Earnings Call Transcript - CRH Q4 2020

Albert Manifold, CEO

Good morning. My name is Albert Manifold. I am the Chief Executive Officer of CRH. I am talking to you this morning from our office here in Atlanta. And I am joined here this morning by two of my U.S. colleagues, Randy Lake on my right, who is the Head of our Americas Materials Business; and also Keith Haas, who Heads up our Global Building Products Business. We are also joined today by our colleagues in Dublin. Senan Murphy, our CFO joins us there; and he too is joined by Frank Heisterkamp, who’s Director of Capital Markets and ESG; and also Tom Holmes who is Head of Investor Relations. And we are going to take you through our results this morning that we published earlier on. But before I do so, I just want to say a short few words to my colleagues in CRH, the almost 100,000 people that worked through the course of last year, a very challenging and difficult year for us personally and professionally and to thank you all most sincerely for the hard work and dedication and indeed sacrifices you made to help deliver for us which were record results. Of course, we are not through the pandemic yet. We hopefully will see relief come to us during the course of this year as science comes to help us. However, all I can ask is that all of us respect the protocols, try to stay safe, and look after each other until this situation unwinds as best it can. So over the next 40 minutes or so, we are going to go through a presentation, which takes you through the background to the performance of our business in 2020. How we have delivered those numbers? What was behind us and indeed setting out for you some sense of what 2021 looks like even though it is very early on in the year? We would also like to take a little bit of time to explain some of the changes that have been happening in our business over the last 10 years. And see how that has changed the face of CRH and also sets us up for the next stage of growth in our company. As usual at the end, we will have questions and answers a little bit different to before, because we are not in a live room anymore and the current climate of course everything is remote, but we will talk about that later on. So, first and foremost, if I can go on to the first slide and just to set out as I said here, some of the key messages that we are talking with regard to CRH on slide two. A very challenging year for us across CRH. What we have seen is a slowdown in our businesses, not necessarily because of a slowdown in volumes, but what’s actually happened is we have seen that significant restrictions in our life and in our business and our ability to get to work principally in Western Europe. Of course, the world lockdowns for several weeks and indeed a couple of months in some of our main markets. We also saw it in Central and Eastern Europe as well. Although, not as much, but it was quite resilient. And here in North America, particularly in the United States, where construction was deemed to be a necessary activity. It’s still slowdown activity levels and it meant that our topline revenues were back by about 2%, but only 2%. But of course we worked within our businesses this year to try and deliver the best results we possibly could. And in 2020, I am happy to report yet again it was another year of advancements both in profits, margins, and cash, where all three were ahead again against a backdrop of a declining topline, which was a really strong and robust performance. Of course higher profitability for us converts into higher cash, and that strong cash is utilized and you can see it in the strength of our balance sheet. Our balance sheet now is at the strongest that’s ever been. Net debt to EBITDA it’s at 1.3 times, and that sets us up very well particularly so when measured up against the significant pipeline of opportunities we see going out ahead of us in the years ahead. But we will talk more about that in the presentation. Also that cash being put to good use for our shareholders, returning cash to our shareholders. We have announced this morning an increase in our full-year dividend to $0.115, a 25% increase in dividend, recognizing not only the strength of our cash flow last year, but also ultimately evidence to the confidence we feel about the repeatability of the performance in the years ahead and the strength of how we feel our cash in a business and the cash generation of our business will support all aspects of our cash allocation as we go forward and we will talk about that during the course of the presentation. Also we have announced a continuation of our buyback program, a recommencement I should say, where we are announcing our ambition to spend up to about $300 million buying back our stock between now and the end of June. All of the performance this year has been a result of the hard work during 2020. But of course, we have been working for a number of years in the reshaping and repositioning of our businesses. That also has helped deliver and we are going to talk about that. We have also been working on the continuous business improvement within our business. That has been a huge part of how we deliver within our businesses and nudging on margins and performance on a year-to-year basis. But also there’s been some crucial changes in terms of the position of our businesses. We used to just produce base materials. We have now evolved our business over the last decade to be one that focuses very much on integrated building solutions providing better options and solutions for our customers and I want to expand upon that at the back end of the presentation. So for the moment I am going to pass you back to Senan in Dublin. He is going to take you through some of the key highlights of our financial performance in 2020. Senan?

