191.7
Discount Factor
Discounted Value
0.922
45.4
0.850
45.7
0.784
45.9
0.723
45.8
0.666
44.8
0.614
43.7
0.566
42.4
Discount Rate
NPV of NOLs ($mn)
8.46%
408.1
WACC
12
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
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)
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
"Improving petchem ROA should come from underlying operational improvement
and better capital allocation."
14
Post-Reorganization Equity
Catalysts
VII. Valuation
W.R. Grace has multiple pathways to unlock value for an asymmetric risk-reward.
Incremental Return
Cumulative CAGR
16.1%
5.1%
+ 5.7%
6.8%
+ 1.6%
7.3%
+ 16.7%
11.9%
40.1%
11.9%
15
16
Competitors
Matthew Juneau Albemarle Investor Relations
Consultants
Anonymous The Catalyst Group
Sell-Side
Anonymous Goldman Sachs
Anonymous Credit Suisse
17
W.R. Grace filed for voluntary Chapter 11 on April 2, 2001 as a result of asbestos litigation
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
18
Our Perspective
19
Waterproofing Systems
Roofing products
%
CAGR: 4.1
$millions
2,500
2,000
1,500
1,000
500
0
2012
1. BCC Research
20
2013
2014
2019
Cement Additives
Marketshares
18%
71%
15%
6%
8%
5%
7%
70%
Sika
BASF
Othes
BASF
Grace
Sika
Others
120.00
5,000,000,000
100.00
4,000,000,000
80.00
3,000,000,000
60.00
2,000,000,000
40.00
1,000,000,000
20.00
0.00
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Grace
Production
21
2020
2030
Price
X. Appendix: Valuation
Sum of the Parts
Base Case
Segment
New Grace
New GCP
2015E EBITDA
$
$
Low
652.3
177.3
Multiple
High
10.0x
8.0x
9.6x
EV
Low
High
12.0x $ 6,523.1 $
10.0x $ 1,418.1 $
11.6x
7,941.2
500.0
173.8
408.2
$ 9,023.3
2,015.8
$ 7,007.5
$
$
7,827.7
1,772.7
New Grace
New GCP
9,600.4
500.0
173.8
408.2
10,682.4
2,015.8
8,666.6
72.6
0.0
72.6
Segment
New Grace
New GCP
2015E EBITDA
$
$
716.4
210.4
Low
Multiple
High
119.38
21.79%
6.79%
10.0x
8.0x
9.5x
EV
Low
High
12.0x $ 7,164.3 $
10.0x $ 1,683.5 $
11.5x
8,847.8
173.8
408.2
$ 9,429.8
2,015.8
$ 7,414.0
$
$
72.6
5.1
67.5
$ 109.84 $
12.06%
3.87%
652.3
177.3
Low
Multiple
High
10.0x
8.0x
9.6x
EV
Low
8,597.2
2,104.3
10,701.5
173.8
408.2
11,283.6
2,015.8
9,267.8
72.6
5.1
67.5
137.30
40.08%
11.89%
22
High
12.0x $ 6,523.1 $
10.0x $ 1,418.1 $
11.6x
7,941.2
173.8
408.2
$ 8,523.3
2,015.8
$ 6,507.5
Segment
$
$
72.6
0.0
72.6
96.52 $
-1.53%
-0.51%
2015E EBITDA
$
$
72.6
5.1
67.5
$
96.41 $
-1.64%
-0.55%
7,827.7
1,772.7
9,600.4
173.8
408.2
10,182.4
2,015.8
8,166.6
72.6
5.1
67.5
120.99
23.43%
7.27%
X. Appendix: Valuation
