CRH 20-F 2009
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended: December 31, 2008
For the transition period from to
Date of event requiring this shell company report
Commission file number: 0-17630
CRH public limited company
(Exact name of Registrant as specified in its charter)
Republic of Ireland
(Jurisdiction of incorporation or organisation)
Belgard Castle, Clondalkin, Dublin 22, Ireland
(Address of principal executive offices)
Glenn A. Culpepper
Tel: +353 1 404 1000
Fax: +353 1 404 1007
Belgard Castle, Clondalkin, Dublin 22, Ireland
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Note Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
TABLE OF CONTENTS
TABLE OF CONTENTS(continued)
In order to utilise the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995, CRH public limited company (the Company), and its subsidiaries (collectively, CRH or the Group) is providing the following cautionary statement.
This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of CRH and certain of the plans and objectives of CRH with respect to these items. These statements may generally, but not always, be identified by the use of words such as anticipates, should, expects, estimates, believes or similar expressions. In particular, among other statements, certain statements in Item 4Information on the Company with regard to management objectives, trends in market shares, market standing and product volumes, in Item 3Key InformationDividends and in Item 8Financial InformationDividends with regard to future dividends, the statements in Item 5Operating and Financial Review and Prospects with regard to trends in results of operations, margins, governmental policies and spending, overall market and macro-economic trends, and Trend Information 2009 on pages 62 to 64, and statements in Item 11Quantitative and Qualitative Disclosures about Market Risk, with regard to risk management, interest and exchange risk are all forwardlooking in nature. By their nature, forwardlooking statements involve risk and uncertainty because they reflect the Companys current expectations and assumptions as to future events and circumstances that may not prove accurate. A number of material factors could cause actual results and developments to differ materially from those expressed or implied by these forwardlooking statements including those discussed in Item 3Key InformationRisk Factors and in Item 5Operating and Financial Review and Prospects.
Statements Regarding Competitive Position
Statements made in Item 4Information on the Company and in Item 5Operating and Financial Review and Prospects referring to the Groups competitive position are based on the Companys belief, and in some cases rely on a range of sources, including investment analysts reports, independent market studies and the Companys internal assessment of market share based on publicly available information about the financial results and performance of market participants.
ITEM 3KEY INFORMATION
The Consolidated Financial Statements of CRH plc have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
The selected financial data are qualified in their entirety by reference to, and should be read in conjunction with, the Consolidated Financial Statements, the related Notes and Item 5Operating and Financial Review and Prospects included elsewhere in this Annual Report on Form 20-F (Annual Report or Form 20-F).
The selected consolidated financial data for the three years ended 31 December 2008 have been derived from, and should be read in conjunction with, the audited Consolidated Financial Statements and Notes thereto set forth in Item 18 of this Annual Report.
CRH uses a number of non-GAAP performance indicators to monitor financial performance. These are summarised below and discussed later in this report.
Interest Cover Ratio. Interest Cover Ratio is used by management as a measure matching the earnings and cash generated by the business to the underlying funding costs. Major non-public financings by the Group and the Groups major bank facilities incorporate covenants based on the Interest Cover Ratio rather than debt to shareholders funds. Interest Cover Ratio is presented here to provide a greater understanding of the impact of CRHs debt and financing arrangements. It is the ratio of EBITDA (Earnings before interest, taxes, depreciation and amortisation, as computed on page 30) to net interest and a table reconciling net interest and EBITDA to finance costs and finance revenue and Group net profit for the financial year is presented on page 30. EBITDA excludes any profit or loss on the sale of non-current assets.
Organic Revenue, Organic Operating Profit. Exchange translation movements can have a significant impact on the reported results for the Group, and can distort comparisons of underlying performance; for example, the decline in the value of the US dollar in 2008 combined with movements in the average exchange rate for the Group's other operating currencies resulted in an adverse translation impact of 50 million at profit before tax level. Furthermore, CRH pursues a strategy of growth through acquisitions, with approximately 1 billion spent on acquisitions in 2008 and over 2 billion spent on acquisitions in 2007; these acquisitions contributed strongly to the change in revenue and operating profit in 2008, adding incremental revenue of 1,902 million and incremental operating profit of 123 million compared with 2007. Because of the impact of both exchange translation and acquisitions on reported results each year, the Group uses organic revenue and organic operating profit as additional performance indicators to assess performance of pre-existing (also referred to as underlying, heritage or ongoing) operations each year; organic revenue and organic operating profit is arrived at by excluding the incremental revenue and operating profit contributions from current and prior year acquisitions, the impact of exchange translation and the impact of any non-recurring items. In Item 5Operating and Financial Review and Prospects which follows, changes in organic revenue and organic operating profit are presented as additional measures of revenue and operating profit to provide a greater understanding of the performance of the Group. A reconciliation of the changes in organic revenue and organic operating profit to the changes in total revenue and operating profit by segment is presented with the discussion of each segments performance in tables contained in the segment discussion commencing on page 33 below.
Group Income Statement Data
Year ended 31 December
Group Balance Sheet Data
In this Form 20-F, references to US$, US dollars or US cents are to United States dollars, references to euro, euro cent, cent, c or are to the euro and UK£ or pounds sterling are to the currency of the United Kingdom of Great Britain and Northern Ireland (United Kingdom or UK). Other currencies referred to in this Form 20-F include Polish Zloty (PLN), Swiss Franc (CHF), Canadian dollar (CAD), Chinese Renminbi (RMB), Argentine Peso (ARP), Ukrainian Hryvnia (UAH) and Israeli Shekel (ILS).
Merely for the convenience of the reader, this Form 20-F contains translations of certain euro amounts into US dollars at specified rates. These translations should not be construed as representations that the euro amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated. The noon buying rate in New York City for cable transfers in euro as certified for customs purposes by the Federal Bank of New York (the FXB Noon Buying Rate) on 31 December 2008 was 1 = US$1.3919 and the Bloomberg Foreign Exchange Rate (BFIX) at noon on 30 April 2009 was 1 = US$1.3243.
The following table sets forth, for the periods and dates indicated, the average, high, low and end-of-period exchange rates in US dollars per 1 (to the nearest cent) using the Bloomberg Foreign Exchange Fixings Rate (BFIX) at noon for April 2009 and the FRB Noon Buying Rate for all other periods.
The above rates may vary slightly from the rates used for translating foreign currencies into euro in the preparation of the Companys Consolidated Financial Statements (see page F-10).
For a discussion of the effects of exchange rate fluctuations on the financial condition and results of operations of the Group, see Item 5Operating and Financial Review and Prospects.
The following table sets forth the amounts of interim, final and total dividends in euro cent per Ordinary Share declared in respect of each fiscal year indicated. Each amount represents the actual dividend payable.
Solely for the convenience of the reader, these dividends have been translated into US cents per American Depositary Share (ADS) (each representing one Ordinary Share) using the FRB Noon Buying Rate applicable at the date of payment, except for the final 2008 dividend, for which the Bloomberg Foreign Exchange Fixings Rate (BFIX) at noon on 30 April 2009 was used. The final dividend will be paid on 11 May 2009.
This section describes the material risks that could affect the Groups business. The factors below should be considered in connection with any forward-looking statements in this Form 20-F and the cautionary statements contained in IntroductionForward-Looking Statements.
Current global economic conditions have negatively impacted and may continue to impact CRHs business, results of operations and financial condition.
CRHs operating and financial performance is influenced by the economic conditions of the countries in which it operates, particularly in Ireland, the European Union and North America. A continuation or worsening of the current strained global economic conditions and the volatility of international markets could result in a further general reduction in business activity and consequent loss of income for CRH. Economic uncertainty exacerbates negative trends in construction activity and may cause certain CRH customers to push out, cancel or refrain from placing orders. Difficulties in obtaining capital and deteriorating market conditions may also lead to the inability of some customers to obtain affordable financing, resulting in lower sales for CRH. These conditions and uncertainty about future economic conditions make it challenging for CRH to forecast its operating results and identify the risks that may affect its business, results of operations and financial condition. If CRH is not able to adapt in sufficient time and appropriately to changes resulting from the difficult environment, CRHs business, results of operations and financial condition may be materially and adversely affected. To the extent government funding through governmental infrastructure programmes is decreased or terminated as a result of these macroeconomic developments or significant change in government policy, Group revenues will be adversely affected because CRH will supply fewer products, or none at all, to such programmes. In addition, a prolonged period of instability in the financial markets would have an adverse impact on the valuations of CRHs pension plan assets and could result in the need for CRH to make additional contributions to its defined benefit plans.
CRH may suffer from decreased customer demand as a consequence of reduced construction activity.
Some of the Groups customers may be reluctant to embark on construction projects in the current market due to the general view that property values will continue to decrease or due to the increased cost or unavailability of debt financing, low investor confidence and concern that the economic downturn will adversely affect occupational demand and rental growth. These factors could result in the possible disruption or curtailment of construction activity which in turn could reduce demand for CRHs products and materials and have a material adverse effect on Group operations, financial performance or prospects.
CRHs business may be affected by the default of counterparties in respect of money owed to CRH.
As a consequence of its normal operations, CRH is often owed significant amounts by contract counterparties (particularly in construction) which amounted to 552 million as at 31 December 2008. In addition, CRH often holds significant cash balances on deposit with financial institutions or invested on a short-term basis, which amounted to 927 million as at 31 December 2008. These contractual arrangements, deposits and other financial instruments give rise to credit risk on amounts due from counterparties. In the current business environment, there is an increased exposure to the default of counterparties, including financial institutions and customers with bad debts, if the economic conditions continue to worsen, which may among other things, reduce CRHs cashflows.
CRH operates in cyclical industries which are affected by factors beyond Group control such as the level of construction activity, fuel and raw material prices, which are in turn affected by the performance of national economies, the implementation of economic policies by sovereign governments and political developments.
Group financial performance is closely tied to the performance of the residential, industrial and commercial construction markets and to general levels of infrastructural activity. These markets are cyclical and are affected by many factors that are beyond Group control, including:
Each of the above factors could have a material adverse effect on Group operating results and the market price of CRHs securities.
CRH pursues a strategy of growth through acquisitions. CRH may not be able to continue to grow as contemplated in its business plan if CRH is unable to identify attractive targets, raise funds on acceptable terms, complete such acquisition transactions and integrate the operations of acquired businesses.
A key element of the Groups growth strategy is to continue its acquisition strategy mainly through value-enhancing mid-sized deals and occasionally larger strategic acquisitions. With a challenging trading backdrop to many of CRHs businesses, managements focus is limited to acquisition opportunities that offer compelling value and exceptional strategic fit. This strategy depends on the ability to identify and acquire suitable assets at acceptable prices, which meet its stringent cash flow and return on investment criteria, which require new investments to give returns well in excess of CRHs cost of capital. CRH may not be able to identify suitable companies which meet its stringent cash flow and return on investment criteria, and, even if identified, may not be able to acquire them. The current global credit market conditions mean financial institutions are applying more stringent lending criteria and the availability of debt is low by historical comparison. If these conditions worsen further it may be more costly, or impossible, for CRH to raise funds to take advantage of opportunities. At the same time, the Groups competitors also strive to expand through acquisitions and may bid for companies that CRH views as potential acquisition targets. In addition, acquisitions may require competition law approval, the assimilation of new operations, products, services and personnel and may cause dissipation of Group management resources, as management may have to divert attention from day-to-day business operations to focus on addressing such issues. The Groups ability to realise the expected benefits from future acquisitions depends, in large part, on its ability to integrate the new operations with existing operations in a timely and effective manner. Even if CRH is able to acquire suitable companies, it still may not be able to incorporate them successfully into its business and, accordingly, may be deprived of the expected benefits of the acquisitions.
CRH faces strong competition in its various markets, and if CRH fails to compete successfully its market share will decline.
CRH continually faces competition in the markets in which Group companies operate. The competitive environment in which the Group operates can be significantly affected by local factors, such as the number of competitors, production capacity, economic conditions and product demand in the local market. In several
markets, downward pricing pressures are experienced from time to time as a result of competitive pressures and the Group is not always able to recover quickly increased operating expenses (caused by factors such as increased fuel and raw material prices) through higher selling prices. If CRH is consistently unable to recover increased operating expenses through higher selling prices, the Groups results of operations could be adversely affected.
Existing products may be replaced by substitute products which CRH does not produce and, as a result, CRH may lose market share in the markets for these products.
A number of Group products compete with other forms of building products that CRH does not produce. Any significant replacement of the Groups building products by substitute products, which CRH does not produce, could adversely impact market share and results of operations in these markets.
Severe weather can reduce construction activity and lead to a decrease in demand for Group products in areas affected by adverse weather conditions.
