CRH plc (CRH) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the CRH plc April Trading Update Conference Call. [Operator Instructions] The next voice you will hear will be Albert Manifold.

Hello, everyone. Albert Manifold here, CRH Group Chief Executive. You are all very welcome to our conference call, which accompanies the release of our trading update earlier today. Joining me on the call is Jim Mintern, our Group Finance Director; Randy Lake, our Chief Operating Officer; and Tom Holmes, Head of Investor Relations. Now following some short opening remarks, we'd be available to take any questions you may have on our announcement. And all told, we aim to finish up in about 30 minutes or so. Before I take us to the key points of our announcements, I'd like to remind you that we'll be hosting an investors update tomorrow, Thursday, 21st of April. It will be a virtual event broadcast live via webcast at 2:00 p.m. London Time, 9:00 a.m. Eastern Time, and the registration details are available on our website. As I've said before, there's be no big reveal, but it will be an opportunity for Jim, Randy and I to take some time outside of results to update you on a number of important items, which are at the core of our strategy going forward. We'll provide you with an update on our portfolio strategy, report on priorities around capital allocation going forward, our approach to sustainability and a more detailed discussion about the benefits of our integrated solutions strategy. Overall, I expect it to last about 19 minutes or so. Turning now to today's announcements, which provide details of our trading performance for the first 3 months of 2022, an update on our recent capital allocation activity and an indication of our expectations for the first 6 months of the year. So beginning with the first quarter trading performance. And overall, it's been a good start to the year for CRH with sales, EBITDA and margin ahead of the prior year. Group sales for the first quarter were 15% ahead, a reflection of the continued benefits of our integrated solution strategy, good underlying demand across our core markets and disciplined commercial management. Let me briefly take you through the first quarter trading trends for each of our businesses, starting with the Americas Materials division. For first quarter, sales were 13% ahead of the prior year. Good commercial management across all business lines more than offset the impact of some cold and wet weather conditions, which impacted activity levels in parts of the Northeast, Great Lakes and Western regions of the United States and Canada. For the division as a whole, activity levels in our asphalt and construction services business were well ahead of the prior year, whilst cement volumes were in line. First quarter aggregates and readymixed concrete volumes were behind the same period in 2021, impacted by some adverse weather conditions. Of course, it's worth noting that our Americas Materials business is particularly seasonal. And the first quarter only typically accounts for about 10% to 20% of our annual volumes. With the continued flow of some strong commercial management, we made good progress on pricing across all products with high single-digit increases in aggregates and asphalts and double-digit increases in cement and readymixed concrete. Turning to Europe Materials. First quarter sales were 11% ahead of the prior year, reflecting strong demand and milder weather across most of our key markets. In the United Kingdom and Ireland, our sales were well ahead of the prior year, reflecting good underlying construction demand in those markets and the benefits of the significant steps we've taken in recent years to reshape and reposition our U.K. business. In Eastern Europe, the demand environment is robust with strong volume growth, particularly in Poland and Romania. Our business in Ukraine had a strong start to the year. But as a result of the ongoing conflict, we have suspended all operations. Of course, it goes without saying that our thoughts and prayers are with the people of Ukraine at this very difficult time, and we are continuing to do everything we can to protect and support our employees and their families on the ground. In Western Europe, sales were also ahead of prior year with improved activity levels in countries including France, Belgium, Germany and Switzerland. In the Philippines, sales were behind the prior year as lower activity levels due to the upcoming presidential election will be offset partially by price improvements. With regard to pricing for the division as a whole, we continue to deliver further improvements during the period with strong progress on recently announced price increases across all products and [ brands ]. And finally, to our Building Products business, where first quarter sales were 22% ahead of 2021, reflecting continued delivery on our integrated services strategy, strong residential demand, particularly in North America and continued recovery in nonresidential activity. Sales in our Architectural Products business were ahead in North America and Europe, reflecting continued strong demand for outdoor living solutions and good commercial management in the early months of the season. In our Infrastructure Products business, sales were ahead as a result of higher activity levels, particularly in the communications, water, energy and transportation sectors, good pricing and a strong performance from National Pipe, our recently acquired water and energy infrastructure distributions business. Turning to our Building Envelope business. Our sales were also ahead, benefiting from continued recovery in nonresidential construction activity and good commercial discipline. So for the group as a whole, it's been a good start to the year with first quarter sales 15% ahead of prior year and continued improvements in both EBITDA and margin. Now before I comment on our expectations for the first half of the year, let me touch briefly on a few other items from today's announcement. First, to our development activities. And in the year-to-date, we've completed 11 bolt-on acquisitions for a total consideration of approximately $600 million. The largest of which was Rinker Materials in our Infrastructure Products business, expanding our pipe and precast solutions offering in the Texas north. We also acquired Calstone in Our Architectural Products business, a leading provider of outdoor living solutions in California. We have a strong and active pipeline of opportunities. And the strength of our balance sheet, combined with our continued focus on financial discipline, will enable us to capitalize on these opportunities to create further value for our shareholders. In February, we announced the divestment of our Building Envelope for an enterprise value of $3.8 billion, representing an attractive exit multiple of 10.5x EBITDA. And we expect that transaction to close during the second quarter of the year. In the light of our strong financial position and commitment to returning cash to shareholders, our ongoing share buyback program is now running at an annualized rate of approximately $1.2 billion. The current tranche of our program is well underway and will be completed before the end of June. Turning now to outlook. Following a good start to the year, assuming normal seasonal weather patterns and absent any major dislocations in the macroeconomic environment, we expect first half sales, EBITDA and margin to be ahead of the same period in 2021. The demand backdrop in North America remains positive. And when combined with good commercial management and the continued execution of our integrated solutions strategy, our Americas Materials and Building Products businesses should continue to perform well. Notwithstanding the challenges of significant energy cost volatility and the ongoing conflict in Ukraine, we expect like-for-like EBITDA in our Europe Materials business to be ahead of the prior year period. It's very difficult to be more specific at this stage of the year when most of our important trading period is still ahead of us. But we will, of course, update you on our expectations as the year unfolds. As ever, we are relentlessly focused on shareholder value creation and believe that our integrated solutions strategy, together with our strong balance sheet, leaves us well positioned going forward. So with that, I will now hand you over to Q&A. [Operator Instructions] I'll now hand you back to the moderator to coordinate the Q&A session of our call.