Multiples Valuation Comps
Company
Enterprise
Name
Value
Revenue (USD)
2013A
2014A
2015E
EBITDA (USD)
2013A
2014A
EV/EBITDA
2015E
2013A
2014A
2015E
9.22x
14.74x
9.89x
15.17x
13.38x
9.74x
7.23x
13.34x
9.07x
11.75x
13.50x
10.99x
11.44x
10.84x
10.45x
23
X. Appendix: Valuation
Operating Model Base Case
2 0 10 A
Revenue
Refining Catalysts
Growth Rate %
Polyolefin and Chemical Catalysts
Growth Rate %
Catalysts Technologies
Growth Rate %
Materials Technologies
Growth Rate %
Revenue
Construction Revenue
Growth Rate %
Total Revenue
2 0 12 A
2 0 13 A
2 0 14 A
2 0 15 E
2 0 16 E
2 0 17 E
2 0 18 E
2 0 19 E
2020E
2 0 2 1E
2675.0
1077.5
45.2%
269.8
12.3%
1347.3
37.2%
872.6
6.5%
2219.9
992.0
13.6%
3211.9
986.8
-8.4%
281.3
4.3%
1268.1
1.0%
862.6
1.0%
2130.7
1024.8
3.3%
3155.5
832.4
-15.6%
291.6
3.7%
1124.0
-11.4%
878.5
1.8%
2002.5
1058.2
3.3%
3060.7
845.5
1.6%
401.3
37.6%
1246.8
10.9%
890.6
1.4%
2137.4
1105.6
4.5%
3243.0
873.6
3.3%
445.4
11.0%
1319.0
6.1%
914.9
2.7%
2233.9
1138.8
3.0%
3372.6
903.5
3.4%
489.2
9.8%
1392.8
5.6%
939.8
2.7%
2332.6
1172.9
3.0%
3505.5
935.6
3.5%
531.6
8.7%
1467.2
5.3%
965.4
2.7%
2432.6
1208.1
3.0%
3640.7
969.8
3.7%
571.5
7.5%
1541.3
5.1%
991.7
2.7%
2533.0
1244.4
3.0%
3777.4
1006.4
3.8%
607.7
6.3%
1614.1
4.7%
1018.7
2.7%
2632.9
1281.7
3.0%
3914.5
1045.5
3.9%
639.1
5.2%
1684.6
4.4%
1046.5
2.7%
2731.1
1320.1
3.0%
4051.3
1087.3
4.0%
664.7
4.0%
1752.0
4.0%
1075.0
2.7%
2827.0
1359.7
3.0%
4186.8
288.3
29.3%
191.8
23.4%
-108.1
-6.0%
372.0
441.3
32.8%
189.6
21.7%
-89.1
-4.0%
541.8
447.8
35.3%
191.5
22.2%
-81.2
-3.8%
558.1
381.7
34.0%
213.2
24.3%
-68.4
-3.4%
526.5
444.6
35.7%
217.3
24.4%
-60.6
-2.8%
601.3
18%
483.5
36.7%
224.7
24.6%
-63.4
-2.8%
644.8
199.3
844.1
25.0%
23.7%
1.3%
524.5
37.7%
232.3
24.7%
-66.2
-2.8%
690.6
205.3
895.9
25.6%
24.6%
1.0%
567.2
38.7%
240.1
24.9%
-69.0
-2.8%
738.3
211.4
949.7
26.1%
25.3%
0.8%
595.9
38.7%
248.2
25.0%
-71.9
-2.8%
772.2
217.8
990.0
26.2%
624.0
38.7%
256.6
25.2%
-74.7
-2.8%
805.9
224.3
1030.2
26.3%
651.3
38.7%
265.2
25.3%
-77.5
-2.8%
839.0
231.0
1070.0
26.4%
677.3
38.7%
274.1
25.5%
-80.2
-2.8%
871.2
238.0
1109.2
26.5%
239.6
24.4%
160.0
19.5%
-109.9
-6.1%
89.9
388.8
28.9%
158.7
18.2%
-90.9
-4.1%
97.3
3.0%
-131.5
393.8
31.1%
162.0
18.8%
-82.9
-3.9%
125.2
4.0%
-122.8
327.5
29.1%
181.8
20.7%
-72.1
-3.6%
151.7
5.0%
-110.2
378.3
30.3%
185.2
20.8%
-65.2
-3.1%
161.7
5.0%
-99.0
409.4
31.0%
191.8
21.0%
-68.2
-3.1%
168.2
5%
-103.0
-3.1%
666.5
199.9
533.1
442.1
31.7%
198.7
21.1%
-71.2
-3.1%
174.9
5%
-107.0
-3.1%
708.6
212.6
569.6
476.0
32.4%
205.7