Senan Murphy, CFO

Thanks, Albert. So I am turning now to slide three, and as you can see, set out on this slide we have set our financial highlights from the results announcement this morning. I guess in summary for me it’s been a very robust performance against what has been a very challenging trading environment over the last 12 months. You can see that we are reporting a sales number of $27.6 billion, which is a decline of 2% over last year and that really reflects the negative impact that COVID has had on activity levels in many of our markets but particularly during the second quarter. Despite that decline in topline, we are reporting record profits today, $4.6 billion of EBITA, which is a 5% increase over what was already a very strong performance in 2019. That earning performance really is a testament to the real focus and quick attention to preserving our profits over the course of the last 12 months. That strong profit performance shows up as well in our margin, another year of margin improvement, 120 basis points of organic growth in our margins over the last 12 months. That’s strong profit performance also helps us to significantly increase our earnings per share. We have been almost 20% increase on a pre-impairment basis over last year. I am pleased to say that we have had another very strong year of cash generation, $3.9 billion of cash from our operations all across the group and again we will talk about that in more detail later. That strong cash generation has further strengthened our capability within our balance sheet. We have now got a year-end position where the net-debt-to-EBITDA ratio is at 1.3 times. That leverage level is the lowest that we have seen certainly within the last decade across the organization and it gives us capacity to be able to create more value as we go forward. At this point, I’d like to hand back over to Randy who is going to share with you a backdrop on the North American markets, maybe he also updates you on the trading performance in our Materials business in North America. Keith will pick up and update you on the trading performance in our Building Products business and Albert will then update on Europe.

Randy Lake, Head of Americas Materials Business

Thanks, Senan. If you turn to slide five. I guess, if I had to use one word to describe construction demand in 2020, I’d say resilient. Construction activity in the northeastern and northwestern portion of the United States, along with Canada were the regions that were primarily impacted by the pandemic restrictions that were put in place, particularly in the first half of the year. Our businesses in the Central, Western and Southern part of the United States were far less affected. As you know about 50% of our Materials business is exposed to infrastructure and we are pleased with the momentum we continue to see there. Although, activity levels were slightly below 2019 that funding is underpinned by a strong bipartisan support at the federal, state and local level. Moving to residential construction, new build construction was robust in the U.S. Demand for new housing is really at multiyear high, supported by low interest rates, low inventory levels and a continuation of the migration pattern we have seen to the western and southern portions of the U.S. Remodeling activity was strong as well as we saw households and individuals redirect discretionary income to the improvement of their homes, and more importantly, for us improvement and building out outdoor living spaces. And really not a surprise to anybody that the non-res market was the particular market that was most heavily impacted. Lower levels of activity in the retail, office and hospitality space were partially offset by good demand in warehouses, data centers, health and communications. And despite that lower level of activity and I would call it really a benign input cost environment we saw a good commercial discipline across all of our markets and product lines. And now turning to slide six to talk a little bit about America’s Materials performance, really happy with and proud of the work the team did in 2020. Our production volumes in aggregate asphalt and ready-mixed concrete were below 2019 levels, primarily due to the restrictions I talked about on slide five. But our cement volumes remained intact and strong, roughly in line with 2019 levels, really driven by an exceptional demand environment out west offset a bit by lower levels of activity in Canada. And again despite those lower levels of activities, our teams did a tremendous job around commercial discipline and that translated into margin improvement in each of the lines of business across our platform. But for me when I look at 2020 and stand back what really to me highlights the great performance has been the resilience of our business model and our operational agility. The ability for us to leverage our scale and our vertically integrated business model to adapt to the volatile demand levels that we saw on a micro market basis and then to be able to flex our cost base accordingly, that’s really what delivered the results you see today, a 10% improvement in underlying EBITDA versus 2019 levels and a strong margin improvement of 260 basis points. Now certainly part of that margin improvement was a result of lower energy environment. But really the majority of those gains just came from better execution from our teams in the markets that we serve. And with that, I will turn the presentation over to Keith and take you through Building Products.

