January 2014 Building Materials & Woodworking Equipment Monitor

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2 Trend 1 Tracker Lumber NOLVs are mixed due to market Lumber gross margin is mixed, as some improvements and increased pricing to companies have experienced lags in customers, which was offset in some cases passing increased pricing through to by rising weeks of supply. customers. Building Materials NOLVs are increasing Building Materials gross margins are due to market improvements, gross margin increasing, with selling price increases increases, and improved inventory mixes. resulting in margin growth. Lumber and Building Materials sales are Lumber inventory is increasing based on increasing due to improving market rising market prices and demand for conditions and increased pricing to lumber. customers. Building Materials inventory is mixed based on segment. 1

3 Overview 2 Data released by the U.S. Department of Commerce indicates that the state of the U.S. construction market continues on the upswing into Overall, construction spending rose 1% in November 2013 to the highest level since May 2009, at $934.4 billion. Residential construction rose 1.9% in November after a decline in the prior month, marking the highest annual rate since before the recession. Further, spending on single-family homes increased 18.4%, while apartment building construction spending increased 36.3%. The U.S. Census Bureau indicated that privately -owned housing starts increased 22.7% on a unit basis from October to November. The November rate of construction represents a 29.6% year-over-year increase. Housing completions remained relatively flat month-tomonth, but represented a 21.6% increase from November While some view the extremely strong November indicators as outliers, it is at the very least encouraging. The annual rate of total starts passed 1,000,000 units for the second consecutive month, indicating continued market health in The November rate of construction for single-family homes marks the highest in over five years. Accordingly, the most recent National Association of Home Builders/Wells Fargo builder sentiment index matched an eight-year high previously reached in August The improved builder sentiment is likely due in part to better conditions on the homebuyer market. According to the National Association of Realtors Pending Home Sales Index, pending home sales increased from in October to in November. The increase marks the first improvement in five months and contributes to the best annual sales total in seven years. 2

4 Recent 3 Appraisal Trends After third quarter softwood prices showed signs of steady increases, fourth quarter prices have continued to follow this trend, with The Framing Lumber Composite Price for Random Lengths standing at $381 on October 25, $397 on November 27, and $387 on December 27. GA witnessed margin expansion in those companies able to pass through price increases to customers. However, the success rate of such endeavors was relatively mixed. Another ramification of rising demand noted by GA was Appraisal engagements through the fourth quarter of 2013 have demonstrated mixed NOLVs compared to prior engagements. Similar to softwood counterparts, the effects of hardwood demand outpacing supply have been far-reaching. Gross margin trends within the hardwood segment have been mixed, as certain companies experienced lags in passing price increases along due to sudden increases for certain species. Suppliers of certain species, such as Red Oak, have experienced availability difficulties due to more demand from their customers to store logs for the winter months, driving prices up. While strong market conditions have led to increases in sales, this has led to increased inventory levels in order to keep up with the current and expected continued demand. The resulting increase in weeks of supply hurt NOLVs in certain instances. higher inventory levels among producers and distributors. Rising vendor pricing resulted in higher inventory costs. In addition, certain companies built up inventory levels to match consumption among customers. Inventory levels, specifically for plywood, have also increased to prevent disruptions caused by the approaching Chinese New Year. Appraisal engagements through the fourth quarter of 2013 have continued to demonstrate mixed results in terms of NOLVs, as improvements in market conditions have been offset in some cases by declines in gross margins among certain companies unable to pass along vendor price increases quickly enough to see benefit. Appraisal engagements through the fourth quarter of 2013 have demonstrated increasing NOLVs compared to prior engagements. Demand has been up almost across the board, resulting in improved sales trends in most cases. Favorable market trends have resulted in the implementation of increased pricing in many cases, which has been met with varying degrees of resistance from customers. However, manufacturers and distributors of other building materials have shown an understanding that they cannot rely solely on increased pricing for improved sales and margin. As non-commodity products, pricing does not always show market-wide fluctuations. As a result, inventory levels have been mixed based on market segment; while vendor pricing has increased in several cases, many companies are more concerned with inventory management and sales mix than with implementing price increases. Further, while improved demand resulted in improved sales trends, higher inventory levels caused weeks of supply increases. Hardwood pricing increased steadily over the course of the fourth quarter, resulting from low log inventories and higher demand from secondary manufacturers and yards. In addition, kiln dried inventories are low, and there has been an uptick in international business, particularly from Chinese buyers. In certain segments of the industry, such as plumbing and heating/ventilation/air-conditioning, companies have taken a proactive approach, focusing on SKU rationalization, price adjustments, and margin expansion initiatives such as facility closures and improving sales mix. There have also been signs of initiatives to increase profits by offering bulk discounts to customers, which would result in better operational efficiencies. Coincidentally, there have also been signs of cost savings through bulk purchasing from vendors. 3

