Summer 2023

CHEMICAL INSIGHTS

Current State of Chemicals and Materials M&A

Over the past quarter, news headlines have seemed skewed even more negative than usual: recessionary concerns, supply chain

disruptions, banking liquidity, inflation, rising interest rates, geopolitical uncertainty & conflicts, debt ceiling showdowns, and more.

Much has been written about these macroeconomic events, and we can concisely summarize them with a simple, obvious statement

– there is significant uncertainty in the market. That being said, buyers and sellers are successfully navigating the current

dominant, financial trends and outlook are the primary value and buyer interest determinants. In the current environment, volume

headwinds have been at the forefront of M&A discussions. Are these driven by customers destocking material after months of

inventory building? Is it demand softness in core end markets? Is it a combination of both? What do volume trends mean for

pricing? When will the headwinds end?

In order to gain a better understanding of these trends and their impact on M&A, we did some digging. At Grace Matthews, we

track performance of ~100 public chemicals and materials companies in the Grace Matthews Index (see page 4 for 10-year EV/

EBITDA chart). We recently sampled the Q1 2023 earnings transcripts for 20 industry leaders spanning multiple sectors – from

commodity chemicals to specialty materials. It is no surprise that volume trends were a key focus across nearly all of the earnings

calls we reviewed. In 16 of those transcripts, industry executives referenced significant volume declines – in many cases, executives

noted double-digit percentage declines relative to last year. You’ll see excerpts from these transcripts scattered throughout this

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In light of these trends, the key question we are asked by clients is, “How does this impact the M&A process?” Let’s first revisit events

of the past two years:

Supply gets tight (2021-2022): Starting with COVID-19 and the subsequent Texas freeze, supply chain challenges became the norm.

This was compounded by a labor shortage, reshaping of the European energy market, and more cautious views on China, all of

which led to further squeezing of supply chains. It was commonplace for materials to be in limited supply (allocations were

Patrick Joseph Winterlich (Executive VP, CFO & Acting Corporate Controller of Hexcel): “We deliberately allowed our

inventory to grow, recognizing some of the supply chain challenges and bringing in the materials. And we did that in order

to make sure that we didn't delay or impact our customers…”

Supply chain easing (H2 2022 – Current): In late 2022, as customers started transitioning away from excess stocking strategies,

suppliers began to anticipate declines in their sales volumes. Significant destocking occurred as companies found themselves

holding elevated levels of (and in many cases, high-priced) inventory. While it isn’t possible to quantify the exact impact and timing

of destocking throughout the value chain, the dynamic was very real (and in some cases, is still ongoing). This exacerbated inventory

management issues for many companies, as they had to deal with customers reducing or delaying orders to resolve their own

overstocking issues.

Macroeconomic events certainly didn’t help the outlook, raising concerns of subdued demand moving forward. While demand and

Luis Rojo (Vice President and Chief Financial Officer at Stepan): “What you saw in Q1 was, we are still depleting high-cost

raw materials that we have in the system…And we believe we're going to need at least Q2 to finish the depletion of some of

these materials…”

Andrew Tometich (CEO, President & Director of Quaker): “Volumes continue to be impacted by a continuation of softer end

market conditions, primarily in the steel and industrial markets…We continue to see softer end market activity across all

regions and at varying degrees.”

Christian Kullmann (CEO & Chairman of the Executive Board of Evonik): “We do have a broad-based weak demand, which

is combined with continued destocking across most of our businesses...”

Ilham Kadri (CEO, Chairman of the Executive Committee & Non-Independent Director of Solvay): In February, “We shared

some insights on our early view of the first quarter, including our expectation that volumes would decline in a weak macro

increases over the past year; these increases generally held and currently are helping to mitigate the impact of volume declines.

Additionally, increased raw material availability is leading to lower raw material prices (for some products) and providing additional

bottom-line cushion from volume declines.

The outlook for pricing and volume trends is uncertain, and several key questions remain for the future: when will customers work

through inventory stockpiles, how will end market demand trend, and when will prices return to “normal levels”, if ever. While most

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executives indicate that volume declines are ongoing, it does seem that demand softness and destocking may be starting to abate

in some markets. A review of all 20 transcripts suggests that the exact timing for destocking normalizing and/or increased end

market activity varies by sector (no surprise). While some companies saw easing in late 2022/early 2023, others are just now seeing

easing.

expect our earnings to start benefiting from moderate deflation from recent historic inflation highs. As a reminder,

aggregate raw material inflation since early 2021 remains at historically high levels… the high-level statement is, we expect

to continue to see moderation as we move through the year…but hard to quantify the scale of that at this point because

there's still so many moving parts...”

Let’s now revisit the question: “How is this impacting a potential M&A process right now?” M&A deal volumes are down across the

global market; however, certain sectors and deal sizes have remained resilient. In particular, deals in the lower middle market (less

than roughly $30M in EBITDA) remain active as they are less dependent on financing sources that may be restricted in the current

capital market environment. Additionally, the chemical sector is viewed as resilient long-term – its products and services are critical

to the global economy and investors generally recognize that long-term success outweighs short-term volatility.

On a more granular level, we wanted to share a few noteworthy M&A takeaways in the wake of recent trends.

3. Upfront Work to Quantify “Sustainable” Performance is Key: Trailing 12-month EBITDA is a key variable in M&A processes,

4. Timing: In many instances, sellers may benefit from waiting to launch a sale process, allowing the company to demonstrate

to meet internal financial forecasts. As a matter of policy, we believe that what’s best for our clients is best for our firm –

sometimes, that means waiting to start a process until market conditions or business fundamentals are in the “right” place.

Performance trends are at the forefront of every conversation right now. How long the current dynamics will persist is hard to say,

but we know volume declines and price increases are having a material impact on the industry. These trends are driving an

emphasis on well-performing assets and leading to increased buyer scrutiny during financial diligence. If you are considering a

transaction, pre-process preparation is as important as ever. Doing the up-front work to “prove out” a story of sustainable

performance and growth is critical.

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internationally. Grace Matthews is global in scope and well known for its strong track record of success dating back to the early 1990s.

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information purposes only. No part of this material may be copied or duplicated in any form or by any means, or redistributed, without Grace Matthews’ prior written consent.

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