Group operations and the demand for a number of Group products are affected by weather conditions in the markets CRH serves. Sustained adverse weather conditions such as rain, extreme cold or snow could disrupt or curtail outdoor construction activity which in turn could reduce demand for CRHs products and have a material adverse effect on Group operations, financial performance or prospects.
CRH is subject to stringent and evolving environmental and health and safety laws, regulations and standards which could result in costs related to compliance and remediation efforts that may adversely affect Group results of operations and financial condition.
CRH is subject to a broad and increasingly stringent range of environmental and health and safety laws, regulations and standards in each of the jurisdictions in which the Group operates. This results in significant compliance costs and could expose the Group to legal liability or place limitations on the development of the Groups operations. The current and evolving laws, regulations and standards relate to, among other things, air (including greenhouse gases, such as the European Unions proposed National Allocation Plan (Phase III) for emissions standards set to begin in 2012) and noise emissions, wastewater discharges, avoidance of soil and groundwater contamination, the use and handling of hazardous materials and waste disposal practices.
Environmental and health and safety laws, regulations and standards also may expose CRH to the risk of substantial costs and liabilities, including liabilities associated with assets that have been sold and activities that have been discontinued. In addition, many of CRHs manufacturing sites have a history of industrial use and, while CRH applies strict environmental operating standards and undertakes extensive environmental due diligence in relation to acquisitions, some soil and groundwater contamination has occurred in the past at a limited number of sites, although to date the remediation costs have not been material to CRH. Currently, a total of 22 sites have reported soil or groundwater contamination issues, mainly due to historical hydrocarbon contamination, which require ongoing monitoring and may require future remediation. Some heavy metal and solvent contamination is present at a small number of these 22 sites. Such contamination might occur or be discovered at other sites in the future. Consistent with the past practice of its business, CRH continues to monitor or remediate soil and groundwater contamination at certain of these sites. Despite CRHs policy and efforts to comply with all applicable environmental laws, CRH may face remediation liabilities and legal proceedings concerning environmental matters.
Based on information currently available, CRH has budgeted capital and revenue expenditures for environmental improvement projects and has established reserves for known environmental remediation liabilities that are probable and reasonably capable of estimation. However, CRH cannot predict environmental matters with certainty, and Group budgeted amounts and established reserves may not be adequate for all purposes. In addition, the development or discovery of new facts, events, circumstances or conditions, including
future decisions to close plants, which may trigger remediation liabilities, and other developments such as changes in law or increasingly strict enforcement by governmental authorities, could result in increased costs and liabilities or prevent or restrict some of the Groups operations, which in turn could have a material adverse effect on CRHs reputation, business, results of operations and overall financial condition.
For additional information see also Item 4Information on the CompanyEnvironmental Regulations.
CRH may be adversely affected by governmental regulations.
CRH is subject to various statutes, regulations and laws applicable to businesses generally in the countries and markets in which it operates. These include statutes, regulations and laws affecting land usage, zoning, labour and employment practices, competition, financial reporting, taxation and other matters.
CRH expects its employees to comply with a code of conduct that involves best practice in relation to regulatory matters but cannot guarantee that its operating units will at all times be successful in complying with all demands of regulatory agencies in a manner which will not materially adversely affect its business, financial condition or results of operations.
Economic, political and local business risks associated with international revenue and operations could adversely affect CRHs business.
CRH operates mainly in Western Europe and North America as well as, to a lesser degree, in developing markets in Eastern Europe, South America, Turkey, China and India. The economies of these countries are at different stages of socio-economic development. Consequently, CRHs future results could be harmed by a variety of factors, including:
CRHs overall success as a global business depends, in part, upon its ability to succeed in differing and sometimes fast-changing economic, social and political conditions.
A write-down of goodwill could have a significant impact on the Groups income and equity.
An acquisition generates goodwill to the extent that the price paid by CRH exceeds the fair value of the net assets acquired. Acquisitions in recent years have generated substantial goodwill. Additional goodwill may arise as a result of further acquisitions.
Under IFRS, goodwill and indefinite-lived intangible assets are not amortised but are subject to annual impairment tests. Other intangible assets deemed separable from goodwill arising on acquisitions are amortised.
Impairment tests conducted during the 2007 and 2008 financial years indicated that no impairment had occurred. Testing in 2006 identified an impairment in respect of the Groups 45% share of goodwill in the Cementbouw B.V. joint venture which was established in 2003 in a leveraged buyout of Cementbouws materials trading and readymixed concrete operations in the Netherlands, undertaken in conjunction with CRHs 100%
purchase of Cementbouws distribution, concrete and clay products activities. An impairment loss of 50 million was recognised in the Group Income Statement of CRH for the year ended 31 December 2006 and was reflected in the segment result for Europe Products in that year. See Note 1 to the Financial Statements, pages F-20 to F-23.
Goodwill does not affect cash flow. However, a full write-down of goodwill at 31 December 2008 would have resulted in a charge to income and reduction in equity of approximately 3.9 billion.
CRH does not have a controlling interest in certain of the businesses in which it has invested and in the future may invest in businesses in which there will not be a controlling interest. In addition, CRH is subject to restrictions due to minority interests in certain of its subsidiaries.
CRH has a significant but not controlling interest in certain operations. Some important decisions such as the approval of business plans and decisions as to the timing and amount of cash distributions may require the consent of CRHs partners or may be approved without CRHs consent. These limitations could make it difficult for CRH to pursue corporate objectives in the future.
CRH conducts its business through subsidiary companies. In some cases, minority shareholders hold significant interests in these subsidiaries. Various disadvantages may result from the participation of minority shareholders whose interests may not always align with those of CRH. The presence of minority interests may, among other things, impede CRHs ability to implement organisational efficiencies and transfer cash and assets from one subsidiary to another in order to allocate assets most effectively.
Financial institution failures may cause CRH to incur increased expenses or make it more difficult either to utilise CRHs existing debt capacity or otherwise obtain financing for CRHs operations or financing activities.
CRHs ability to access sources of liquidity during periods of liquidity stress (such as have been experienced in recent months) may be constrained as a result of current and future market conditions. If CRH is unable to fund future operations by way of financing, its business, financial condition and results of operations will be adversely impacted.
A downgrade in CRHs credit ratings may increase its costs of funding.
CRHs credit ratings of Baa1/BBB+ are on negative outlook with Moodys Investors Services and Standard & Poors, respectively, and may be downgraded from current levels. A downgrade may result from specific factors relevant to CRH or from other factors (such as general economic weakness or sovereign credit rating ceilings).
Any material deterioration in CRHs existing credit ratings may significantly reduce its access to the debt markets and increase its borrowing costs including interest rates payable on existing and future debt. Any of these factors could have a material adverse effect on CRHs businesses, results of operations and overall financial condition.
CRH has incurred and will continue to incur debt, which could result in increased financing costs and could constrain CRHs business activities.
CRH has incurred and will continue to incur significant amounts of debt in order to finance its business and ongoing acquisition programme. As of 31 December 2008, CRH had outstanding net indebtedness of approximately 6.1 billion. A significant portion of CRHs cash generated from operations is dedicated to the payment of principal and interest on its indebtedness and will not be available for other purposes. In 2008, this portion was 22% (2007: 17%, 2006: 29%). If CRHs earnings were to decline significantly, it could experience difficulty in servicing its debt instruments.
CRH has entered into certain financing agreements containing restrictive covenants, which could limit its operating and financial flexibility. Such covenants require CRH to maintain a certain minimum interest cover ratio, a certain minimum ratio of current assets to current liabilities, a certain maximum ratio of net debt to EBITDA and a minimum net worth, and place a maximum limit on the ratio of net debt to net worth. These restrictions could limit CRHs flexibility in planning for, and reacting to, competitive pressures and changes in its business, industry and general economic conditions and limit its ability to make strategic acquisitions and capitalise on business opportunities.
Many of the Groups subsidiaries operate in a currency other than the euro, and adverse changes in foreign exchange rates relative to the euro could adversely affect Group reported earnings and cash flow.
A significant portion of Group revenues and expenses originates in currencies other than the euro, primarily in US dollars, pounds sterling, Swiss francs and Polish zloty. As at 31 December 2008, approximately 72% of Group shareholders funds were denominated in currencies other than the euro, predominantly the US dollar (41%). As a result, from year to year, adverse changes in the exchange rates used to translate foreign currencies into euro, such as the weakening of the US dollar against the euro, has impacted and may continue to impact the Groups reported results. It is the Groups policy to hedge partially its investment in foreign currencies by ensuring that net worth, net debt and net interest are spread across the currencies in which the Group operates, but otherwise CRH does not generally engage in hedging transactions to reduce Group exposure to foreign exchange translation risk.
For additional information on the impact of foreign exchange movements on the Groups Consolidated Financial Statements for the year ended 31 December 2008 see Item 5Operating and Financial Review and Prospects.
CRH is exposed to interest rate fluctuations.
CRH is exposed to movements in interest rates which affect the amount of interest paid on borrowings and the return on its cash investments. As at 31 December 2008, 52% of CRHs net debt was at floating interest rates. Any increase in relevant floating interest rates would reduce CRHs profits.
ITEM 4INFORMATION ON THE COMPANY
History and Development of the Company
CRH public limited company is the parent company for an international group of companies, engaged in the manufacture and supply of a wide range of building materials and in the operation of builders merchanting and Do-It-Yourself (DIY) stores. CRH is the largest company, based on market capitalisation, quoted on The Irish Stock Exchange Limited (Irish Stock Exchange) in Dublin. CRH is also quoted on The London Stock Exchange Limited (London Stock Exchange) in London and on the New York Stock Exchange in the United States. The market capitalisation of CRH as of 31 December 2008 was 9.5 billion.
The Group resulted from the merger in 1970 of two leading Irish public companies, Cement Limited (established in 1936) and Roadstone Limited (incorporated in 1949). Cement Limited manufactured and supplied cement while Roadstone Limited was primarily involved in the manufacture and supply of aggregates, readymixed concrete, mortar, coated macadam, asphalt and contract surfacing to the Irish construction industry.
The Company is incorporated in the Republic of Ireland. CRH is a public limited company operating under the Companies Acts of Ireland, 1963 to 2006 and the Investment Funds, Companies and Miscellaneous Provisions Act, 2006, each as amended. The Groups worldwide headquarters are located in Dublin, Ireland. Its principal executive offices are located at Belgard Castle, Clondalkin, Dublin 22 (telephone: +353 1 404 1000). The Companys registered office is located at 42 Fitzwilliam Square, Dublin 2, Ireland and its US agent is Oldcastle, Inc., 375 Northridge Road, Atlanta, Georgia 30350. The Company is the holding company of the Group, with direct and indirect share and loan interests in subsidiaries, joint ventures and associates.
The Group is organised into four Divisions, two in Europe: Materials and Products & Distribution; and two in the Americas: Materials in the United States and Products & Distribution in the United States, Mexico, Canada, Chile and Argentina. From Group headquarters, a small team of executives exercises strategic control over its decentralised operations. The Group employs a total of approximately 93,500 people worldwide.
For IFRS reporting purposes, the Groups activities fall into three reporting business segments: Materials, Products and Distribution, which are each further divided between the Groups two geographical areas, Europe and Americas, resulting in six reporting segments. The activities of the various segments are briefly described as follows:
Materials businesses are involved in the production of cement, aggregates, asphalt and readymixed concrete.
Products businesses are involved in the production of concrete products and a range of construction-related products and services.
Distribution businesses are engaged in the marketing and sale of builders supplies to the construction industry and of materials and products for the DIY market.
In the detailed description of the Groups business that follows, estimates of the Groups various aggregate and stone reserves have been provided by engineers employed by the individual operating companies. Details of product end-use by sector for each reporting segment are based on management estimates.
As a result of planned geographic diversification since the mid-1970s, and most particularly in the period 2001 to 2008, the Group has expanded by acquisition and organic growth into an international manufacturer and supplier of building materials. CRH now has operations in 35 countries, mainly in Western Europe and North America as well as, to a lesser degree, in developing markets in Eastern Europe, South America, Turkey, China and India.
ActivitiesAnnualised production volumes
Building materials is an inherently cyclical business linked primarily to GDP growth in local economies. Recognising the variability that cyclicality brings, CRHs strategy is to sustain and build a balanced business with exposure to multiple demand drivers that can deliver CRHs strategic vision to be a responsible international leader in building materials delivering superior performance and growth. Geographic and product diversity serves to smooth out some of the effects of changing economic conditions and to provide multiple opportunities for growth. Sectoral and end-use diversity reduces some of the effects of varying demand patterns across building and construction activity by maintaining a balanced portfolio of products, serving a broad customer base.
