CRH plc (CRH) Earnings Call Transcript

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

Good afternoon, everyone. Albert Manifold here, CRH Group Chief Executive, and you're all very welcome to our conference call, which accompanies the release our trading update earlier today. Joining me on the call is Senan Murphy, our Group Finance Director; Jim Mintern, our Finance Director Designate; Frank Heisterkamp, Director of Capital Markets and ESG; and Tom Holmes, Head of Investors. Following some short opening remarks, we will be available to take any questions you may have on our announcements. And all told, we aim to finish up in about 30 minutes or so. Now before I take you through the key points of our announcements, I'd like to take the opportunity to recognize the dedication and resilience of our people across the group as we continue to navigate the challenges and uncertainties arising from the COVID-19 pandemic. As always, the safety of our employees, contractors and customers remains paramount to CRH and is a core focus for us in everything we do. Our announcement today provides details of our trading performance for the first 3 months of 2021 as well as an update on our recent capital allocation activity. We will also provide you with an indication of our EBITDA expectations for the first 6 months of the year and our earnings report on the outlook for the second half. So beginning with our first quarter trading performance. And overall, it's been a positive start to the year for CRH. Group sales for the first quarter of the year were 3% ahead on a like-for-like basis, a reflection of good underlying demand across core markets and further progress on pricing and commercial management. Let me briefly take you through the trading trends for the first quarter of 2021 across our individual businesses. Starting with our Americas Materials division, first quarter like-for-like sales were broadly in line with the prior year. Our business has experienced some extremely cold and disruptive weather conditions in the month of February, impacting our operations in the Northeast, Midwest and Texas, in particular. For the division as a whole, first quarter aggregates and asphalt volumes were behind a strong prior year comparatives. In contrast, our cement and readymixed concrete volumes were 5% and 2% ahead, respectively, with good demand, particularly in the western regions of the United States. Of course, it's worth noting that our materials business is particularly seasonal, and the first quarter typically only accounts for between 10% and 20% of our annual volumes. With a continued focus on strong commercial management, we made good progress on pricing in aggregates, cement and readymixed concrete. Despite lower pricing in our asphalt business, margins expanded due to lower input costs. Although it's still very early in the season, the bidding environment remains broadly stable, and there is positive momentum with regard to further infrastructure stimulus measures in the United States. Infrastructure funding remains a bipartisan issue. And whilst there are some uncertainties regarding the quantum and the timing of any such funding plans, we're confident that a viable multiyear program can and will be put in place. Turning to Europe Materials. Our like-for-like sales were slightly ahead of the prior year, as more seasonal weather patterns during January and February were offset by improved trading conditions in March. In Western Europe, our like-for-like sales were broadly in line. Volumes across most products in the U.K. and France were ahead of the prior year, which was heavily impacted by COVID-19-related shutdowns, whilst Germany, Switzerland and Finland were impacted by adverse weather and more resilient prior year comparators. In Eastern Europe, more normal weather conditions impacted volumes in Poland and Romania, partially offset by resilient demand in Hungary and Serbia. In the Philippines, cement volumes were well ahead in the first quarter in a competitive pricing environment. With regard to pricing for the division as a whole, we continue to deliver improved pricing during the period with good progress across our major markets. And finally, to our Building Products business, where like-for-like sales for the first quarter were 12% ahead of 2020, reflecting strong demand for residential construction, particularly in North America, partially offset by lower activity levels in the nonresidential sector. Like-for-like sales in Architectural Products were 27% ahead, reflecting strong underlying demand for outdoor living products and good early season purchasing by home centers in advance of key spring trading period. In our Building Envelope business, like-for-like sales were behind as a result of lower nonresidential activity due to the impact of COVID-19-related uncertainty and lower backlogs entering the year. In our Infrastructure Products business, like-for-like sales were ahead as a result of good demand in the telecom and energy sectors in both Europe and North America. So for the group as a whole, it's been a good start of the year, notwithstanding the impact of more normal seasonal weather patterns across many of our markets compared to the relatively milder conditions we experienced in 2020. Before I go into our outlook in further detail, let me touch briefly on a few other items from today's announcements. First, for our development activities. And in the year-to-date, we have completed 4 bolt-on acquisitions for a total consideration of $180 million. The largest of which was a precast concrete business, which expands our Infrastructure Products footprint in the U.S. Midwest. Our acquisition pipeline remains robust 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. We've also completed the divestment of our Brazil cement business with total proceeds of over $200 million, representing a good outcome for our shareholders and further progress in becoming a simpler and more focused business going forward. In light of our robust balance sheet and continued strong cash generation, in March, we announced our intention to recommence