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ESG Industry Report Card: Building Materials

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ESG Industry Report Card: Building Materials

 

Analytic Approach

Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019).

Our ESG report cards qualitatively explore the relative exposures (average, below, above average) of sectors to environmental and social credit factors over the short, medium, and long term. For environmental exposures, chart 1 shows a more granular qualitative listing of key sectors and (in some cases) subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative forward-looking opinion of credit risks across sectors.

In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector. These comparative views of environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.

Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, privacy, (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score.

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The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates.

Building material distributors incur materially lower environmental risks, because their business model is a blend of business services and material companies, so we have listed them separately.

Environmental Risk

General building materials:   We see environmental risks for most building material companies as above average given their indirect exposure to key end-markets such as housing and real estate, where energy savings and insulation will be a key part of carbon dioxide (CO2) reduction targets. To some extent, environmental risk also arises from waste, pollution, and toxicity, for example related to building products made with asbestos, which may result into liabilities or litigation. In addition, all building material companies are exposed to climate-related risks, which can interrupt local operations and damage equipment. For example, in the past couple of years, persistent bad weather resulted in a drop in sales in some cases, and companies did not recover from these quickly. That said, we only categorize weather variations as true-environmental (ESG) risks, to the extent they are extreme or might be associated with climate change. However, there is large variance among the environmental risks among individual building materials producers. Some products such as cement and gypsum use manufacturing processes that produce GHG emissions, while other companies might primarily assemble components (e.g., HVAC, plumbing fixtures, and toolmakers) or distribute, having little environmental impact.

Cement and other heavy building materials:  Environmental risks for cement producers and other heavy building material companies are above the average for building material industry, given that these companies typically crush, convert, and move raw materials to produce their end-products, which often requires a substantial use of fuel, and frequently results in GHG emissions, waste, and pollution.

Cement makers are responsible for 7%-8% of the world's CO2 emissions. The industry's huge carbon footprint partially stems from its high fuel requirements. The global average emission level is at around 640kg CO2/ton cement reported under the Getting the Numbers Right (GNR) database. While large companies have started implementing measures to limit CO2 emissions, global demand for cement is increasing. From 2014-2017, the direct CO2 intensity of cement production increased 0.3% per year, according to the International Energy Agency, and cement production could rise by as much as 23% by 2050 as the global population grows. According to the same agency, a 24% cut in emissions for the global cement industry is needed to comply with the 2 degrees Celsius scenario set in the Paris Agreement.

Reduction of CO2 emissions will therefore be on the cement companies' agenda for next few years to comply with a more stringent environmental regulation, particularly in the EU, where an emissions trading system has been in place for a few decades and carbon pricing has more than doubled over the past 18 months (to levels of 2x per ton of CO2). Almost all European cement companies have set targets for CO2 emission reduction by 2030 and they will continue investing in available technologies, such as plant upgrades through thermal energy efficiency, using alternative raw materials and fuels, or reducing the clinker ratio (clinker is the result of sintering limestone and alumina-silicate materials such as clay at a temperature of 1,400-1,500 degrees Celsius during the cement kiln stage). The use of other constituents in cement and the reduction of the clinker-to-cement ratio means lower emissions and lower energy use. Ordinary Portland cement can contain up to 95% clinker (the other 5% being gypsum). The current average clinker-to-cement ratio over all cement types in the EU27 is about 74%; the lower the clinker ratio, the more environmentally friendly.

Available technologies have all proved economically viable, allowing in most instances the reduction of operating costs. We believe that the associated additional capex should be contained, not exceeding 2% of revenues. Those companies more advanced in this matter could easily achieve the 2030 CO2 emission target by applying the above approaches to their cement plants. A more substantial reduction of CO2 and potential carbon neutrality would instead require concrete recycling on a large scale, and the adoption of breakthrough technologies to both capture CO2 and recarbonize recycled concrete. This technology is new and not yet economically viable. However, research and development could change this in the next five years.

In our view, companies achieving a more pronounced reduction of CO2 will likely gain a competitive edge over other players. This is because they will improve their ESG standing, not only related to environmental risks but also to social and governance, by enhancing their relationship with stakeholders, such as regulators, governments, investors, and clients. Furthermore, fewer emissions can result in lower operating costs for cement production. For example, by using alternative fuels, companies can reduce their dependence on volatile fossil fuel costs and lower their energy bills. Vertical integration with waste management can help cement companies plan optimal use of alternative fuels and alternative raw materials, and contribute to a circular economy. In those countries with an ETS framework, such as the EU, companies with lower CO2 emissions will likely need to buy fewer allowances or can sell excess, which can be a source of cost efficiency, particularly if the rising CO2 price trend continues.

Other environmental-related duties, such as the storage of hazardous substances and the restoration of quarrying sites, have a direct, albeit modest, impact on adjusted debt. For example, asset retirement obligations related to large building material players in EMEA on average have resulted in a 0.2x increase in debt to EBITDA.

Building materials distributors:   Environmental risk is comparatively low for building materials distributors, because their business is not energy-intensive and it distributes, rather than develops, products.

Social Risk

In our view, social risk is below average, and therefore a less important credit factor in the building materials industry. However, safety management risk is relevant, with varying degrees of risk among emerging and developed markets depending on regulatory oversight, policies, procedures, and training.

The most significant credit factor relates to evolving consumer behavior in response to climate change or environmental risks. For example, regulatory initiatives and consumer choice is influenced by increased focus on energy efficiency in mature markets, supporting the development of high thermal efficiency insulation in buildings, and the use of alternative power sources; in addition, more sustainable building products can influence customer choice. Hence it might be a risk and an opportunity, supporting medium-term growth prospects for the most innovative products. This is becoming a key differentiating factor that favors those companies investing more in research and development (R&D), and that to some extent reduce their exposure to the cyclicality of the construction business.

Governance

Overall, governance risk is idiosyncratic, usually reflecting each company's corporate culture, board oversight and influence on management and strategy, geographic footprint, and group complexity. Still, specifically for the sector, we pay attention to litigations and antitrust disputes that are common in the cement and building material sector in both developed and emerging countries.