CRHs unique balance across regions, products and all building and construction sectors is one of the key drivers of the Groups strategy. Our relentless focus on performance, with multiple growth platforms from which to pursue value-creating opportunities and dedicated people with ambition to achieve, operating in an environment which values strong governance and prudent policies, underpin our ability to deliver consistent performance and returns over the long term.
In 2008, CRHs operations were balanced between geographic regions: 40% Western Europe, 45% North America and 15% Emerging Regions, the latter comprising operations in Eastern Europe, the Eastern Mediterranean, North Africa, South and Central America and Asia. While product balance remains weighted towards the heavyside with 75% in materials and concrete products and 25% in lightside products and distribution, each of these businesses deliver strong returns on capital through the cycle. Sectoral balance remains stable and end-use balance, which tends to trend towards Repair, Maintenance & Improvement (RMI) in developed economies, is counter-balanced by significant new build demand in developing economies.
While CRHs strategy has evolved and will continue to evolve with the expansion and development of the Group, the solid foundation of a balanced business with an emphasis on performance delivery remains core. As we look to the future, CRH will continue to optimise its business positions in the developed world where returns are more predictable and business practices are more developed. In parallel, CRH will seek to establish, in a measured way, platforms for the future in emerging economies that show the potential for above-average growth.
CRH manufactures and distributes building material products from the fundamentals of heavy materials and elements to construct the frame, through value-added products that complete the building envelope, to distribution channels which service construction fit-out and renewal.
Materials: The Fundamentals
Strategy: To build and maintain strong vertically integrated businesses with leading market positions. Implementation focuses on accumulating long-term permitted reserves, continuously investing in plant and equipment for product quality, operational efficiency and customer service, and seeking value-creating expansion opportunities via greenfield development and acquisitions in selected markets.
Products: Constructing the Frame
Strategy: To build and expand leadership positions in targeted markets in the manufacture of structural and architectural concrete products and related accessories. Implementation focuses on continuously improving the businesses with state-of-the-art IT, exchange of process and product know-how and leveraging engineering, project management, logistics and marketing skills to add more value for customers, while simultaneously pursuing new product and new region opportunities.
Products: Completing the Envelope
Strategy: To develop current strong positions and seek new platforms for growth in complementary product segments. Implementation focuses on increasing penetration for CRH products, edge expansion into new architectural products and solutions, developing positions to benefit from scale and best practice, and creating competitive advantage through product, process and end-use innovation.
Distribution: Fit-out and Renewal
Strategy: To build and grow a strong network of professional builders merchants and DIY stores primarily in metropolitan areas. Implementation focuses on organisational initiatives and best-in-class IT to realise operational excellence, optimise the supply chain and provide superior customer service, while seeking opportunities to invest in new regions and other attractive segments of building materials distribution.
General Development of the Business
Throughout the early and mid-1970s, the bulk of the Groups income continued to be earned in Ireland, with overseas interests comprising a concrete products business in the UK and a builders merchanting business in the Netherlands, which had a small manufacturing division and one DIY store. A strategic decision was taken in 1977 to invest in familiar business sectors overseas and to develop the existing overseas operations. At the same time, the Group recognised the need to respond in Ireland to the energy crisis during the mid-1970s and invested a total of almost 200 million over the period 1975 to 1985 in modernising its two cement plants near Dublin and in Limerick.
Since that time, CRHs strategic vision has been to become an international leader in building materials, delivering superior and sustained shareholder returns, while reducing its dependence on individual markets and achieving a balance in its geographic presence and portfolio of products.
CRHs first acquisition in the United States was the 1978 purchase of Amcor, Inc., a producer of concrete products including pipe, masonry and precast, with plants in Utah, Idaho and Colorado. During the 1980s the Group continued to expand its concrete products activities in the United States and added primary materials to its range of activities with the acquisition in 1985 of Callanan Industries, an aggregates and asphalt business based in Albany, New York. Following the acquisition in 1990 of a 50% shareholding in HGP Industries, the largest
independent glass fabricator in the United States, CRHs US operations were reorganised into four product groups: Precast, Architectural Products, Materials and Glass. A fifth product group, Distribution, was added in 1996 with the acquisition of Allied Building Products, a national roofing/siding distributor based in New Jersey. In 2000, the Precast, Architectural Products, Glass and Distribution groups were organised into the Americas Products & Distribution division. The Materials group, which had been expanded by the acquisition of Tilcon in 1996 and of Thompson McCully in 1999, was designated the Americas Materials division at this time. In 2006 the acquisition of MMI Products, with operations in construction accessories, welded wire products and fencing, added a fifth product group to the Products & Distribution division. 2006 also saw the completion by the Group of its largest single acquisition, Ashland Paving And Construction (APAC), at a cost of 850 million, representing a major expansion for the Americas Materials division.
Meanwhile, during the same period the Group expanded its operations in Europe, adding clay products and fencing to its existing product range of mainly concrete products, while also completing bolt-on acquisitions to expand its network of builders merchanting and DIY outlets primarily in the Netherlands and the United Kingdom. CRH also expanded geographically in Europe during the 1980s and 1990s, establishing bases in Spain, Poland, Ukraine, Belgium, Germany and France, and in 1997 was organised into the Europe Materials and Europe Productions & Distribution divisions. In 1999/2000, the Group greatly expanded its Europe operations with the acquisition of Finnsementti/Lohja Rudus in Finland (including a readymixed concrete operation in Russia), the Jura group in Switzerland and of Ibstock Building Products in the United Kingdom. Also in 1999, the Group decided to divest its builders merchanting activities in the United Kingdomthis remains the only significant divestiture of a business by the Group. In 2003, the Group acquired the distribution and building products operations of Cementbouw, a leading Dutch building materials group with a total of 90 DIY and merchanting stores in addition to manufacturing a range of concrete and sand lime products. In 2004, with the acquisition of a 49% shareholding in Secil, a Portuguese manufacturer of cement and readymixed concrete, CRH also added acquired interests Secils operations in Tunisia and Lebanon. In the past three years, CRHs geographic footprint has expanded to include investments in Turkey, China and India.
As a result of the planned geographic diversification, most particularly in the period 2001 to 2008 during which CRH has spent a total of approximately 11.5 billion on acquisitions and investments, the Group has expanded by acquisition and organic growth into an international manufacturer and supplier of building materials. CRH now has operations in 35 countries, mainly in Western Europe and North America as well as, to a lesser degree, in developing markets in Eastern Europe, South America, the Mediterranean basin, China and India, employing approximately 93,500 people at over 3,700 locations.
The Group spent a net 2 billion on 69 acquisitions during the year ended 31 December 2006. In August 2006, CRH completed its largest acquisition to date, the 850 million purchase of APAC, an integrated aggregates and asphalt business in the midwest and south regions of the United States, complementing the Groups existing Materials businesses in the north, midwest and west regions of the United States. The Group expanded its operations in the construction accessories sector with the acquisition of Halfen-Deha in Europe and MMI in the United States; in addition to its construction accessories activities, MMI also has wire reinforcement and fencing operations. The combined cost of these three acquisitions, at 1.3 billion, represented 61% of total 2006 spend on acquisitions and investments. The primary focus of the remaining acquisitions was on small to mid-sized transactions which complemented the Groups existing operations, or expanded them into adjacent territories. These were effected across all divisions and major geographies.
Spending on acquisitions and investments in the year ended 31 December 2007 amounted to 2 billion on 78 acquisitions. The Group completed its first investments in Turkey and China, with the acquisition of a 50% shareholding in Denizli Cement, a 1.8 million tonne per annum modern cement plant in southwestern Turkey with a vertically integrated readymixed concrete business; and 100% of Harbin Sanling Cement, a modern 650,000 tonne cement plant in northeastern China. In the Americas, the Materials division acquired Conrad Yelvington Distributors, a rail-based distributor of aggregates in the southeastern United States, and completed the purchase of certain aggregates and readymixed concrete assets from Cemex in Florida and Arizona. In the
Americas Products business segment, the Glass group acquired the Vistawall group, a manufacturer of a broad range of architectural aluminium glazing systems. In the western US, the Group acquired Acoustical Materials Services, a distributor of interior products, a growing sub-sector for CRHs US Distribution division. In Europe, the Group acquired Gétaz Romang, a building materials distributor in French-speaking Switzerland, which together with CRHs existing operations in the German-speaking area of Switzerland, gave the Group strong national leadership, and acquired the remaining 55% of Cementbouw B.V., one of the leading readymixed concrete producers in the Netherlands. These 8 deals represented 56% of the total acquisition spend for 2007.
During the year ended 31 December 2008 CRH spent a total of 1 billion on 53 acquisition and investment transactions. The Group completed its first transaction in India during the year, acquiring a 50% shareholding in My Home Industries Limited, a cement producer headquartered in Hyderabad and with a current annual production capacity of approximately 3 million tonnes from modern facilities. In Europe, the Group acquired its first subsidiary in Hungary with the purchase of Ferrobeton, a precast concrete elements producer operating four plants in Hungary and one in Slovakia, which manufacture a similar product range to the Groups existing operations in Romania. The European construction accessories business was expanded with the acquisition of Ancon, a UK-based designer and manufacturer of a range of stainless steel fixing systems, with operations in continental Europe, the Middle East and Australia. The Distribution group acquired an initial 35% shareholding in Trialis, an independent regional builders merchant operating 190 branches in central, south and southwest France. These 4 transactions accounted for 53% of the acquisition spend in 2008. Americas Materials completed 19 bolt-on transactions expanding its network of locations. In the Americas Products & Distribution division, 7 bolt-on transactions were completed across Precast, Architectural Products and MMI operations while Distribution completed one transaction in its exterior products business.
In January 2009 the Group acquired a 26% shareholding in Yatai Cement for RMB 2.1 billion (224 million). Yatai is the leading cement manufacturer in northeastern China with 14 million tonnes of cement capacity currently being expanded to 18 million tonnes.
The percentage of Group revenue and operating profit for each of the six reporting segments for 2008, 2007 and 2006 is shown in the table on page 12.
Business Operations in Europe Materials
The Materials Division in Europe is a major vertically integrated producer of primary materials and value-added manufactured products operating in 19 countries and is actively involved in the Groups development efforts in Asia.
Its principal products are cement, aggregates, readymixed concrete, concrete products, asphalt and lime. Ireland, Poland, Finland, Switzerland, Spain, Portugal and Ukraine, together with India and China in Asia and Turkey in the Mediterranean, are the major markets.
In total, the Division employs approximately 14,500 people at over 550 locations.
Aggregate reserves are adequate to permit production at current operating levels for a minimum of 20 years.
CRH is the largest supplier and producer of cement in the Republic of Ireland, accounting for approximately 55% of cement market demand in the whole island of Ireland. The Group operates two cement plants with a total annual production capacity of 2.6 million tonnes of clinker. Capacity utilisation was high at both plants in 2008. In December 2008 Irish Cement completed a 200 million investment project at its major cement facility near Dublin. The investment has created an ultra-modern, energy-efficient plant meeting world best practice emissions standards. Cement customers primarily comprise concrete producers and merchants supplying construction contractors and others. Sales to other CRH subsidiaries accounted for approximately 32% of Irish Cements revenue in the Republic of Ireland in 2008, with the next five largest customers accounting for approximately 33%. Competition comes principally from three cement plants, two in the Irish Republic and a third plant near Belfast. Results are influenced primarily by the level of construction activity in Ireland.
In addition to cement, CRH produces aggregates, readymixed concrete, concrete products and asphalt road products at 111 locations throughout Ireland. Aggregates, asphalt and related services are sold principally to local governmental highway authorities and to contractors, while readymixed concrete and concrete products (manufactured mainly at locations with aggregates on site and including block, masonry, pipe, rooftiles and paving) are sold to both the public and private construction sectors. CRH is also involved in asphalt contracting and sells agricultural limestone to the farming community. The Group encounters strong competition in all of its markets and competes principally on quality, service and price. Operations are affected by the overall level of government capital expenditure, the level of activity in the housing, agricultural, industrial and commercial construction markets and by the weather.
CRHs subsidiary Finnsementti is the sole cement manufacturer in Finland. Operating from two dry-process plants in southern Finland, the company has an annual capacity of 1.8 million tonnes of cement. Limestone is available under long-term supply agreements. Sales to other CRH subsidiaries accounted for approximately 26% of Finnsementtis revenue in 2008. The company competes on the basis of the quality and consistency of its product and on the reliability of its service. Competition comes mainly from Germany, but also from Lithuania and Russia. Annual cement imports into Finland are reported to be approximately 0.25 million tonnes per annum.
