Throughout 2009, tough markets across all sectors where our businesses operate resulted in a decline in operating profit. The management team responded vigorously to the challenge taking radical and effective action to mitigate these effects. We continue to focus on commercial initiatives, cost reduction and performance improvement plans across all our businesses.
The squeeze on credit and falling consumer confidence hit the housing sector across all regions. Non-residential activity also declined. The repair, maintenance and improvement sectors were more resilient. Overall, the Division saw sales decrease by 12%, EBITDA decline by 25% and operating profit decline 39%.
With few exceptions our businesses experienced volume and price pressure. Towards year-end some improvement in UK brick deliveries was evident. While some degree of stability has returned to markets in Europe, we expect trading in 2010 to be challenging.
The Division carried on from 2008 with the implementation of significant cost reduction actions. Capital expenditure was again cut back and tighter working capital management yielded a very positive outcome on cash flow. Our focus continued on defending margins and conserving cash throughout our businesses.
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Concrete Products
This group manufactures concrete products for two principal end-uses: pavers, tiles and blocks for architectural use, and floor and wall elements, beams and vaults for structural use. In addition, sand lime bricks are produced for the residential market. Our businesses experienced difficult market circumstances, mainly in residential-related markets and increasingly, as the year progressed, in the non-residential sector. Good progress in public sector niche markets in France and the Netherlands was outweighed by major weaknesses in Denmark and Eastern Europe.
Architectural
Architectural operations faced difficult conditions in most markets and performed below 2008. Our Belgian, French and Danish paver and tile businesses suffered from weak residential markets and falling consumer confidence. Results in our Dutch and German operations improved driven by targeted commercial initiatives. After a strong performance in 2008 the Slovakian market weakened considerably. In response to the continuing difficult market conditions, further factory closures in Belgium, France, the UK and Germany were made and overhead costs were reduced significantly.
Structural
Our structural concrete operations delivered operating profit well below 2008. The businesses were severely impacted by difficult conditions in residential markets and declining non-residential activity. Our Belgian business supplying the industrial and farming sector delivered strong results. Due to major restructuring initiatives taken at our Dutch and Swiss businesses in 2008, results in these operations were ahead in 2009. The programme of factory closures and general cost reduction continued in 2009 especially in Denmark, Belgium and Hungary where volumes and prices remained weak.
Clay Products
The Clay Products group principally produces clay-facing bricks, pavers, blocks and roof tiles and operates in the UK, the Netherlands, Germany, Poland and Belgium and also supplies various export markets. For the year as a whole, volumes in the UK brick industry declined considerably although some upturn was visible in the last quarter. Following the major reorganisation plans implemented in 2008, additional factory closures and production shutdowns took place. The benefits from these measures coupled with strong product innovation resulted in an operating profit outcome well ahead of 2008. In Mainland Europe, lower volumes and energy price increases led to lower operating profit despite good progress and benefits from the new country-based organisation serving two operating regions, Central Europe and Eastern Europe.
Building Products
The Building Products group is active in lightside building materials and is organised in three business areas: Construction Accessories, Building Envelope Products and Insulation Products. Market conditions in 2009 deteriorated with the non-residential sector slowing significantly. With volumes declining, the operating profit outcome was lower than in 2008 despite relatively robust pricing. Construction Accessories
This business unit is the market leader in construction accessories in Western Europe. Falling demand, especially in the non-residential sector, offset somewhat by new innovative products brought to market, resulted in lower operating profit. Our UK business acquired in 2008 exceeded our expectations aided by strong export figures. The main focus is on realising greater commercial synergies and back-office cost reduction through a more integrated organisational structure.
Building Envelope Products
These operations specialise in systems and products for entrance and climate control solutions, and are mainly active in non-residential construction focussing on the growing RMI, safety and comfort market segment. Volumes at our Entrance Control operations in fencing, security and access systems were lower than 2008. Our Rooflight & Ventilation business, which specialises in climate control, suffered a decline in activity although pricing remained generally robust. Sales to the industrial sector continued in line with 2008. The Roller Shutters business turned in a satisfactory performance being only marginally behind 2008 due to successful new product launches and tighter cost control. As part of our annual strategic review of businesses we have decided to exit climate control activities and concentrate on the more focussed Fencing, Security and Shutters businesses that, for the future, offer us greater market leadership potential in Europe.