Keith Haas, Head of Global Building Products

Thanks, Randy. And looking now at slide seven, it sets out the performance of Building Products last year 2020. It was certainly a difficult and challenging year for us. We do business in 15 different countries around the world and that’s kind of 15 different ways to handle the crisis. But against that backdrop our teams delivered continued progress in our business by having a long-term focus on continuous business improvement, as well as developing integrated products and solutions for our customers. We were able to grow our sales, grow our profits and improve our margins last year despite all the challenges. I mean when you look inside our portfolio businesses there were ups and downs. Our building Envelope business, which is primarily North America and Europe, and primarily focused on non-residential, had its challenges and activity levels did decline in that business last year. We had good cost controls to preserve our profitability though. In our Infrastructure Products business we saw stable demand, and against that stable backdrop we were able to continue to grow our profits and our margins in North America and indeed in Europe. The biggest business in our division is Architectural Products and they had a record performance in 2020. That’s because of the focus that they have on residential markets, and especially RMI within residential. And starting around the beginning of Q2 we saw a significant increase in demand for residential RMI products, especially outdoor living products which are the core of what we do in our Architectural Products business, and that carried on through the year. So against that positive demand backdrop and our focus on operating efficiency and serving our customers with passion, we were able to deliver record sales, record profits and record margins in that business last year. But it’s not just about last year. There’s been a significant amount of change and transformation improvement in Building Products over the last number of years. We have got a simpler, more focused portfolio of businesses. We have demonstrated consistent growth and consistent improvement in our margins and our returns. And we are now at 25% of Group EBITDA. It’s a very strong foundation from which CRH can build for in the future. Albert, over to you.

Albert Manifold, CEO

And thanks guys. Look, really strong performance by both our businesses in North America, really great delivery which underpinned the delivery for CRH in 2020. If I can move on to the next slide just to give you a sense of the backdrop that we saw in our European markets. Europe was much more impacted by the pandemic than it was here in the United States, particularly Western Europe and in our big markets of Ireland, U.K. and France very significant closures and restrictions on activity levels for several months in some cases. And in fact, it was well into the second half of the year, excuse me, before we saw activity levels coming back to where they should be. And Central and Eastern Europe was a little bit more resilient. It was back upon normalized levels, but at least it was a little bit more resilient. I mean really good delivery in our markets there. Of course we saw in the second half of the year which we will talk about later on, we saw a rebound and that was what brought the strength particularly in Europe in the second half of the year was the fact there was so much catch-up work from the first half of the year, and delighted to see again for the third year in a row strong price increase coming through our major businesses in Europe. I’d like to specifically turn to Europe Materials now and look at the performance of that division on the next slide. Again, a very solid performance in what was an extremely challenging environment. I mean almost two or three cycles in one year trying to manage different businesses in different ways was very challenging. But I have to say, we did a good job and I was delighted to see in that very busy second half of the year both profits and margins were ahead in the second half of the year across Europe. As I said, the third consecutive year of price increases, particularly coming through our big cement businesses. We had a very strong performance in Poland and Romania on the basis of that. And I think really what we are seeing there is prices getting back to where they should be. Prices in Europe dislocated from the rest of the world sometime around 2010, 2012 and the global financial crisis and significant investments have been made by all the major cement producers across Europe and we will continue to be made in a changing regulatory environment and these investments need to be paid back and therefore we need to get proper pricing or more normalized pricing and I think we will continue that in the years ahead. Very happy to see although it doesn’t show in the face of the profit and loss account you are looking at there, the progress and work we have done on the margin. Although, we took a step back a margin in Europe this year, really it was as a result of the pandemic. And in fact, the worst part of our business in terms of the pandemic closures was the United Kingdom, but we were pretty much close to five months to six months. And if I’d taken out the U.K. out of the numbers that you can see our margin would have progressed by about 100 basis points, which testifies to the resilience of our business across Europe. Look, that’s a very brief overview of our business and it kind of brings you to a conclusion with regard to what was behind the trading numbers that were actually there. I think you know a really good robust performance in a very, very challenging environment something we have never seen before and a testament to the strength not only of the business model that we have, but the years of work that we have done to get us to this particular place and we have a lot more work to do. So what I’d like now to do is to hand back the Senan in Dublin who will take you through the financial performance that was delivered by those operations.

