It's payback time for CRH investors who stuck with building materials giant through a 2009 share sale, global economic downturn and another tap on the shoulder two years ago to help fund the company's largest acquisition.
Starting off with a €6.6 billion of net debt at the beginning of last year, after spending €8 billion on deals in 2015, CRH's chief executive Albert Manifold and his team managed to reduce the level to €5.3 billion by year-end.
The reduction in its debt from three times earnings before interest, tax, depreciation and amortisation (ebitda) to 1.7 was even more impressive. It was driven by €2.3 billion of pure cash generation – as the group absorbed the €6.5 billion purchase of businesses from European rivals Lafarge and Holcim ahead of their merger in 2015 – keeping a rein on investment, at €800 million, and funding acquisitions from proceeds of selling unwanted assets.
Small hike
CRH also managed to increase its dividend by 4 per cent to 65 cent per share. It’s a small hike, for sure, but it ends a period of seven years of stagnation on payouts and signalled a return to a period of year-on-year dividend growth. It had previously operated an unbroken progressive payout policy between 1984 and 2009.
CRH’s €1.3 billion share sale in March 2009 may not have been used for the promised acquisition spree at the time, but it cushioned the group’s balance sheet at a time when rivals were in trouble. Having been built through decades of small bolt-on purchases, it managed to carry out its two largest deals in 2015 – the Lafarge-Holcim transaction and $1.3 billion (€1.2 billion) acquisition of US glazing products company CR Laurence.
CRH has now proven that it can digest the big deals, with cost savings resulting from the recent purchases running ahead of schedule. It has also sold €2 billion of unwanted and low-performing businesses over the past two years, hitting the upper end of a target within 18 months.
Manifold invoked Charles Darwin’s survival-of-the-fittest theory on a call with reporters Wednesday morning when asked if the group was at the end of its divestments. When it comes to investment returns and margins, you don’t want to be a regional CRH manager looking to hold onto an asset whose performance is lagging among the bottom 20 per cent of CRH, the chief executive said.
“There’s no divine right to be part of the group of CRH,” said Manifold. “You need to justify your existence.”
And after a pause last year, in which the company’s €213 million of acquisitions was outdone by €283 million of disposals, CRH is back on the hunt again. It has spent €500 million on deals so far this year in North America, while Germany was the centre of €400 million of European asset sales. Manifold maintains the group has capacity to spend between €2 billion and €3 billion on transactions over the next year and a half.
Leveraged
“It’s no secret the sector is still quite heavily indebted and heavily leveraged, so it is still a buyers’ market,” Manifold said, on a separate call with analysts. “I have a pile of acquisition proposals . . . on my desk. The great thing is we can be selective.”
Meanwhile, CRH sought to play down the impact of US president Donald Trump's planned $1 trillion of infrastructure spend, which he asked Congress to back as he addressed both the House of Representatives and the Senate for the first time in a joint session on Tuesday evening. Trump offered little by way of detail on the plan in the keenly-awaited speech.
However, the $300 billion-plus Fast Act highway spending programme, which became law in late 2015, as well as initiatives by various states across the US voted on in November, is enough to be getting on with, according to the group. CRH’s Atlanta-based Oldcastle unit is, after all, the largest building materials company in North America, with 55 per cent of its business exposed to infrastructure.
If there’s anything that can put a break on infrastructure spending in the US, it’s not ambition; it will be the availability and cost of labour, according to CRH.
