This week, the building giant announced its first fall in profits in 15 years, but it had already started to cut costs last year and is now investing in China and India, writes Barry O'Halloran
THIS WEEK, for the first time in 15 years, building materials giant and leading Irish Stock Exchange company, CRH, announced a fall in first-half profits. At the end of June, profit before tax was down €60 million or 10 per cent at €606 million. The weak dollar was to blame for one-third of this, but the rest was down to slowing demand and tougher trading conditions.
And it's going to get tougher. The group said it expects profits for 2008 to be down 10 per cent, more than it predicted in a trading statement released early last month.
Yesterday, Davy analyst, Barry Dixon, predicted that CRH would earn €2.44 per share this year, 2 per cent lower than the stockbroking firm's previous forecast.
It's not hard to work out why. CRH depends for 84 per cent of its sales on the US and European building industries, neither of which is in rude health right now.
In the US, the construction recession sparked by the credit crisis shows no real signs of going away. Europe is just beginning to show the effects of the recent decline in the euro zone.
Outgoing CRH chief executive, Liam O'Mahony, said that as the first half drew to a close in June, activity in key European markets was beginning to slow.
Dixon cites the decline in both markets as the reason for his re-evaluation of the group's earning prospects.
"In the Americas materials division, higher prices have resulted in a decline in volumes which, given the relatively high fixed cost base, has resulted in a deterioration in margin," he says in a note issued yesterday.
"This, combined with concerns regarding the health of state highway budgets, has caused us to be more cautious on the outlook for 2009. In European products, the clay products and insulation businesses are expected to remain weak, while there are increasing signs of weakness in concrete products in core Europe."
Operating profits in CRH's European products division were down 12 per cent at €158 million in the first half. The underlying fall was 22 per cent, before taking contributions from acquisitions made this year and in 2007 into account. This helped to ease the pain in this business.
The picture is bleaker in the Americas materials operation, which, with a first-half turnover of €1.9 billion, accounted for around 42 per cent of its US sales and around €1 in every €5 of all revenues.
Operating profit in this division halved to €31 million, while sales of key elements of it, such as asphalt and quarried stone (known as aggregates) were down sharply.
Alongside this, the group is also feeling the effects of rising energy and raw material costs. The manufacturing of building products such as cement and concrete uses huge amounts of energy.
Another important CRH product, asphalt, requires bitumen, a by-product of oil, and it was consequently more expensive this year. The group passed some of these costs on, which hit sales.
O'Mahony, and his successor designate, finance director Myles Lee, were reasonably philosophical about all of this when they announced the group's interim results this week.
O'Mahony emphasised that CRH has enjoyed a long period of earnings growth during which shareholders benefited from increasing dividends.
He added that when he steps down on December 31st, he would have liked to have presided over another year of growth, but conceded that that now seems very unlikely. "That's life," he said.
The group is not shrugging its shoulders though. Since 2007, when it was becoming increasingly obvious that its industry was slowing, it has cut costs to the point where it has created savings worth €500 million a year.
This involved cutting around 5,000 jobs from its 90,000-strong workforce. O'Mahony and Lee stressed that lay-offs are the result of local management decisions in individual businesses, and not part of a group programme.
It is clear from all this that the group is going into defensive mode. Lee, who will succeed O'Mahony on January 1st, said this week that CRH will not focus as heavily on acquisitions as it has done historically, and will instead put the emphasis on managing its ongoing operations.
"For the moment, our focus is on running our existing businesses and making sure that they are well run," he said.
That is not to say CRH will not keep buying smaller rivals. This strategy has been key to its growth over the last two decades.
It has already committed €700 million to this so far this year. Lee says that value for money and a realistic outlook about a target's prospects will determine what else it spends and where.
One of this year's purchases is a stake in Chinese cement manufacturer, Patkai. This is awaiting government approval, something that the group expects will happen.
While most western investors were falling over themselves to get into China, CRH was a good deal more cautious, opting first for a wait and see approach, and then for moving in slowly.
This may change. China, India - into which it moved this year with the purchase of a stake in Home Products - and central and eastern Europe were the star performers in the first half, delivering growth while virtually everywhere else was either static or slipping.
Lee indicated that the group is now looking more to these emerging markets for opportunities, although it is unlikely to ignore Europe and the US, which are likely to account for the bulk of its business in the near future.
The group is also watching the US presidential race closely. As one of the country's biggest asphalt manufacturers, highway building is a big part of its business. Federal and state governments drive all the activity in this sphere.
O'Mahony pointed out that the Democrats have historically spent more on public works programmes like highway building than the Republicans, and Barack Obama has already indicated that he is likely to take this approach. Presumably then, he can at least count on the support of CRH workers next November.
