CRH(CRH) - 2018 Q4 - Annual Report

Overview This section outlines CRH's global business, investment appeal, strategic direction, and governance practices in 2018 Our Global Business in 2018 CRH operates a global business spanning 32 countries with over 3,700 locations, diversified across Materials, Products, and Distribution - CRH's global footprint includes 32 countries and over 3,700 operating locations[9] - The business portfolio is diversified by division and end-use, with key segments including Materials, Products, and Distribution, serving residential, non-residential, and infrastructure markets[12] Why Invest in Us CRH presents itself as an attractive investment due to market leadership, a balanced portfolio, a unique acquisition model, and strong shareholder returns - CRH is the largest building materials company in North America and the largest heavyside materials business in Europe[14] - The company has delivered an industry-leading compound Total Shareholder Return (TSR) of 14.8% since 1970[14] - Over the past five years, CRH has increased revenue by 64% and EBITDA by 143%[14] Chairman's Introduction The Chairman reported 2018 progress with strong financial results, active portfolio management, increased dividends, and a new three-division structure 2018 Financial Highlights | Metric | 2018 | 2017 | | :--- | :--- | :--- | | EBITDA | €3.4 billion | €3.1 billion | | Profit After Tax | €2.5 billion | €1.9 billion | | Net Debt/EBITDA | 2.1x | 1.8x | - The Board recommended a final dividend of 52.4c per share, resulting in a 6% increase in the full-year dividend to 72.0c per share[16] - Key portfolio changes in 2018 included the acquisition of Ash Grove Cement Company for approximately €2.9 billion and the divestment of the Americas Distribution business for €2.4 billion[16] - A multi-year business improvement initiative was announced to deliver 300bps of EBITDA margin improvement by 2021, alongside a new, simplified three-division structure effective January 1, 2019[16] Strategy Review This section details CRH's strategic framework, focusing on continuous improvement, disciplined growth, leveraging scale, and talent development for long-term value Chief Executive's Review The CEO highlighted record 2018 profit delivery, driven by market fundamentals, significant portfolio management, and a new simplified structure 2018 Performance Highlights | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Revenue | €26.8 billion | €25.2 billion | +6% | | EBITDA | €3.4 billion | €3.1 billion | +7% | | Profit After Tax | €2.5 billion | €1.9 billion | +31% | | Earnings Per Share (EPS) | 302.4c | 226.8c | +33% | | Dividend Per Share (proposed) | 72.0c | 68.0c | +6% | | Return on Net Assets (RONA) | 9.6% | 10.6% | -100bps | | Net Debt/EBITDA | 2.1x | 1.8x | +0.3x | - A simplified new Group structure with three divisions (Americas Materials, Europe Materials, Building Products) became effective January 1, 2019, to create a more focused business[21] - The outlook for 2019 is positive, supported by favorable market dynamics in the US and continued progress in key European markets, despite regional variations and Brexit uncertainty[23] Strategy CRH's strategy maximizes long-term value and shareholder returns through continuous improvement, focused growth, leveraging scale, and developing leaders - The Group's strategy is built on four pillars: Continuous Improvement, Focused Growth, Benefits of Scale, and Developing Leaders[25] - In 2018, CRH spent approximately €3.6 billion on acquisitions, including 45 bolt-on transactions, which are integral to its growth model[28] - The company leverages its scale for global procurement, managing approximately €17 billion in products and services annually to drive value[28] Business Model CRH's business model creates value through continuous improvement, a proven acquisition model, dynamic capital management, and disciplined financial management Value Created in 2018 | Metric | Value | | :--- | :--- | | EBITDA | €3.4 billion | | Profit After Tax | €2.5 billion | | EPS | 302.4c | | RONA | 9.6% | - The business model emphasizes a balanced portfolio, which was enhanced in 2018 by divesting the Americas Distribution business and reallocating capital to high-growth regions in the US[34] Measuring Performance CRH uses financial and non-financial KPIs to track strategic progress, focusing on shareholder returns, value creation, financial discipline, cash generation, and sustainability Financial Performance KPIs (2016-2018) | KPI | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Total Shareholder Return (TSR) | 22.9% | 21.8% | 1.5% | | Return on Net Assets (RONA) | 9.7% | 10.6% | 9.6% | | EBITDA Net Interest Cover | 9.4x | 10.9x | 11.0x | | Operating Cash Flow (OCF) | €2.3 billion | €2.2 billion | €1.9 billion | Sustainability Performance KPIs (2016-2018) | KPI | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | % Zero-Accident Locations | 90% | 94% | 94% | | Greenhouse Gas Emissions (kg/€ Revenue) | 1.1 | 1.1 | 1.4 | | % Females in Senior Management | 8% | 9% | 10% | Sustainability