5 Pricing 4 Trends Softwood lumber, including species such as Spruce, Pine, Fir, and Cedar, is typically used for structural building purposes, as well as millwork. Pricing continued its upward trajectory through much of the fourth quarter, before sputtering in December. Demand remained relatively strong throughout the period, as demonstrated by the first positive Random Lengths Index in consecutive weeks since May The Index, based on data from the Western Wood Products Association, indicates that unfilled orders outpace current inventory at a stronger rate than the previous five-year period. As a result of strong market dynamics, pricing escalated from the early summer trench. However, the run of upward momentum was held in check by the government shutdown and the oncoming winter weather. As a result, demand stalled in October and dropped off in December. While some dealers anticipated a repeat of the strong winter building season of last year, the forecast was not enough to drive prices higher in December. With prices remaining relatively high, most buyers failed to stock up inventory for the spring, hoping for a softening of pricing in the meantime. However, with demand showing no signs of losing buoyancy, GA anticipates that softwood framing lumber pricing will show resiliency through early $450 $430 $410 $390 $370 $350 $330 $310 Monthly Average Framing Lumber Pricing Trend January 2013 through December 2013 $ per MBF 4

6 Pricing 5 Trends Softwood panel pricing has not yet exhibited a significant wintertime lull. Pricing has been driven largely by an increase in housing construction, from 781,000 units in 2012 to a predicted 920,000 in Many believe that the pace will increase to over 1,000,000 in 2014, setting the stage for a bullish panel market. In the coming months, demand will be supported by continued demand from the South, while demand from the North is likely to slip based on inclement weather conditions. Suppliers of paneling noted strong sales gains in December. Specialty panels, in particular, exhibited higher levels of demand over the period. These panels, which include siding panels, are used primarily in multi-family dwellings in the West. They are also used in garage and shed building in the Northeast. $530 $510 $490 $470 $450 $430 $410 $390 $370 $350 Plywood Panel Pricing Trend January 2013 through December 2013 $ per MBF 5

7 Pricing 6 Trends Hardwood prices have increased steadily over the past several months among most species. In particular, red and white oak prices have escalated in the fourth quarter. The increases are due in large part to log shortages, shortages that show no signs of being alleviated anytime soon. As winter progresses into spring, supplies could further diminish. Demand remains strong and continues to outpace supply. In addition to healthy domestic demand, international demand for certain species, namely Oak, has surged through year-end. While buyers may look to postpone purchases until supplies are replenished, high demand levels may render this wait-and-see approach untenable. Further complicating matters are production slow-downs for Oaks in the North. Poor drying conditions will likely exacerbate supply-side issues, keeping prices buoyant through Spring. $1,800 Hardwood Pricing Trend Various Kiln-Dried Species December 2012 through December 2013 $ per MBF $1,700 $1,600 $1,500 $1,400 $1,300 $1,200 $1,100 $1,000 $900 6

