CRH plc (CRH) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the CRH plc Trading Update. [Operator Instructions] I must advise you that the call is being recorded today on Tuesday, the 24th of November 2020. And I shall now hand over to your speaker for today, Albert Manifold, Chief Executive Officer. Please go ahead.

Good morning, everyone. Albert Manifold here, CRH Group Chief Executive, and you're all very welcome to our conference call and webcast presentation, which accompanies the release of our trading update this morning. I'm joined on the call by our Group Finance Director, Senan Murphy; Frank Heisterkamp, Director of our Capital Markets and ESG; and Tom Holmes, Head of Investor Relations. Over the next 15 minutes or so, Senan and I will take you through some of the main points of this morning's announcement, highlighting the key drivers of our trading performance for the first 9 months of the year as well as providing you with an indication of our expectations for the year as a whole. Afterwards, we'll be available to take any questions you may have. And all told, we should be done in about 45 minutes. Turning to Slide 1. And before we begin, I would like to take a moment to acknowledge that our strong financial performance is the result of the extraordinary efforts and commitment of our teams on the ground right across the group, the underlying strength of our business model and the decisive actions we have taken to adapt to the evolving demand environment across our markets. As we continue to navigate these challenging and uncertain times, the health and safety of our people remains our #1 priority and is a core focus for us in each and every day. With regards to our trading performance, I'm pleased to report that the good delivery in the first half has continued into the third quarter. And for the first 9 months of the year, our business has delivered profit and margin improvement despite lower overall activity levels across our markets. Group's 9-month EBITDA of $3.4 billion, 2% ahead on a like-for-like basis, with a further 100 basis points improvement in our underlying margin, all delivered against a 3% decline in sales. Turning to Slide 2. And notwithstanding the uncertainties that persist in relation to the impact of the COVID-19 pandemic across our markets going forward, I would like to update you on our thoughts regarding the overall market backlog and the trading environment as we sit here today. In North America and Central and Eastern Europe, underlying construction demand remains resilient while in Western Europe, activity levels have improved despite the continuing health crisis across our markets. Infrastructure and residential demand remains positive, but certain nonresidential sectors, particularly office, retail and hospitality have continued to experience lower levels of activity. Despite these lower overall activity levels and notwithstanding the relatively benign energy cost environment, good commercial practices and pricing discipline are continuing across our businesses. Turning now to our divisional trading performance and first to Americas Materials on Slide 3. During the third quarter, weather disruption in part of the South and West of the United States and a strong prior year comparative results in volume declines across all product areas. Despite these lower activity levels, disciplined commercial management across our businesses continues to underpin positive pricing momentum in aggregates, cement and readymixed concrete, while our asphalt business have delivered further margin expansion. Our strong focus on cost control helped us to deliver improved profitability across our business. Against a 4% decline in like-for-like sales for the first 9 months of the year, our business delivered a 9% increase in EBITDA and a further improvement in margin. Next to the performance of our Europe Materials business on Slide 4, where we delivered a significant improvement compared to our first half performance, reflecting the continued recovery of activity levels across a number of our key markets and strong cost management across our businesses. In the absence of nationwide restrictions on construction across much of Central and Eastern Europe, demand remained resilient with our businesses in Switzerland, Germany, Poland and Romania continuing to perform well. In Western Europe, activity levels have recovered to approximately 90% of normal, with improving trends in cement volumes across France and Ireland during the third quarter of the year. In the United Kingdom, activity levels are also recovering, albeit from a lower base, and today, are operating at approximately 75% of normalized levels. Despite these lower levels of activity, I'm pleased to see good pricing discipline continuing across our markets. Overall, cement pricing in Europe is 3% ahead for the first 9 months of the year with improvements across all our major markets. Putting this all together, our overall third quarter like-for-like EBITDA was 2% ahead of the prior year period, representing good margin improvement of slightly lower sales. Turning to Slide 5 on our Building Products division, which experienced a continuation of the strong delivery we saw during the first half of the year. The performance of this business reflect its significant exposure to residential and nonresidential markets and the contrasting trends we've seen in the year-to-date. Our Architectural Products business, for example, continued to benefit from strong residential repair and maintenance demand in both North America and Europe through the third quarter. Our Infrastructure Products business continued to deliver a resilient performance for the first 9 months of the year despite pandemic-related restrictions impacting activity levels. And finally, our Building Envelope business, primarily exposed to U.S. nonresidential construction, continued to be impacted by lower levels of activity in that particular market. Overall, 9-month like-for-like sales were 3% ahead while EBITDA increased by 9%, a robust performance, reflecting strong operating leverage through our continued focus on cost control and pricing discipline. At this point, I'd like to hand you over to Senan to take you through our cash performance and year-end balance sheet expectations.