CRH integrates sustainability into its business strategy, prioritizing health & safety, environmental protection, people development, and ethical governance - In 2018, 94% of active locations were accident-free, however, there were three employee fatalities and three contractor fatalities[57] - 42% of product revenue comes from products with enhanced sustainability attributes, such as those incorporating recycled materials or having a lower carbon footprint[58] - The company is on track for its 2020 commitment of a 25% reduction in specific net CO2 emissions from 1990 levels for its cement plants, having achieved a 23% reduction by 2018[64] - Female representation in senior management increased to 10% in 2018 from 9% in 2017; as of February 2019, 38% of the Directors of CRH plc were female[60] - Approximately 38,500 employees were trained in the Code of Business Conduct (CoBC) in 2018, with approximately 14,000 completing advanced compliance training covering anti-bribery[65] Risk Governance CRH employs a dynamic Enterprise Risk Management (ERM) framework, aligned with COSO guidelines, to identify, assess, and manage risks to its strategic objectives - The Group's Enterprise Risk Management (ERM) framework is a forward-looking, strategy-centric approach developed in line with COSO guidelines[70] - In 2018, over 30 risk workshops were held with more than 300 senior leaders participating to identify and manage business risks[70] - The Board is ultimately responsible for risk management, with the Audit Committee monitoring the effectiveness of the risk management and internal control systems[70] Business Performance This section reviews CRH's financial performance in 2018, including detailed segmental analysis across Materials, Products, and Distribution Business Overview In 2018, Americas Materials was the largest contributor to Group revenue (33%) and operating profit (47%), followed by Europe Heavyside 2018 Revenue & Operating Profit by Segment | Segment | Revenue % | Operating Profit % | | :--- | :--- | :--- | | Europe Heavyside | 28% | 23% | | Europe Lightside | 14% | 5% | | Europe Distribution | 6% | 5% | | Americas Materials | 33% | 47% | | Americas Products | 17% | 21% | | Asia | 2% | -1% | Finance Director's Review The Finance Director's review covers 2018 financial performance, including organic growth, acquisitions/divestments, currency effects, liquidity, and capital resources 2018 Performance Review In 2018, CRH achieved a 6% sales increase to €26.8 billion and a 7% EBITDA rise to €3.4 billion, driven by acquisitions and organic growth Key Components of 2018 Performance Change | € million | 2017 | Exchange | Acquisitions | Divestments | Organic | 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales revenue | 25,220 | (682) | 1,855 | (348) | 745 | 26,790 | 6% | | EBITDA | 3,146 | (100) | 357 | (36) | 79 | 3,365 | 7% | | Operating profit | 2,095 | (68) | 226 | (26) | 31 | 2,177 | 4% | - Operating cash flow was €1.9 billion in 2018, down from €2.2 billion in 2017, primarily due to €469 million in cash outflows related to the Americas Distribution discontinued operation[88] - The Group spent €3.6 billion on 46 acquisition transactions and realized €3.0 billion from divestment proceeds[89] - Net debt increased by €1.2 billion to €7.0 billion at year-end 2018, with Net Interest Cover at 11.0x[90] 2017 Performance Review 2017 saw growth with a 6% EBITDA increase to €3.1 billion and a 10% operating profit rise to €2.1 billion, augmented by one-off items and acquisitions Key Components of 2017 Performance Change | € million | 2016 | Exchange | Acquisitions | Divestments | Organic | 2017 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales revenue | 24,789 | (479) | 596 | (204) | 518 | 25,220 | 2% | | EBITDA | 2,980 | (74) | 60 | (21) | 75 | 3,146 | 6% | | Operating profit | 1,908 | (53) | 14 | (14) | 114 | 2,095 | 10% | - 2017 results included two one-off items: a €81 million past service credit from a Swiss pension scheme and a €447 million reduction in net deferred tax liabilities from the US "Tax Cuts and Jobs Act"[100] - The Group spent €1.9 billion on 34 acquisition/investment transactions in 2017, with the largest being Suwannee American Cement in Florida[100] Segmental Reviews This section provides detailed operational and financial reviews of CRH's business segments, categorized into Materials, Products, and Distribution Materials Overview The Materials segment, CRH's largest, is a vertically integrated producer of aggregates, cement, lime, concrete, and asphalt with leading market positions - CRH is the largest heavyside materials business in Europe and the largest producer of aggregates and asphalt in North America[105] - The Materials businesses are founded on resource-backed assets like cement and aggregates, supporting a vertically integrated model[106] Americas Materials In 2018, Americas Materials' operating profit grew 18% to €1.0 billion, driven by acquisitions and organic sales growth despite cost inflation Americas Materials Performance 2018 | € million | 2017 | Exchange | Acquisitions | Divestments | Organic | 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales revenue | 7,970 | -356 | 1,026 | -26 | 337 | 8,951 | 12% | | EBITDA | 1,270 | -56 | 267 | -12 | 24 | 1,493 | 18% | | Operating profit | 858 | -37 | 176 | -9 | 21 | 1,009 | 18% | - The acquisition of Ash Grove in June 2018 gave CRH a market leadership position in the North American cement market[114] Europe Heavyside Europe Heavyside delivered positive 2018 performance with 5% operating profit growth to €501 million and 10% sales increase, boosted by acquisitions Europe Heavyside Performance 2018 | € million | 2017 | Exchange | Acquisitions | Divestments | Organic | 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales revenue | 6,902 | -54 | 511 | -53 | 305 | 7,611 | 10% | | EBITDA | 839 | -9 | 65 | -1 | 37 | 911 | 9% | | Operating profit | 478 | -6 | 36 | 0 | 13 | 501 | 5% | - Performance was strong in Ireland, the Benelux, Denmark, and Poland, while the UK faced challenges from input costs and Brexit uncertainty[117] Asia In 2018, the Asia segment faced challenging conditions with lower operating profit due to higher fuel costs in the Philippines and price pressure in India Asia Performance 2018 | € million | 2017 | Exchange | Organic | 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales revenue | 436 | -36 | 31 | 431 | -1% | | EBITDA | 52 | -7 | -20 | 25 | -52% | | Operating profit/(loss) | 15 | -4 | -25 | -14 | -193% | - Operating profit in the Philippines was significantly behind the prior year primarily due to higher fuel and power costs[125] Products Overview The Products segment is a leading global supplier of value-added building products for residential and non-residential construction, focusing on scalable businesses - The Products division is organized into three product groups in the Americas and four in Europe, which were merged into a single global Building Products Division as of January 1, 2019[137] Americas Products Americas Products achieved a 6% operating profit increase to €459 million in 2018, driven by demand, efficiencies, and acquisitions, offsetting softness and cost inflation Americas Products Performance 2018 | € million | 2017 | Exchange | Acquisitions | Divestments | Organic | 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales revenue | 4,327 | -187 | 193 | -2 | 102 | 4,433 | 2% | | EBITDA | 573 | -25 | 21 | 1 | 33 | 603 | 5% | | Operating profit | 435 | -19 | 12 | 1 | 30 | 459 | 6% | - The division completed six acquisitions for approximately €160 million, extending its geographic footprint and product offerings in the US[150] Europe Lightside Europe Lightside reported a successful year with a 5% sales increase to €1.5 billion and an 8% operating profit rise to €110 million, boosted by acquisitions and strong demand Europe Lightside Performance 2018 | € million | 2017 | Exchange | Acquisitions | Divestments | Organic | 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales revenue | 1,440 | -11 | 16 | -12 | 75 | 1,508 | 5% | | EBITDA | 143 | -1 | 2 | 1 | 7 | 152 | 6% | | Operating profit | 102 | -1 | 1 | 1 | 7 | 110 | 8% | - Performance was strong in the Netherlands, Australia, and Poland, while key markets like Germany and the UK remained stable[155] Distribution Overview CRH's Europe Distribution business serves professional builders, specialist contractors, and DIY customers through a network of local and regional brands - The division operates across over 550 locations in Europe, serving DIY, General Builders Merchants (GBM), and Sanitary, Heating and Plumbing (SHAP) sectors[168] Europe Distribution In 2018, Europe Distribution saw modest like-for-like sales growth but overall sales fell 7% to €3.9 billion and operating profit fell 46% to €112 million due to divestments and challenging markets Europe Distribution Performance 2018 | € million | 2017 | Exchange | Acquisitions | Divestments | Organic | 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales revenue | 4,145 | -38 | 109 | -255 | -105 | 3,856 | -7% | | EBITDA | 269 | -2 | 2 | -25 | -2 | 181 | -33% | | Operating profit | 207 | -1 | 1 | -19 | -15 | 112 | -46% | - Overall results were significantly impacted by the divestment of the DIY business in the Benelux in July 2018[178] Governance This section details CRH's corporate governance framework, including Board composition, committee reports, and remuneration policies Board of Directors This section provides biographical details for CRH's Board of Directors, highlighting their diverse expertise - The Board is led by Chairman Nicky Hartery, Chief Executive Albert Manifold, and Group Finance Director Senan Murphy[185] - Three new non-executive Directors were appointed in 2018: Richie Boucher, Mary K. Rhinehart, and Siobhán Talbot, enhancing the Board's expertise in financial services and the building materials sector[187][190][192] Corporate Governance Report The Corporate Governance Report details CRH's governance structures and the Board's 2018 focus areas, including strategy, Board renewal, and safety - The Board's key focus areas in 2018 were