Family ownership is present in a few cases, but has not necessarily translated into weaker governance. In fact, we have a few instances in the cement sector where family ownership has allowed the companies to pursue long-term growth and sustainability rather than near-term shareholder remuneration.

ESG Risks In The Building Materials Industry

Table 1

Issuer Review--Europe, Middle East, And Africa Building Materials And Cement Producers
Issuer/Rating/Comments Country Analyst
HeidelbergCement AG(BBB-/Positive/A-3)  
We see Germany-based HeidelbergCement's ESG related exposure as similar to the other cement producers, while higher than the building material industry in general. The company's goal is to reduce its carbon dioxide (CO2) emissions by 30% in 2030 compared with 1990 levels. Emissions stood at 599 kilograms (kg) per ton of cement in 2018, or 20% lower than 1990 levels. It is also gradually increasing its use of alternative fuels and decreasing its clinker ratio to reduce its CO2 emissions. In 2018, the proportion of alternative fuels in the fuel mix was a high 22%, and the group intends to increase it to 30% by 2030. HeidelbergCement is among pioneers in CO2 capture and use. The company has various projects for CO2 capture (such as LEILAC) and use to produce construction materials, including the recarbonization of concrete products and waste and mineral byproducts. While this has limited impact on current CO2 reduction efforts, it might become a key source of competitive advantage in next few years. In 2018, total expenditure for research and technology amounted to €145.7 million, corresponding to 0.8% of group revenue. The company aims to invest 80% of its research and development budget in the development of sustainable products by 2030. Being among the largest aggregate producer in the world, HeidelbergCement extracts raw materials from its own quarrying sites, for which it has made provisions to cover costs relating to environmental protection measures, as well as site rehabilitation and clean-up costs (€413 million at year-end 2018, an overall small amount corresponding to about 13% of 2018 EBITDA). We assess the company's governance and management as strong, based on its extensive experience and expertise, which we believe allows it to pursue long-term sustainability. HeidelbergCement is nevertheless involved in some antitrust proceedings, mainly in Europe, but the potential financial implications are limited in our view. Germany Renato Panichi
LafargeHolcim Ltd.(BBB/Stable/A-2)  
We see Swiss-headquartered LafargeHolcim’s ESG related exposure as similar to that of other large cement and heavy building materials companies, albeit higher than the broader building material industry. LafargeHolcim ambitious CO2 reduction targets of 520 kg of CO2 per ton of cementitious output by 2030. As of 2018, the company had reduced its CO2 emissions to 576 kg of CO2 per ton, which translates into a 25% reduction compared with the 1990 baseline, the highest reduction among international cement companies. Site restoration and other environmental provisions stood at CHF860 million as of Dec. 31, 2018, about 15% of 2018 adjusted EBITDA. We assess LafargeHolcim’s overall management and governance as strong, taking into account the expertise and commitment to sustainable business operations, transparency in reporting and dialogue with capital markets, and corrective actions since the Syria incident. The latter include the creation of a new ethics, integrity, and risk committee; the adoption of a more rigorous risk-assessment process focusing on high-risk third parties (and joint ventures); the introduction of a restricted party screening program; and a new sanctions and export control program. In June 2018, French authorities placed a subsidiary of LafargeHolcim, Lafarge S.A., under investigation over allegations that it financed terrorist groups, including Islamic State, and endangered the lives of its employees to keep its Syrian cement plant running despite the worsening regional conflict. LafargeHolcim is also subject to an ongoing case in India, where the group's subsidiaries were fined €390 million for alleged cartelization in 2012. We understand that there is no evidence that the investigation's findings will materially hurt the group financially. However, a significant disbursement, in case of an adverse outcome, could put pressure on the ratings. Switzerland Paulina Grabowiec
Buzzi Unicem SpA(BBB-/Stable/A-3)  
We see Italy-based Buzzi Unicem's ESG related exposure as similar to that of the broader cement industry, while higher than the building material industry in general. The company has set a goal to reduce its CO2 emissions to 662 kg CO2 per ton (or 5%) in 2022 compared with 2017 levels. To reach this, the group aims to optimize the thermal and electrical efficiency of plants, the proportion of alternative fuels, the use of nonnatural raw material, and the proportion of clinker content in cement. As of 2018, the company had reduced its gross CO2 emissions to 690 kg CO2 per ton (down from 696 in 2017 and 705 in 2016). Instead, net CO2 emissions stood at around 630 kg per ton in 2018, which is modestly higher than those of leading European peers, such as HeidelbergCement and LafargeHolcim. This mainly reflects the group's proportionally higher activities in the U.S. (about 30% of total volumes) where emissions are higher due to the market standard of higher proportion of clinker in the cement. We see Buzzi Unicem’s management and governance as satisfactory. The Buzzi family holds about 59% of the company's ordinary shares, and the executive board consists predominately of family members. The family has a solid track record of investing in business development while preserving balance-sheet strength. Buzzi Unicem has, however, been exposed to antitrust proceedings. In particular, in 2017, the Italian antitrust authority fined the company for €60 million, or about 10% of 2017 reported EBITDA, for allegedly coordinating with three competitors on cement prices increases. Italy Renato Panichi
Titan Cement Co. S.A.(BB/Stable/B)  
We see Belgium-headquartered Titan Cement’s ESG-related exposure as similar to that of broader cement producers. Titan set its sustainability targets in 2017, including a 20% reduction of CO2 emissions compared with 1990 levels. With emissions of 684.6 kg CO2 per ton in 2018 (down 2% from 2017 and 12% compared to 1990), the company is making good progress, while it has already achieved its remaining emissions (nitrogen oxide, sulfur oxide) and water consumption reduction targets (a 40% reduction from 2003). However, emissions are higher than those of leading European peers, such as HeidelbergCement (599 kg/ton) and LafargeHolcim (576 kg), due to lower usage of alternative fuels. We view Titan’s management and governance as satisfactory. Eight out of 15 members of board of directors are independent non-executives. The company has been continuously increasing its international footprint with now above 60% of group EBITDA from the U.S., a market with favorable fundamentals. It also built up its cash pooling outside Greece during the most recent financial crisis. We consider Titan’s performance and liquidity is effectively delinked from Greek sovereign risk. With the recent completion of the share exchange tender offer, the company moved its incorporation to Belgium and primary listing at Euronext Brussels. This will improve its market image, link it with large international stock exchanges, and broaden its access to debt capital markets, providing it with potential to fund growth under more competitive terms. Belgium Wen Li