[Operator Instructions] Your first question comes from the line of Gregor Kuglitsch from UBS.

Maybe I'll be a bit naughty and ask you 2 parts. So if you could just perhaps give us an update where your energy cost and sort of general cost position is? Obviously, you're guiding for margin expansion, I guess, in percentage terms in from -- for the first half. So maybe just maybe give us sort of your best view of how the spread between price and cost is evolving across the various geographies.

Gregor, Jim here. I'll take that one. That in terms of energy, typically, you're aware, our energy cost range is between 9% to 11% of our total sales. And in the first quarter this year, we're within that range. About half of our energy cost is in bitumen, typically at the mid- to high 40%. As you know, we very carefully manage that input cost and -- particularly through our winter-fill program and, indeed, the price escalation clauses that are in place in most of the states in which we operate. We've had very strong commercial management across our businesses for many years now and with the practice of dynamic pricing in place, which will cover the cost inflation. And as you said, the quarter 1 margins are ahead, and we also expect margins to be ahead for the first half of the year also.

I suppose I should say, Gregor, as well, building on what Jim has just said there. I mean let's not forget the business for a number of years now has been beyond just selling base materials. It's much more an integration of base materials with value-added products and the service to go with it, so a full end-to-end solution. And that now makes up 55% of our total sales. Last year was a very difficult year for costs across our industry. And yet, we were ahead in all of our divisions in terms of margin, and again, ahead of our peers. So it really is attesting once again, with the margin performance in this current year, we've moved past being a price taker. And again, this causes us being a price maker in the marketplace, that really is where we're at. So the energy costs are there, the headwinds. But you can just see exactly how we managed them last year, and we continue to manage them in the current year. Thank you.