8 Pricing 7 Trends Northern bleached softwood kraft ( NBSK ) spot pulp prices have increased steadily since August Major producers such as Domtar, Resolute Forest Products, and Alpac announced $20 per tonne price increases implemented January 1, Prices are now the highest they ve been in three years. The high prices are as a result of low inventory levels among softwood producers, with a predicted 25 days of supply tallied at the end November. While current hardwood kraft pulp supplies are high, they have declined since the third quarter. As a result, several key players in the industry have announced modest $10 per tonne increases for 2014 after multiple months of decline. Conversely, hardwood kraft pulp supplies are currently outpacing demand. While inventories fell at the end of November, current supplies continue to represent a surplus to current needs, as the market maintained 40 days of supply at the end of November. Pulp Average Spot Market Price January 2013 through December 2013 $ per tonne $750 $730 $710 $690 $670 $650 $630 $610 $590 $570 7

9 Building 8 Materials Reference Sheet Q Q Q Q Average Softwood Framing Lumber ($350 - $400/mbf) 12% (24%) 8% 9% OSB ($260 - $280/mbf) 18% (41%) (10%) (3%) Pine Plywood ($525 - $560/mbf) 13% (18%) (1%) (2%) Q Q Q Q Red Oak ($1,000 - $1,200/mbf) 10% 11% - 18% White Oak ($990 - $1,200/mbf) 1% 5% - 18% Ash ($845 - $860/mbf) % Poplar ($690 - $780/mbf) 2% Hard Maple ($1,400 - $1,850/mbf) 14% 8% - 2% Kiln-dried - all U.S. regions Q Q Q Q Ash ($1,250 - $1,275/mbf) % Hard Maple ($1,745 - $1,785/mbf) 10% 6% 7% 2% Red Oak ($1,495 - $1,550/mbf) 11% 9% 1% 8% White Oak ($1,450 - $1,500/mbf) 3% 3% - 12% Poplar ($1,000 - $1,050/mbf) - 2% - - Walnut ($2,800 - $2,850/mbf) - - 5% 6% October 2013 November 2013 December 2013 NBHK Mixed Species - Canada/U.S. Sources, Delivered to U.S. East ($615 to $650/ton) SBHK Mixed Species - U.S. Sources, Delivered to U.S. East ($615 to $650/ton) NBSK - Canadian Sources, Delivered to U.S. East ($670 to $740/ ton) SBSK - U.S. Sources, Delivered to U.S. East ($645 to $690/ton) (4%) (2%) 1% (4%) (2%) 1% 4% 5% 1% 4% 2% - 8

10 Experience 9 GA has been involved in the liquidation of three National Home Centers building products locations, the liquidation of inventory and fixed assets across eight North Pacific Building Materials distribution centers, and the auctions of various woodworking companies, including Woodworking IVA, The Truss Company, Lux Cabinetry, LLC, and Graeber s Lumber & Millwork. GA has worked with and appraised numerous companies within the building products industry, including industry leaders within each category. While our clients remain confidential, they include industry leaders such as globally-recognized full-line lumber and building materials distributers and some of the largest U.S. roofing distributors, as well as market-leading manufacturers and distributors of plumbing fixtures. GA s extensive list of appraisal experience includes: The nation s largest supplier of building materials for home building, as well as professional and contract builders. Suppliers of iron and wood building components utilized in stair construction. One of the largest roofing products distributors in the United States, with locations throughout the country and sales exceeding $2 billion annually. Specialty producers of custom interior wood doors for the education, commercial, health care, institutional, and hospitality industries. Global leaders in home fixtures and plumbing products, including faucets, sinks, toilets, and bath tubs, with presence in over 40 countries. Leading manufacturers of HVAC systems, serving residential, light commercial, and commercial applications, with annual sales exceeding $1 billion. One of the nation s largest producers of oriented strand board ( OSB ), siding, and engineered wood products. The largest independent distributor of wallboard, acoustical, and other specialty building materials in the United States. GA also maintains appraisal experience involving more regionalized and specialized building materials companies, allowing for the utmost depth in our valuations: Regional sawmills, log processors, and producers of green and kiln-dried lumber. Manufacturers and distributors of fasteners and bolts used in light and heavy construction. A leading distributor of roofing materials, with 60 distribution facilities nationwide. A manufacturer and distributor of exterior residential building products, primarily servicing professional contractors. Distributors of exotic imported hardwoods utilized in high-end building projects. Independent building material and plumbing product retailers and wholesalers, each serving distinct regional customer bases. A diversified holding company operating in the building materials supply industry, with a focus on more specialized supply services. A manufacturer and distributor of metal roofing and accessories for residential, light commercial, and agricultural applications. Various companies woodworking machinery and equipment, including producers of dimensional lumber, hardwood lumber, plywood, and fiberboard. Given our experience in both the valuation and disposition of woodworking equipment, GA is uniquely qualified to render value opinions and serve your liquidity needs through the sales of surplus and/or idle woodworking assets. In addition to our vast liquidation and appraisal experience, GA maintains contacts within the Building Products industry that we utilize for insight and perspective on recovery values. 9