our share buyback program with further tranche of up to $300 million. Our current tranche is now well underway and will be completed before the end of June. So now turning to our outlook. And following a positive start to the year, we expect first half profitability to be well ahead of the prior year period, which experienced a heavily disrupted second quarter due to the pandemic-related restrictions across many of our key markets. Sitting here on the 28th of April, with our most important trading period ahead of us, it's very difficult to be more specific at this stage. We will, of course, update you on our expectations as the year unfolds. As we look into the second half, we expect further normalization in our markets as the health situation continues to improve. There remain, however, significant near-term uncertainties that we need to be mindful of, particularly the complex unwind of COVID-19 across our markets. We must be patient and we must be careful. There is light at the end of the tunnel, but it will take time. Looking beyond the near-term uncertainties, however, we expect significant public and private support for construction activity going forward. And given the resilience of our business model and the strength of our balance sheet, we remain well positioned to benefit from the growth opportunities that lie ahead. As always, we remain resolutely focused on the continued execution of our long-term strategy to deliver higher margins, returns and cash for our shareholders. Now before we return to -- over to Q&A, let me take a moment to update you on a few items that have been in our minds since we last spoke to you in early March. First, with regard to U.S. infrastructure. We have seen further developments in recent weeks with a number of proposals being put forward for consideration and discussion. As I mentioned earlier, although there are uncertainties around the scale and timing of these plans, we believe we are headed in the right direction and that a solution can and will be found. Clearly, there are politics involved. So it's very hard to predict how it will play out. But we believe that is broad-based bipartisan support for increased infrastructure investment, which will be very beneficial for CRH as the largest building materials business in North America. Another important development arises from last week's climate summit, with the United States commissioning over 50% reduction in carbon emissions by 2030. These are critically important commitments and are to be welcomed. We are all citizens of this world, and delivering on these commitments is essential for the future of society. Not only is it the right thing to do, but from a business perspective, we also think these commitments should be embraced. And as North America's largest recycler and as a leading provider of integrated building solutions with global technical expertise in these areas, we believe this climate commitments represents significant opportunities for CRH. As you know, in our industry, there's a lot of focus on carbon emissions, particularly in cement. But cement is only part of the story. And as such, I, as President of the GCCA, the Global Cement and Concrete Association, representing not only CRH, but the largest cement companies in the world, including LafargeHolcim, Heidelberg, Cemex and almost half of the cement and concrete industry around the world. Let me just lay out a few simple findings. Cement is used for only one purpose, that is to make concrete. And cement is a significant emitter of CO2. However, the product that makes concrete is a carbon sink. It actually absorbs CO2, like trees absorb CO2. In fact, over its life cycle, approximately 25% of all the CO2 emitted during the manufacturing process is actually reabsorbed back from the atmosphere by concrete. Of course, reducing the carbon footprint of cement is crucial for our world, and significant progress has already been made by the industry today. All across our industry, there are specific plans in place for further reductions out to 2030. And as an industry, through the GCCA, we are committed to further reducing emissions to ensure we will all be producing carbon-neutral concrete by 2050, in line with commitments made to the Paris report. This is an industry effort. Nobody is ahead of the game. But let me assure you that as an industry, we take this matter very seriously, and we are all working together in collaboration to address this specific challenge. But as I mentioned earlier, it's not just about carbon emissions. It's about reducing the impact of construction on our environment and our world. It's about improving the quality of construction; building safer, cleaner and better; improving the thermal efficiency of buildings, prolonging their life cycles; increasing the use of recycled materials; and becoming a greater contributor to the circular economy. This is where the world is going. And over the last number of years, we, at CRH, have significantly shaped, repositioned and adapted our business in line with these trends. We have been working in partnership with our customers to better understand their individual needs. And over time, we have developed a much more integrated offering, uniquely combining base materials, value-added products and innovative solutions to better serve our customers' needs, while capturing more value in the process. Our integrated offering makes us more deeply embedded with our customers, creating long-term partnerships and building barriers to switching. This change strategy has been fundamental to delivering increased profitability, improved returns and higher cash generation. It is less capital intensive, requiring less capital expenditure and brings both reduced cyclicality and higher growth opportunities. The world of construction is changing. And by providing more integrated and innovative solutions to our customers, we are playing our part in helping to reinvent the way our world is being built. So with that, I will now hand you over to Q&A. I believe we have some questions on the line. [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.

