The CRH team worldwide responded promptly in 2009 to the extremely difficult trading conditions and delivered strong cash generation in a difficult operating and financial environment. For 2010, management remains focussed on operational delivery while continuing to evaluate acquisition opportunities that offer compelling value and strategic fit.
Overview
The extreme turbulence experienced in financial markets in the second half of 2008 took its toll on world economic activity in 2009, most particularly in Europe and the US. Construction activity in these regions was hard hit as residential and non-residential markets declined, with government-funded infrastructure investment only partially compensating. Against this backdrop, and despite significant ongoing cost reduction efforts, CRH suffered a significant profit decline.
Key aspects of our 2009 results include:
- EBITDA for 2009 was €1,803 million, in line with the guidance provided in the Trading Update Statement of 5th January 2010, representing a decline of 32% compared with €2,665 million in 2008. EBITDA is stated after charging costs associated with the Group’s restructuring efforts of €205 million (2008: €62 million).
- Depreciation and amortisation costs amounted to €848 million (2008: €824 million) and include impairment charges of €41 million (2008: €14 million).
- Operating profit fell 48% to €955 million (2008: €1,841 million) after restructuring and impairment charges of €246 million (2008: €76 million). Excluding these charges, operating profit fell 37%.
- Profit before tax and impairment charges of €773 million was 53% below 2008 but ahead of the guidance of €750 million provided in the January 2010 Trading Update. After impairment charges of €41 million (2008: €14 million), profit before tax of €732 million showed a decline of 55% on 2008.
- Earinings per share fell 58% to 88.3c (2008: 210.2c adjusted for the March 2009 Rights Issue).
- Dividend per share of 62.5c showed a slight increase on the Rights-adjusted 2008 dividend of 62.2c. 2009 represents CRH’s 26th consecutive year of dividend growth.
- Significant working capital reduction together with capital expenditure restraint contributed to operating cash flow of €1.2 billion, double the 2008 level of €0.6 billion.
- Net debt reduced to €3.7 billion (2008: €6.1 billion) reflecting strong operating cash flow and proceeds from the March 2009 Rights Issue which raised just over €1.2 billion net of expenses.
- With year-end net debt to EBITDA of 2.1 times and 2009 EBITDA/net interest of 6.1 times, CRH has one of the most flexible balance sheets in its sector.
My thanks to all the CRH team worldwide for responding promptly to the extremely difficult trading conditions and for delivering such strong cash generation in a difficult operating and financial environment.
2009 Operations
Trading in the first half of 2009 proved extremely demanding with most markets impacted by weakening economic activity, not helped by the most severe first-quarter weather for many years in both Europe and North America. Reported sales for the first half of 2009 declined by 15% (21% excluding acquisition and exchange translation effects), EBITDA fell 41% and operating profit and profit before tax were down 66% and 82% respectively.
While conditions in the second half of 2009 remained challenging, a robust performance by the Americas Materials Division combined with increasing benefits from cost reduction measures resulted in improvements in the rate of profit decline compared to the first half of the year despite second-half asset impairment charges. Second-half sales fell by 19% (18% excluding acquisition and translation effects), while EBITDA declined by 26% with operating profit down 37% and profit before tax 39% lower than the second half of 2008.
Europe Materials experienced sharp profit reductions in Ireland, Finland and Ukraine with 2009 cement volumes showing falls of between 35% and 45% on 2008 levels. These factors combined with adverse translation effects due to weakness in the Polish Zloty and Ukrainian Hryvnia were the main factors influencing the reported 26% reduction in sales, 46% reduction in EBITDA and 59% reduction in operating profit.
Europe Products & Distribution was less affected in its core Eurozone markets with reported sales down 12%, EBITDA down 25% and operating profit down 39%. RMI (repair maintenance and improvement) oriented Distribution operations proved more resilient than Products operations, where an improved performance from Clay activities was more than offset by lower profits in Concrete and Building Products businesses.
Americas Materials saw second-half benefits from infrastructure projects funded by the American Recovery and Reinvestment Act. However, with weaker residential and rapidly declining non-residential demand, overall aggregates volumes for the year fell 23%, with asphalt down 15% and readymixed concrete lower by 32%. As a result reported US Dollar revenues fell by 19%. However, strong pricing and lower energy costs delivered an overall improvement in margins limiting the US Dollar EBITDA and US Dollar operating profit declines to 12% and 16% respectively.
Americas Products & Distribution, which relies heavily on residential and non-residential activity suffered severely. High-teen percentage sales declines in Architectural Products and Roofing & Siding Distribution were outweighed by more significant declines in other segments leaving overall US Dollar sales revenue 25% lower than in 2008. US Dollar EBITDA was 58% lower, while US Dollar operating profit fell 89% exacerbated by significant losses in MMI due to steel price erosion.
Throughout 2009 we continued the cost reduction efforts initiated in 2007 and progressively implemented further cost and efficiency measures across the Group. Combined savings from these cost actions over the four years 2007 to 2010 are estimated at €1.65 billion. These measures are outlined in the Chief Operating Officer’s review.
2009 Rights Issue & Development
Maintenance of a strong balance sheet and a disciplined and rigorous approach to acquisition activity have always been core financial principles for CRH and this conservative approach to balance sheet management and development has ensured a solid ongoing financial position over the long term. In March 2009, the Board decided it was appropriate to strengthen CRH’s financial flexibility to ensure that the Group could take advantage, in its traditional long-established disciplined manner, of an expected increased flow of development opportunities driven by deleveraging and portfolio rationalisation across the sector.