CRH also produces aggregates, precast concrete products and readymixed concrete in Finland, and has locations in the Baltic States of Latvia and Estonia. CRH is the only Western readymixed concrete producer in St. Petersburg, Russia.
Central Eastern Europe
In Poland, CRH operates a modern dry process kiln at Ożarów, approximately 170km south east of Warsaw, with a total annual clinker production capacity of 2.8 million tonnes. Management is reviewing the timing of the requirement for additional cement capacity in Poland, and accordingly further expenditure has been postponed on the expansion project at Ożarów which was announced in 2007. A second smaller plant, located approximately 210km south east of Warsaw, has an annual clinker capacity of 0.28 million tonnes. CRH also produces a range of building materials including aggregates, asphalt, readymixed concrete, concrete products and lime in Poland.
The Group operates one wet-process cement plant in southwest Ukraine which produced 2.1 million tonnes of cement in 2008. An investment of 210 million to convert this facility to dry process is ongoing; this project, the first ever Joint Implementation Project registered by the United Nations, is expected to deliver significant efficiency savings and reduced CO2 emissions when commissioned in 2010. Substantial limestone reserves are located close to the plant.
With two modern, well-equipped, energy-efficient cement plants in Switzerland, CRH has an annual capacity of 1.0 million tonnes. Both plants are located close to large limestone deposits. CRH has a market share of approximately 23%. Competition comes principally from two cement manufacturers in Switzerland. CRH also has aggregates and readymixed concrete operations in Switzerland, which have strong regional positions in the central and northwestern regions of Switzerland, producing approximately 3.1 million tonnes of aggregates and over 0.9 million cubic metres of concrete annually. Approximately 43% of cement produced is sold to CRHs readymixed concrete operations.
CRH has cement transport and trading, readymixed concrete and aggregates operations in the Netherlands.
CRH surface-mines aggregates from five quarries in Catalonia and one quarry in each of the Madrid, Valencia and Andalucia regions. During 2008, CRH produced approximately 3.0 million tonnes of aggregates of which approximately 94% was used to supply its own readymixed concrete and concrete products operations. Aggregate reserves in Spain are adequate to permit production at current operating levels for a minimum of eight years. CRH operates 70 readymixed concrete plants in Spain and in 2008 produced 2.5 million cubic metres of readymixed concrete. CRH also manufactures a variety of concrete products including blocks, pipe, paving slabs, steel reinforced beams and girders. CRH sources its cement supplies primarily from a number of major Spanish producers. Competition comes mainly from other large readymixed concrete producers and from a variety of small concrete product manufacturers in Spain. While the Group's largest market is the densely populated Catalonia region in northeastern Spain, it also operates readymixed concrete plants elsewhere in Spain.
CRH has a 26.3% equity stake in Corporación Uniland S.A. (Uniland), a major Spanish manufacturer of cement, readymixed concrete, mortar and aggregates with additional cement and readymixed concrete interests in Tunisia, Argentina and Uruguay.
CRH holds 49% of Secilwith joint management control. In Portugal, Secil operates three integrated cement plants with total capacity of 3.9 million tonnes, 49 readymixed concrete plants and 9 hard rock quarries. The company also produces precast concrete and mortars in Portugal. Secil is a prominent producer of cement in southeastern Tunisia where it has one plant with capacity of 1.3 million tonnes. In addition, Secil has a 51% investment in an integrated cement plant in Lebanon with a cement capacity of 1.3 million tonnes and a 51% investment in a cement grinding operation located in the south of Angola, and has a number of investments in other undertakings in Portugal. In 2008, Secil sold 6.2 million tonnes of cement (3.6 million tonnes in Portugal, 1.3 million tonnes in Tunisia, 1.0 million tonnes in Lebanon and 0.3 million tonnes in Angola), and also produced 2.1 million cubic metres of readymixed concrete and 3.5 million tonnes of aggregates in Portugal.
CRH has a 25% equity interest in Mashav, the holding company for the sole producer of cement in Israel. Mashav's facility at Ramla has two modern dry process kilns with combined annual capacity of 4.0 million tonnes of clinker. The Har Tuv location has a single semi-dry process kiln with annual capacity of approximately 0.55 million tonnes of clinker.
CRH holds a 50% stake in Denizli Cimento, an integrated cement and readymixed concrete business in Turkey. Denizli has a modern cement facility with a clinker capacity of 1.8 million tonnes and is the market leader in the Aegean region of southwestern Turkey. The company has substantial limestone reserves. Denizli also operates a network of 14 readymixed concrete plants in Denizli and the surrounding area.
CRH operates a cement plant in the Heilongjiang region of China. Harbin Sanling is a modern plant with two clinker production lines and total cement capacity of 0.65 million tonnes per annum.
In 2008, CRH acquired a 50% joint venture stake in My Home Industries Limited (MHIL), a cement company with headquarters in Hyderabad and markets in the Andhra Pradesh region of Southeast India. MHIL has an annual cement capacity of 3.2 million tonnes. A new grinding plant is under construction which will increase capacity to 4.2 million tonnes during 2009.
Business Operations in Europe Products & Distribution
Products & Distribution in Europe is organised into two reportable segments, Products and Distribution. The Products segment is organised into three groups of related manufacturing businesses involved in concrete, clay and other building products. Distribution encompasses professional builders merchants and DIY stores.
The Products segment operates in 20 European countries with the Benelux, the UK, France and Germany accounting for the bulk of its revenue. The Products segment seeks leadership positions in the markets in which it operates. This segment has approximately 21,300 employees at 523 operating locations.
This group manufactures concrete products for two principal end-uses: pavers, tiles and blocks for architectural use, and floor and wall elements, beams and vaults for structural use. In addition, sand-lime bricks are produced for the residential market. The group has manufacturing operations in Benelux, Denmark, France, Germany, Italy, Hungary, Poland, Romania, Slovakia, Switzerland and the UK. Principal raw materials include cement, crushed stone and sand and gravel all of which are readily available locally.
The architectural products group manufactures a range of concrete pavers, tiles, blocks, precast vaults, drainage and sewerage products. In 2008, the architectural group acquired Jonker, a bolt-on to our Dutch paver business that strengthens our position in the important Amsterdam market.
The structural products group focuses on floor and wall elements, beams and other structural elements for use in structural applications. In 2008, the structural group expanded its activities into Hungary, with the acquisition of Ferrobeton, a leading player in the non-residential market.
The Clay Products group has operations in Belgium, Germany, Netherlands, Poland and the UK, with the Ibstock operation in the UK being the largest business. The group principally produces clay facing bricks, pavers, blocks and rooftiles.
The Building Products group is active in lightside building materials and comprises three broad product segments: Construction Accessories, Building Envelope Products and Insulation.
The Construction Accessories group is a market leader in construction accessories in Europe. The platform was expanded in 2008 with the acquisition of Ancon, a UK-based designer and manufacturer of a range of stainless steel fixing systems, with operations in Continental Europe, the Middle East and Australia.
The Building Envelope Products business unit is mainly active in the non-residential construction market. The business unit comprises Fencing & Security (F&S), Daylight & Ventilation (D&V) and Roller Shutters & Awnings (RSA) businesses which specialise in entrance control and climate control products. F&S is a supplier of security solutions, which includes designing and manufacturing fencing and security gate systems and supplying access control systems for the building industry, manufacturing industry, sports and recreational areas, power stations and airports. Raw materials for fencing and security gate manufacturing comprise steel, aluminium, reinforced glass fiber, chain-link fabric and barbed wire purchased from a variety of sources. The D&V group manufactures glass and synthetic rooflights and associated smoke exhaust and natural ventilation systems. The group comprises 18 manufacturing locations in Germany, Benelux, the UK and Ireland. The RSA group was established in 2006 by the acquisition of AVZ, a leading developer, assembler and distributor of roller shutter and awning systems in the Netherlands.
The Insulation group is a pan-European business manufacturing three of the four main materials used in insulation (the fourth being mineral fiber which is not manufactured by the group). Insulation products are sold primarily to builders merchants for applications in commercial buildings and housing, while packaging products are manufactured for the electronics and food processing industries as well as for the horticultural industry.
This segment has approximately 11,500 employees at 717 operating locations.
Professional Builders Merchants
Professional Builders Merchants caters to the heavyside sector selling a range of bricks, cement, roofing and other building products mainly to small and medium-sized builders. Competition in merchanting is encountered primarily from other merchanting chains and local individual merchants. Three bolt-on acquisitions in 2008 added 8 locations to the existing network of 116 builders merchants locations in the Netherlands. In Switzerland two acquisitions added 12 branches to the existing network and strengthened the groups position as the largest builders merchant and the only country-wide supplier of sanitary ware, heating and plumbing (SHAP) products. In both France and Germany, CRH is a major regional distributor, with 91 locations in France. Bauking, in which we have a 47.82% stake, operates primarily in the northwestern half of Germany with 125 locations and our SHAP-activities expanded in 2008 with the acquisition of Paulsen, a leading player in the northern part of Germany.
In addition CRH holds a 21.66% stake in Groupe SAMSE, a publicly-quoted distributor of building materials to the merchanting sector in the Rhône-Alpes region of France and acquired a 34.8% investment in Trialis, the leading independent builders merchant in France (190 locations) in 2008.
The DIY Europe platform operates under five different brands: GAMMA (the Netherlands and Belgium), Karwei (the Netherlands), Hagebau (Germany), Maxmat (Portugal) and BricoHouse (Spain) selling to DIY enthusiasts and home improvers. CRH operates 131 Karwei and GAMMA DIY stores in the Netherlands and 19 GAMMA stores in Belgium. The stores operate within the Intergamma franchise organisation, the largest DIY group in the Benelux. Buying and advertising is undertaken by Intergamma, which is owned by its franchisees. Bauking operates 54 DIY stores under the brand name Hagebau. In Portugal, Maxmat is a 50% joint venture cash and carry DIY chain with 34 stores. CRH has 11 DIY stores in Spain operating in the Alicante/Valencia region. Competition comes primarily from other national DIY chains and from local DIY stores.
Business Operations in Americas Materials
The Americas Materials Division is a major vertically-integrated supplier of aggregates, asphalt and readymixed concrete in the United States, with operations in 44 states. The Division also offers transportation, construction and paving services, employing a total of 22,000 people at over 1,400 operating locations.
The Division is the largest asphalt producer, the third-largest aggregates producer and one of the top 5 readymixed concrete producers in the US. Aggregate reserves are adequate to permit production at current operating levels for a minimum of 20 years.
The Division is broadly self-sufficient in aggregates and its principal purchased raw materials are liquid asphalt and cement used in the manufacturing of asphalt and readymixed concrete respectively. These raw materials are available from a number of suppliers. There is a continued focus on improving bitumen and energy purchasing and we continue to source the lowest cost alternative energy for use in asphalt production.
Federal, state and local government authority road and infrastructural projects awarded by public bid represent a significant proportion of work carried out by the Division. The Division also has a broad commercial base, supplying stone, readymixed concrete and asphalt for industrial, office, shopping mall and private residential development and refurbishment.
In 2008 CRH reorganised its operations geographically into East and West, each containing four divisions.
Northeast (including operations in New England, New York, New Jersey and Connecticut)
Mid Atlantic (Pennsylvania, Delaware, Virginia, West Virginia, Kentucky, eastern Tennessee and North Carolina)
Central (Ohio and Michigan) and
Southeast (Alabama, Georgia, South Carolina and Florida)
Southwest (including operations in Texas, Oklahoma, Arkansas, Mississippi, western Tennessee, Missouri and Kansas)
Rocky Mountain/Midwest (Colorado, Wyoming, South Dakota, Iowa and Minnesota)
Northwest (Washington, Oregon and northern Idaho) and
Staker Parson (southern Idaho, Utah and Arizona)
Business Operations in Americas Products & Distribution
The Products & Distribution Division in the Americas operates mainly in the United States with a presence in Mexico, Canada and South America. This Division is comprised of two reportable segments, Products and Distribution.
This segment comprises five groups of which four are in North America: Architectural Products, Precast, Glass and MMI, each with local and national market positions; the fifth group is in South America where CRH is a major producer of clay products in Argentina and has glass fabrication businesses in Argentina and Chile. This segment has approximately 20,200 employees at 395 operating locations.
Architectural Products group (APG) APG, which is a large North American producer of concrete masonry, hardscape products, prepackaged concrete mixes and lightweight aggregates, as well as lawn and garden products, services the US and eastern Canada from 222 operating locations and 19 distribution centres in 38 states and two Canadian provinces. The residential and non-residential sectors combined account for over 95% of APGs output, a significant proportion of which is used in the RMI and DIY sectors.
APGs concrete masonry products are used for cladding and foundations. Hardscape products comprise pavers, retaining wall products and patio products.