21.3%
-74.3
-3.1%
181.7
5%
-111.1
-3.1%
752.3
225.7
607.5
510.8
33.1%
213.1
21.5%
-77.3
-3.1%
188.6
5%
-115.3
-3.1%
797.2
239.2
646.6
534.9
33.1%
220.6
21.7%
-80.4
-3.1%
195.5
5%
-119.5
-3.1%
831.6
249.5
675.2
558.3
33.1%
228.4
21.8%
-83.4
-3.1%
202.5
5%
-123.7
-3.1%
865.5
259.7
703.4
580.6
33.1%
236.5
22.0%
-86.3
-3.1%
209.3
5%
-127.8
-3.1%
898.7
269.6
730.8
742.0
240.3
982.3
819.4
1801.7
873.3
EBITDA
Catalysts Technologies
Margin %
Materials Technologies
Margin %
Corporate
Margin %
New Grace EBITDA
Construction EBITDA
Total EBITDA
Margin %
Consensus Margin %
Difference
EBIT
Catalysts Technologies
Margin %
Materials Technologies
Margin %
Corporate (New Grace)
Margin %
Construction Products
Margin %
Corporate (Full)
Margin
Total EBIT
US EBIT
EBIT on New Grace
2 0 11A
-163.1
626.2
30.0%
289.7
456.6
472.9
437.2
24
498.3
X. Appendix: Valuation
Operating Model NOLs
N O L
D C F
2 0 10 A
2 0 11A
2 0 12 A
2 0 13 A
2 0 14 A
2 0 15 E
2 0 16 E
2 0 17 E
2 0 18 E
2 0 19 E
2020E
2 0 2 1E
2675.0
3211.9
3155.5
3060.7
3243.0
3375.1
667.0
200.1
-59.3
140.8
3511.3
710.0
213.0
-59.3
153.7
3651.0
754.9
226.5
-59.3
167.2
3793.4
801.5
240.5
-59.3
181.1
3937.7
838.2
251.4
-59.3
192.1
4083.3
874.9
262.5
-59.3
203.1
4229.3
911.3
273.4
-59.3
214.1
1800.0
-140.8
1659.2
1659.2
-153.7
1505.5
1505.5
-167.2
1338.3
1338.3
-181.1
1157.2
1157.2
-192.1
965.0
965.0
-203.1
761.9
761.9
-214.1
547.8
35%
35%
35%
35%
35%
35%
35%
630.0
-49.3
580.7
580.7
-53.8
526.9
526.9
-58.5
468.4
468.4
-63.4
405.0
405.0
-67.2
337.8
337.8
-71.1
266.7
266.7
-74.9
191.7
Discount Factor
Discounted Value
0.922
45.4
0.850
45.7
0.784
45.9
0.723
45.8
0.666
44.8
0.614
43.7
Revenue
EBIT
US EBIT
Interest Payments
US EBI (Pre-Tax Income)
Beginning US NOL Balance
NOL Carryforw ard Usage
Ending US NOL Balance
Statutory Tax Rate
Discount Rate
NPV of NOLs ($mn)
8.46%
408.1
WACC
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
25
X. Appendix: Valuation
DCF Base Case
Taxes Savings
Marginal Tax Rate
49.2
35%
DC F
2 0 10 A
2 0 11A
2 0 12 A
2 0 13 A
2 0 14 A
289.7
456.6
472.9
437.2
498.3
48.7
31.8
2.6
83.1
289.3
11%
(49.70)
52.5
30.9
2.6
86
387.8
12%
(98.50)
54
29.5
2.6
86.1
353.6
11%
34.20
54.2
31.4
5.7
91.3
240.7
8%
112.90
66.3
32.1
7
105.4
379.2
12%
(138.50)
2 0 15 E
9188.7
1893.9 *Based on m ultiples
673.8 *Unconsolidated affiliate and excess cash
2015.8
9740.7
67.5
144.31
53.6
35%
2 0 16 E
58.2
35%
2 0 17 E
62.9
35%
66.6
35%
2 0 18 E
2 0 19 E
70.1
35%
2020E
533.1
35%
346.5
569.6
35%
370.2
607.5
35%
394.9
646.6
35%
420.3
675.2
35%