And maybe if I answer from the second part, just in terms of -- on the margins, yes, in Q1. Our sales, EBITDA and margin was ahead. And also, the reported margin for the first half year, we expect sales, EBITDA and margin to be ahead as well for the first half.

Thank you.

Your next question comes from the line of Ross Harvey from Davy.

Year on that front. I'm just wondering, can you give us some color on what you're seeing in the pipeline.

I think I just got the end of the question. It's about M&A, about what we're seeing in the pipeline. Is that correct, Ross?

Yes, that's correct, Albert. Sorry, yes.

Yes. Good. Thank you, yes. Thank you. Look, the pipeline is quite strong. We've had a good start to the year, good sense of momentum carried out from last year. First quarter, we executed across 11 deals, mainly in the U.S. here, spent just short of $600 million on M&A. I suppose the 2 big standouts with us so were we've bought a nice business, an add-on to our APG business in Northern California, Calstone, which is mainly a hardscapes and masonry business. And the biggest deal we did was we bought an add-on to our IPG business, our Infrastructure Products business in really sort of in culverts pipe and -- in Texas, and again, a nice deal add-on there. I have to say that there's a lot of opportunities out there. I'm pleased to see again that the $600 million we spent this year with average close to 7x EBITDA. And that's before we started getting into the business and improving them and delivering synergies as well. Good pipeline ahead of us. As always, we're very careful, very selective. Just on the start, we've plenty of money. But it's easy to spend money. It's hard to deliver value, and we have to be very careful how we do stuff. But we look forward to this year with that -- after this and off to a good start.

Your next question comes from the line of David O'Brien from Goodbody.

Back in March, I guess you gave us some color on the order book. And with that in mind, you said you're looking forward to a year of progress. Just wonder how has the order book evolved? And as such, how is your confidence on a year of progress evolved as well?

It's only 7 weeks ago since we talked to you. But actually, probably what happened, the order book since then has kind of backed up a bit because we've had some pretty poor weather in the U.S. particularly across the Great Lakes and out West, which meant that we haven't been able to execute on the orders. So it's backed up a bit. So it's still healthier and continues on adding to it. And we've backed up a bit. So we should still have a good quarter 2 and good momentum in the business there. But I'm joined here with -- as well there, Randy. Maybe you might give us, Randy, give us a sense in terms about the order book. But also kind of what tenders are, what the dynamic there with regard to tenders, so in terms of pricing and all issues that are coming into us.

Yes. So I guess we look at it -- or I look at it a couple of different ways. One is just overall activity in terms of the quantum that we're bidding. And that continues to be ahead of relatively significantly even without the Infrastructure Act, primarily because of the work that had been done previously by individual states. But even into 2022, there's been 40 -- well, over 80 actual individual funding mechanisms approved by voters in the states that we operate. And so that's just continued to add to the robustness of the bidding environment. And I'd say just on -- and from our standpoint, where we operate, we would win kind of our typical percentage. So the backlogs continue to remain strong. I think what's encouraging as well for us is just to look at kind of the margins in those backlogs, as they continue to improve and our ability to execute continues to ramp up. We have a clear line of sight currently through the first half of the year and a positive momentum going into the second half as well.

Well, the other sort of thing, David, that's actually starting to -- it's been evolving really for the last 2 years, and we see it coming more and more. And I don't see it any -- we're talking it about tomorrow. You'll hear about it tomorrow, more tomorrow. Of course, we operate in public contracts. And of course, public contracts want to get value for money, so cost is hugely important. But more and more circularity and recycling of materials, particularly the big public contracts, is coming in a specified part of what we do, and that plays to our strength. You'll hear more about it tomorrow. I'm just kind of teeing it up tomorrow to take note of it. It's becoming an important -- much more important niche than it has been here before.

Your next question comes from the line of Paul Roger from BNP Paribas Exane.

Congratulations on the strong start. So maybe my question will focus on Europe. I wonder if it's possible to quantify the price increases you've seen in the different markets and also comment on whether you are planning further hikes later in the year. And if I can just tag on a second. Are you confident that you could keep pushing price in Europe without destroying demand?