I'll be quick. One, I was just wondering, could you give us a sense of the momentum in business after the weather cleared up. So how you kind of traded through March and into April in both Europe and North America? And two, I was wondering, could you talk about your acquisition pipeline, what kind of opportunities you're seeing? And how perhaps we should think about your comments just there around integrated building solutions, how should we think about that in terms of acquisition or growth CapEx? How does that fit into the capital allocation strategy?

Bob, 2 questions there. I'll take both of them. And look, we've set out this morning how the first quarter is done, and you've seen the numbers there. With regards to the current run rate and how business is trading, actually, we've had a good April. And if I just start in the United States and look at the overall market there, with the improving health situation in the United States, the economy is charged to move over. And the 3 sectors that we serve, the residential, the nonresidential, the infrastructure moving ahead quite well. I have to say the residential sector is going from strength to strength. Good demand, low interest rates and housing stocks are probably as low as I've seen them. And that is underpinning good strength into the residential market. And that's been seen by coming through parts of our business that are mostly exposed to that, primarily at this time of the year it's the APG business. Nonres actually is turning out to be a better story than we had anticipated. We felt that last year's decline will continue into this year, and it will a further bit bottom out this year, which I think it will do. But it seems to us at this stage now that it's probably a shallower and shorter dip this year than we would have enthused. And I think that we'll be returning back to growth in nonres at the back end of this year at the latest. So a nice surprise there, a positive surprise. With regards to infrastructure, early season, yes, and it was slow during January and February. But of course, it's very, very quiet time of the year. I have to say, activity levels are starting to build in the order book. It's still quite early in the season in the U.S., but activity levels are beginning to build, and we're quite pleased with the pace of the take up. I'm quite pleased with the margins in that. So the U.S. seems to be in fairly good and robust shape. Switching back to Europe. And with regard to Europe, again, there was some significant weather impacts both in East and Western Europe in February, in particular. But again, good momentum once the weather shifted. And April, again, we've had a good month across pretty much all markets. Again, as the situation starts to recover and the shutdowns are being lifted, people are getting back to work and you're getting that catch-up effect, but also underlying activity is good and pricing is good. And Europe continues on ahead. So quite pleased with the performance as we sit here today, on the 28th of April, for the month of April, and the momentum looks fairly good in Europe as well. With regards to the M&A pipeline, I mean, 4 bolt-on deals dominating the first quarter of the year, $200 million. And as I said, we have before -- we had -- pipeline is quite strong. We're just keeping our discipline. We're looking at a number of deals. The most important is to do deals that not only bring value to our shareholders, but fit with our overall long-term strategy. And that strategy, as you know, is focused very much on North America and in Europe. So that's the areas we're looking at. Clearly, we're not looking at the developing world. And also, as you rightly indicated, the build-out of the building products and the extension of the product solutions, which has been a key driver of not only pull-through of our materials, but also the continued success, as you see, again, of our building products business. And following that trend, where we can effectively extend our base materials into the manufacture of our products and the delivery of the services with those products as well, that full extension is where construction is going. And we will tap into those areas there again. And again, a lot of deals there. I'd expect to see a ramp-up in our M&A during the course of this year. And also, I think we're getting to the point whereby, we're looking at the opportunities where we're seeing growth of development CapEx, effectively, capital expenditure, which we're actually rolling out rather than going and buying businesses with expansion in CapEx, particularly in some of our growth markets in Eastern Europe and across the U.S., which will be higher than normal and probably will lead to us having a higher CapEx than you would normally expect by a couple of hundred million at least in this year. And it's just a question we can either do M&A or we can do internal CapEx and expanding our existing capacity in existing locations. It's cheaper for us to do this. It's higher returning. It's more reliable. And we've always said that the best returning investments we make are internal CapEx. So there's increased expansionary CapEx. M&A pipeline is good and strong. And we just need to hold our discipline and roll it out over there, the next few years. This is a multiyear program. We're not looking to flip any light switches in quarters here. Just take a strong progressive view of it. But pleased about the performance of the first quarter, pleased about the run rate, M&A pipeline is good. And with discipline, I would expect it to move on and accelerate during the course of this year.

Our next question is from Gregor Kuglitsch from UBS.

I'll limit myself to the one, I think, I'm supposed to ask. So I'm going to ask your sort of final comments there on sort of sustainability carbon. I guess I'm interested specifically what you think will happen in the U.S., which obviously has been lagging behind compared to Europe. So do you think there will be changes to regulation in the building code, perhaps to lower clinker ratios? What are your plans, if any, for carbon capture? I think the U.S. is relatively suitable for that. So I would be interesting to sort of your strategy on sort of decarbonizing the American business, please?