Senan Murphy, CFO

So turning now to slide 11, you can see here the components of our profit performance over the last 12 months. The highlight on this slide for me really is the $230 million of organic growth, a 5% increase on last year in terms of our performance there. And that’s a tremendous performance across all of our businesses particularly when you take into account the fact that our topline has actually reduced by over $500 million in the same period. I think that strong organic growth is a testament to the commitment of our people, it’s also obviously a result of the strength and resilience of our business model and it also reflects the ongoing relentless focus on continuous business improvement across all of our operations around the Group. We can see here that the contribution from acquisitions net of divestments over the last 12 months is an incremental $32 million of profit. By CRH standards we have had a very quiet year on the acquisition front. We made a conscious decision during the course of the year to step back on M&A activity given the lack of clarity in many of our markets. Currency translation is a small tailwind this year. Our decision to change our reporting currency earlier in the year has had a positive result in reducing the volatility and the variation associations with translating our performance into profits. We have had one-off costs during the year associated with COVID, mostly related to restructuring activities that were required in some of our markets as a result of the impact of the pandemic on our business.

Frank Heisterkamp, Director of Capital Markets and ESG

Thank you, Albert. Moving to the Q&A part of our presentation today and as you will have heard from the webcast moderator, because we are in two locations on two different continents, we can’t take your questions over the phone today. Instead, we would ask you to please submit them by e-mail over the web link facility that we have provided. Don’t forget to mention your name and the institution that you represent. And Tom and I will gather your questions here and present them to management. Experience says that they usually have more questions than our time schedule will allow us to deal with here live. So please be assured, should any of your questions not be addressed today directly, the IR team will follow up with you individually afterwards. So with that, maybe Tom as we have already received some early questions this morning, maybe you can start the first question for the team.

Tom Holmes, Head of Investor Relations

Thank you, Frank. Albert, the first two questions come from Robert Gardiner in Davy. The first question is: can you please provide an update on your Americas Materials backlog and outlook? And are you seeing any infrastructure project delays or cancellations? The second question is: how should we think about the split of capital allocation between the shareholder returns and acquisitions? Can we assume the buyback will continue beyond the initial tranche or is it dependent on acquisition opportunities that come your way?

Albert Manifold, CEO

Thanks, Tom. Two specific questions there. I will go lastly to Randy to ask him about his views on terms of the materials market here with regard to backlog. Look it’s very early in the season yet. So let’s not just to call out again. But Randy will take it through his views on that. But firstly what I might do as is our Senan to have his comments if I can just pass my own comment before I pass it through to Senan. I think you only need to look back at CRH over the last two years to three years to four years to see how we have allocated capital and how we have successfully allocated capital to drive the performance of our business and the returns and value for our shareholders. And that has been a mixture of strong mixture of M&A, careful buybacks within our businesses and also increasing dividends. I think that’s what we are going to see and expect going forward particularly as we start to enter a growth cycle. But Senate I’d like to maybe that’s what we have done over the last three years, maybe your views in terms of how you see the next couple of years rolling out.

Senan Murphy, CFO

Sure. Yeah. So, Bob, how are you? You probably won’t be surprised with this answer because I know you have asked these questions before and maybe the good news is the answer isn’t changing. I think when we look at capital allocation and we think about our priorities, the first place we always start is really investing in the organic growth in our business, because that’s the one that gives us the highest returns and probably the lowest risk attached to us in terms of where we go. So that’s clearly a part. As you know, we spent $1 billion last year in terms of organic growth. That was about 75% depreciation. That’s lower than you would normally expect. And what I’d be guiding is that, as you look into 2021 and beyond that would be more in line with appreciation. So running at about 100% depreciation is what you should expect to see in terms of organic investment. The second area clearly is dividend. We continue to have a progressive mindset to dividend. I mean we have got 37 years of either maintaining or progressing dividends. This year again is another year where we are showing progressive dividend coming through. We have a 20% growth in earnings per share and we have got a 25% increase in dividend. So that is an ongoing priority for us in terms of making sure we maintain that at healthy levels with healthy cover obviously. The buyback program, it’s good to be relaunching that at this point in time. For me what that does is it shows discipline that when we have got excess cash that we are actually able to deploy that in a positive way and buy back shares is an effectively use an efficient way of giving back money to our shareholders. And then clearly there is obviously capacity to be able to invest that into the acquisition pipeline be that bolt-on deals as we have done in the past and we will continue to do in the future and you have heard this morning a couple of mentions of the fact that that pipeline looks healthy going into ‘21, but also in terms of medium opportunities when they come along. And hopefully going forward maybe it’s a challenge that the team faced that we will continue to be really disciplined and diligent in terms of how we allocate capital just like we have done over the last decade.

