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Glenn Culpepper
Finance Director |
CRH continued to generate strong cash flow in 2009. Our excellent working capital management and pragmatic approach to capital expenditure, together with the proceeds of €1.24 billion from the March 2009 Rights Issue, resulted in a reduction of €2.4 billion of debt. Our debt maturity profile and credit ratios are among the best in the sector, leaving us with substantial financial flexibility.
General
With continued weakness in the financial, economic and business climate worldwide in 2009, and significant declines in construction activity in the Group’s major markets, management’s focus during the year remained firmly concentrated on cost reduction and operational initiatives.
Sales revenues for 2009 amounted to €17.4 billion, a 17% decline compared with the €20.9 billion reported last year. EBITDA for the year, after once-off charges of €205 million associated with our cost reduction programme, declined by one-third to €1.8 billion, in line with the guidance provided in the Interim Management Statement of 10th November 2009 and the Trading Update Statement of 5th January 2010. Profit before tax excluding impairment charges, amounted to €773 million, a decrease of 53% compared with 2008, and ahead of the guidance of €0.75 billion provided in the January Update.
After impairment costs of €41 million (2008: €14 million), pre-tax profit declined by 55% to €732 million. Reflecting the increase in average shares in issue as a result of the Rights Issue in March 2009, a slightly higher percentage decline of 58% was reported in earnings per share for the year.
Overall operating margin fell from 8.8% in 2008 to 5.5% in 2009.
Profit on disposal of non-current assets at €26 million was below 2008 (€69 million).
Expenditure on acquisitions and investments in 2009 amounted to €458 million.
In March 2009 the Group issued approximately 152 million new Ordinary Shares by way of a Rights Issue, generating net proceeds for the Group of €1.24 billion.
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Key Components of 2009 Performance
Table 1 below sets out the key components of the Group’s performance in 2009, analysing the change in results from 2008 to 2009.
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Exchange Translation Effects
While the US Dollar strengthened during 2009 with the average US$/€ rate of 1.3948 being 5% stronger than in 2008 (1.4708), this was more than offset by the decline in the average Polish Zloty exchange rate which at 4.3276 was 19% weaker (2008: 3.5121). Currency movements in total had a net negative impact of €44 million at profit before tax level. The average and year-end exchange rates used in the preparation of CRH’s financial statements are included under Accounting Policies of this Report.
Incremental Impact of Acquisitions
Acquisitions completed in 2008 and 2009 contributed incremental operating profit of €24 million on additional sales of €298 million, an effective incremental operating profit margin of approximately 8%.
The Group’s European segments accounted for the bulk of the acquisition impact in 2009, generating an incremental €20 million in operating profit on additional sales of €244 million. This reflected the full-year impact of the sanitary ware, heating and plumbing acquisitions by the Distribution group in Germany and Switzerland in mid-2008, and of the Group’s joint venture cement investment in India in May 2008.
In the Americas, the incremental impact from acquisitions was, as expected, relatively modest, with an incremental €4 million in operating profit on sales of €54 million.
CRH’s 2010 results are expected to reflect a modest incremental impact from 2009 acquisitions, which on a combined basis, have annualised sales of approximately €200 million.
Non-recurring items – Restructuring and Impairment Costs
The ongoing focus on operational excellence initiatives to deliver cost savings continued throughout 2009 and the related savings generated from these initiatives are discussed in the Chief Operations section of this Report. The costs incurred to implement this 4-year cost saving programme amounted to €205 million in 2009 (2008: €62 million).
Impairment charges of €41 million were recorded against the carrying value of property, plant and equipment and intangible assets – the corresponding charge in 2008 was €14 million.
Ongoing Operations
2009 organic sales declined by €4,103 million, a reduction of approximately 19% following a fall of approximately 6% in 2008. Overall organic sales declined by 17% in Europe while the reduction was 22% in the Americas; this compared with 2008 which saw organic sales decline by approximately 4% in Europe and by 8% in the Americas. Underlying operating profit fell by €708 million, more than double the €301 million fall in organic operating profits in 2008.
Underlying operating profit for our European operations fell by €389 million on an underlying sales reduction of €1,845 million, reflecting challenging trading conditions in almost all our markets. Our Materials businesses suffered from the impact of significant volume declines in all its major markets except Switzerland and organic operating profit fell by €260 million. Our businesses in the Products segment experienced difficult trading conditions throughout 2009, with like-for-like sales down 19% compared with 2008; however, the benefits from the ongoing restructuring programme began to come through in the second half when underlying operating profit was slightly ahead of 2008, while the decline for the full year was €74 million. Declining consumer confidence and weaker new residential construction activity resulted in an overall decline in underlying profits of €55 million in Distribution, with the second-half decline being slightly lower than the first half.