CRH plc(BBB+/Stable/A-2)  
We see Ireland-headquartered CRH’s ESG related exposure as similar to the broader building material industry. Cement represent a limited proportion of group revenues, but together with lime, it accounts for 93% of the group direct CO2 emissions. The company has set a goal to reduce its CO2 emissions by 25% in 2020 compared with 1990 levels. Emissions stood at 583 kg per ton cementitious product in 2018, or 23% lower than 1990 levels and comparable with that of HeidelbergCement and LafargeHolcim. The proportion of alternative fuels in the fuel mix was a leading 30% in 2018, which also reflects the group's proportionally higher share of cement business in Europe, where use of alternative fuels is higher than other regions. CRH has no history of significant environmental accidents, and has a good safety record. As one of the largest building material players in the world, it extracts raw materials from its own quarries and pits, for which it has made provisions to cover costs relating to environmental protection measures, as well as site rehabilitation and clean-up costs (€484 million at the end 2018, or about 13% of 2018 EBITDA). We assess the company's management and governance as strong, based on management's extensive experience and expertise, which we believe helps limit risks in this area. CRH is involved in some antitrust proceedings, mainly in Europe, but the potential financial implications are limited. Ireland Renato Panichi
Compagnie de Saint-Gobain(BBB/Stable/--)  
We believe France-headquartered Saint-Gobain is better-positioned on environmental risks than the building material industry in general, in addition to having significantly lower CO2 emissions than cement players. We believe regulatory initiatives to increase energy efficiency in mature markets, develop high thermal efficiency insulation in all buildings, and promote the use of alternative power sources in homes support medium-term growth prospects for Saint-Gobain's most innovative products. The company has invested significantly in research and development and taken out several patents in the past few years. This is a key business strength, because it somewhat lessens the company's exposure to the volatility of the building material cycle. Saint-Gobain has set a target to reduce its CO2 emissions by 20% in 2025 (base 2010). At year-end 2018, the reduction figure was 11.7%. In September 2019, the company signed a pledge called "Business ambition for 1.5°C," committing itself to reach net-zero emissions by no later than 2050 in line with 1.5 degrees Celsius scenarios. One specific area of past environmental risk relates to some asbestos-related litigation, mainly in the U.S. In 2018, it recorded a $106 million charge to cover developments in relation to claims, although this is less than 2% of group EBITDA. As of Dec. 31, 2018, the group's provision for asbestos-related litigation in the U.S. amounted to $568 million, which has been unchanged over the past few years. A material step has been taken in January 2020 by filing DBMP LLC, a U.S. affiliate holding legacy asbestos liabilities, under Chapter 11 in view of resolving all claims. Cybersecurity risk is increasing for building material distributors like Saint-Gobain. In June 2017, the company experienced a cyberattack that affected the majority of its systems in Western Europe. It estimated the impact of the attack was a €65 million operating income reduction during the first half of 2017, equivalent to 4.4% of operating income. Saint-Gobain's management and governance, which we view as strong, is in line with global best practices and balances stakeholder interests. A lead independent director was elected since the June 2017 shareholders meeting, mitigating the dual CEO and chairman role structure. The company is involved in antitrust proceedings, mainly in Europe, but the potential financial implications are limited. In 2014, Saint-Gobain paid €715 million to settle an antitrust claim by the European Commission concerning automotive glass. The simultaneous disposal of its entire stake in its glass-packaging subsidiary Verallia North America allowed the group to offset the otherwise the meaningfully negative impact on its leverage metrics. France Gaetan Michel
Legrand S.A.(A-/Stable/A-2)  
We see France-based Legrand's credit quality more positively influenced by environmental and social factors than global building material industry peers. The company is a manufacturer of electrical and digital building infrastructure, so we see less environmental risk than for heavy building materials and cement companies. Also, Legrand's strong research and development capacity (4.8% of sales in 2018) and ability to launch products enables it to cope with regulatory initiatives to increase energy efficiency in mature markets and to maintain its market shares. Furthermore, its investments, new products, and acquired businesses, which respond to social megatrends, somewhat lessen exposure to the volatility of the building materials cycle. The company focuses on digital infrastructure and connected products, allowing it to increase its estimated addressable market to €100 billion from €80 billion over the past four years. We view Legrand's management and governance as strong, reflecting management's experience and expertise, and a balance of different stakeholders' interests. Legrand has not been subject to major litigation. However, in September 2018, police investigated the company's offices, along with the offices of other French electrical goods' manufacturers and distributors. According to the press, these investigations relate to suspicions of cartel pricing and corruption. We understand they are ongoing. France Pascal Séguier
Neptune Holdco S.a.r.l. (Armacell)(B(prelim)/Stable/--)  
We see Germany-based Armacell as being somewhat better positioned on environmental factors than the broader building materials industry. The company's portfolio has a clear focus on conserving energy and contributing to a circular economy: flexible insulation materials help enhance the energy efficiency of technical equipment; engineered foams are used in lightweight applications; its PET foam is 100% produced from post-consumer PET plastic bottles. About 25% of Armacell’s products are fully recyclable with the remainder being reusable. This is in line with social megatrends and can, to some extent, reduce the company's exposure to the inherent volatility in the cyclical building materials industry. We see Armacell's management and governance as fair and comparable with that of other private-equity-owned companies. Luxembourg Wen Li
Note: Ratings as of Feb. 10, 2020.

