Earnings Call Transcript - CRH Q2 2020

Albert Manifold, CEO

Good morning, everyone. This is Albert Manifold, Chief Executive of CRH Group. Welcome to our conference call and webcast presentation, where we will discuss our 2020 interim results released this morning. Joining me on this call are Senan Murphy, our Group Finance Director; Randy Lake, President of Americas Materials; and Keith Haas, President of Building Products. Also with us today are Frank Heisterkamp, Director of Capital Markets and ESG; and Tom Holmes, Head of Investor Relations. Before we dive into a brief presentation of our results, I want to acknowledge the extraordinary dedication and resilience of our employees during the challenges posed by the COVID-19 pandemic. The last six months have been tough during this unprecedented time as we all adjusted to a global health crisis. The health and safety of our employees, contractors, and customers is our top priority at CRH, and we are making every effort to ensure a safe working environment for them. Over the next 30 minutes or so, Senan and I will present the highlights of the results we published this morning, focusing on the key drivers of our trading performance for the first half of the year and our expectations for the remainder. We will also be happy to answer any questions you may have, and we expect to conclude in about an hour. On Slide 2, I will share some key highlights from our first half performance. The impact of COVID-19 restrictions varied significantly across our markets in the first half of the year. In Western Europe, our operations faced challenges from nationwide shutdowns in several key markets, while construction demand in Eastern Europe and North America proved more resilient. Despite these varying restrictions, we acted quickly and comprehensively to protect our business, especially during the second quarter. I’m pleased to report a solid first half performance for CRH, with EBITDA of $1.6 billion, 2% higher than last year, and a 70 basis points underlying margin improvement, achieved despite a 3% decline in sales. Cash generation remains a crucial focus across our businesses. In the first six months of the year, we generated $1 billion of operating cash flow, a record that strengthens our balance sheet and liquidity position. Senan will provide more details on that shortly. This strong performance supports our continued dividend delivery to shareholders, a commitment that has lasted 50 years. Given the group’s resilient first half results and despite ongoing uncertainties in our markets, I am pleased to announce an interim dividend of $0.22 per share, in line with last year, reflecting the group’s financial strength and our commitment to delivering consistent returns in a constantly changing environment. Before reviewing our divisional trading performance, I will give an overview of how our individual markets evolved in the first half of the year. Slide 4 illustrates our quarterly sales trends so far this year. After a positive start with first quarter like-for-like sales 3% higher, we encountered significant business disruption in the second quarter due to COVID-19 restrictions in many key markets. Consequently, second quarter like-for-like sales fell by 8%. The chart of our monthly like-for-like sales performance on the right side provides more detail of the first half. It clearly illustrates the extent of the declines, particularly in April, when government restrictions heavily impacted our operations. However, it is encouraging to note some improving trends towards the end of the second quarter, as restrictions were eased, with June’s like-for-like sales 3% above the prior year.

Senan Murphy, Group Finance Director

Thank you, Albert, and good morning, everyone. So turning to Slide 13. So Albert has given you a good overview of the trading trends across our markets during the first half of the year as well as an outline of some of the actions taken to protect our profitability and preserve our cash during a very difficult time. But let me now take a moment to guide you through some of the key drivers of that profit and cash performance. As you've heard us talk about the benefits of our financial strength and flexibility many times before, and this year is no different, we came into 2020 with a very healthy balance sheet and a net debt-to-EBITDA ratio of 1.7x. As the global health crisis unfolded and with the financial markets in turmoil, we took steps to bolster our liquidity position and further underpin our investment-grade rating. We took the precautionary decision to draw down on our EUR 3.5 billion revolving credit facility, and we successfully issued EUR 2 billion of bonds at very attractive rates and duration. We also delivered a very strong cash performance. And despite all the challenges we faced during the first half, we generated $1 billion of operating cash inflow. That's a record first half performance for the group, and it further underpins our financial strength. We ended the first half of the year with available cash balances of just over $10 billion, which is sufficient to cover all our maturing debt obligations over the next 5 years. This also provides us with significant optionality for future value creation, whether that's through capital investments or that's through value-accretive acquisitions or cash returns to our shareholders.