Paul, 3 questions and very important questions. Yes, no problem. No problem at all. Look, with regards to pricing, we -- I'll just -- let me go back to last year. I said during the course of last year, ourselves, that we got behind the cost curve in Europe. We've caught up at the end of the year and we started the end of the year with good momentum. And that's meant that we've gone and started the season in Europe with required and necessary price increases catching up a bit on last year and also the necessary price increases for this year. I would say probably across Europe, high single digits would be the norm across Europe. So very significant price increases to offset the cost increases. There are some markets where we are seeing sort of low double-digit price increases, and that's up, been very strong. And for the quarter, since we started those price increases, which really, those discussions would have taken place in the early part of this year. We've had obviously a big surge in energy costs again. And of course, that meant that again, I think we're -- personally speaking of Europe, I think we're slightly behind the cost curve in Europe. Now what is interesting that even if we're behind the cost curve, the solution model continues to deliver margin improvement in our business. So it just goes to show, there's a bit of a dislocation between cost and prices and such, which is why we keep saying we're more a price maker than a price taker. But I'll answer your question. With regard to pricing in the second half of the year, I think the industry as a whole will need to catch back up and get ahead of price increases again. So I do think there will be further price increases in later this year. I suspect it to be more quarter 3 than quarter 2 because these current price increases are only being established and put into the market as we speak. So I suspect it to be in the back end of the summer. The momentum is good in the industry. The momentum is good in to the market. And as you say, look, there's pricing difference, there's cost increases that are not going to go away, so that's why I sense -- what I sense it will be. With regard to -- in terms of our business and margin improvement with regard to like in Europe, again, there is a bit of a dislocation, Paul, between cost and pricing with CRH. Because we don't just -- we're not like all the other guys. We don't just sell stuff by the tonne, right. We turn our base materials into products. And in turning them into products, we're doing so in a fairly carefully designed, specified way, working with our customers to solve their complex problems. And we get paid for those design, engineering, architectural skills that we have within our business. And that's where the margin increase is coming across both our business, both in North America and in Europe. So it's not just really about cost necessarily anymore. It's about that additional benefit we bring to solve our customers' problems.

Your next question comes from the line of Yassine Touahri from On Field Investment.

So one question for me. Have you seen any construction work cancellations or postponements since the war in Ukraine, either because of shortages or because of the higher construction costs?

In fact, no, we have not. As we've mentioned, of course, within Ukraine we have. But that's only a small part of our business, and effectively everything is on hold until that matter is sorted out. And let's hope it [ divines itself ] very, very soon. But broadly speaking, across Europe, there has been no slowdown or no impact. In fact, we've had good, robust demand. Of course, the -- all of Central and Eastern Europe and all the bordering countries that we have with Ukraine in terms of Poland, Slovakia, Romania, Hungary, all quite strong activity levels start of the year and have continued on with the pace, in fact, will probably increase during the course of the year. There's good momentum across Central and Eastern Europe, and that's not going to stop any time soon.

Your next question comes from the line of Nabil Ahmed from Barclays.

My question was on the U.S. GAAP tax holiday that we saw in a number of states, and I think some others are thinking about it. Do you expect any impact at all on your business going forward?

Yes, look, there's been a lot of speculation in the press about potential states looking for gas tax holidays. We haven't seen any impact on the ground. Randy, you're -- you may have been there -- maybe there, right, so...

Yes. I mean as you said, there's been discussion in and around that. We see very few action to support those claims. A couple of states have moved on a temporary hold. But actually, what they're doing is they're taking a lot of the COVID relief money and backfilling any shortage or kind of gap from the gas tax. And those are temporary measures. So it hasn't impacted the bidding environment. Certainly, it hasn't impacted underlying funding.

Yes, that's a good point, Randy. And they -- state budgets are really in fairly robust shape. And that's why we feel, again, I don't think that there'll be any issue with regard to any gas tax holidays. It's just they're not really there yet. If they do come, they'd be eaten up by the budgets that are there. But also, in terms of support by the state for the federal budget increases coming through, so the infrastructure and investment act that have passed before or last year, again, we think that will come through quite strongly as well. So we think it's in good shape.