11 Monitor 10 Information The Building Materials & Woodworking Equipment Monitor relates information covering most building projects, including industry trends, market pricing, and their relation to our valuation process. GA provides our customer base with a concise document highlighting the building products industry. Due to the commodity nature of certain building materials, timely reporting is necessary to understand an ever-changing marketplace. GA strives to contextualize important indicators in order to provide a more in-depth perspective of the market as a whole. GA internally tracks recovery ranges for specialty and exotic hardwoods and softwoods, building product retailers and wholesale distributors, hardware supply stores and distributors, and specialty building products, but we are mindful to adhere to your request for a simple reference document. Should you need any further information or wish to discuss recovery ranges for a particular segment, please feel free to contact your GA Business Development Officer. GA s Building Materials & Woodworking Equipment Monitor provides market value and industry trend information for a variety of building products. The information contained herein is based on a composite of GA s industry expertise, contact with industry personnel, liquidation and appraisal experience, and data compiled from a variety of well-respected sources believed to be reliable. We do not guarantee the completeness of such information or make any representation as to its accuracy. 10

12 Appraisal 11 & Valuation Team Mike Marchlik National Sales & Marketing Director (818) David Seiden Executive Vice President, Southeast Region (770) Ryan Mulcunry Senior Vice President - Northeast Region, Canada & Europe rmulcunry@greatamerican.com (617) Mark Weitz President mweitz@greatamerican.com (818) Ken Bloore Chief Operating Officer kbloore@greatamerican.com (818) Bill O Brien Associate Director, Building Materials Specialist bobrien@greatamerican.com (781) Bill Soncini Senior Vice President, Midwest Region bsoncini@greatamerican.com (312) Drew Jakubek Managing Director, Southwest Region djakubek@greatamerican.com (972) Jennie Kim Vice President, Western Region jkim@greatamerican.com (818) Gordon Titley Director of Valuations, GA Europe Valuations gtitley@gaeurope.co.uk Michael Petruski Executive Vice President mpetruski@greatamerican.com (818) Marc Musitano Chief Operating Officer mmusitano@greatamerican.com (818) Bryan Seeley Director bseeley@greatamerican.com (646) About Great American Group Great American Group is a leading provider of asset disposition solutions and valuation and appraisal services to a wide range of retail, wholesale, and industrial clients, as well as lenders, capital providers, private equity investors, and professional services firms. In addition to the Building Materials & Woodworking Equipment Monitor, GA also provides clients with industry expertise in the form of monitors for the chemicals and plastics, metals, food, and building products sectors, among many others. GA offers the European Manufacturing Monitor via its subsidiary, GA Europe Valuations Limited. Headquarters Burbank Blvd. Suite 300 South Woodland Hills, CA GREAT 11