Savings allow group to keep cash flowing

ANALYSIS:CRH CHIEF executive Myles Lee pointed out yesterday that the building materials group is now facing into the fourth year of a sustained decline in construction on both sides of the Atlantic.

The group’s markets in both Europe and America have shrunk over the last three years. In 2006, the US built just over 2.1 million new homes. This year it is likely to complete less than a quarter of that.

On a much smaller level, activity in Ireland, which accounts for around €5 in every €100 in sales generated by CRH every year, dropped by close to 40 per cent in 2009, and is likely to shrink by a further 20 per cent this year.

This has forced CRH to cut the size of its own businesses. Mirroring the decline in its own industry, it began slowly in 2007 with savings of €50 million, but became more unsparing over the past two years, reaching €643 million in 2009.

It is hoping to sell its European insulation businesses this year. The companies, spread across six countries, are not market leaders and their raw material costs are likely to increase in line with oil prices.

The group now costs €1.65 billion a year less to run than it did in 2007, and Lee says that it will be seeking a further €260 million in net savings this year. The measures have allowed the group to continue to generate cash in the face of the recession, while cash flow doubled to €1.1 billion last year.

Yesterday, Lee said that the cuts had resulted in the group cutting around 1,800 permanent and seasonal jobs from what was a 9,000-strong workforce in 2007.

While it may be focusing part of its efforts on reducing the size of individual operations, it is going to continue to grow by buying up rival businesses.

Last year, it raised €1.2 billion from shareholders, part of which was to be used to fund acquisitions in a market which the company said was likely to offer good value.

This was based on two things: the vast amounts of money owed by many of its peers – a result of borrowing at the industry’s peak – meant these peers would have to sell assets to survive; and the near absence of credit meant prices had fallen way below the inflated levels of four and five years ago.

However, stability in the bond markets meant some companies were able to refinance their debts, temporarily easing the pressure, while continued uncertainty meant it was harder to establish value.

Yesterday, Lee pointed out that the debts are still there, and it is getting easier to get a handle on value. The company is back talking to the small, family-owned operations it typically targets in the US and Europe. But its chief executive did not rule out a substantial purchase this year, providing it can get value for its money.