Thanks, Albert. Good morning, everyone. On Slide 6, you can see the key components underpinning our expectations for our year-end net debt position. And I'm pleased to say that despite the significant volatility our business has experienced over the course of the year so far, we expect the year-end with a very healthy balance sheet position as a result of our continued focus on financial discipline and strong cash generation. Let me briefly take you through some of the key components, working left to right on the slide. We ended 2019 with net debt position of $7.5 billion and a net debt-to-EBITDA of 1.7x. We expect 2020 to be another year of strong cash generation and indeed, strong cash conversion across the group, resulting in a significant reduction in our year-end net debt position. In the year-to-date, we've generated over $260 million of proceeds from divestments and reinvested approximately $180 million on 14 value-accretive bolt-on acquisitions across the group. That results in a net proceeds of over $80 million. And notwithstanding disciplined management of our capital expenditure over the course of the year, we expect to invest a total of $1 billion to support growth in our business in 2020. In addition, we've also returned approximately $1 billion to shareholders in the form of dividends and share buybacks earlier in the year. Taking all of this into account, we expect our net debt position to finish the year at close to $6 billion or approximately 1.4x net debt to EBITDA, a very strong result and provides us with significant optionality for future value creation as visibility improves.

Thanks, Senan. Another strong cash performance, really highlighting the strength and resilience of our business model and, as you say, providing us with significant optionality going forward. Now before I turn to outlook, on Slide 7, I'd like to briefly update you on the progress we have made on our strategic objectives. During our interim results in August, we presented you with the slides that reflected on the strength of our business through the continued execution of our long-term strategy, enabling us to deliver even in challenging and uncertain times. We've highlighted that through the active management of our portfolio in recent years, we've become a simpler and more focused business. And we said that we will continue to reshape and refine our portfolio to deliver superior growth, margins, returns and cash generation for our shareholders. As an example, in October, we reached an agreement to divest our cement business in Brazil for over $200 million, providing us with the opportunity to reallocate those proceeds into higher growth areas with more sustainable returns. We both continue to adjust our asset base. In light of the changing market environment and as a result of the combined economic effects of COVID-19 and the uncertainty surrounding Brexit, we expect to recognize a noncash impairment charge of approximately $800 million in the fourth quarter of the year, primarily in relation to our operations in the United Kingdom and our associated investments in China. As you've heard us say many times, we are relentlessly focused on continuous business improvement, a deeply embedded practice of making our businesses better to incremental improvement initiatives to structurally improve our margins, cash and returns year-after-year. Again, to a very challenging trading environment, we made further progress in this regard during the first 9 months of the year, delivering an underlying margin improvement of 100 basis points. And as Senan mentioned, we expect 2020 to be another year of strong cash generation and improved cash conversion for the group. And now before we turn it over to questions and answers, let me finish with the word on outlook on Slide 8. In Americas Materials, we expect solid underlying demand to continue for the remainder of the year and for pricing to remain supportive despite lower energy costs across our business. In Europe Materials, we're expecting improved levels of activity despite the continuing health crisis across our markets. In Building Products, we expect good demand in residential and repair and maintenance and improvement activity to continue for the remainder of the year, partially offset by a more mixed environment in nonresidential construction. Taking all of this into account for the group as a whole, we expect full year EBITDA to be in excess of $4.4 billion, ahead of the prior year on a like-for-like basis, representing further margin improvement and another year of progress for CRH. As we look ahead to 2021, while the pace and shape of recovery across our markets remains uncertain, we are confident that the strength of our business leads us well positioned for the challenges and opportunities that lie ahead. So that concludes our presentation this morning, and we're now happy to take your questions. [Operator Instructions] I'll now hand you back to the moderator to coordinate the question-and-answer session of our call.

[Operator Instructions] Our first for today is from Robert Gardiner from Davy.