Thanks, Gregor. Yes, I totally agree with you. First of all, as I said to you, as individuals, as corporate, we welcome the announcement of the United States by President Biden to obviously cut emissions by 50% till 2030. It should be noted, of course, that already the reduction from the 2005 base year has already been 21%, so further 29% to go in that. And I think it will bring significant changes in the way of life in the United States and in particular, with regard to building materials, not just on CO2, which we've talked about, but specifically to your question, I think it will use a different type -- regulation will come into it to permit different types of cement. Because largely speaking, in the United States, they use one type of cement, the cement that uses the most clinker. And of course, in Europe, we have sometimes 2, 3 and even 4 different types of cements where we use lower clinker ratios, which lowers the CO2 footprint. And I expect that they will be brought in progressively over time. I think the other thing that will happen is there will be a greater focus on using alternative fuels. We tend not to use alternative fuels in the United States because the customer practice is not to use and there's no advantage in using them, but by putting targets in place, that the regulators and the cement companies and associations have agreed to in Europe, by doing something similar in the United States, that also will reduce down the CO2 footprint. I think that's very important with regard to that. And thirdly, I think actually the way we are actually using and constructing buildings, that also further regulations, which is coming in Europe, which is where our product solutions are going, I think that too will also reduce the CO2 footprint. So as part of the PCA, as part of the Global Cement and Concrete Association, we're right in the middle of the mix, working with regulators to help shape the next stage of increased regulation or increased modernization of the industry here. We're a very large cement business across not only Canada and the United States as well as Europe. And I think the experience that we have in Europe will really stands to us as we roll out these plans across the U.S. because effectively we will be doing, much as we did when we bought the Ash Grove business, it's taking the expertise and experience that we have for the last 15, 20 years in Europe, and bring it onto -- into North America. And I think that will bode well both for the company, but also in terms for society over here as well.

Our next question is from Paul Roger from Exane BNP Paribas.

Hope you well. And congratulations on the start. So I'll also limit myself to one question then. And I'd focus on the Building Products division. I mean, obviously, you've had a really strong Q1. I'm just trying to understand really the sustainability of that growth momentum. And I guess the extent to which it's benefiting from things like people doing up their gardens when they're working from home, and whether that type of tailwinds could have sort of fade as we go through 2021?

Paul, good question. And I might be worried if I look at the facts, it doesn't bear us up because the Building Products has been growing, with sustained growth maybe for the last 6 or 7 years at this stage. And it's not only been top line, it's been bottom line, it's been margin and it's been cash. And it's been led by the 3 legs of the stool, all of them with different markets. But actually, the principle by which they are delivering that value is in this way of providing a broader solution and services to our customers. So the APG business, you're absolutely right, has been focused on the outdoor living. But outdoor living has been a growing space in the United States, maybe for the last 6 or 7 years. And our role and our part in that not only in providing the products, but also working with our customers to broaden out the offering to our customers with a full product range and then working with the professional installers as to how they should put that in, what are the best solutions for them. And that didn't just start when COVID had hit last year. That's been going on since 2014, 2015 and it continues to go on. The footprint expands. Likewise, with our Infrastructure Products, again, that take us -- it's nothing to do with COVID at all. It's to do with the idea of the transportation of vital utilities, particularly storm water and water management. And again, that's the problem in all of the developed worlds because we have not invested as we have -- as we've built up our urban environments and water is a vital scarce resource. So the protection and transportation of it is hugely important. So that's been a strong growth there. That's not a COVID item. That's a strong trend that will continue on for decades. And likewise, the OBE business where, again, looks very similar to strategy, whereby we started out with just basically being a glass business, that now there's a much more integrated offering to the glazing customer, providing all the products they need, not only the hardware, the glass, but also the aluminum, the home -- frame of windows and all the associated products to go with it. So you become the one-stop shop, and I'm looking at further plans as to how to expand and build out that platform. So it's more the success of the business model, the integrated solution rather than anything to do with COVID because all of those trends have been evident as you go back to the numbers, Paul, since 2013, 2014 when we started out on this road.

Our next question is from Elodie Rall from JPMorgan.

So I'll limit one as well. Maybe on pricing, since we haven't discussed that yet. So you've had a good start of the year in the U.S., with pricing up 3%, 4%. I think you said on aggregate cement. Then you mentioned good pricing development in Europe, pretty much everywhere, except, I think, Asia, in Q1. How do we think about pricing for the rest of the year? Do you see more increase to come in EMEA region? And how do we think about that in light of cost inflation, which is ramping up as we all know?