Lawn and garden products, mainly bagged and bulk soil, mulch and specialty stone products, are marketed to major DIY and homecenter chains across the United States. Cementitious dry-mixes, marketed under the Sakrete® and ProSpec® brands, and lightweight aggregate are also important product lines. APG also includes Glen-Gery Corporation, a clay brick producer with an annual capacity of over 590 million bricks, operating 9 brick plants located primarily in the northeast and midwest regions of the United States.
Competition for APG arises primarily from other locally-owned concrete products companies. Principal raw material supplies are readily available.
Precast group The Precast group produces precast, prestressed and polymer concrete products, small plastic box enclosures and concrete pipe in the US and Canada with 84 locations in 26 states and the province of Quebec.
The most significant precast concrete products are underground vaults sold principally to water, electrical and telephone utilities. Other precast items include drainage and sanitary sewer products such as pipe, manholes, inlets and catch basins, street and highway products such as median barriers, culverts, short span bridges and precast flooring. In many instances, precast products are an alternative to poured-in-place concrete, which is a significant competing product. Plastic enclosures are also supplied to water, electrical and telephone utilities. Polymer trench is sold to the electric and railroad market.
In the northeast, the Building Systems group manufactures and installs pre-stressed concrete plank, precast structures and other products. These products are used mainly in structures such as hotels, apartments, prisons, parking garages and bridges.
Concrete pipe is used for storm and sanitary sewer applications, which are largely local government projects. Competing materials include corrugated steel pipe and high-density polyethylene pipe in storm sewer applications and plastic pipe in sanitary sewer applications.
Glass group The Glass group custom-manufactures architectural glass and engineered aluminium glazing systems for multi-storey commercial, institutional and residential construction. With 72 locations in 26 states and four Canadian provinces, the Glass group is a large supplier of high-performance glazing products and services in North America, delivering to all of the top 50 MSAs (Metropolitan Statistical Areas) in the US and four Canadian provinces.
Tempered glass and engineered aluminium glazing systems are building products with major applications in the RMI construction sector, and have a growing range of specialty uses in furniture, appliances, marine windows and in a wide range of architectural applications. The architectural glass product range includes insulated, spandrel, laminated, security and sound control glass manufactured in a variety of shapes, thicknesses, colours and qualities. The engineered aluminium glazing systems product range includes a broad range of storefront and entrances, curtain wall, skylights and architectural windows.
MMI MMI Products Inc., acquired in April 2006, is a leading US manufacturer and distributor of building products used by the residential, non-residential and infrastructure sectors. Operations comprise three distinct product segments: the construction accessories business supplies over 2,000 specialised products used in concrete construction activities; the welded wire reinforcement division mainly supplies products for non-residential and infrastructure applications; the third business manufactures and distributes a variety of fencing and related products. The group has 17 manufacturing plants and 59 branches across 29 states and a plant in Mexico.
South America CRH operates 5 different companies in Argentina and Chile.
Canteras Cerro Negro is a clay roofing, wall and floor tiles producer. It owns two state-of-the-art production facilities in Olavarría, 350 km south of Buenos Aires. Cormela, acquired during 2008, produces clay bricks at a facility in Campana, 60 km from Buenos Aires.
Superglass (Argentina) and Vidrios Dell Orto (Chile) fabricate tempered, laminated and insulated glass.
Commercial Duomo is a specialised construction products retailer and wholesaler in Chile. The company was acquired in 2008 and operates 3 retail stores.
Oldcastle Distribution, trading primarily as Allied Building Products (Allied), has 202 branches in 31 US states and 2 Mexican states, focused on major metropolitan areas. It comprises two divisions which supply contractor groups specialising in Roofing/Siding and Interior Products (wallboard, steel studs and acoustical ceiling systems). This segment has approximately 4,000 employees at 202 operating locations.
Allied is a large distributor in the Roofing/Siding segment in the United States. Demand is largely influenced by residential replacement activity, with the key products having an average life span of roughly 20 years. This division also supplies commercial roofing products.
We have significantly expanded the Interior Products segment in recent years and this division now accounts for more than 40% of annualised Distribution sales. The primary customers are drywall contractors who are mainly involved in new residential and new commercial construction. Three of its 63 branches are in Mexico.
Activity in the construction industry is characterised by cyclicality and is dependent to a significant extent on the seasonal impact of weather in the Groups operating locations with activity in some markets reduced significantly in winter due to inclement weather.
Sources and Availability of Raw Materials
CRH generally owns or leases the real estate on which its main raw materials, namely aggregates and clay reserves, are found. CRH is a significant purchaser of certain important materials such as cement, bitumen, steel gas, fuel and other energy supplies, the cost of which can fluctuate significantly and consequently have an adverse impact on CRHs business. CRH is not generally dependent on any one source for the supply of these materials, other than in certain jurisdictions with regard to the supply of gas and electricity. Competitive markets generally exist in the jurisdictions in which CRH operates for the supply of cement, bitumen, steel and fuel.
CRH is the holding company for an international group of companies. The principal subsidiary, joint venture and associated undertakings are listed in Exhibit 8.
Property, Plant and Equipment
At 30 April 2009, CRH and its joint ventures had a total of 2,879 building materials production locations, of which 1,796 were located in the Americas, 101 were located in the Republic of Ireland, 123 in Britain and
Northern Ireland and 859 in Mainland Europe. At the same date, CRH had a total of 919 Merchanting & DIY locations of which 202 were located in the Americas and 717 in Mainland Europe. 484 locations in the United States, 11 in the Republic of Ireland, 58 in Britain and Northern Ireland, 720 in Mainland Europe, and 5 in Canada are leased, with the remaining 2,520 locations held on a freehold basis.
CRH believes that all the facilities are in good condition, adequate for their purpose and suitably utilised according to the individual nature and requirements of the relevant operations. CRH has a continuing programme of improvements and replacements to properties when considered appropriate to meet the needs of the individual operations. The Groups principal properties by acreage at 30 April 2009 are listed below. All quarries are open pit.
CRH is committed to excellence in environmental management. Group environmental policy, applied across all Group companies, is to:
Achieving our environmental policy objectives at all our locations is a management imperative; this line responsibility continues right up to CRH Board level. Daily responsibility for ensuring that the Group's environmental policy is effectively implemented lies with individual location managers, assisted by a network of Environmental Liaison Officers (ELOs). At each year-end, the ELOs assist the Group Technical Advisor and his team in carrying out a detailed assessment of Group environmental performance, which is reviewed by the CRH Board.
During 2008, CRH spent approximately 56 million on environmental upgrades and improvements in Group subsidiary companies. Many companies reduced specific air emissions, increased recycling of water,
continued with the use of secondary materials and achieved further process and energy efficiency gains, with direct economic as well as environmental benefits. We continued restoration of worked-out quarries and pits, and fostered biodiversity where it exists: 92% of all our quarries and pits now have restoration plans.
CRH publishes details of its environmental performance in its annual Corporate Social Responsibility Report, downloadable from www.crh.com. The entire 2007 Report was verified by DNV (Det Norske Veritas), and qualified as A+ application level under the G3 sustainability reporting guidelines of the GRI (Global Reporting Initiative). The 2008 CSR Report will be available by mid-2009. During 2008 CRH was again ranked among the sector leaders by a number of leading socially responsible investment rating agencies, and was again listed on the Dow Jones World and STOXX indexes and the FTSE4Good Index.
Addressing climate change
CRH recognises that climate change is a major challenge facing humanity, and is committed to playing its part in developing practical solutions. CRH is a core member of the Cement Sustainability Initiative (CSI) of the World Business Council for Sustainable Development (WBCSD). The CSI is a voluntary initiative by 18 of the worlds major cement producers, promoting greater sustainability in the cement industry.
In 2007, CRH committed to a 15% reduction in its specific CO2 cement plant emissions by 2015 compared with the 1990 specific emissions for the same portfolio of plants. This reduction is on track, and is being achieved through major capital investment programmes at its cement plants in Finland, Ireland, Ukraine and Poland. The Ukraine project is the worlds first Joint Implementation Project (JI-0001) registered by the United Nations under the flexible mechanisms of the Kyoto Protocol, and will replace an old technology wet-process plant with a state-of-the-art dry process plant.
CRH operated successfully within the pilot phase of the National Allocation Plans under the European Emissions Trading Scheme for the period 2005-2007, and is actively implementing a carbon reduction strategy in the context of the published Plans for the Kyoto phase for the period 2008-2012. Through Cembureau (European Cement Association) and the WBCSD, CRH is actively engaged in industry initiatives to develop appropriate carbon mitigation strategies post 2012.
Possible environmental liabilities
At 30 April 2009 there were no material pending legal proceedings relating to environmental regulations or to site remediation which are anticipated to have a material adverse effect on the financial position or results of operations or liquidity of the Group, nor have internal reviews revealed any situations of likely material future environmental liability to the Group.
ITEM 5OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Summary of 2008 results
After a strong start, economic growth in Eastern Europe weakened as the year 2008 progressed, while in the core Eurozone countries the slower trading patterns evident in the second quarter intensified through the second half of 2008 with increasingly negative economic newsflow. In the United States, new residential construction continued its decline while the negative developments in financial markets in the second half of 2008 had a growing impact on previously resilient non-residential demand. US infrastructure volumes were adversely affected by the strong pricing necessary to recover sharply higher energy-related input costs.
Europe Materials had a positive first half of 2008 with continuing advances in Poland and Ukraine, together with recovery in Portugal, more than compensating for declines in the Irish and Spanish markets. However, with slowing construction activity in Eastern Europe and generally weaker trading patterns in other markets, profitability in the second half was close to 2007 levels. Overall, for the year, operating profit grew by 8%.
Europe Products & Distribution had a good start to the year; however, slower trading patterns evident through the second quarter intensified through the second half and operating profit for the year fell by 20%. Our Concrete Products operations launched significant cost reduction initiatives in response to weakening markets. The Clay Products business was severely impacted by the sharp downturn in UK housing construction, which necessitated sharp capacity cuts and cost restructuring. Building Products businesses generally performed well, with positive acquisition contributions and satisfactory demand in non-residential segments. Distribution activities benefited from acquisition effects but these were more than offset by weaker trading in builders merchanting in the second half of the year.
Our Americas Materials business, a national leader in aggregates, asphalt and readymixed concrete, with a major presence in infrastructure markets, saw operating profit decline 13% in US dollar terms. While highway funding was strong, with good spend from the multi-year Federal programme and from State and local sources, residential and non-residential demand declined. High energy-related input costs, particularly through the summer months, required a continuing intense focus on efficiency, cost and pricing initiatives. The achievement of price increases necessary to recover higher input costs led to sharp volume declines with an inevitable impact on profitability.
Americas Products & Distribution, which principally sells to the residential and non-residential sectors, saw operating profit decline 14% in US dollar terms. The Architectural Products and Precast groups, with their significant exposure to early stage construction, were most affected, with combined US dollar operating profit down approximately 50%. In contrast, the Glass group, whose products are utilised later in the construction cycle, delivered improved underlying profit and also benefited from the full-year inclusion of Vistawall acquired in June 2007. The initiatives implemented in 2007 to improve profitability at MMI resulted in a significant uplift in profit, despite the tough demand backdrop. Our products operations in South America once again reported positive outcomes. Distribution had an outstanding year with ongoing benefits from effective pricing, revenue and overhead management, and from the November 2007 acquisition of Acoustical Materials Services, which together delivered a substantial uplift in operating profit and margin.
Throughout 2008, our management teams responded early and progressively to weakening markets by implementing the necessary cost and efficiency measures across the Group and by focussing resolutely on cash generation. This unfortunately necessitated some painful adjustments in many of our operations but was essential to maintaining performance in challenging times.
Managements Financial Review
The following discussion should be read in conjunction with the Consolidated Financial Statements of CRH that appear elsewhere in this Annual Report on Form 20-F. These financial statements have been prepared in accordance with IFRS.
The terms ongoing, organic, underlying, like-for-like and heritage have the same meaning in the discussion that follows.
The level of construction activity in the geographical areas in which Group businesses operate influences the Groups results. Activity in the construction industry is characterised by cyclicality and is dependent to a significant extent on the overall level of government capital expenditure, the level of activity in the housing, industrial and commercial construction markets and local weather conditions.
2008 saw major changes in the financial, economic and business climate worldwide. These events necessitated a significant shift in CRHs short-term focus with the implementation of wide ranging cutbacks across CRHs businesses and a significant curtailment of development activity as the economic environment deteriorated. Despite a very challenging backdrop, and the adverse translation effects of a weaker average US dollar/euro exchange rate, CRH performed robustly and succeeded in limiting the decline in performance following 15 consecutive years of growth between 1992 and 2007.