Table 2

Issuer Review--North America Building Materials And Cement Producers
Issuer/Rating/Comments Country Analyst
Eagle Materials Inc.(BBB-/Watch Neg/--)  
We see Eagle Materials as more exposed to environmental factors relative to other building materials companies but in line with other cement producers. It operates seven cement plants and five concrete and aggregate operations that account for 49% of the company’s revenues. Light building materials (gypsum wallboard and paperboard) constitute another 45%. Eagle has announced it will separate its heavy and light materials segments into two distinct companies in 2020. The company's cement plants emitted about 783 kg of CO2 per ton in 2018, in line with other U.S. cement makers. Eagle’s cement capacity is just over 5 million tons (5% U.S. share), considerably less than most other global cement producers, many of whom operate in North America. The company's light materials business operates five wallboard plants that also produce emissions and water runoff. Eagle’s entire business is subject to numerous regulations, inspection and permitting requirements and is in compliance with U.S. Environmental Protection Agency emission standards. It has not had any recent material adverse environmental events. The company uses a low-cost strategy with continuous initiatives to use less energy, materials, and resources in its production. For example, by using alternative fuels, Eagle has reduced coal usage in its cement manufacturing by 44% since 2010; 100% of the paper in the company's wallboard comes from recycled materials; and Eagle has reduced water usage at it paper mill by 20% since 2014 and by over 30% in its cement operations since 2012, operating well below permitted water consumption levels. The low cost/reduced materials strategy has resulted in the company achieving the highest margins among publicly rated cement and gypsum wallboard/paper producers (with its EBITDA margin in the mid-30% range). U.S. Kimberly Garen
Martin Marietta Materials Inc.(BBB+/Stable/--)  
We view Martin Marietta’s exposure to environmental risk as less supportive of credit quality relative to other building materials companies due to its operation of two cement plants--with cement representing about 8.6% of revenues and 13% of gross profit in 2018. The vast majority of Martin’s operations consist primarily of aggregates quarries and, to a lesser extent, ready mix concrete and asphalt plants, which we view as having less environmental risk due to a lower emissions profile. Martin possesses about 4.25 million tons of cement capacity, and production was just under 4% of the U.S. share. Its cement plants emitted about 700 kg of CO2 per ton cementitious product sold in 2018, lower than other U.S. producers. The company's Midlothian cement plant was awarded the U.S. EPA’s 2014 Energy Star certification for superior energy efficient performance. Martin’s aggregates quarries consume fossil fuels to operate heavy equipment (rolling stock loaders, crushers). Quarries also produce water discharges that are regulated and subject to permits and inspections. Safety issues are also a key risk. However, the company has a good track record in managing its properties and maintaining worker safety, and there have been no recent major environmental events. We assess the company's social risk as moderate--somewhat higher than most other building materials companies but not excessive or high-risk. Quarries often are near residential and urban areas. Good relations and communication with municipalities and residents is critical as a most quarries operate under local permits. The company has good relations in the communities in which it operates and we are not aware of any significant issues or community opposition regarding the operations of its facilities. We also view the risk of losing a local permit as low, and this risk is also mitigated by the large number of quarries which Martin operates. The loss of operation at one or even several quarries is unlikely to have a material impact. U.S. Kimberly Garen
Summit Materials LLC(BB/Stable/--)  
The ratings on Summit incorporate somewhat higher environmental risk than most other building materials companies given the company's ownership and operation of two cement plants, but these are in line with those of other heavy materials and cement producers. The cement segment represents only 13% of revenues in 2018, when it produced about 2.1 million metric tons of cement product or about 2% of the U.S. market. The bulk of Summit's operations are aggregates quarries, which, in our view, are less environmentally sensitive than cement production due to a much lower emissions profile. Quarries consume fossil fuels to operate heavy equipment and are subject to emission, water, safety, and other regulations. The company's cement plants produced 770 kg of CO2 emissions per metric ton of cement in 2018, in line with those of other U.S. producers. Summit’s cement plants use alternative fuels composed of hazardous liquid and solid waste from surrounding industrial factories that would otherwise go into landfills. As a result, 43% of the plant’s energy came from these alternative sources, reducing fossil fuel consumption and earning the Energy Star Award from the U.S. EPA. Summit has not has any recent material violations or adverse environmental events. A degree of social risk stems from local communities, as most quarries operate under local permitting requirements as to emissions, noise, dust abatement, and water runoff. Failure to comply could result in restricted operations, fines, litigation, and adverse publicity. U.S. Thomas J. Nadramia
Vulcan Materials Co.(BBB/Stable/--)  
We consider Vulcan more exposed to environmental risk than most building materials companies but less so than other heavy materials producers which operate cement plants. The company operates aggregate quarries, as well as asphalt and ready-mix concrete facilities. Key environmental factors include management of water runoff and land use. Vulcan also uses fossil fuels to power its plants (primarily crushers and grinders) and operate heavy equipment on site. Worker safety is of high importance and a priority in quarry operations, and the company has a good track record in this regard. Many of Vulcan’s quarries are close or adjacent to urban and suburban communities. Maintaining good relations with local municipalities and neighbors is key, as the company must maintain local permits to operate and its sites are subject to environmental and safety regulations and inspections. However, we view the risk of loss of a local operating permit as low and absent a significant event, and the impact of such a loss is mitigated by the large number of quarries which Vulcan operates. Vulcan has no history of significant environmental accidents, and has maintained good relations with communities where it operates. U.S. Pablo Garces
Note: Ratings as of Feb. 10, 2020.