438.9
703.4
35%
457.2
111.8
394.4
12%
(15.16)
-83.8
359.3
49.2
408.5
0.922
376.6
121.0
409.9
12%
(15.54)
-90.8
384.9
53.6
438.6
0.850
372.8
130.8
425.7
12%
(15.81)
-98.1
411.8
58.2
470.0
0.784
368.3
125.7
441.7
12%
(15.98)
-94.2
435.7
62.9
498.6
0.723
360.3
130.7
457.7
12%
(16.04)
-98.0
455.5
66.6
522.1
0.666
347.8
135.6
473.7
12%
(15.99)
-101.7
475.1
70.1
545.2
0.614
334.9
73.6
35%
2 0 2 1E
0.0
35%
0.0
35%
CV
730.8
35%
475.1
140.4
489.6
12%
(15.84)
-105.3
494.3
'21
73.6 Term inal Value
567.9
11843.1
0.566
0.566
321.6
6706.4
Grow th
3.50%
1.066
1.044
0.023
9.6%
4.05%
Market Cap
7218.8
8683.2
Net Debt
1464.4
WACC
8.46%
L+350
"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
"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
26
X. Appendix: Valuation
DCF Downside Case
DC F
2 0 10 A
2 0 11A
2 0 12 A
2 0 13 A
2 0 14 A
2 0 15 E
2 0 16 E
2 0 17 E
2 0 18 E
Total Revenue
growth %
2675.0
3211.9
20.1%
3155.5
-1.8%
3060.7
-3.0%
3243.0
6.0%
2762.0
-14.8%
2615.3
-5.3%
2759.2
5.5%
3200.6
16.0%
EBITDA
margin %
372.0
13.9%
541.8
16.9%
558.1
17.7%
526.5
17.2%
601.3
18.5%
275.3
10.0%
375.5
14.4%
401.9
14.6%
511.2
16.0%
289.7
10.8%
456.6
14.2%
472.9
15.0%
437.2
14.3%
498.3
15.4%
185.6
6.7%
285.8
10.9%
312.2
11.3%
421.4
13.2%
289.7
456.6
472.9
437.2
498.3
83.1
3.1%
-49.7
86
2.7%
-98.5
86.1
2.7%
34.2
91.3
3.0%
112.9
105.4
3.3%
-138.5
185.6
15.0%
157.7
89.8
3.3%
56.25
-89.8
214.0
0.922
197.3
285.8
15.0%
242.9
89.8
3.4%
17.15
-89.8
260.1
0.850
221.1
312.2
15.0%
265.3
89.8
3.3%
(16.82)
-89.8
248.5
0.784
194.8
6062.9
1820.3 *Based on m ultiples
673.8
2015.8
4720.9
67.4
70.07
CV
421.4
15.0% *NOL Projection
358.2
89.8
2.8%
(13.10)
'18
-89.8 Term inal Value
345.1
7197.2
0.723
0.723
249.4
5200.4
Grow th
3.50%
Tax Rate
Estimates tax rate using NOL Carryforw ards to shield income. Based on Management guidance
Perpetuity Grow th
27
Equity Beta
1.066
1.044
0.023
9.6%
4.05%
Market Cap
7218.8
8683.2
Net Debt
1464.4
WACC
8.46%
L+350
X. Appendix: Valuation
DCF Sensitivities
Base Case Sensitivity
WACC
9.5%
9.0%
8.5%
8.0%
7.5%
2.5%
$108.9
$116.8
$126.1
$137.1
$150.2
WACC
9.5%
9.0%
8.5%
8.0%
7.5%
2.5%
11.1%
19.2%
28.6%
39.8%
53.3%
4.0%
$127.9
$140.0
$154.8
$173.2
$196.9
4.5%
$136.8
$151.1
$169.1
$192.1
$222.9
WACC
9.5%
9.0%
8.5%
8.0%
7.5%
2.5%
$45.3
$50.5
$56.6
$63.9
$72.6
4.5%
$66.1
$75.9
$88.2
$104.0
$125.1
4.0%
30.5%
42.8%
57.9%
76.7%
100.9%
4.5%
39.5%
54.2%
72.5%
96.0%
127.4%
WACC
9.5%
9.0%
8.5%
8.0%
7.5%
2.5%
(52.7%)
(47.3%)
(40.9%)
(33.3%)
(24.2%)
4.5%
(31.0%)
(20.7%)
(7.9%)
8.6%
30.6%
28