Our operations in the Americas had a challenging year reporting a decline of €2,258 million in underlying sales and a decline of €319 million in like-for-like operating profit. While lower private sector demand in 2009 had a significant negative impact on volumes for the Materials Division, infrastructure activity gained momentum through the second half. With lower input costs for energy and the benefit of targeted cost reduction measures and price increases, the Division reported improved margins in 2009 in spite of a 19% decline in ongoing sales revenues; ongoing operating profit was €72 million lower than 2008. The combination of weak residential markets and ongoing reductions in non-residential construction activity had a major impact on our Products businesses in the Americas which reported falls of €881 million in sales and €170 million in operating profits from underlying operations. Our Distribution operations suffered primarily from the decline in residential and commercial construction, with underlying operating profit falling €77 million behind 2008.
Finance Costs
Net finance costs for the year of €297 million were lower than last year (2008: €343 million) reflecting strong operating cash flow for the year and the benefits of the Rights Issue.
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Financial Performance Indicators
Some key financial performance indicators which, taken together, are a measure of performance and financial strength are set out in Table 2.
Table 2 Key Financial Performance Indicators
|
2009 |
2008 |
| Operating profit margin (%) |
5.5 |
8.8 |
| Interest cover |
|
|
| – EBITDA basis (times) |
6.1 |
7.8 |
| – EBIT basis (times) |
3.2 |
5.4 |
| Effective tax rate (%) |
18.3 |
22.5 |
| Net debt as a percentage of total equity (%) |
38.3 |
74.7 |
| Net debt as a percentage of year-end market capitalisation (%) |
28.1 |
64.1 |
| Return on average capital employed (%) |
6.6 |
12.9 |
| Return on average equity (%) |
6.7 |
15.6 |
EBITDA – earnings before finance costs, tax , depreciation, impairment charges and intangible asset amortisation
EBIT – earnings before finance costs and tax (trading profit)
Both EBITDA and EBIT exclude profit on disposal of non-current assets |
Operating Profit Margin
Overall operating profit margin for the Group fell by 3.3 percentage points in 2009 to 5.5%, with all segments except Americas Materials experiencing margin declines.
Interest Cover
Management believes that the EBITDA interest cover based ratio is useful to investors because it matches the earnings and cash generated by the business to the underlying funding costs. As set out in Note 23 of the financial statements, the Group’s major bank facilities and debt issued pursuant to Note Purchase Agreements in private placements require the Group to maintain EBITDA/net interest (excluding share of joint ventures) at no lower than 4.5 times for twelve-month periods ending quarterly on 31st March, 30th June, 30th September and 31st December in each year. Non-compliance with financial covenants would give the relevant lenders the right to demand early repayment of the related debt thus impacting the maturity profile of the Group’s debt and the Group’s liquidity.
While EBITDA/net interest cover for the year reduced to 6.1 times (2008: 7.8 times), it remained comfortably above the Group’s covenant levels and within the Group’s comfort range of 6 to 6.5 times.
Tax Rate
The tax charge at 18.3% of Group profit before tax decreased compared with 2008 (22.5%). The decline in the tax charge largely reflects lower taxable profits in a number of jurisdictions where higher tax rates apply.
Net Debt
Year-end net debt of €3.7 billion was €2.4 billion lower than year-end 2008; this reduction in debt, combined with the increase in equity following the March 2009 Rights Issue, resulted in a reduction in the percentage of net debt to total equity from 74.7% at year-end 2008 to 38.3% at year-end 2009.
The Group’s market capitalisation at year-end 2009 was €13.3 billion, some 40% higher than at year-end 2008 (€9.5 billion); this combined with the lower net debt resulted in a fall in the debt/market capitalisation percentage from 64% at year-end 2008 to 28% at year-end 2009.
Returns on Capital Employed and Equity
Return on average capital employed and return on average equity both declined in 2009.
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Liquidity and Cash Resources
Net debt for the Group at 31st December 2009, at €3.7 billion, was €2.4 billion lower than the €6.1 billion at the end of 2008. This reduction reflects the strong cash generation characteristics of the Group, which combined with the €1.24 billion of proceeds from the Rights Issue and a positive translation adjustment of €0.1 billion, more than offset the impact of the total €1.0 billion spent on acquisitions, investments and capital projects and the €0.4 billion cash dividends paid during the year.