Table 3

Issuer Review--Latin America Building Materials And Cement Producers
Issuer/Rating/Comments Country Analyst
Votorantim S.A.(BBB-/Positive/--)  
We see Brazil-headquartered international conglomerate Votorantim as having higher environmental exposure than the broader building material industry, given its focus on producing cement and other heavy building materials. Its cement activities represent 40%-50% of EBITDA while CO2 emissions from the cement subsidiary average 620 kg of CO2 per ton of cementitious product in 2018. In addition through its main subsidiaries, the mining-company Nexa Resources S.A. and the cement-producer Votorantim Cimentos S.A., the company faces climate-change-related weather risks: El Niño led to floods in Peru in 2017 and affected Nexa’s production, while severe winters in the Great Lakes region usually delays cement consumption. The financial impact from those events, however, was modest, especially because of the group’s business and geographic diversification. We assess Votorantim’s management and governance as satisfactory, taking into account the company's consistent strategic planning process, with clear and well-defined operational and financial goals, and sound internal controls and risk management culture. Brazil Felipe Speranzini
Cementos Pacasmayo S.A.A. (CPAC)(BB+/Stable/--)  
CPAC, like all cement producers, is more exposed to environmental risks than the broader building material industry, particularly because its cement plants cause significant CO2 emissions. In Peru, environmental concerns and regulatory scrutiny are progressing more slowly than in developed markets. However, CPAC’s environmental policy is aligned with industry standards, and its credit profile has not been affected by these factors. The company complies with local regulation and is member of international bodies that monitor GHG emissions and waste treatment, among other factors. Although CPAC does not have specific goals to reduce its CO2 emissions, its two largest plants have reported a stable ratio of CO2 emissions per ton of clinker (CO2/t clinker), of about 430kg CO2/t clinker over the past few years. This ratio compares favorably against global peers, which is estimated at about 800kg CO2/t clinker in the GNR database, explained by CPAC’s low clinker-to-cement ratio, of an estimated 73%. We assess CPAC’s management and governance as fair comparable with those of Peruvian and regional peers. The company is family owned; its board is composed by one family member, five company directors and three independent members, which oversee four committees for executive, audit, antitrust and corporate governance matters. Peru Santiago Cajal
Union Andina de Cementos S.A.A. y Subsidiarias(BB/Stable/--)  
Peruvian-based UNACEM, like all cement producers, is more exposed to environmental risks than the building industry in general, particularly because its operations cause significant CO2 emissions. Environmental concerns and regulatory scrutiny are progressing more slowly in Peru and in Latin America than in developed markets. Nevertheless, management acknowledges the importance of reducing its GHG emissions at its plants. Although UNACEM is exposed to these medium-term risks, mainly in central Peru, Ecuador, and the U.S. state of Arizona, where it consolidates the bulk of its operations, its credit profile has not been affected. In 2018, its two largest plants (Atocongo and Condorcocha), in Peru, reported 627 kg and 821 kg of CO2 equivalent per ton of cement produced, respectively. Condorcocha plant being 4,000 meters above sea level. On the other hand, its cement production in Ecuador registered 555 kg. These figures compare in line against global peers reported under the GNR database, estimated around 640kg. Moreover, UNACEM has pursued different strategies to decrease its environmental impact by increasing the use of alternative fuels, as it currently uses in its Ecuador’s cement plant and partially using natural gas in its Atocongo plant (estimated reduction of GHG emissions by over 120k tons annually). We assess UNACEM’s management and governance as fair, similar to most other Peruvian and regional peers. The Rizo Patrón family ultimately controls UNACEM, and its board of directors is composed of 13 members, of whom four are linked to the family and four are independent. Peru Santiago Cajal
Grupo Cementos de Chihuahua S.A.B. de C.V. (GCC)(BB+/Stable/--)  
Mexico-based GCC, like all cement producers, is more exposed to environmental risks than the broader building materials industry, because its operations cause significant CO2 emissions. The company is subject to different regulators, given its operations in the central U.S. and the Mexican state of Chihuahua. We believe that environmental concerns and regulatory scrutiny in the U.S. is progressing faster than in Mexico. Nevertheless, GCC has had no regulatory issues and has been proactive into acknowledging and taking measures to reduce its GHG emissions without affecting its credit quality. The company recently closed two long-term agreements with renewable energy suppliers, that are estimated to generate savings and will cover about 20% of electricity consumed in its Mexico operations and 100% of electricity consumed in its Odessa, Texas, cement plant. In 2018, GCC’s net specific CO2 emissions were 747 kg CO2 per ton of cement, marginally higher than 738 kg in 2017, mainly explained by the acquisition of Trident plant. These figures compare above global peers reported under the GNR database, estimated near 640kg. However, the 2018 level was still down 6.3% from the 2005 baseline, in line with the company’s goal of reducing net CO2 emissions by 9% in 2020 and 31% in 2030, being a commitment that GCC made as an active member of the Global Cement and Concrete Association. As part of the involvement, GCC remains focused on achieving Sustainable Development Goals established by the United Nations Global Compact. We assess GCC’s management and governance as fair comparable with that of many Mexican peers. The company is ultimately family-owned; its board is composed of as many as 14 members, of which four are independent, exceeding the 25% bylaw requirement. Mexico Santiago Cajal
Elementia S.A.B. de C.V.(BB/Watch Neg/--)  
Mexico's Elementia, like all other cement producers, is comparatively more exposed to environmental risks than the broader building material industry, because its operations cause significant CO2 emissions. The company is subject to different regulators, because it operates two cement plants in the east coast of the U.S. and three in Mexico’s central region, with a combined installed capacity of 5.5 million tons per year. We believe that environmental awareness and regulatory scrutiny in the U.S. is progressing faster than in Mexico. Since becoming a signatory of the U.N. Global Compact, the company has made gradual progress into identifying and selecting Sustainable Development Goals. We assess GCC’s management and governance as fair. Corporate practices and governance structure generally align with industry standards and local peers. The Del Valle and Slim families jointly control Elementia. Its board of directors is composed of 11 members, of whom four are independent. Mexico Santiago Cajal
Cementos Progreso S.A. (CemPro)(BB-/Stable/--)  
Guatemala's CemPro, like all other cement producers, is more exposed to environmental risks than the broader building materials industry, because its three cement plants cause significant CO2 emissions. In our opinion, in Guatemala, environmental awareness and regulatory scrutiny are progressing more slowly than in developed markets. However, CemPro’s environmental policy is aligned with industry standards, and its new state of the art San Gabriel plant, a $1.4 billion investment, will have positive long-term environmental implications for the company. In 2018, CemPro’s net specific CO2 emissions were 622 kg of CO2 per ton of cement, comparing similarly to worldwide averages reported under the GNR database, estimated at around 640 kg. Moreover, the company acknowledges the importance of sustainability in its long-term strategy, becoming, in October 2019, a member of the Global Cement and Concrete Association. CemPro’s social and safety risks are similar to the industry. We note the company’s resolution to some opposition from local communities during the construction of its San Gabriel plant. We assess CemPro’s management and governance as fair and comparable with that of most domestic peers, despite the lack of independent directors on its board. Mitigating this is a prudent investment strategy in specific projects, such as the development of its San Gabriel plant. The Novella family owns and controls the company. The company’s board of directors is composed of five primary directors and three alternate directors. Guatemala Santiago Cajal
CEMEX S.A.B. de C.V.(BB/Stable/--)  
We see Mexico-based CEMEX’s ESG related exposure as similar to other cement producers, while higher than the building material industry in general, being one of the largest cement companies in the world with installed capacity of approximately 92.6 million tons. In recent years, it has allocated about 10% of capital investments into sustainability-related projects, including operating efficiencies to mitigate the carbon footprint through alternative fuels and clinker substitution efforts. Use of low carbon fuels represented 27% of total fuel mix in 2018, and generated more than $180 million in savings including CO2 emissions avoided in carbon regulated markets. CEMEX reports absolute and specific CO2 emissions following the latest version of the Cement Sustainability Initiative (CSI) Protocol. In 2018, the company averaged specific net CO2 emissions of 630 kg per ton cementitious product, representing a reduction of 21.6% versus its 1990 baseline. CEMEX's cement products have 15%-20% fewer carbon emissions than the industry average, by using clinker with 20% of natural pozzolanic material, which complies with applicable European Standard Specifications. We assess CEMEX’s management and governance as satisfactory. The board of directors has 12 members and three alternates, of which more than 25% are independent as per the Mexican Securities Market Law. CEMEX is a publicly traded company with a very fragmented investor base. Under its ownership structure--senior management and immediate families own less than 2% of shares, collectively, which facilitates the adoption and execution of strategic decisions that ensure the sustainability of the business, and protects shareholder value. Mexico Luis Manuel Martinez
Intercement Brasil S.A.(B/Stable/--)  
Intercement is more exposed to environmental risks than the building materials industry in general, similarly to other cement producers. The group reported emission levels of 570-580 kg of CO2 equivalent per ton of cement produced over the past few years, which is lower than global average for cement producers according to GNR database. In addition, the company has invested in its co-processing activities, which allows for the thermal destruction of industrial waste in substitution to fossil fuels avoiding 437,000 tons of CO2 emissions in 2018. It increased by 84% its thermal substitution over the past six years, reaching 15.8% in 2018. We assess Intercement’s management and governance as fair. The company is controlled by Mover Participações S.A. (previously Camargo Correa S.A.), one of the biggest Brazilian private conglomerates. Mover Participações’s engineering and construction subsidiary closed a collaboration agreement with Brazilian authorities in 2015 and 2017 from corruption investigations with about R$915 million to be paid in installments over eight years. Intercement itself is, however, not involved and has not suffered any related direct financial impact. Brazil Felipe Speranzini
Note: Ratings as of Feb. 10, 2020.