Revenue for 2008 amounted to 20.9 billion, similar to the 2007 level and in excess of 20 billion for the second consecutive year. Full year profit before tax amounted to 1.6 billion, a decrease of 14% compared to 2007, and in line with guidance provided in the Interim Management Statement of 11 November 2008 and in the Trading Update Statement of 6 January 2009. There was a lower decrease in earnings per share which fell 11% to 233.1c (2007: 262.7c), as a result of the share buyback and a lower effective tax rate, 22.5% compared with 24.5% in 2007.
Operating profit in CRHs European divisions declined by 57 million to 1,049 million, a 5% decrease. Acquisitions completed in 2007 and 2008 contributed an incremental 73 million of operating profit, while organic operating profits declined by 130 million. Operating profit for the Americas operations decreased by 188 million to 792 million, down 19%. The weaker average US dollar/euro exchange rate accounted for 67 million of the decrease in operating profit. In US dollar terms, operating profit declined 13%. Overall operating profit margin decreased to 8.8% (2007: 9.9%).
Profit on disposal of non-current assets at 69 million was ahead of 2007 (57 million).
Expenditure on acquisitions and investments during 2008 totalled approximately 1 billion.
CRH repurchased a total of 18.2 million Ordinary Shares in 2008, equivalent to 3.3% of the total outstanding at the end of 2007. In light of the stresses in financial markets, and to maintain maximum financial flexibility, the share repurchase programme was terminated in November 2008.
Interest Cover Ratio
Management believes that the EBITDA interest cover based ratio is useful to investors because it matches the earnings and cash generated by the business to the underlying funding costs. The calculation of net interest and EBITDA in the following table presents the various interest and EBITDA-related items of the Group Income Statement, added together to show net interest and EBITDA for each year.
As set out in Note 23 to the Financial Statements on page F-55, the Groups major bank facilities and debt issued pursuant to note purchase agreements in private placements require the Group to maintain EBITDA/net interest (excluding share of joint ventures) no lower than 4.5 times for twelve-month periods ending 30 June and 31 December in each year. Non-compliance with financial covenants would give the relevant lenders the right to demand early repayment of the related debt thus impacting the maturity profile of the Groups debt and the Groups liquidity.
Despite lower profitability in 2008, EBITDA/net interest cover remained high at 7.8 times for the year (2007: 9.4 times), above the Groups comfort range of 6 to 6.5 times.
Calculation of EBITDA Interest Cover Ratio
For 2008, reported revenue was broadly in line with 2007, with declines in operating profit of 12% and in pre-tax profit of 14%. The key components of 2008 performance are analysed in the table on page 32.
Exchange translation effects
2008 saw a further decline in the value of the US dollar with the average US dollar/euro rate of 1.4708 being 7% weaker versus the euro than in 2007 (1.3705). This combined with movements in average exchange rates for
CRHs other operating currencies resulted in an adverse translation impact of 50 million at profit before tax level. The average and year-end exchange rates used in the preparation of CRHs financial statements are included under Accounting Policies in the 2008 Financial Statements on page F-10.
Incremental impact of 2007 acquisitions
2007 acquisitions contributed incremental operating profit of 70 million on revenue of 1.372 billion, an effective incremental operating profit margin of approximately 5%.
In Europe, 2007 acquisitions generated an incremental 32 million in operating profit on revenue of 563 million to give a margin of approximately 5.7%. This reflected primarily the full-year impact of the Gétaz Romang acquisition completed by the Distribution group in May 2007, and the buyout of the outstanding 55% of the Cementbouw business at end-August 2007, which is now reported as part of the Europe Materials segment.
In the Americas, 2007 acquisitions contributed an incremental 38 million in operating profit on revenue of 809 million, with acquisitions across Products and Distribution operations accounting for the bulk of the total impact.
Incremental impact of 2008 acquisitions
The incremental impact from 2008 acquisitions amounted to 53 million in operating profit and 530 million in revenue, an effective operating margin of 10%.
Acquisitions by CRHs European divisions operations contributed an incremental 41 million in operating profit and 411 million in revenue, a margin of 10%. Materials acquisitions added 16 million in operating profit and 74 million in revenue to the 2008 outcome, which included CRHs 50% joint venture share in My Home Industries Limited in India acquired in May 2008. The acquisition in April of Ancon, the UK construction accessories business, and Hungarian precast concrete producer Ferrobeton, were the major contributors to an incremental 16 million in operating profit on revenue of 172 million from 2008 Products acquisitions. The contribution from 2008 acquisitions undertaken by Europe Distribution9 million in operating profit on revenue of 165 millionreflects primarily the strengthening of CRHs sanitaryware, heating and plumbing business with three acquisitions in Switzerland and Germany in mid-2008.
2008 acquisitions in the Americas contributed an incremental 12 million in operating profit on revenue of 119 million, with acquisitions across Materials and Products operations accounting for most of the impact.
CRHs 2009 results are expected to reflect a modest incremental impact from 2008 acquisitions, which on a combined basis, have annualised sales of approximately 0.8 billion.
There were no non-recurring items in 2008 or 2007.
2008 organic revenue declined by 1.248 billion, a reduction of approximately 6% compared with growth of just over 1% in 2007. Overall organic revenue declined by 4% in Europe while the reduction was 8% in the Americas; this compared with 2007 which saw organic revenue growth of approximately 8% in Europe and a decline of 5% in the Americas. Underlying operating profit fell by 301 million compared with a growth of 164 million in organic operating profits in 2007.
Underlying operating profit for CRHs European operations fell by 130 million on an underlying revenue reduction of 434 million, reflecting the impact of weaker markets, particularly in the second half of the year. Operating profits for the Materials businesses in Europe were flat for the year, with a positive first half offset by
generally weaker trading patterns in the second half. The Products business in Europe experienced increasingly difficult trading conditions, with a 27 million operating profit decline in the first six months followed by further declines in the second half to result in an overall decline of 99 million for the year. While first-half underlying operating profit in the Europe Distribution business was in line with 2007, weakening consumer confidence had an adverse impact in the second half with the overall decline in underlying profits amounting to 35 million.
CRHs operations in the Americas had a challenging year reporting a decline of 814 million in underlying revenue and a decline of 171 million in like-for-like operating profit. The Materials Division continued to achieve success in recovering higher energy and other input costs, but with significant like-for-like volume declines, underlying operating profit fell by 86 million. Throughout the year, the negative developments in financial markets had a growing impact on previously resilient US non-residential demand, while residential activity continued to weaken with the Products businesses reporting falls of 291 million in revenue and 94 million in operating profits from underlying operations. While CRHs Distribution operations in the Americas suffered from the decline in residential construction, effective pricing and revenue and overhead management resulted in underlying operating profit being 9 million higher than 2007.
Key Components of 2008 Performance
Reported 2008 pre-tax profit of 1,628 million includes the Groups share of associates after tax profit of 61 million. The tax charge at 22.5% of the Group profit before tax decreased compared with 24.5% in 2007.
Group profit for 2008 amounted to 1,262 million, a decrease of 12% on 2007 Group profit of 1,438 million.
Operating profit margins
Overall operating profit margin for the Group fell by 1.1 percentage points to 8.8%, with all segments except Europe Materials and Americas Distribution experiencing margin declines. The table below summarises the margins by business.
Operating Profit Margin Data
Europe Materials experienced a change in economic conditions during 2008. After a positive first half when continuing advances in eastern Europe more than compensated for declines in Ireland and Spain, the deteriorating global economic environment impacted second half performance. Overall, operating profit for the year was up 8% on a record 2007 performance.
Construction demand in Ireland fell significantly in 2008. The decline of the residential sector, which commenced in 2007, accelerated through the year. Sales to the commercial sector, which were strong in the first half, weakened considerably in the second half. The infrastructure and agricultural sectors continued to see strong demand. Cost reduction programmes were intensified with consequent one-off rationalisation costs. Overall operating profit declined compared to 2007.
In the Netherlands, CRHs cement trading, readymixed concrete and aggregates business, consolidated into Europe Materials in 2007, had a good first full year in the division and exceeded target returns.
Finlands economy grew at a more modest rate in 2008 following the strong expansion of recent years. Overall construction demand advanced during the first half; however, the second half saw slowing non-residential construction, an accelerating decline in residential output and completion of a number of infrastructure projects. As a result, demand for CRHs products was at a lower level than in 2007; however, improved efficiencies and strong cost control led to increased operating profit. The Baltic States had a difficult year and overall profit in Latvia and Estonia declined. CRHs operations in St. Petersburg benefited from declining input costs, but weaker second-half demand resulted in a lower outcome.
The Polish construction market experienced a good year. Increases in commercial and industrial construction compensated for a decline in infrastructure and public non-residential building and also in housing activity in the main cities. Cement volumes remained at 2007 levels. The concrete products businesses performed very well with increased volumes in readymixed concrete and pavers, although walling products were impacted by a slowdown in the residential sector. Overall in Poland, improved efficiencies and good input cost recovery resulted in improved margins and operating profit was up significantly on 2007 levels. In Ukraine, cement volumes grew strongly in the first half but fell back in the second half as political and economic difficulties intensified. However, better pricing and the use of coal in place of high cost natural gas resulted in higher operating profit.
Infrastructure and public non-residential spending increased and more than compensated for declines in housing and industrial activity. Cement volumes were in line with 2007 levels but significant fuel cost increases were not fully recovered resulting in cement profits behind 2007. Margins in CRHs readymixed concrete and aggregates business increased and the outcome was ahead of 2007. CRHs combined Swiss operations delivered a satisfactory performance in 2008.
Iberia and Eastern Mediterranean
Construction activity in Spain fell significantly. New infrastructural projects in Catalonia benefited CRHs operations in the second half of the year. However, the residential and non-residential sectors were particularly affected and despite adjusting capacity by consolidating locations, operating profit declined significantly. The Portuguese economy grew in 2008; however, construction declined with lower activity in all sectors. CRHs Secil joint venture with three cement plants operated at full capacity taking advantage of strong export markets. Secil also enjoyed a positive performance in its activities outside Portugal and reported a good uplift in operating performance due to a favourable pricing environment and production efficiencies. Construction demand in the Southwest Aegean region of Turkey was somewhat negative and this, combined with increased competition, resulted in declining volumes and prices, and lower operating profit, from CRHs joint venture Denizli Cement.
Sanling Cement in northeastern China achieved record volumes and improved factory efficiency. However, competitive pricing in the region resulted in a lower outcome. CRHs 50% Indian joint venture, My Home Industries Limited (MHIL), has been included in CRHs consolidated results from May 2008. The significant economic and construction growth in the Andhra Pradesh market continued as anticipated and MHIL performance was ahead of CRHs expectations.
Following a positive first quarter, CRHs markets became increasingly difficult as the year progressed and its Products operations saw operating profit decline by 27%, impacted by 35 million of rationalisation costs.
Architectural operations faced difficult conditions in several markets in 2008 and performed significantly below 2007. CRHs Belgian, French and Danish paver and tiles businesses suffered from weak residential markets and falling consumer confidence while its UK block business experienced a significant volume drop. In Germany, the downturn in new residential construction impacted results. Results in CRHs Dutch operations improved driven by a restructuring project which commenced in 2007, while its Slovakian businesses continued to perform strongly. CRHs structural concrete business delivered profits below 2007. Danish and Irish businesses were significantly impacted, from the beginning of the year, by difficult conditions in residential markets. Belgium and the Netherlands, which include CRHs sand-lime brick operation, were less affected, with the decrease in the residential sector only becoming evident from the third quarter. CRHs operations serving non-residential markets across Europe performed well, with strong results in Belgium and France driven by tight operational control. Significant restructuring involving factory closures and capacity reduction was undertaken across both Architectural and Structural operations during 2008.
Results in the Clay Products group declined significantly in 2008, primarily due to difficulty in the UK brick market. In response to falling revenues, four factories were closed, extensive production shutdowns implemented and overhead costs reduced. Energy prices increased significantly during the year which, combined with production cut-backs, closure costs and redundancy programmes, resulted in an outcome well below the prior year. In Mainland Europe, CRHs country-based organisation was restructured to form two operating regions, Central Europe and Eastern Europe, improving cross border trading and reducing administration costs. Volumes declined as the year progressed; however, this was largely offset by strong pricing and overall the profit performance for these operations was similar to 2007.