Table 3 summarises CRH’s cashflows for 2009 and 2008. The changes in operating profit and interest are discussed above.
Table 3 Cash Flow
| € million |
2009 |
2008 |
| Inflows |
|
|
| Profit before tax |
732 |
1,628 |
| Depreciation (including impairments) |
794 |
781 |
| Amortisation of intangibles (including impairments) |
54 |
43 |
| Working capital movements |
661 |
(62) |
|
2,241 |
2,390 |
| Outflows |
|
|
| Tax paid |
(104) |
(322) |
| Dividends |
(386) |
(369) |
| Capital expenditure |
(532) |
(1,039) |
| Other |
(59) |
(89) |
|
(1,081) |
(1,819) |
| Operating cash flow |
1,160 |
571 |
| Acquisitions and investments |
(458) |
(1,072) |
| Disposals |
103 |
168 |
| Share issues |
1,445 |
59 |
| Treasury/own shares purchased |
(2) |
(414) |
| Translation |
120 |
(240) |
| Decrease/(increase) in net debt |
2,368 |
(928) |
| Opening net debt |
(6,091) |
(5,163) |
| Closing net debt |
(3,723) |
(6,091) |
The increased charges for depreciation and amortisation mainly reflect the impact of increased impairment charges of €41 million in 2009 (2008: €14 million).
The Group has maintained an intense focus on cash generation throughout 2009, and the net working capital inflow of €661 million represents a further excellent performance in managing receivables and payables in a challenging environment. This compares with a net outflow of €62 million in 2008.
Tax payments were lower than in 2008 as a result of the sharp reduction in pre-tax profits.
The increase in dividends paid reflects the 1% increase in the final 2008 dividend which was paid in May 2009, together with the impact on the interim 2009 dividend paid in October 2009 of the 152 million additional shares in issue following the March 2009 Rights Issue. The interim dividend per share for 2009 of 18.5c was held in line with the interim dividend per share for 2008.
Capital expenditure of over €0.5 billion represented 3% of Group revenue (2008: 5%) and amounted to 0.67 times depreciation of €794 million (2008: 1.33 times). Of the total capital expenditure, 66% was invested in Europe with 34% in the Americas. Our capital expenditure included approximately €0.15 billion and €0.25 billion of investment in major cement plants in 2009 and 2008 respectively.
The caption denoted “Other” mainly reflects the elimination of non-cash income items, primarily share of associates’ profits and profit on disposal of non-current assets, and non-cash expense items such as IFRS share-based compensation expense, which are included in arriving at profit before tax.
Spend on acquisitions and investments in 2009 amounted to €0.458 billion, a significant reduction compared with the €1.1 billion spent in 2008. This reflected a deliberate curtailment of development activity from mid-2008 as the economic environment deteriorated.
The share issues caption in 2009 principally reflects the €1.24 billion net proceeds from the March 2009 Rights Issue, together with the take-up of shares in lieu of dividends under the Company’s scrip dividend scheme of €148 million (2008: €22 million) and issues under Group share option and share participation schemes of €60 million (2008: €37 million).
In both 2009 and 2008 the Employee Benefit Trust purchased 0.1 million shares to satisfy share option exercises. Share purchases in 2008 also reflected the acquisition of approximately 18.2 million shares under the share purchase programme which was announced in January 2008; the Group announced the termination of this programme in November 2008. In 2009, 3.9 million (2008: 2.0 million) of these shares were used to satisfy the exercise of share options.
Exchange rate movements during 2009 reduced the euro amount of net foreign currency debt by €120 million principally due to the 3% increase in the euro exchange rate against the US Dollar from 1.3917 at end-2008 to 1.4406. The unfavourable translation adjustment of €240 million in 2008 reflected a 5% decrease in the euro rate versus the US Dollar from 1.4721 at end-2007 to 1.3917 at end-2008.
Year-end net debt of €3,723 million (2008: €6,091 million) includes €114 million (2008: €153 million) in respect of the Group’s proportionate share of net debt in joint venture undertakings. Details of the components of net debt are set out in Note 25 to the financial statements.
At the end of 2009, 77% of the Group’s net debt was at interest rates which were fixed for an average period of 5.9 years. The euro accounted for approximately 31% of net debt at the end of 2009 and 117% of the euro component of net debt was at fixed rates. The US Dollar accounted for approximately 59% of net debt at the end of 2009 and 69% of the US Dollar component of net debt was at fixed rates.