Table 4

Issuer Review--Asia-Pacific Building Materials And Cement Producers
Issuer/Rating/Comments Country Analyst
Anhui Conch Cement Co. Ltd.(A/Stable/--)  
As China’s second-largest cement producer, Conch has higher exposure to the environmental than the building materials industry in general, with annual cement capacity of 353 metric tons. The cement industry in China faces increasing regulatory and public scrutiny over its environmental impact. As a leading player, Conch plays a pivotal role in the industry’s environmental protection upgrade. The company has developed technologies to reduce greenhouse gas and air pollution emissions. In addition, it has made meaningful progress in energy conservation, recycling, and waste treatment. We expect the company to further its pursuit of technological innovations to reduce emissions and to increase energy consumption efficiency. Conch’s CO2 emission was 843.7 kg per ton of product in 2018, representing a 1.32% decline from 2017 level, and in line with industry average in China. Conch’s increasing expenditure toward environmental protection will likely have little impact on the company's credit quality, given its extremely low leverage. We expect the tightened control over environmental protection to clear out small-scale competitors, increase industry consolidation, and benefit market leaders like Conch. China Allen Lin
KCC Corp.(BBB-/Negative/--)  
Korea-based building and construction materials company KCC exhibits environmental exposure broadly in line with that of peers. The company is undertaking efforts, such as reducing its GHG footprint through steps including monitoring energy consumption, installation of photovoltaic plants and LED lighting at its facilities, recycling and safely disposing waste material, waste water treatment and reducing emission of air pollutants at its sites. Evolving consumer behavior in response to environment concerns, use of chemicals, and safety management remain key social risks for the company. KCC regularly monitors and manage toxic chemicals in its products and has increased its environmental investments to process and replace hazardous chemicals in its products and processes with safer materials. Workplace safety, however, remains a greater risk for KCC compared with peers. The company reported a fire incident and employee casualties at different sites over the past two years, after which it came under growing criticism over worker safety. Although the company has ramped up its safety management system following these incidents, its safety record would need to be monitored over the next few years, as this can affect reputation and hamper prospects of winning new orders. South Korea Shawn Park
Boral Ltd.(BBB/Stable/--)  
Australia-headquartered international building product and construction material group Boral has above-average exposure to environmental risks, given that its operations are resource-intensive, including various quarrying activities and cement operations. At sites where the company extracts natural resources or manufacture products, it has obligations related to site rehabilitation or clean-up of contamination. Across Australia and the U.S., Boral owns or leases over 150 locations that are greater than 20 hectares in size, with more than 26,000 total hectares. The company has made provisions for future costs associated with remediating and rehabilitating sites. For the year ended June 30, 2019, Boral reported a provision for restoration and environmental rehabilitation of A$89.2 million. The company is a significant emitter of GHG through its clinker manufacturing operations in Australia. Boral recorded total GHG emissions in fiscal 2019 of 2.4 million tons CO2-e. Its cement business accounted for nearly60% of the company's total GHG emissions, while its brick businesses in Western Australia and the U.S. accounted for 9%. In Australia, Boral has reduced GHG emissions by around 40% since fiscal 2005. About half of this decrease is due to realigning its portfolio away from emissions-intensive businesses. The reminder of the decrease is due to reducing clinker manufacturing in Australia in favor of importing it from more efficient and larger scale operations in Asia. Since fiscal 2012, Boral has reduced scope 1 and 2 GHG emissions from its operations by 32% and its emissions intensity by 48%. In fiscal year 2019, Boral’s GHG emissions intensity decreased by 7% to 348 tons of CO2-e per one million of Australian-dollar revenue, from 375 tons in fiscal 2018, reflecting lower absolute emissions and steady underlying group revenue. Boral is targeting to reduce emissions intensity by 10%-20% on fiscal 2018 levels by fiscal 2023. The company intends to increase the share of annual revenue from lower carbon and high-recycled-content products which in fiscal 2019 was 10%, and avoid a further 1.1 million-1.5 million tons CO2-e in the supply chain on fiscal 2018 levels through increased fly ash supply by fiscal 2022. Management is addressing some of these risks by realigning its portfolio away from emissions-intensive businesses. For example, Boral's strategy has shifted away from energy- and resource-intensive, high fixed-cost manufacturing to lightweight, innovative, and more-variable-cost building products and materials. We assess the company's management and governance as satisfactory, given our view of the company's operating strategy and corporate governance architecture. Nevertheless, in December 2019, Boral advised that it had identified financial irregularities in its North American window manufacturing business, which is likely to result in a one-off impact on EBITDA of US$20 million to US$30 million (albeit manageable in comparison to group EBITDA of around A$1 billion in fiscal year 2019). The company's business strategy integrates ESG management practices with its core operations and investment decisions. Australia Ieva Erkule
Note: Ratings as of Feb. 10, 2020.