Albert Manifold, CEO

Thanks very much Senan and what I can do is maybe pass over to Randy the second part or the other part of the question was about the backlog and activity levels in 2021 here in our Materials business. Randy?

Randy Lake, Head of Americas Materials Business

Well, as you said, Albert, it’s early days. I guess I look at two things in particular kind of overall bid activity and then actually our backlog. So I’d say overall bid activity across North America is roughly at the same pace and same quantum that we saw around this time of the year and our backlogs we are getting our equivalent shares roughly in line with last year so pretty stable. I think one of the things maybe a little bit of color on that is that we are seeing more multiyear projects as part of that backlog, which would give you a sense in terms of the confidence that states have in particular because the Fast Act has been extended to September and states, I think, as well as the federal government understand the underlying need for an improvement and expansion of infrastructure in general. You would be well aware of what’s happened in the U.S. now in terms of some of the stimulus activities taking place and the Senate is actually debating that today, maybe a bit that falls out of that package for infrastructure. But I think, more importantly, is that once that’s done all eyes and attention, because it is a bipartisan issue, will then shift to what would be the new version of the Fast Act. And so, I would expect progress to exist there. But as far as today Bob everything as that we see is roughly stable and flat to where we were last year.

Albert Manifold, CEO

Thanks very much, Randy. Thanks, Sam. And back to you and Dillon for the next question.

Tom Holmes, Head of Investor Relations

Albert, The next question comes from Gregor Kuglitsch in UBS. First question is, can you improve underlying margins in 2021 and what are your expectations for cost inflation and pricing in your main markets that underpin your outlook? And the second question is regarding M&A, what kind of transactions are in your M&A pipeline and is there more to be done on the divestment front for CRH?

Albert Manifold, CEO

Okay. Hi. Hi, Gregor. Three questions there. Maybe just first in myself on margins and I’d ask my colleagues Randy and Keith in particular can talk about pricing here in North America. I’ll talk about pricing within Europe and indeed I also come back and talk about M&A as well. Look, of course, we can improve our margins. I have just talked about continuous business improvement that continues and that business improvement should translate some higher margins. And I would never seek to cap the margins with the returns are cash as rich, why would we. We always have an ambition to grow. So the answer to that question is, yes, we should continue to grow as we see so much more to be done within our business and we will continue to work on that. When it comes to the individual pricing, maybe I might turn to my two colleagues first. Maybe Keith you might just talk about pricing in terms of what happens or what you see happening here in North America in terms of residential and non-residential and Randy you might look at the infrastructure and I will take Europe at the end of that.

Keith Haas, Head of Global Building Products

The pricing environment in 2020 was favorable, with improvements seen across nearly all our businesses. The same factors are influencing both the residential and non-residential markets in North America. Demand is strong in the residential sector, as Randy mentioned earlier. Although we face some challenges in the non-residential sector, activity levels remain solid. Overall, as I discuss with our teams, we have positive expectations for pricing and the recovery of any costs we may encounter in 2021. Randy?

Randy Lake, Head of Americas Materials Business

Yeah. In terms of pricing in the, call it, in the Materials space, I would expect kind of a continuation of what we saw last year really, I would say, strong discipline in all lines of business in all markets. I’d say there’s a general recognition in particular to aggregate pricing of the finite availability of those resources and the value then that’s placed for that. You can even look back to the financial crisis where we saw prices escalate in aggregates. And so my expectation is that we would continue to see that as we progressed through this year, same for our cement business as well and part of that is you are going to see an improvement on underlying demand just because of the pandemic restrictions that won’t be in place as we get into 2021. I think when it comes to other lines of business, I have said this before, kind of whether it’s in asphalt line of business or the ready-mixed line business line of business, it’s about margin management, it’s about managing those input costs and our teams have been very effective in executing our commercial strategy there and I would expect that to continue in 2021.