Your next question comes from the line of Glynis Johnson from Jefferies.

Question on the U.S. infrastructure bill. I'm just -- you talked about U.S. being robust in the backlogs without that U.S. infrastructure bill as yet having effect. Is there any clarity you've got as to how we might expect that to benefit here? Does it go to maybe latter part of this year but into next year?

Yes. No, you're absolutely right in your timing. I mean this year is all about the money that was committed last year and execution of projects that have already been started. And most of the bigger projects that will benefit from the increased federal spending will actually -- it will be at the very end of this year and probably next year before we start to see it coming through. And but -- I mean, most of the benefit, we assume that it will be spent sort of -- it's sort of would be '22, '24 would get the lion's share of the work that's coming through. So we're not seeing anything yet. I suspect, though, what's happening here is you're seeing maybe a clearing out of "old projects," where people really are just finishing up the jobs that they had allocated funding for, knowing that there's very significant increase in federal of funding coming forward, that they can start more longer-term projects, sort of 3-, 5-year projects. And that's the one thing that people sometimes overlook with regards to the funding coming forward. It's not just a substantial increase in funding that's coming forward. It's the longevity, the 5 years that are rolling out through. It allows people to plan in the longer term for bigger projects, which really will sustain momentum for a longer period of time. So I think you're seeing a clearing out of maybe the shorter-run projects. And then the people will start to look at the longer-term projects, which should start to kick in very earliest, back end of this year, but it's more a '23, '24, '25 issue than a '22.

So then the backlog you're seeing doesn't have any of that in as yet.

No, no, no. Too early yet.

Your next question comes from the line of Elodie Rall from JPMorgan.

So my question would be about use of proceeds from the $3.6 billion that you will get from the disposal of the Building Envelope.

Look, obviously, the deal has not -- has yet to close. And our view is it will close probably in the course of the few weeks in quarter 2 of this year. Look, it leaves us with a very strong balance sheet. And we have options to allocate that capital actually to create value for our shareholders. I'll ask Jim for -- maybe to comment on this as such. Maybe if I just focus on the M&A side of it. Look, as I said earlier on as I was talking to David's question. Our pipeline is quite strong. We can be quite selective. We're probably at a run rate of bolt-on M&A, it's probably running at the rate of somewhere between $1.2 billion to $2 billion a year. Elodie, that -- they're kind of deals that just come in the door. But of course, we could shut things down if the world went completely the wrong way, but we don't think it will. And on top of that, there's platform deals to be done. And we're constantly looking and have constant conversations with key persons many, many years to see how we can actually move the deal. So I'm confident over the next sort of 1 to 2 years, we will significantly use the funds that we have to reallocate back into our business for growth investments, not only with regard to CapEx but also with regards to significant M&A. But again, always with a strong focus on the financial adjustment we've had there within our business. Of course, we have been returning cash to our shareholders as well. So maybe, Jim, you want to just chat about our philosophy and our strategy on that.

Sure. Yes. In terms of the use for the proceeds, Albert touched on it. He would've called out last year, a step up on our development CapEx rate on that and some of those higher growth markets and some of the solutions space as well. And that's continuing into '22 as well. We also announced an increase in dividend to where the final dividend for 2021 was up over 5%. And our share buyback program is running at an annualized rate now of about $1.2 billion. The current tranche will finish before the end of June. That's a $300 million tranche, and that will finish by the end of June. So we have capacity and have optionality, but understand, that obviously, the pipeline is good in terms of M&A. But as ever, all the investment decisions will be looked through that lens of just ensuring we're driving shareholder value accretion with good capacity, good options, but always maintaining that rigor and discipline.

Your next question comes from the line of Cedar Ekblom from Morgan Stanley.

On energy costs, you'll be benefiting at the moment relative to spot due to some of your forward buying contracts that you have in place. Can you remind us sort of when you would probably need to be reentering the market to reestablish your energy purchases going forward? And a little bit of color on how that positions sort of in Europe versus the U.S.? Do you have longer lead times in Europe? Or is it about the same across your portfolio?