Table 5

Issuer/Rating/Comments Country Analyst
Sonepar SAS(--/--/A-2)  
Sonepar is developing a long-term sustainable development strategy and counts on playing a key role in promoting a circular economy. As a global leader in the building and industry sectors (which represent respectively 82% and 50% of estimated energy savings), the group is at the heart of the energy transition. It is fully committed to placing the planet at the core of its vision and is preparing for energy transition by promoting energy efficient products and raising awareness on sustainability internally using e-learning solutions. This should lessen the group exposure to the volatility of the building material cycle. Sonepar has a satisfactory governance. It is a family-owned company with a solid track record of investing in the business development while preserving balance sheet strength, which is a key supporting factor for the rating. Sonepar does not have a track record of significant litigation, but we are monitoring the ongoing investigation (since September 2018) in France on electrical goods’ manufacturers and distributers related to suspicions of cartel pricing. France Renato Panichi
Rexel S.A.(BB/Stable/B)  
Rexel’s product offering responds to new trends, such as internet of things and greater demand for carbon-free, which allow the company to increase its addressable market. As a result, sales of energy-efficient solutions more than doubled in 2018, reaching €1.74 billion. We see Rexel's governance structure in line with that of peers. We note the increasing presence of Cevian Capital in the company's shareholders structure. At this stage, we have not seen any material changes in Rexel's financial policies, and we note that the company targeted deleveraging for 2019. It does not have a track record of major litigations, but we are monitoring the ongoing investigation (since September 2018) in France on electrical goods’ manufacturers and distributers related to suspicions of cartel pricing. France Pascal Séguier
LSF10 Wolverine Investments SCA (Stark Group) (B/Negative/--)  
LSF10 Wolverine uses responsible sourcing and assortment of eco-labeled products, with a strong focus on sustainable timber, reducing risk of brand image. We view governance as fair, in line with other private-equity owned companies. LSF10 Wolverine is owned by Lone Star Funds. Denmark Pascal Séguier
Adolf Wuerth GmbH & Co. KG(A/Stable/A-1)  
The Germany-based Wuerth group is the largest global distributor of assembly products in the maintenance, repair, and operations industry. It is committed to logistical optimization targeting less packaging, less filling material, and fewer trips, which also addresses customers' increasing demand on sustainable products and solutions. The company has satisfactory governance. It is controlled by the Wuerth family, with supervisory board consisting of three family and two nonfamily members. The family remains heavily involved in the group's overall development and continues to have a strong say in key strategic decisions. However, we think the management and governance structure is effective and will balance stakeholders’ interests. Germany Wen Li
Quimper AB (Ahlsell) (B/Stable/--)  
Ahlsell distributes regularly new products, such as a polyvinyl chloride-free injection hose, or Nordic Ecolabelled cleaning products, to address increasing customer’s demand on sustainable products and solutions. We view governance as fair, and in line with that other private-equity owned companies. Quimper AB is owned by CVC Capital Partners. Sweden Pascal Séguier
Ferguson plc(BBB+/Stable/A-2)  
Ferguson offers products that help monitor energy consumption and water usage. The company's focus on sustainability is demonstrated through the efficient use of its fleet and its reduction of carbon emissions, consumption of less energy, and production of less waste. We view Ferguson's focus on the promotion of eco products as a source of competitive advantage. For example, the company responds to the trend of increasing customer demand for sustainable solutions by offering products that help monitor energy consumption and water usage. We view Ferguson's governance as sound, reflecting the company's detailed and publically disseminated strategy that has been consistently implemented over the years, its ability to track strategy execution, high standards of operational performance, and management's expertise and experience. United Kingdom Paulina Grabowiec
Travis Perkins plc(BB+/Negative/--)  
Travis Perkins operates one of the largest vehicle fleets in the U.K., distributing heavy and bulky materials over 2,000 sites, with associated regulatory and compliance requirements. Poor safety practices or accidents could result in significant harm to its 28,800 employees, or affect the group's trading performance and damage its reputation. Positively, the accident frequency rate, or number of lost-time Incidents per million hours worked, decreased to 7.5 in 2018, continuing a downward trend observable since 2015. The group is the largest U.K. merchant certified to buy and sell Forest Stewardship Council (FSC) and Program for the Endorsement of Forest Certification (PEFC) timber products. Over 97% of timber and timber-fiber products purchased by the group in 2018 were certified as responsibly sourced. United Kingdom Lucas Hoenn
Note: Ratings as of Feb. 10, 2020.