Albert Manifold, CEO

Thanks, Senan. Another great cash performance there and a real reflection of the financial strength and discipline of the group. Now before I turn to outlook, I'd like to take a moment to reflect on the strength of our business and how it has enabled us to deliver even in difficult times, something that was clearly demonstrated by our first-half performance. As you can see on Slide 18, we have a wealth of experience across our group. Our management teams have been through periods of uncertainty and business disruption many times before, and we have proven track record performance and delivery through the cycle. We have a clear strategy with a robust and resilient business model, benefiting from a balanced portfolio of businesses across geographies, sectors, and end-use markets. Through the active management of our portfolio in recent years, we've become a simpler and more focused business. And we will continue to refine and reshape our business to deliver superior growth, returns, and cash generation for our shareholders. We are relentlessly focused on continuous business improvement, a deeply embedded practice of making our businesses better through incremental improvement initiatives to structurally improve our margins, cash, and returns year after year. Another core focus for us is the area of sustainability, which is deeply rooted in all aspects of our strategy. We're committed to reducing the impact of construction and construction materials on our environment, and we are proud to be recognized as an industry leader by the major ESG rating agencies. Turning to Slide 19 and our expectations for the remainder of the year. Given the uncertain economic backdrop, we have significantly less visibility than we would normally have at this point of the season. As a result, we're not in the position to provide full-year guidance at this time. However, based on trading trends during July and August to date, I give you an indication of our expectations for each of our businesses for the third quarter. In Americas Materials, with regional variances across our markets and despite positive pricing momentum in our businesses, we expect third quarter like-for-like sales to be slightly down against strong prior year comparatives. In Europe Materials, we're seeing improving trends in our Western European markets in quarter 3. While there are also some signs of improvements in the U.K., we expect the recovery in that market to continue at a slower pace. Our Eastern European businesses continue to hold up well, and there's good pricing discipline across all our markets. Overall, we expect third quarter sales for our Europe Materials businesses to be behind prior year. In our Building Products businesses, we expect continued strong residential RMI demand to be offset by ongoing weaknesses in certain nonresidential segments. As a result, and notwithstanding an element of pull-forward of demand into the first half of the year, we expect third quarter like-for-like sales to be broadly in line with 2019.

Randy Lake, President of Americas Materials

Yes, absolutely. Thank you, Albert. First half of the year, you'll give complete credit to the teams. They took, with really unforeseen circumstances, primarily in the Northeast, the West, a lot of work done in terms of consolidating operating facilities, trying to maximize production at given facilities and, really, from that standpoint, driving a very nice cost position. I think the underlying business that we have going into the first half of the year was really based upon the bidding activity that we had in the end of '19 and the beginning of 2020. We saw those levels roughly similar to what we saw in 2019, but it was really about the execution in the field and that margin management. As you know, our positions, we have good positions commercially across the U.S. Construction activity was deemed essential by the states, in particular, the DOTs. And so we saw states throughout the country take advantage of lower traffic flows to give us access to projects and allow us to do paving work in relatively free zones there. So efficiencies were relatively high during the first half of the year. Good pricing discipline across the business, whether that has to do with our cement business and aggregate and asphalt business. So we saw the teams really focus hard on delivering good value and maximizing the positions that we have.

Keith Haas, President of Building Products

Yes, sure, Albert. If you look at Building Products, I think as you alluded to earlier in the presentation, it was really not a one-size-fits-all direction there. In terms of our business, the positives would have been in the residential and primarily in the residential RMI, both in North America and in Europe, where people were sheltered in place or otherwise looking to improve their homes as it became more of a center of their lives. And we have very strong relationships with major retailers and DIY retailers in North America, which really fueled our growth there. In Architectural Products division, they had a very robust Q2. We had a very robust Q2 in Architectural Products as well. And in Europe, in the economies that remained open that you alluded to, we had strong performance in Poland and Germany especially, which fueled our Architectural Products business in Europe.

Senan Murphy, Group Finance Director

So Gregor, I'll address those questions. First, regarding the cash position, you're right. In the first half of the year, we saw just over $1 billion in cash inflow from our operating activities. Typically, we'd expect an outflow during this period, so we have significantly improved in that area. Instead of experiencing a working capital outflow, we've enhanced our working capital by $800 million compared to last year. This improvement is evident across all our operations, as everyone has been focused on managing inventory levels and ensuring that we stay on top of our receivables. This focus on inventory and working capital management has contributed to the year-on-year improvement of $800 million in our working capital position. While some of this may be due to timing, we believe much of it is a permanent enhancement as we continually strive to improve our working capital and reduce our outstanding amounts.

Albert Manifold, CEO

Thanks, Senan. I mean, just to round that up, Bob, we highlight both of those areas because, clearly, they are areas that are perhaps the more resilient parts of the business this year, but they are relatively flat top line. But what stands out is that against that top line, they've managed to both grow bottom line and significantly grow margin. And that's not as a result of anything that we dreamt of or plotted during the last 6 months. As Keith and Randy both said, it is as a result of the ongoing work that has been part and parcel of the reshaping and repositioning of our businesses and their businesses and also the plans to execute against that strategy, which came to fruition during the first half of this year and will continue on in the periods ahead. Look, ladies and gentlemen, that's all we have time for this morning. I want to thank you for your attention. I hope we've managed to answer all of your questions. But as always, if you have any follow-up questions, please feel free to get in touch with our Investor Relations team. And we look forward to talking to you again in November when we provide you with the trading update for the first 9 months of the year. Thank you again for this morning, and stay safe.