I'm not too sure we are benefiting from energy cost in the current environment despite whatever 4 projects we have to go -- 4 projects we might have in place. Of course, energy cost increased quite significantly during the course of last year. And of course, we don't carry forward like for 12 months. We're carrying forward for 1, 2, 3 months. Most of our hedges, if you could even call them that, tend to be within the business contracts that we have with our customers. Our customers are very well educated on what energy prices would be. And very often, we have automatic adjustments and accelerators as we do have here in the United States where I am at the moment with regard to a lot of our customers whereby it's a direct path to them, the benefit or the disadvantage of that as the case may be. So we're not really benefiting from any holidays with regards to hedges that went back for years and years when oil was $30 a barrel. Those days are long in the rearview mirror. So it's not a question on any big unwind. It's just a question of carefully managing our cost base. So of course, I go back to the issue that we're not a business that just is a cost margin business anymore. It's the idea -- as I said, we sell much more than just base materials. And really, that allows us to push the margin ahead in our business. So there's no big unwind with regard to hedges. We do tend to cover forward as best as we can, but it tends to be more than 3 to 6 months, quite frankly. We probably cover somewhere between 1/3 or half of our business at any one time. And our natural hedges within our business is because we're bidding on projects and work which are quite short term in nature some of the time. So you're looking at sort of 4 to 6 weeks. So already, unless there's a massive dislocation on price over the next 4 to 6 weeks, what I'm bidding on the work over the course of the next month is the current price of energy. So we are really covered in that area. If we were a big cement player, I fully accept and understand whereby you'd be buying massive amounts of coal or pet coke, probably even from Australia or the Far East. You're buying sort of 60,000, 80,000 tonnes at a time. That might be an issue for us, but we're not really a big cement producer. We're much more of an integrated player, of course. That there's more to [ our group ] than just the cement business. And therefore, our power tends to be more electricity and diesel, which is more bought on the spots than our forward contracts.

Your last question comes from the line of Will Jones from Redburn.

Just wondering if perhaps you can give us a little bit more color around the U.S. asphalt business, thinking with the winter-fill process, which presumably has come to a close now, whether you think bitumen is likely to follow the spot oil price, but we can also screen as to its usual relationship? And I guess, when all is said and done, where you think those selling prices kind of need to be, give or take in asphalt compared to the 8% or so that you're currently running after tax?

Look, I mean, I've -- bitumen doesn't -- is not properly correlated to oil. It does go up, of course, and it has gone up and for some ways to our winter-fill program. It carries on -- our winter-fill program will carry on until the end of April, actually, quite frankly, all the way through. And in reality, what we're doing now as we go into the market, I think people are bidding jobs at spot prices for bitumen, so that it's well built into the market as it is as such. The only differences anybody will ever have or anybody, meaning us, will ever have is if you're bidding the long work, and there is a significant price dislocation from the day that you bid to the day that you actually have to go and buy the bitumen. Now the reason why it's such an advantage for us is because we have the advantage of knowing that we have got 800,000 tonnes plus in our tanks. So that if there is a significant disadvantage, it's almost like a strategic reserve we can pull down from to protect ourselves against a big dislocation. But we don't tend to get massive movements over short periods. It can happen from time to time, but it doesn't tend to be the norm. It tends to be much more of a slow cycle so we can watch it. So we do have to manage it. The winter-fill program is very successful and has been very successful for -- in CRH. It gives that strategic advantage that we kind of have a strategic reserve at a known price that we can draw down from if we do come into difficulty with regard to short-term spot prices and we find ourselves on the wrong side of a particular contract, which is very helpful. But that tends to be very much the exception rather than the norm. And again, bitumen prices are today, will find themselves into asphalt contracts for everybody in the U.S. market over the course for the next sort of 3 to 6 weeks when people are bidding on work. Okay. Listen, well look, I think that's all we have time for this morning. Look, I want to thank you all for your attention. And as always, if you have any follow-up questions, please feel free to get in touch with our Investor Relations team. And we all look forward to speaking to you again during our investor update tomorrow. Thank you, and goodbye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.