The Rights Issue, on the basis of 2 New Ordinary Shares for every 7 existing Ordinary Shares at €8.40 per New Ordinary Share, raised €1.238 billion net of expenses and was strongly supported by CRH’s broadly spread investor base.
To date, the flow of acquisition opportunities arising has been lower than anticipated, as the mid-2009 recovery in bond markets facilitated significant fundraising across the sector thereby alleviating short-term financial pressures for many participants. In addition, a greater than expected deterioration in industry trading conditions as 2009 progressed was not matched by reductions in vendor expectations. Against this background the Group invested a total of €0.46 billion during 2009 on 17 transactions.
First-half expenditure included the purchase of a 26% associate stake in Yatai Cement, the leading cement manufacturer in northeastern China, plus six other acquisitions across the Group’s Materials and Distribution segments. Second-half spending of €0.18 billion principally comprised four important bolt-on transactions in our Americas Materials Division completed in November/December plus six smaller Materials transactions in Poland, China and the US.
For 2010, management remains focussed on operational delivery while continuing to evaluate acquisition opportunities that offer compelling value and strategic fit. CRH expects to see more acquisition opportunities as industry participants, both public and private, re-evaluate their portfolios and seek to restore flexibility to their balance sheets.
2009 Organisation and People
As outlined in the 2008 Annual Report, the second half of 2008 and beginning of 2009 saw significant position changes at senior management level in CRH, all of which were filled from within the organisation. In very difficult circumstances the new leaders have stepped up to their roles with energy and commitment ensuring the continued effective functioning of the senior team and indeed the wider organisation.
Responding to the evolving market environment during 2009 has obviously required a substantial re-thinking of organisation structures and staffing levels with a consequent reduction in employment levels in all business segments. These reductions, while painful and regrettable, have been necessary to limit the impact on the Group of sharply lower levels of demand for our products.
Corporate Social Responsibility (CSR)
A positive commitment to CSR is at the centre of CRH’s philosophy and management approach. Throughout the Group we strive to operate to best international practice in the areas of corporate governance, environment and climate change, health & safety and social performance. Our commitment in this regard is set out on page 10 of this Report and in the separate annual CSR Report which is available for download from our website, www.crh.com.
Once again in 2009, CRH was included in the Dow Jones World and STOXX Sustainability Indexes on the basis of a rigorous analysis of performance carried out by Sustainability Asset Management (SAM) of Zurich who have rated CRH as “Gold Class”. We are also a member of the FTSE4Good Index and have been rated amongst the world’s most highly ranked companies by GovernanceMetrics International (GMI) which focuses on performance in the area of corporate governance.
Strategy
CRH’s strategy continues to be focussed on the manufacture and distribution of building materials, with approximately 80% of our business in heavyside – cement, aggregates, asphalt, readymixed concrete and concrete products – and the remaining 20% split between lightside value-added building products and distribution. This mix provides a balanced exposure to residential/non-residential/infrastructure end-uses and also to new build/RMI, each of which displays different cyclical characteristics in terms of timing, amplitude and duration.
In geographical terms CRH is balanced roughly 35% Western Europe/50% North America/15% Emerging Regions, the latter comprising significant operations in Eastern Europe built up over the last decade and more recently-established positions in Asia.
With a challenging trading backdrop for many of our businesses over the past two years, management’s emphasis has been firmly concentrated on operational delivery and establishing a base from which to deliver a strong rebound in margins and earnings as markets stabilise and recover over the coming years. This was accompanied by a curtailment of development activity from mid-2008 as the economic environment deteriorated and financial uncertainty spiked in the aftermath of the Autumn 2008 financial crisis. However, value-enhancing acquisitions have been, and will continue to be, a core driver of CRH’s long-term development and with the re-commencement of acquisition activity since mid-2009 we believe that CRH is well positioned to deliver an improving deal flow as industry valuations adjust and trading visibility improves.
In addition to our development efforts we are continuing to re-evaluate elements of our existing portfolio which, given recent significant changes in the economic environment, may no longer offer the opportunities for growth and/or returns originally envisaged.
2010 Outlook
We expect a difficult demand backdrop through much of 2010 with continuing declines in non-residential activity across our markets not helped by a poor start to the year as a result of prolonged severe weather in Europe and North America during January and February.
In Europe, concerns remain relating to fiscal deficits in a number of countries, although some markets have proved resilient. In Poland, which has weathered the economic downturn better than many other European countries, our operations are well-placed to benefit from infrastructure-driven growth in 2010. In the United States, recent data releases on residential construction activity have been below expectations and the likely timing of recovery in US residential activity remains unclear. On infrastructure, the extension of the SAFETEA-LU Federal Highway funding programme is currently the subject of intense debate in the US Senate and House of Representatives with progress anticipated over the next 10 days. Recent euro-weakness and the relative strengthening of the Polish Zloty and US Dollar compared with 2009 will, if maintained, be beneficial in 2010.
The significant adjustments to our cost base achieved over the past three years and our ongoing restructuring measures, together with our substantial balance sheet capacity, have strengthened the Group operationally and position CRH well to respond to upside demand developments and to avail of value-enhancing acquisition opportunities as these arise across our markets.
Myles Lee
1st March 2010