Albert Manifold, CEO

Thank you, everyone. With a fresh perspective on Europe, I'd like to highlight our pricing advantage discussed earlier. We are observing a persistent recovery in pricing that we anticipate will extend over several years. If we struggle to maintain pricing growth in a year like 2020, that will emphasize its critical nature. This trend is likely to influence the entire supply chain, particularly with expected seamless growth in Europe and the European Union, supported by a $750 million relief package aimed at revitalizing the economy. This increase in activity will likely bolster pricing across Europe moving forward. Therefore, I maintain an optimistic outlook for pricing in both the Americas and Europe in the years to come. Regarding mergers and acquisitions, we don't plan any drastic changes, but rather a steady approach. Our daily acquisitions at CRH are aimed at growth since about 75% of our North American industry comprises smaller, independent businesses. Our strategy involves integrating these local companies into our network to leverage economies of scale in procurement and operations, generating value in the process. Additionally, we will pursue opportunities to expand our platforms. A prime example is the Ash Grove acquisition nearly three years ago, a substantial $3.5 billion investment that significantly enhanced our cement presence in North America. We expect to make further strategic acquisitions over the next decade, similar to the C.R. Lawrence transaction within our Products division, as well as the Lafarge and Holcim initiatives. We envision continuing the trend of platform deals, alongside a focus on transforming our base materials into value-added products that offer solutions for our customers. Providing these services will be vital as we adapt to the evolving marketplace. While our core strategy remains consistent, we will increasingly aim to deliver more solutions alongside our existing businesses, which served us well in 2020. I hope that clarifies your question, Gregor. Back to you in Dublin, Frank.

Frank Heisterkamp, Director of Capital Markets and ESG

Thank you, Albert. The next two questions come from Arnaud Lehmann from Bank of America. First question is: what does the exposure of your Building Products division to the U.S. residential market and could it support strong top-line growth again this year? Second question is: what were the key drivers of the performance of your Americas Materials division in the second half of 2020 and how sustainable is that in 2021 in the context of inflationary cost pressures?

Albert Manifold, CEO

Okay. Well, I am the right man in the right place sandwiched by the two oracles of knowledge on these two topics. So first of all, with regard to your comment and Building Products in the residential market, Keith obviously over to you?

Keith Haas, Head of Global Building Products

Yeah. Thanks Arnaud for the question. Look, U.S. residential for our Building Products division, our residential in total is about 45% of our demand and the U.S. is obviously our biggest market. So it’s a significant component of what we do in Building Products is driven by the residential markets here in the U.S. And as noted earlier, they are robust. I think there’s about a 1.3 million starts last year and I know I think we would see kind of stable demand for that going forward and that will support our business. Anything around new residential is good for our business. But what I think it’s important for CRH is, new residential I kind of think about as like the icing on the cake, because for every new home that’s built in the U.S., there’s 100 homes that are already here and our business is really driven by the maintenance and improvement of the existing housing stock as incomes go up, as neighborhoods develop, as communities develop and they want nicer homes to live in that feeds the demand in our business. So a strong residential market could lead to growth for us in 2021. But I think the important thing is the strong foundation that we have within the residential space and that constant year-over-year maintenance and improvement of the housing stock with the big partners that Albert talked about in the retail space and then in the professional space.

Albert Manifold, CEO

Thanks, Keith. Very clear and again very significant as Keith as the 100 homes currently on the ground here as for every new home that builds. And they need to be maintained and money needs to be spent on them, not only the houses but in the backyards and all of that. And again the increasing focus we have all in mind is paying dividends for us here in business. Randy, we had a strong second-half performance in our Materials business in North America and in particular quarter four, maybe it might just interpret what that means for us in terms of rolling forward as well.

Randy Lake, Head of Americas Materials Business

I’d mention that in addition to the residential comment, those 100 homes might also require a new asphalt driveway. To your point, we had a successful fourth quarter. There are two key aspects to highlight. First, having been in this industry for a long time, I've learned that the difference between a really good year and a great year can often be influenced by the weather in the fourth quarter. This year, we experienced particularly mild conditions, which allowed us to continue operations right up to the holidays, which was fantastic. Additionally, as I mentioned earlier, the pandemic restrictions in place, especially in the Northeast, impacted our operations. We've discussed the significant presence we maintain in both the Northeast and Northwestern United States, as well as Canada. Much of our work had been delayed until the middle of the second quarter, leading to a buildup of demand. We were able to address that demand and sustain our efforts throughout the remainder of 2020. Looking ahead to this year, I believe we will maintain our momentum, as supported by infrastructure initiatives, given the bipartisan backing from federal, state, and local levels. We are witnessing engagement from legislative officials who are actively developing plans to sustain this momentum, along with other sectors of the economy, including residential and remodeling. While the momentum may not reach the peak levels we observed in the fourth quarter, we expect to continue seeing underlying demand.