Insulation Products
Our Insulation business manufactures a variety of high quality foam products for use in the residential, non-residential and industrial buildings sectors. The decline in residential markets, across Europe, and price pressure in Eastern Europe were the main reasons for lower operating profit, although these effects were tempered by strong demand for RMI products driven by ongoing European legislation for energy efficiency. Following rigorous strategic analysis we have decided to exit the Insulation sector as we no longer see a route to becoming a pan-European leader in this sector.
Distribution
Trading conditions for our distribution businesses continued to be very difficult in 2009 with the residential sectors across all our markets showing various degrees of decline. Price discipline and tight management in purchasing resulted in gross margins in line with 2008. However, operating profit declined 29%. The principal focus is on further cost reduction at overhead level, improved category management and greater benefits from operational excellence by leveraging our economies of scale.
Professional Builders Merchants
With 479 locations in six countries, Professional Builders Merchants has strong market positions in all its regions. Benelux: Markets were weak in 2009 and this resulted in lower sales and operating profit compared with 2008. France: All regions experienced a slowdown and further restructuring costs resulted in operating profit well down on 2008. Trading results at our associate Trialis (in which we acquired a 34.8% shareholding in July 2008) were below expectations as its markets in the southwest of France proved to be very difficult. Switzerland: Compared with other Western European construction markets, the Swiss market was less impacted. However the combination of lower volumes in heavyside materials and additional restructuring costs resulted in a lower operating profit outcome versus 2008. Austria: Despite slowing sales from a weaker residential market, our initiatives to improve gross margin and reduce overheads contributed to an increase in operating profit. Germany: Bauking, in which we have a 48% joint-venture stake, operates primarily in northwest Germany. Sales in this region suffered and despite a small increase in gross margin and relentless cost control, like-for-like operating profit was down. Our Sanitary, Heating and Plumbing (SHAP) business in Germany, acquired in 2008, is a leading player in the northwest part of the country. Benefiting from a robust demand for heating equipment, performance was in line with expectations. We see this business as a platform for further SHAP growth in Germany.
DIY
The DIY Europe platform has activities in five countries with 241 stores under five different brands: Gamma (the Netherlands and Belgium), Karwei (the Netherlands), Hagebau (Germany), Maxmat (Portugal) and Jelf BricoHouse (Spain). The Netherlands: Despite a sharp decrease in consumer confidence, sales and operating profit in the first half of 2009 were relatively robust but thereafter demand declined further especially in the fourth quarter, with full-year operating profit lower than 2008. Increased competition and promotional campaigns had a negative impact on margins; however, this was mitigated by efficient store operations, tight cost control and sharp franchise formula management. Belgium: Gamma Belgium with 19 locations had lower sales and operating profit mainly due to weaker consumer confidence and demand. Germany: Bauking operates 51 DIY stores under the brand name Hagebau. Although Bauking managed to keep costs under tight control, operating profit declined in a very competitive market. Portugal: The economic environment continued to be difficult and operating profit was down on 2008. Spain: We entered the Spanish DIY market in May 2007 in the Alicante/Valencia region. Market circumstances have been very challenging and results, while below expectations, were broadly in line with 2008.
Outlook
The markets for our businesses will continue to be difficult in 2010. With the exception of the UK, the residential sector will be challenging especially in the Netherlands. The non-residential sector is expected to weaken further. Public sector investments in France and Government infrastructure initiatives in the Netherlands should provide some upturn in related concrete and distribution businesses. The RMI sector is expected to decline but at a slower pace than the new building sector. With the exception of Poland, Eastern Europe market conditions will be very demanding. The effects of our comprehensive cost-reduction programme initiated in late 2007 will be continued through into 2010. More benign energy prices should provide some relief on the cost side.