Robert Gardiner from Davy here. Two for me. So one, obviously, balance sheet is in fine shape. So how should we think about capital allocation in 2021? Do you see maybe a resumption of the buyback and the bolt-on strategy? Or would you be prepared to step into bigger deals as visibility improves? And then two, I'm just wondering if you could expand on your outlook comments, especially for the different end markets that you serve. And I'm kind of thinking in terms of the different businesses where you have a pipeline of backlog such as Americas Materials?

Bob, 2 questions there. First question on capital allocation, which I'll ask Senan to talk about in a moment. And the second one is just to give us -- perhaps, you asked me to give a bit more granularity about the outlook for the markets that we're servicing and what we're seeing in front of us. I'll take the second one, as I say, and then I'll pass the capital allocation to Senan. And in our main market in North America, specifically in the United States, I suppose, the 3 subsectors that -- of the market that make up the construction marketplace, obviously, infrastructure is the biggest area. And coming off the back of reasonably robust quarter 3 and continuing on through quarter 4, actually, I have say, we think that demand levels are pretty solid actually. We have a clarity now with regards to the fact that we have a continuing resolution of the FAST Act, which gives the federal support for the funding going forward into 2021. And in the election on November 3, about -- we're about 344 different initiatives across the United States, across different states and localities to support increased state funding, of which about 95% or more passed committing another $14 billion of state funding to infrastructure going forward. And against that backdrop and also from our own sense and our own network, talking to our customers, I think there are mechanisms currently being put in place, not only at the federal level that we've seen, but also at a state level to ensure that funding will be there to support activity levels going forward into 2021. so I think we feel fairly okay about 2021. It's going to continue on at the pace of growth that we've been seeing over the last couple of years. Residential markets have actually been quite robust. Hardly surprising that, in quarter 2, there was a slowdown, but it's rebounded well in quarter 3. And we're looking now on a rolling sort of an annualized basis. We're looking at our housing patients close to 1.5 million new homes in the United States. And significantly for that, we're seeing quite a shift in mix towards single-family home, they're up almost 10% on last year as compared to multifamily homes. And that, again, is a better mix for us because they're more materially intensive. And the nonresidential markets are clearly more mixed. The retail and commercial would make up about 50% of that, and it tends to be hurt most in the North and the Northeast and the Midwest. Stronger down South and definitely stronger out West and stronger in areas such as education and medical clearly and warehousing and having to do with technology centers as well. So a bit of a mixed bag. Overall, down in non-res this year. I expect it to continue down, but maybe perhaps at a slower pace for next year. So overall, I think U.S. markets next year, broadly speaking, I think we continue to see flat to slightly ahead next year with regard to activity levels, and we'll see where pricing goes on top of that. If I switch to Canada, by the way, of a particularly challenging quarter 2, again, a very significant impact of the pandemic, but actually performing reasonably well in quarter 3. And again, if we return to more normalized environments, significant pent-up demand, particularly in and around Ontario, which is the core of our business in Canada. Coming across to Europe and without going through it in too much detail, broadly speaking, a recovering situation across Europe. The core of our businesses are mainly in Central and Eastern Europe, and they've been relatively unaffected during the course of this year with the pandemic, keeping activity levels pretty much at normalized levels, and we see that continuing forward. A little bit of a patchwork growth in many different countries in Central and Eastern Europe, but broadly speaking, continuing the progress that we saw in the first half of the year during quarter 3 and quarter 4, and we expect that to continue into next year. Western Europe is recovering, getting back to normalized levels. And we think there will be specific support going through that next year. 2022, for instance, is the year of the French presidential elections. The moment expects to see, as we always do, significant support for social initiatives and social housing, in particular, in France, in 2021 to support our market. Ireland, doing well. Finland is very, fairly solid as well. And U.K., probably the one area, which is perhaps slower than anywhere else, and we'll talk about that later on, I'm sure. We're covering, but at a slower pace than everywhere else. But broadly speaking, solid steady as we go, as far as we can see out, and I think we're looking forward to continue progress in 2021 going forward.