Albert Manifold, CEO

Thanks Randy. And in fact, maybe Arnaud, I can add a further point from a European perspective. I mean with the strong second half in Europe. But again remember the significant restrictions we had in the first half of the year, meant as Randy indicated, there was catch-up demand within that. So you need to interpret what the second half there really happened. Of course, the momentum is good, but it was particularly strong because people couldn’t get to work in the first half of the year particularly in some of the most restrictive markets. Back to you in Dublin, Frank.

Frank Heisterkamp, Director of Capital Markets and ESG

Thank you, Albert. The next question comes from Paul Roger from Exane. And what will the cost headwind be this year if energy prices stay where they are and will pricing be sufficient in the business to offset these pressures?

Albert Manifold, CEO

Okay. Well, thank you, Paul. Two questions there. Obviously, related to margin and a continuation of margin. Senan, I might turn to you in terms of your own interpretation of how we would think about cost headwinds, of course, our business is this year. And then come back here and again we will talk about pricing ambitions for this current year again.

Senan Murphy, CFO

Sure. Yeah. Paul, I mean, when you look at our cost headwinds. I think a lot of them you know well in terms of our labor costs, our materials costs, et cetera. I think we usually end up having this conversation about energy costs. We have obviously had a good year in terms of energy costs as Randy mentioned earlier on particularly in America’s Materials business where we saw a decline in our average energy costs through the course of 2020 and that obviously has helped us. I think as we look into 2021. I think the main thing I would call out when I think about energy costs or headwinds in that space, is the conversation we had earlier about margin and our focus on margin. And our ability and our desire to be able to make sure that any inflation that we are looking at in terms of input costs that we are looking to recover that to our price and still be able to make positive momentum on margin. So that’s the way I think we talk about that’s certainly the way we think about it. And I think as we look ahead to 2021, I think we are thinking about the margin we can do they were as opposed to any one line item of cost.

Albert Manifold, CEO

Yeah. Thanks Senan. Maybe if I can just paraphrase what my colleagues have been saying this morning with regard to pricing here in North America and I can talk about Europe. I mean pricing went ahead in our two major markets last year in what was a very challenged year and the momentum continues to be good. Our ambitions are strong and we would anticipate a broadly speaking a positive year for pricing. It’s early stages, yes. Things can go wrong but broadly speaking we would anticipate a good pricing environment both in Europe and indeed North America for 2021. Back to you, Frank.

Frank Heisterkamp, Director of Capital Markets and ESG

Thank you, Albert. The next question is from Elodie Rall in JPMorgan. Question is can you please update us on the progress against your margin improvement plan. How much of this has been delivered to date and are you confident of further delivery in 2021?

Albert Manifold, CEO

Hi, Elodie. As mentioned earlier, we are not limiting our ambitions regarding margins. We will see how things develop as we work to improve our business every day. Over the past three years, we have made significant progress on our margins. We remain attentive to the external factors affecting us, particularly in Europe. However, we have indicated that you can expect CRH to deliver improved profitability, margins, returns, and cash flow year-on-year. The extent of our progress will depend on various factors, but we will continue to grow and have made significant strides toward achieving an increase of 300 basis points. Let's see how 2021 unfolds in terms of the macroeconomic environment and costs. Overall, I must say we have demonstrated good progress this year, and I expect we will see further margin improvement in 2021. Back to you, Frank.

Frank Heisterkamp, Director of Capital Markets and ESG

All right. The next question is from Will Jones in Redburn regarding the U.K. In the past you have given a sense of the U.K. performance versus the rest of Europe. Could you update us on this for 2020 please and how much of the U.K.’s lost ground you think could be recovered in 2021?