strategy, Board renewal, succession planning, talent management, and safety[194] - A new permanent Safety, Environment & Social Responsibility (SESR) Committee was established in 2018[195] - As of December 31, 2018, 38% of the Directors on the Board were women, a figure set to increase to 42% after the 2019 AGM[216] - The company's largest shareholder as of year-end 2018 was BlackRock, Inc., holding 8.01% of the Ordinary Share capital[233] Audit Committee Report The Audit Committee's 2018 focus included a competitive audit tender process, financial report review, and new accounting standard implementation - A key activity in 2018 was a competitive audit tender process, resulting in the Board selecting Deloitte to be appointed as auditor for the financial year ending December 31, 2020[201] - The committee reviewed significant accounting areas including impairment of goodwill, contract revenue recognition, and accounting for acquisitions and divestments, particularly the large Ash Grove acquisition[211] Nomination & Corporate Governance Committee Report In 2018, the Nomination & Corporate Governance Committee focused on Board renewal, appointing new non-executive directors and advancing diversity policy - The committee recommended the appointment of three new non-executive Directors in 2018 to enhance industry expertise, financial expertise, and global experience[216] - As of December 31, 2018, 38% of the Board Directors were women, which was planned to increase to 42% after the 2019 AGM[216] Directors' Remuneration Report This report details CRH's director remuneration policy and outcomes, including proposed changes for 2019 following shareholder dissent - Following a 39.69% vote against the 2017 remuneration report at the 2018 AGM, the committee engaged in extensive shareholder consultation to develop a revised 2019 Remuneration Policy[238] - Key proposed changes for 2019 include: introducing Return on Net Assets (RONA) to the Performance Share Plan (PSP), increasing the deferred bonus portion to 33.3%, and raising the CEO's minimum shareholding requirement from 250% to 350% of salary[243] 2018 Remuneration Outcome Snapshot | Director | Annual Bonus (% of max) | Value of PSP awarded in 2016 (% of max) | | :--- | :--- | :--- | | Albert Manifold | 81.48% | 59.13% | | Senan Murphy | 81.48% | 59.13% | Directors' Report The Directors' Report provides a statutory overview of the Group's principal activities, 2018 financial results, and business review - The Group reported a profit before tax of €1.86 billion from continuing operations for the year[346] - The Board proposed a final dividend of 52.4c per share, bringing the total 2018 dividend to 72.0c, a 6% increase over 2017[348] - Between May 2 and December 31, 2018, the company repurchased 27.9 million ordinary shares for a total of €789 million as part of its €1.0 billion buyback program[347] Financial Statements This section presents CRH's audited consolidated financial statements for 2016-2018, along with the independent auditor's reports and key accounting policies Independent Auditor's Reports The independent auditor, Ernst & Young, issued an unqualified opinion on CRH's consolidated financial statements and internal control over financial reporting - The auditor, Ernst & Young, expressed an unqualified opinion on the consolidated financial statements for the years 2016, 2017, and 2018[384] - An unqualified opinion was also given on the company's internal control over financial reporting as of December 31, 2018, excluding recent acquisitions like Ash Grove Cement Company[386] Consolidated Financial Statements This section presents CRH plc's core audited financial statements for 2016-2018, including Income Statement, Balance Sheet, and Cash Flows Key Financial Statement Data (€ millions) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Income Statement | | | | Revenue | 26,790 | 25,220 | | Group Operating Profit | 2,177 | 2,095 | | Group Profit for the Year | 2,521 | 1,919 | | Balance Sheet | | | | Total Assets | 35,173 | 31,633 | | Total Equity | 16,554 | 14,977 | | Total Liabilities | 18,619 | 16,656 | Key Cash Flow Data (€ millions) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net cash inflow from operating activities | 1,899 | 2,189 | | Net cash outflow from investing activities | (1,592) | (2,685) | | Net cash (outflow)/inflow from financing activities | (113) | 343 | Accounting Policies This section details CRH's IFRS accounting policies, including the adoption of new standards and key accounting estimates and judgments - The Group adopted IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) effective January 1, 2018, with no material impact on the Group's results[399] - The adoption of IFRS 16 (Leases) from January 1, 2019 is expected to have a material impact, with the recognition of a lease liability and right-of-use asset of approximately €2.0 billion[403] - Key accounting policies involving significant estimates and judgements include impairment of goodwill, retirement benefit obligations, provisions for liabilities, and taxation[405]