And then, Bob, just in terms of capital allocation, as you point out, obviously, we intend to end 2020 with a very strong balance sheet. That gives us plenty of options as we go to 2021. And I guess if we look at the usual checklist, starting with CapEx, obviously, we'll continue to invest in our business, but it will continue to be a disciplined approach as you saw from us in 2020. And we did reduce the CapEx spend in response to lower activity levels in some parts of our business. And then in other parts of our business where we had very strong activity levels, we continue to invest. So we should expect to see a continuation of that approach from us into 2021. In terms of dividends, obviously, we have 30 years -- 36 years of a very proud track record in terms of a stable or increasing dividend. We continue to have a progressive approach to dividends, and you should expect to see a continuation of that as we look forward. I think in terms of the next lever, it's obviously M&A, looking at that. M&A is a very -- and remains a very key part and important part of our growth strategy as we look forward. Typically, in any year, as you know, we would do somewhere between $500 million, $600 million and $1 billion of bolt-on deals. That number, obviously, is much lower in the current year as we pointed out to date. We've done about $200 million of bolt-on deals, so it's quite unusual. And I guess that's a reflection of the uncertain environment we've been operating in. But the pipeline looks good and looks healthy today as you look into 2021. And as some of that uncertainty starts to recede, then you should expect to see an uptick in activity levels in terms of allocation of capital towards the M&A side. I would say finally then, looking at buybacks. I mean buybacks, we know are an important part of our capital allocation strategy. And we paused our current program back in March due to the unprecedented volatility we saw in the markets at that point in time. As I said, thankfully, the worst of that seems to be behind us at this point in time with regard to volatility. And given our strong balance sheet, obviously, we're very aware of the attraction of share buybacks to our shareholders. And obviously, we'll update you further on that during the first quarter of next year.

Our next question is from Gregor Kuglitsch from UBS.

I'm going to approach the 2 questions similarly. Maybe if I can explore your outlook on pricing into next year. I guess, we're quite late in the year, so perhaps some vectors have gone out. So if you can give us a sense what you think the likely price increases are and maybe put it into context for us in what you're expecting to cost. In other words, do you think pricing could be net accretive? Or is it going to be basically inflationary? And then coming back on M&A, can you just maybe explore a little bit more there. You talked about bolt-ons. I guess the question is what appetite, if any, is there for larger transactions? I think previously, you've kind of suggested you're less keen on big transactions. So if you could just give us a sense of what you're seeing in your pipeline and whether you're prepared to do something bigger.