In total, 2008 operating profit was broadly in line with 2007. Construction Accessories experienced another year of performance and growth. The contribution of Ancon, acquired in April 2008, exceeded CRHs expectations and all its businesses showed solid operating results despite deteriorating market conditions towards the end of the year. CRHs Building Envelope Products includes Entrance Control, Climate Control and Roller Shutters & Awnings businesses. Entrance Control operations in fencing, security and access systems experienced another year of solid performance. In Climate Control, CRHs rooflight & ventilation activity reported further progress in operating results, driven by a strong performance in its German business. The Roller Shutters & Awnings business experienced difficult market conditions due to declining consumer confidence and
unfavourable weather conditions in the Netherlands. Despite good progress on profit improvement initiatives, Insulation Products had a difficult year. The slowdown in residential markets, especially in the United Kingdom and Ireland, high volatility in input prices and price pressure in Eastern Europe were the main reasons for a disappointing result.
The effects of the worldwide financial crisis led to a slowdown in business activity as 2008 progressed. Revenue increased aided by contributions from eight acquisitions completed in 2008. However operating profit in 2008 declined by 8% compared with 2007.
Trading across CRHs Builders Merchants operations which had a generally good first half weakened with the economic climate and organic revenue registered a decline of approximately 4%. In the Netherlands, after a relatively strong first six months, revenue weakened in the second half resulting in lower annual like-for-like revenue and operating profit compared with 2007. In France, CRHs heritage operations in Ile-de-France (100%), Burgundy (58%) and Franche-Comté (58%) witnessed a slowdown which resulted in reduced revenue and profit. Compared to other Western European construction markets, the Swiss market showed some resilience. However, internal reorganisation costs resulted in a slightly disappointing outcome with profits down on 2007 despite higher revenue.
CRHs Austrian operations benefited from reorganisation initiatives taken in 2007 and 2008. These measures included the closure of some loss-making branches and, although 2008 revenue decreased, operating profit returned to positive territory. Further initiatives continue to be implemented to restore margins to appropriate levels. Revenue at Bauking, the German joint venture in which CRH has a 48% stake, held up fairly well but like-for-like revenue versus 2007 was down marginally and despite relentless cost control, like-for-like operating profit also declined. The 2007 acquisitions were successfully integrated and performed according to expectations. Overall in Germany, including acquisition effects, revenue advanced and operating profit was at a similar level.
CRHs DIY operations which were adversely affected by weakening consumer confidence in the first half of the year proved more robust through the second half as a result of strong management action.
In the Netherlands and Belgium, like-for-like revenue was flat compared with 2007. Increased competition and promotional campaigns had a negative impact on margins; however, this was mitigated by tight cost control and sharp franchise formula management leading to only a modest decrease in operating profit.
In Germany, Bauking operates 54 DIY stores under the brand name Hagebau. In a very competitive market, Bauking managed to keep costs under tight control which led to a slight decline in operating profit while maintaining a similar revenue level to 2007.
In Portugal, revenue increased supported by the opening of 5 new stores; however, start-up losses for the new openings and difficult market conditions resulted in lower profits than in 2007. In Spain, market circumstances in Alicante/Valencia have been very challenging and results were below expectations.
Americas Materials had a very challenging year with unprecedented increases in bitumen and energy costs and a sharp decline in market volumes across all major business lines. Through effective pricing, energy management and cost cutting initiatives, the division was able to limit the overall decline in US dollar operating profit to 13% from 2007 levels, a solid result.
Overall energy costs increased by 41% compared with 2007 despite lower volumes as prices surged during the construction season. The increase was mainly driven by bitumen, which experienced a 60% price increase from 2007 levels. The pricing of energy used at CRHs asphalt plants, consisting of fuel oil, recycled oil and natural gas, increased by 45%. Diesel and gasoline jumped 38% and 19% respectively.
In order to offset the substantial jump in energy costs, selling prices were increased across all CRHs product lines with an 11% increase in aggregates pricing, a 28% increase in asphalt and a 4% increase in readymixed concrete. With the significant increases in selling prices and relatively fixed public infrastructure spending, highway paving volumes declined in 2008. Including acquisitions, aggregates volumes declined 16%, asphalt declined 10% and readymixed concrete dropped 7%. Heritage aggregates volumes showed a 17% drop with asphalt down 14% and readymixed concrete down 21%.
CRH management implemented several energy and cost reduction initiatives in 2008 to limit the decline in profit. CRHs winter-fill strategy helped to contain bitumen cost increases and it successfully increased its usage of recycled asphalt to lessen bitumen requirements. Division-wide purchasing programmes were initiated to reduce the unit cost of purchased materials and supplies while continued operational best practice efforts helped reduce both labour and equipment cost while eliminating waste. Reductions in fixed overhead staffing and other fixed costs were progressively implemented in response to shrinking demand.
The Northeast division had a difficult year mainly due to significant declines in New Jersey and Connecticut markets. In the Central division, companies in Ohio and Michigan experienced volume reductions consistent with its overall declines in aggregates and asphalt. However, with sound pricing initiatives, good bitumen purchasing, and effective cost controls, the division was able to achieve a good advance in profit. The Mid-Atlantic division saw its operating profit decrease slightly, due mainly to challenging markets in Pennsylvania and Delaware, with reduced demand and higher energy costs. The Southeast division experienced a difficult year with severe market declines leading to a sharp fall-off in operating profit.
The Southwest division was impacted by volume declines in aggregates and rapidly escalating variable costs associated with asphalt production. Pro-active efforts to increase prices and reduce costs along with the successful integration of 2007 acquisitions resulted in an overall profit increase for this division. The Rocky Mountain/Midwest division moved profits ahead in 2008 due to strong demand and positive performance in western Colorado, Wyoming and South Dakota. The Midwest companies experienced a tougher year with a slower economy and poor highway activity in Minnesota. In the Northwest, worsening economies in Northern Idaho and Oregon had a severe impact on volumes and although favourable pricing somewhat softened the negative impact, profits fell sharply. The Staker Parson operations saw a significant drop-off in volumes from the very strong levels of 2007, reflecting a weakening economy in both Utah and Idaho.
CRHs Products businesses faced another tough year with ongoing financial and credit market turmoil, further declines in new residential construction and a slowdown in non-residential markets. Significant cost reduction measures were implemented across CRHs businesses which somewhat mitigated the impact of volume declines.
Architectural Products group (APG)
APG faced very difficult trading conditions in 2008 due to the ongoing deterioration in the residential construction sector, a second-half slowdown in its non-residential markets, weaker demand from the homecenter channel, and rising raw material, energy and fuel costs. Reflecting these negative factors, the groups United States masonry, brick and dry-mix divisions experienced considerable profit declines, while its Canadian masonry and United States lawn and garden businesses held up relatively well. Management actions to reduce the bottom-line impact through extensive cost reductions and regional consolidation of plant networks somewhat offset the negative external factors. Overall, APG recorded an 8% decline in revenue and a 59% decline in operating profit.
Overall volumes were down approximately 9% in 2008, with operating margins off significantly from a strong 2007. Drainage products and plastic box enclosures were particularly hard hit while non-residential also slowed as tight credit and project completions negatively impacted revenue. In spite of the harsh economic backdrop and an increasingly competitive market, good cost control and effective price management lessened the profit impact.
Trading conditions in the architectural glass market weakened in 2008 as commercial construction activity declined. Despite raw material cost increases, higher input costs, and a more competitive environment, margins were stable. Managements focus on customer service, cost control and product mix enabled the group to achieve an exceptional outcome. Revenue and profits increased 18% and 28% respectively due to the outstanding
performance of the Engineered Products group. Of note were the full-year contributions from the Vistawall acquisition completed in June 2007 and significantly improved results from Antamex, the groups Canadian-based supplier of high-performance curtain wall systems and engineering design services.
MMIs sales volumes generally declined because of reduced market activity. However, with benefits from rationalisation and cost reduction measures, profits improved markedly in 2008 helped by an enhanced view of value pricing and price increases in advance of rapidly increasing steel costs. Management responded to the decline in sales volumes through overhead reductions and rationalisation of the distribution network in its fencing business, and through closure of a manufacturing plant at its welded wire reinforcement (WWR) division. MMI also took action to enhance its leadership resources significantly during the year and recruited new senior level leadership for both the WWR and construction accessories operations.
CRHs operations in Argentina and Chile performed well despite a deteriorating economic climate as 2008 progressed. In Argentina, operating profit from the ceramic tile and glass businesses was slightly down on 2007 levels. CRHs Chilean glass business reported an improved outcome; a new state-of-the-art laminating facility started production in March 2008. The Santiago-based distributor of specialised building products, acquired in early 2008, was impacted by second-half currency devaluation of the Chilean peso.
Americas Distribution comprises two divisions which supply specialist contractor groups; Roofing/Siding which accounts for approximately 58% of annualised sales and Interior Products (wallboard, steel studs and acoustical ceiling systems) which represents approximately 42% of annualised sales.
Roofing/Siding (Exterior Products)
US petroleum-based roofing systems benefited from a surge in demand due to hailstorms in southern and central US cities and a spike in petroleum costs to create a positive pricing environment for the Roofing/Siding division.
While Interior Products markets were challenging, with significant wallboard price deflation, the inclusion of a very positive full-year trading contribution from the November 2007 acquisition of Acoustical Materials Services in the western United States and Baja California, offset organic declines.
Overall Americas Distribution operating profit increased 41% in US dollar terms and operating margins advanced by over a full percentage point from 5.3% to 6.4%.
CRH performed robustly in 2007 with growth in reported revenue of 12%, in operating profit of 18% and in pre-tax profit of 19%. The key components of 2007 performance are analysed in the table on page 42.
Exchange translation effects
2007 saw a sharp decline in the value of the US dollar with the average US dollar/euro rate of 1.3705 for 2007 being 8% weaker versus the euro than in 2006 (1.2556). This combined with movements in average exchange rates for our other operating currencies resulted in an adverse translation impact of 67 million at profit before tax level. The average and year-end exchange rates used in the preparation of CRHs Financial Statements are included under Accounting Policies on page F-10 of this Report.
Incremental impact of 2006 acquisitions
2006 acquisitions contributed incremental operating profit of 121 million on revenue of 1,636 million, an effective incremental margin of approximately 7%.
In Europe, 2006 acquisitions generated an incremental 27 million in operating profit on revenue of 245 million to give a margin of approximately 11%. This primarily arose in Products operations and mainly reflected the impact of the Halfen-Deha Construction Accessories acquisition completed in May 2006 and the AVZ Roller Shutters & Awnings purchase finalised in August together with 11 other Products acquisitions spread throughout 2006.
In the Americas, 2006 acquisitions contributed an incremental 94 million in operating profit on revenue of 1,391 million, with the incremental operating profit margin of approximately 7% reflecting inherently low margins in both APAC, acquired by Americas Materials in August 2006, and in our MMI platform acquired by Americas Products in April. APAC exceeded expectations in 2007 contributing almost all of the incremental 80 million in operating profit and 1,002 million in revenue generated by 2006 Materials acquisitions. In Products, MMI had a tough year as the downturn in new housing particularly impacted its residential orientated fencing activities. As a result the incremental operating profit impact from 2006 Products acquisitions was slightly negative on incremental revenue of 226 million. However, 2006 Distribution acquisitions contributed strongly delivering incremental operating profit of 15 million on revenue of 163 million.
Incremental impact of 2007 acquisitions
The incremental impact from 2007 acquisitions amounted to 101 million in operating profit and 1,215 million in revenue, an effective margin of just over 8%.
2007 acquisitions by our European based operations contributed an incremental 76 million in operating profit and 861 million in revenue, a margin of approximately 9%. Our Materials operations benefited from acquisitions in Poland, Portugal, Turkey and China and from the buyout of the outstanding 55% stake in Cementbouw B.V., following which responsibility for this business passed from Europe Products to Europe Materials. Materials acquisitions added 34 million in operating profit and 210 million in revenue to the 2007 outcome. The acquisition in May 2007 of Gétaz Romang, the publicly-quoted Swiss builders merchanting group, was the major contributor to the very strong incremental impact from 2007 Distribution acquisitions36 million in operating profit on revenue of 566 million. The contribution from 2007 acquisitions undertaken by Europe Products6 million in operating profit on revenue of 85 millionis stated net of the impact of transfer of responsibility for Cementbouw B.V. to Europe Materials effective end-August 2007.
2007 acquisitions in the Americas, which were mainly concentrated in the second half of the year, contributed an incremental 25 million in operating profit on revenue of 354 million, with acquisitions across Materials and Products operations accounting for the bulk of the total impact.
In 2006 two non-recurring items affecting our Europe Products & Distribution businesses had a net adverse impact of 12 million on reported 2006 profit.
There were no non-recurring items in 2007 and this is reflected in the movement in non-recurring items in the table of Key Components of 2007 Performance below.