Albert Manifold, CEO

The U.K. faced significant challenges in 2020 due to the severe impact of the pandemic, which resulted in extensive shutdowns for several months. It wasn't until the latter half of the year that we began to see a return to more normal levels of activity, affecting all sectors of our industry. Therefore, it's not accurate to evaluate 2020 as a reflection of long-term trends. Looking at the different segments of our markets—residential, non-residential, and infrastructure—I'm pleased to report that major infrastructure projects are finally underway. For instance, the high-speed two project in the southeast is gaining momentum, although some other projects are progressing more slowly and at reduced levels. On the residential side, last year was challenging, as indicated by the house builders' reports, but they expect growth in 2021, and we align with that view. There is considerable pent-up demand and enthusiasm in the market, bolstered by government initiatives like reduced stamp duty. We anticipate that residential activity will continue robustly, at least returning to pre-pandemic levels in 2021 and potentially 2022. Non-residential, however, raises more concerns due to uncertainties. While areas like warehousing, digital, and logistics have thrived in our online-driven economy, retail and office spaces have faced severe setbacks due to COVID and perhaps Brexit. This is particularly evident in London, where new projects are slow to commence, vacancy rates are high, and rental prices are declining. The shift away from high-spec non-residential construction, which has previously been very lucrative for us, is now being substituted with lower-margin infrastructure work. While we are grateful for the volume of work available, the specifications required for infrastructure differ significantly from high-quality developments in London. While we expect improvement in the U.K. in 2021 following the challenges of last year, the situation will depend on the composition of projects throughout the year, and we will keep you updated as developments unfold.

Frank Heisterkamp, Director of Capital Markets and ESG

Thank you. I understand the time constraints for today's session. Tom, could you please present the last two questions to the team? We can follow up with the Investor Relations team later regarding any other questions that have been submitted individually. Please go ahead, Tom.

Tom Holmes, Head of Investor Relations

Yeah. A lot of questions here coming through. I think a lot of them have been have been addressed and covered already today. Maybe just two final ones, as Frank said, if we can squeeze them in one here. Could you please provide an update on the trends you are seeing in the U.S. non-residential market and the outlook there for 2021? And another, could you please elaborate on the benefits of your integrated business model and have this strategy particularly within your Products business given you an advantage in the area of sustainability?

Albert Manifold, CEO

Okay. Two questions there. Two good questions. Maybe Keith might ask you to talk about the non-residential market here in the U.S. trends and come back to me at the very end to talk about the benefits receiver of integrated building solutions in terms of sustainability.

Keith Haas, Head of Global Building Products

Yeah. Certainly Albert. As we talked about earlier, the non-res market is the one that’s most challenged coming out of the COVID health crisis. And it’s understandable, right, offices, retail, things like that hospitality are kind of the crux of where the impacts of the virus are. So there are challenges and there will continue to be challenges in that space. But I think as Albert alluded to earlier, even in respect to the U.K. non-residential isn’t just about those types of construction. It’s also around e-commerce, telecommunications, data centers, warehouses, logistics, which are thriving at the moment, as the economy changes construction has to change to where the world is going. Look kind of in the short term, non-residential in the U.S., I think, 2021 will continue to be a challenging year. I think our view broadly is that it’s probably going to be the bottom of whatever down cycle this is in non-residential and that from 2022 onward we will see growth. But it has to be and it will be an important part of our business going forward. It’s driven, I think, as we talked about earlier by just basic fundamentals of business GDP growth, employment growth and the long-term looks very good for this and we will adapt and change as we need to and position our businesses to where that growth is.

Albert Manifold, CEO

Keith discussed integrated building solutions, emphasizing that this area is fundamentally about sustainability. He highlighted that we cannot keep constructing in the same way we have been; it is not sustainable given the increasing population. Change is necessary. CRH stands out as the most diverse and largest building materials company globally, placing it in a unique position to reassess and adapt base materials, directly benefiting customers and complying with regulations. CRH serves as a vital link between manufacturers and customers. As we develop products, services, and integrated solutions, sustainability becomes paramount. The aim is not only to generate financial value but also to create societal value in all our efforts. This focus on integrated building solutions is central to CRH's growth strategy moving forward, and there is optimism about the prospects in a climate-focused market for the company in the coming years. Look, I am very conscious. We have come to the end of our time. I am sorry we had such a short time with regards to the Q&A and it was a little bit different to other times, but that’s the world we live in. Every day is a little bit different. And I want to thank you for your time this morning and I thank you for your attention and thank you for those who sent in questions. I hope you found it informative. And again, if there are some questions that we didn’t get to, of course, our IR team or indeed ourselves, we will be on the road talking to you face-to-face and happy to deal with those questions if and when we get the opportunity to do so. We are next going to talk to you when we update the markets in April 28th with regard to our trading statement and we will update you in terms of the performance of our business for the first quarter and indeed how we see the first half of the year evolving. So for the moment, I want to thank you for your attention, and most of all, I want you all to stay safe, mind yourselves and we look forward to seeing you at the end of April. Thank you and have a good day.