Table 6

Issuer Review--U.S. Building Material Distributors
Issuer/Rating/Comments Analyst
ABC Supply Co. Inc.(BB/Stable/--)  
As a distributor, ABC produce meaningful emissions or waste streams other than from its operations of a large delivery fleet of trucks, which consume fossil fuels and produce emissions. However, we do not view this risk to be any greater than many other companies that rely on motor transport. Kimberly Garen
Beacon Roofing Supply Inc.(B+/Stable/--)  
As a distributor of roofing shingles and products with no manufacturing assets, Beacon does not produce substantial GHG or emissions other than those associated with the transport and delivery of its products, which is done almost entirely by fossil fuel consuming trucks. Pablo Garces
BMC Stock Holdings Inc.(BB-/Stable/--)  
BMC is a large U.S. distributor of building materials and products sold primarily to homebuilders in the U.S. The primary source of GHG emissions and fossil fuel consumption is due to operation and use of delivery trucks. However, we view the company’s risk as similar to that of other companies relying on truck transport. Pablo Garces
Builders FirstSource Inc.(BB-/Stable/--)  
Builders is the largest distributor of materials and products to homebuilders in the U.S. It primarily transports lumber, wood products and finished materials from manufacturers to homebuilders. The company operates about 400 locations in 40 U.S. states and uses a large truck transport fleet that consumes fossil fuels and produces tailpipe emissions, but we do not view the levels of emissions as excessive or unique compared to other companies that rely on truck transport. Thomas Nadramia
Core & Main L.P. (B+/Negative/--)  
As a distributor of water, sewer, storm drain and fire production products, Core & Main’s fossil fuel usage and emissions are mostly limited to the transport of the company’s products, primarily by truck, to work sites. Some of Core & Main's distributed products are used to meter water usage, which is key to conservation and sustainability. We expect demand for the company’s products to increase as access to clean water and stricter water runoff regulations take on more importance. Thomas Nadramia
The Cook & Boardman Group LLC(B/Stable/--)  
Cook & Boardman is a small, specialty distributor of architectural doors, frames and hardware and also provides value-added services and installation. Its operations have little adverse environmental or social impact. In addition, the company is certified under the Forest Stewardship Council to provide guidance to customers to meet LEED requirements for energy efficiency, fire safety, and sustainability of its products. Pablo Garces
Dimora Brands Inc. (B/Stable/--)  
Dimora Brands sources kitchen and bath cabinet hardware (decorative knobs, pulls, slides, hinges, and similar products) primarily from Asian manufacturers and distributes them to U.S. cabinet producers and designers. The products themselves have little inherent risk and, due to their small size and low weight, and they consume little energy to transport to end users. Pablo Garces
Distribution International Inc.(CCC+/Positive/--)  
The company distributes insulation materials used in commercial buildings and industrial applications, which are a key to energy conservation and “green” construction. However, we view its operations as having low environmental impact limited primarily to transportation of its products to its customer. Vania Dimova
Foundation Building Materials Holding Co. LLC(B+/Stable/--)  
Foundation sells wallboard and acoustical ceilings into commercial and residential construction markets. It does, however, operate a large fleet of delivery vehicles that burn fossil fuels but we view this risk as similar to those of other companies that transports product by truck. Pablo Garces
GMS Inc.(BB-/Stable/--)  
GMS is a publicly owned distributor of building materials, specializing in interior products including wallboard, ceilings, steel studs and other products. Like most distributors, the company transports large amounts of materials via a truck fleet, which burn fossil fuels. Kimberly Garen
LBM Borrower LLC a/k/a US LBM Holdings Inc. (B+/Stable/--)  
US LBM Holdings distributes lumber, structural components, and other building products to homebuilders and remodelers. Similar to peers, the company relies on trucks that consume fossil fuels and produce emissions, but we view this risk as in line with any other entity transports its products to end markets by truck. Nidhi Narsaria
SiteOne Landscape Supply Inc. (BB-/Stable/--)  
SiteOne distributes landscape supplies to professionals who design, install, and maintain lawns, gardens, golf courses and other outdoor spaces. The company has no energy-intensive manufacturing operations. Nidhi Narsaria
Specialty Building Products Holdings LLC (US Lumber) (B/Negative/--)  
US Lumber distributes lumber, moldings, engineered wood products, and other building materials to lumber yards and dealers that serve homebuilders and remodelers. As with other distributors, the company uses significant delivery assets (trucking) that produce emissions, but we view this risk as in line with the industry. Nidhi Narsaria
SRS Distribution Inc.(B/Negative/--)  
SRS is the third-largest distributor of roofing products and supplies in the U.S. Other than emissions and use of fossil fuels consumed in delivering its products (and often, local contactors use their own trucks to pick up product from the company’s distribution sites), SRS' activities have little environmental impact. Thomas Nadramia
84 Lumber Co.(B+/Stable/--)  
84 Lumber is a large U.S. distributor of building materials and products sold primarily to homebuilders in the U.S. Like most of fits peers, the primary source of GHG emissions and fossil fuel consumption is due to the operation and use of delivery trucks. Tennille Lopez
Note: Ratings as of Feb. 10, 2020.

This report does not constitute a rating action.

Primary Credit Analysts:Renato Panichi, Milan (39) 02-72111-215;
renato.panichi@spglobal.com
Thomas J Nadramia, New York + 1 (212) 438 3944;
thomas.nadramia@spglobal.com
Secondary Contacts:Danny Huang, Hong Kong (852) 2532-8078;
danny.huang@spglobal.com
Luis Manuel Martinez, Mexico City (52) 55-5081-4462;
luis.martinez@spglobal.com

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