Greg, 2 questions there. First one on outlook and pricing and just a sense of where we are with regard to costs next year and give at least some sense of that early this season. And the second one with regard to M&A and just a bit more granularity about our appetite and where we are. And with regards to our pricing, look, we haven't started the pricing season. Yes, we're finishing out this year, so it gives us a chance to do that. We've come off the back of what I would consider to be your solid pricing environment, both in North America and Europe. I mean our costs go up and our costs have gone up over the last number of years. And in particular, in Europe, we are playing catch-up for quite a number of years, and we will continue to make catch-up for a number of years. So I would expect across Europe to see progressive pricing continuing on during the course of 2021 and not because we should, we need it. The assets we invest in are expensive assets that need to be maintained, and we need to get paid for the products that we sell. It's a high-quality product that means very tight specification, and we continue to invest time, people and resources to do so. And of course, we've got increasing cost with labor and logistics and fuel costs as well. So from my point of view, across Europe, I expect to see a fairly continuation of a positive pricing environment in 2021. With regards to the United States, I think it's well embedded now at this stage for a number of years, and that pricing is something that we should expect across our businesses. And I would expect it to continue there. In both markets, I would expect it to be in or at the same level as we saw in this current year, Gregor. With regard to costs and cost -- input costs, obviously, our main input costs are labor and logistics and fuel costs. I would expect labor costs during the course of next year. Labor is still tight, quite frankly, even though unemployment has risen both in the European Union and indeed in the United States. But of course, it's specific labor we need. We're still quite tight in that. So I'd expect labor cost to be up maybe 2% to 3% depending on your specific regional focus. And logistics costs and energy costs, I think, they're broadly stable from where they are now at this point in time, looking at that. We would cover forward a lot of our cost in energy, in particular. So we're always rolling forward. So we are probably about 1/3 of our cost covered rolling as we go into next year. But I think we've done for quite some time. It's just part of what we do. So that would be the pricing and cost environment as I would see it here today. Obviously, we'll be much better informed as we move into quarter 1 next year. With regard to M&A, I think Senan said it very well. We -- with the pandemic that hit us in the first half of this year, clearly, everybody just took a pause, and we did hit the pause button. I mean I've been in CRH for 20-plus years now. At this stage, I don't ever recall spending $180 million in M&A at November in any year, but this has been an extraordinary year. And -- but we deliberately held our hands. It's not because we lack appetite, it's not because we lack the capital, it's because we just lack the visibility. And when you got no visibility, it's very difficult to talk to way forward in terms of looking at forecast. And also this year, challenges of actually physically meeting people, what we've seen over several months in terms of the restrictions of travel that goes with that. However, in saying that, I have to say that, certainly, over the last 2 to 3 months, that has started to ease somewhat in terms of travel within Europe, Continental Europe and within the United States, made it easier. Also, I think the fact that it's visible, the flag of uncertainty is lifting somewhat in terms of what next year looks like. I've just given you our costs in terms of how we think next is going to play out, and that's just not a CRH view. That's an industry view. And with that in mind, we can start to see a bit more greater clarity where opportunities may amount. We have capital. Senan has said M&A has been a significant part of the value creation story for CRH going forward. We want to do M&A. We want to do disciplined M&A. And I think we would expect to see a progressive increase in our activity levels there during the course of the next couple of quarters. I don't think we're going to hockey stick up from where we are now at the moment, but I would expect it to progressively improve as we return to that particular game. With regard to large M&A, there's nothing specifically planned with regard to large M&A. If we take a progressive capital approach, as you know, CRH will do, it's highly unlikely we're going to be doing a sort of multibillion-dollar deal tomorrow. At the same time, we keep our eyes and ears sharpened and open for value opportunities, and you would have seen that in the past. Just when cash flow came along, there was a $3.5 billion deal. It was a big deal, but it was a very fine deal. And it was a good deal for CRH. It was a good deal for ASH growth, and I think we always keep our eyes and ears open to that. Our industry has been very fragmented, both in Europe and in the United States. As you would well know, there are a number of deals of $1 billion plus that people haven't even heard of private businesses, making $100 million to $150 million of EBITDA every year. And all of a sudden, there are succession issues or are there issues with regard to expansion or they want to move other business on. And it's our job as part of what we do is keeping in touch with these people. This is our registry. This is our job, and we keep a very careful eye on those. So I wouldn't rule out anything extraordinarily large. I wouldn't say there's anything probably in the coming quarters, quite frankly. I think we stole it back from where we are at the moment. But we always keep an eye on value. And we know that if we do execute disciplined M&A, that usually ends up delivering value for our shareholder, and that's what we're here for.

Our next question is from the line of Paul Roger from Exane.

So just 2 questions then. Going back to the CapEx point. Senan, you've obviously given guidance for this year. You mentioned a bit about next year as well. Some of your competitors have talked about the need to start hike in sustainability investment, potentially on things like carbon capture but general CO2 reduction. Is that a view you share? And maybe also if you can give us some indication of how much of that $1 billion CapEx is going into reducing CO2 this year? And then the second question also on CO2. Clearly, a few of your large-cap peers have gone quite aggressive on targets for 2030. You are at $520 million for 2030. Any plans to revisit that? And then finally also on sustainability. Are you thinking about tough in any green sources of finance?

I'll start with the CapEx. And then Albert, do you want to say a few words on sustainability targets? Paul, just in terms of the CapEx point, yes, I think as you pointed out, first thing I would remind you of is that 85% of our business is not cement, or said another way, 15% of our business is cement. So when you're comparing our CapEx numbers to some of our peers, you should bear that in mind. This year, obviously, our CapEx spend is $1 billion. It's down to about 75% of depreciation. But as I said earlier, in some of that spend, obviously -- we've obviously spent more than previous years where we've had part of our business, particularly on the repair and maintenance side, some of our products businesses where we've actually expanded our capacity to be able to cope with growing activity this year. And then in other areas, we've obviously caught back. When I look at the sustainability spend, I mean, the sustainability spend is embedded within that number. And as you look to 2021 and beyond, there's a portion that is related to obviously driving our sustainability agenda. I would say it's an affordable part of that as opposed to calling out a specific number. I would expect that when you go into '21, that with activity levels, as you see activity levels improving again, the CapEx spend would increase across in the parts of our business that need it. And I think there's probably -- what I would say really about it in terms of ESG, Albert, do you want to add something there?