The Group finished the year in a very strong financial position with 98% of the Group’s gross debt drawn under committed term facilities, 95% of which mature after more than one year. In addition, at year-end the Group held €1.6 billion of undrawn committed facilities, which had an average maturity of 2 years. At year-end 2009, 96% of the Group’s cash, short-term deposits and liquid resources had a maturity of six months or less.
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Shareholders’ Equity
The increase of €1.55 billion in total shareholders’ equity (capital and reserves attributable to CRH’s equity shareholders) during 2009 reflects the proceeds of €1.24 billion from the March 2009 Rights Issue. The total movements in equity for the year are analysed in the Consolidated Statement of Changes in Equity (a new primary financial statement) of this Report.
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Employee Benefits
The assets and liabilities (excluding related deferred tax) of the defined benefit pension schemes operated by various Group companies, computed in accordance with IAS 19, have been included on the face of the balance sheet under retirement benefit obligations. At end-2009, the net deficit on these schemes amounted to €454 million (2008: €414 million); after deducting the related deferred tax asset, the net liability amounted to €351 million (2008: €320 million). The net liability expressed as a percentage of market capitalisation decreased from 3.4% at year-end 2008 to 2.6% at year-end 2009, reflecting primarily the impact of the March 2009 Rights Issue.
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Share Price
The Company’s Ordinary Shares traded in the range €12.55 to €20.70 during 2009. The year-end share price was €19.01 (2008: €16.10 restated). Shareholders recorded a gross return of 22% (dividends and capital appreciation) during 2009 following returns of -22% in 2008, -23% in 2007, +29% in 2006, +28% in 2005 and +23% in 2004.
CRH is one of six building materials companies included in the FTSE Eurotop 300, a market capitalisation-weighted index of Europe’s largest 300 companies. At year-end 2009, CRH’s market capitalisation of €13.3 billion (2008: €9.5 billion) placed it among the top 3 building materials companies worldwide.
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Insurance
Group headquarters advises management on different aspects of risk and monitors overall safety and loss prevention performance; operational management is responsible for the day-to-day management of business risks. Insurance cover is held for all significant insurable risks and against major catastrophe. For any such events, the Group generally bears an initial cost before external cover begins.
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Legal Proceedings
Group companies are parties to various legal proceedings, including some in which claims for damages have been asserted against the companies. The final outcome of all the legal proceedings to which Group companies are party cannot be accurately forecast. However, having taken appropriate advice, we believe that the aggregate outcome of such proceedings will not have a material effect on the Group’s financial condition, results of operations or liquidity.
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Financial Risk Management
The Board of Directors sets the treasury policies and objectives of the Group, which include controls over the procedures used to manage financial market risks. These are set out in detail in Note 21 to the financial statements.
Financing Activity
In March 2009, the Group issued approximately 152 million new Ordinary Shares at €8.40 per share under the terms of a 2 for 7 Rights Issue. The total proceeds from this issue, net of expenses, amounted to €1.24 billion.
In May 2009, as part of its ongoing financing strategy, CRH completed its first transaction in the Eurobond market with the successful issue of €750 million notes with a coupon of 7.375% and expiring in May 2014. This issue further enhances the Group’s debt maturity profile.
These actions, combined with the Group’s strong focus on cash generation, excellent working capital management and restrained capital expenditure, leave CRH well-positioned in terms of debt facilities and maturity profile. CRH remains committed to maintaining an investment grade credit rating.
Currency Management
The bulk of the Group’s net worth (capital and reserves attributable to equity holders) is denominated in the world’s two largest currencies – the US Dollar and the euro – which accounted for 37% and 34% respectively of the Group’s net worth at end-2009.
2009 saw a negative €96 million currency translation effect on foreign currency net worth which includes a €120 million favourable translation impact on net foreign currency debt.
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Sarbanes-Oxley Act
As a result of its NYSE Listing, CRH is subject to the provisions of Section 404 of the Sarbanes-Oxley Act of 2002, which requires management to perform an annual assessment of the effectiveness of internal control over financial reporting and to report its conclusions in the Company’s Annual Report on Form 20-F, filed with the Securities and Exchange Commission. For the year ended 31st December 2008, management concluded that the Company’s internal control over financial reporting was effective. As required by US law, Ernst & Young audited the effectiveness of the Company’s controls over financial reporting for 2008 and issued an unqualified opinion thereon.
Management’s assessment and the auditors’ report on the effectiveness of internal controls for the year ended 31st December 2009 will be included in the 2009 Annual Report on Form 20-F.