In accordance with International Accounting Standard 36 Impairment of Assets, goodwill arising on business combinations is subject to annual impairment testing. The Groups 2006 impairment testing resulted in a 50 million write-down of goodwill relating to its 45% Cementbouw B.V. joint venture. The write-down was charged against Europe Products in reporting operating profit by business segment. This joint venture had been established in 2003 in a leveraged buyout of Cementbouws materials trading and readymixed concrete operations in the Netherlands, undertaken in conjunction with CRHs 100% purchase of Cementbouws distribution, concrete and clay products activities. The joint venture has experienced difficult trading in recent years and the remaining 55% was bought-out on 30 August 2007 and since that date is reported as part of Europe Materials.
Also during 2006, in response to legislative changes in the Netherlands, CRH reached agreement with its employees in the Netherlands on changes to certain pension arrangements which altered their basis under IFRS from defined benefit to defined contribution. This resulted in the elimination of certain defined benefit obligations from the Group Balance Sheet with a resultant pre-tax profit of 38 million which was reflected in arriving at operating profit for 2006. Of this 19 million was credited to Europe Products and 19 million to Europe Distribution in reporting 2006 operating profit by business segment.
2007 organic revenue growth amounted to 238 million, a growth rate of just over 1% compared with 9% in 2006. Overall organic revenue growth in Europe of 8% was substantially offset by a decline of 5% in the Americas; this compared with 2006 which saw organic revenue growth of approximately 7% in Europe and almost 12% in the Americas. Despite the lower overall organic revenue growth, organic operating profit progress maintained strong momentum with an increase of 164 million (2006: 201 million).
Our European operations generated organic operating profit growth of 178 million on an organic revenue increase of 694 million to give an effective margin of 26%. Our Materials businesses performed strongly through the year, with particularly strong markets in central and eastern countries, delivering an organic operating profit increase of 125 million. Our Products & Distribution operations both enjoyed very strong first half growth but, with a slower economic backdrop in core Eurozone markets, organic second half performance was slightly below a strong second half in 2006. For 2007 as a whole, organic operating profit advanced by 30 million in Products and 23 million in Distribution.
Our operations in the Americas had a challenging year in 2007 but successfully limited the decline in organic operating profit to just 14 million despite a 456 million decline in organic revenue. The Materials Division achieved significant success in recovering higher energy and other input costs to report an excellent 42 million advance in organic operating profit. Despite a turbulent backdrop in financial and housing markets, growth in non-residential construction markets and profit improvement measures limited the organic operating profit reduction in our Products activities to just 17 million. Our Distribution operations suffered from the decline in residential construction and significant price deflation in gypsum wallboard and organic operating profit was 39 million lower.
Key Components of 2007 Performance
Reported 2007 pre-tax profit of 1,904 million includes the Groups share of associates after tax profit of 64 million. The tax charge at 24.5% of Group profit before tax increased compared with 23.6% in 2006.
Group profit for 2007 amounted to 1,438 million, an increase of 17.5% over 2006 Group profit of 1,224 million.
Operating profit margins
Structurally low operating margins in the two major 2006 acquisitions, APAC and MMI, together with 2006 restructuring charges at APAC plus the impact of non-recurring items outlined above, affect comparisons of reported Group and segmental operating profit margins for 2006 and 2007. The table below compares the reported 2007 operating profit margins with 2006 margins.
Operating Profit Margin Data
In 2007, the Europe Materials Division was the fourth and smallest contributor to Group revenue and the largest contributor to Group operating profit.
Europe Materials continued to benefit from strong economic conditions and increased its operating profit and related margin significantly during 2007, primarily through organic growth.
In Ireland construction demand continued to grow in the first half of 2007; however, the second half saw an accelerating decline in residential output. The National Development Plan continued to underpin demand in the road sector, while private investment remained strong particularly in commercial and retail projects. Agricultural construction recovered well, supported by environmental improvement grant aid. As a result overall demand for our products was at a similar level to 2006. The Northern Ireland business, particularly quarry products and construction, benefited from the general sense of optimism in the economy.
Ongoing programmes to reduce operating costs and improve efficiency delivered further savings in 2007, particularly in the area of energy cost reduction. Commercially, the emphasis on cost recovery through price improvement continued. Operating profit was ahead of 2006.
Irish Cement commenced a 200 million investment project to modernise its Platin Works.
The Finnish economy grew by 4% in 2007. Broad-based strength in construction activity contributed to strong advances in cement, aggregates and readymixed concrete volumes. There was a particularly strong increase in new non-residential construction, which grew by over 20% when compared with 2006 levels. Ongoing investments in infrastructure such as the Helsinki-Turku motorway and Vuosaari port, combined with a stable residential construction market, also underpinned volume growth. All products achieved improved pricing and this resulted in a very good uplift in operating performance. The new clinker line at the Lappeenranta cement plant, commissioned during the first half of 2007, has performed satisfactorily to date.
Sales volumes in Estonia, Latvia and St. Petersburg were generally ahead of 2006. Higher input costs remained a challenge, particularly in Russia, though good cost control and better pricing held overall profit in line with 2006 levels.
Overall, good volume growth and better pricing delivered improved profitability in the Finland/Baltic region in 2007.
Central Eastern Europe
2007 was another good year for the Polish economy with GDP growth of 6.5% and unemployment falling to a new low of 11.4%. Inflation, although low, rose to an average 2.5% while overall construction output increased by an estimated 16% on 2006. The unusually mild first quarter set the tone for cement demand with annual volumes up 17% on 2006 levels. Our concrete businesses performed extremely well with improvement in both volumes and prices across all product groups. Despite some delays in the road programme our aggregates and blacktop businesses performed well with a significant increase in hardrock aggregates revenue. The lime group continued to perform satisfactorily with lime product volumes up 7%. Overall, profit in Poland improved significantly on 2006 levels.
In Ukraine GDP grew by 8% with increased demand for cement. Higher cement pricing in Russia and other neighbouring countries had a positive knock-on effect on pricing and profitability progressed significantly to record levels.
Work has commenced on both the 1.8 million tonne Ożarów cement capacity expansion in Poland and on CRHs Joint Implementation Project (JI-0001) to convert its Ukrainian cement plant from wet to dry process with associated environmental and operational benefits.
The Swiss economy grew by 2.8% in 2007 with continuing strong private consumption and substantially increased exports. Inflation and unemployment rates remained at low levels. Construction grew by 1.4%, with residential activity reaching its peak mid-year and leveling off in the second half. Growth drivers were infrastructure and industrial construction. Start-up infrastructure projects led to an increase in cement sales while excellent weather conditions in the first quarter of the year, as well as strong construction activities in all the regional markets, led to better profitability in downstream aggregates, asphalt and readymixed concrete operations.
Following the acquisition in August 2007 of the remaining 55% of Cementbouw B.V. (which was previously reported as a 45% joint venture within Europe Products), this business was reorganised to report under the Europe Materials Division and performed to expectations since acquisition.
Although the Spanish economy continued to grow, our volumes in Spain were a little down on the record levels achieved in 2006. Nevertheless, better pricing and improved cost control led to higher margins and increased profitability. Activity remained strong in our main markets with the exception of Madrid. Corporación Uniland, the Groups 26% cement associate, which is accounted for using the equity method, recorded a strong increase in profitability.
The Portuguese economy grew by 1.9% in 2007; however, construction had another difficult year with activity decreasing 3.9%, reflecting reduced activity in housing. Secils three cement plants operated at full capacity taking advantage of strong export markets. Overall, Secil recorded a satisfactory year due to a good advance in profitability in its Tunisian cement operation and in its downstream activities in Portugal. Ciment de Sibline, the cement and concrete business in Lebanon in which Secil acquired a controlling stake in January 2007, performed in line with expectations.
Denizli Cement, which is one of three large cement producers in the Aegean region of southwestern Turkey and is vertically integrated downstream in readymixed concrete, and in which CRH acquired a 50% joint venture shareholding in April 2007, performed in line with our expectations in the eight months following acquisition and ahead of prior year results. In Israel, Mashav, in which CRH holds a 25% stake and which is accounted for using the equity method, performed slightly ahead of 2006.
Our purchase in February 2007 of Harbin Sanling Cement in Heilongjiang in northeast China represented a first step for CRH in the Chinese cement and building materials market.
2007 saw good progress on the development front with eight acquisitions which further consolidated our positions in existing Western European markets and expanded our operations in Eastern Europe, in particular in Poland and Romania. The group reported a solid organic operating profit advance boosted by contributions from acquisitions.
Architectural operations performed ahead of 2006 despite difficult market conditions in several markets. Our Dutch and Belgian businesses continued to face tough competition due to market over-capacity and downward price pressure. The German business posted strong results despite a downturn in new residential construction. In France results improved driven by operational synergies. Our Danish and Slovakian businesses continued to perform strongly. Supreme in the UK, acquired in April 2006, contributed above expectations in its first full year. The architectural group made four acquisitions in 2007 including an add-on to Supreme in the UK, two bolt-ons to our water treatment and paving business in Belgium, and Elpreco, an entry into the Romanian market.
Our structural concrete operations again delivered excellent results in 2007 driven by tight operational control and strong markets in Belgium, France, Denmark and Poland, in particular in the new non-residential sector. Our sand-lime brick business posted lower results reflecting slower activity levels in the Dutch residential market. The structural group expanded its product range and market position in Denmark with the acquisition of a concrete stairs business in March followed by the purchase of a lightweight wall panels and flooring manufacturer in August; this group also acquired a small add-on in France and completed the buyout of the remaining 75% of Ergon Poland.
This group delivered increased operating profit for 2007.
UK brick industry volumes showed a welcome return to growth in the first half of 2007; however, with heavy rain across the UK in mid-summer, volumes for the year finished at a similar level to 2006. Ibstock operating profit advanced strongly due to operating and overhead efficiencies.
In the Netherlands our markets slowed as the year progressed and profitability declined slightly.
In Germany the initial early optimism was not sustained and our clay operations were restructured and capacity reduced. However, organic results improved on 2006. Our Polish operation advanced strongly and profit increased sharply, as a result of good volume and price growth. In November 2007, we expanded our presence with the acquisition of a clay brick, block and rooftile manufacturer in western Poland.
Market conditions in 2007 were positive, particularly in non-residential sectors in Germany, the Benelux and the UK. All business units contributed to organic improvement, complemented by acquisitive growth.
This business unit, operating in the construction accessories market in Europe, experienced another year of excellent performance and growth. The full year contribution of Halfen, acquired in May 2006, exceeded our expectations and all our other businesses showed solid operating results. We completed four small bolt-on acquisitions during the year, which performed as expected.
Building Envelope Products
This business unit comprises Fencing & Security (F&S), Daylight & Ventilation (D&V) and Roller Shutters & Awnings (RSA) businesses which specialise in entrance control and climate control products. All segments contributed to a stronger 2007 performance. F&S once again delivered record results. Despite difficult markets for our glass projects business, D&V showed a year of progress in operating results, mainly driven by an excellent performance in its German roof lights business. The first full year contribution from our RSA business, acquired in August 2006, exceeded expectations.
Insulation Products had another year of organic improvement in both revenue and operating profit. Good returns from restructuring initiatives and growing demand in our key markets, especially in Poland, underpinned a solid performance.
2007 was another strong year with a further improvement in revenue and operating profit. Good market conditions in most of our markets, a mild winter and a continued focus on margin improvement and cost control underpinned organic growth. This was supplemented by excellent contributions from the ten acquisitions completed in 2007.
Professional Builders Merchants sell building material products to the professional contractor, while DIY provides decorative and home improvement products to the consumer.
Professional Builders Merchants
With 448 locations in five countries, Professional Builders Merchants has strong market positions in all its regions and generated significant margin improvement in 2007.
The Netherlands: Following a good final quarter in 2006, this business performed very strongly in the first half of 2007, supported by a positive market and mild winter conditions. Although the global credit crunch impacted sentiment from mid-year, demand remained solid throughout the second half. This positive backdrop combined with a targeted quality for quantity margin improvement programme enabled our Dutch professional business to report strong revenue and profit growth.
France: Our heritage operations in Ile-de-France (100%), Burgundy and Franche-Comté (58%) benefited from good market conditions resulting in improved revenue and profit. LDP (100%), acquired in January 2007 with 17 locations in Normandy, delivered very satisfactory results exceeding our initial expectations.
Switzerland: Our acquisition (effective 1 May 2007) of Gétaz Romang, created the largest builders merchants business in Switzerland with more than 100 locations and annualised sales of approximately 1 billion. In addition to its traditional builders merchants business, the new group has a leading position in a
number of specialised builders merchants businesses including sanitary ware, tiles, kitchens and ironmongery. Organic improvement in the heritage Baubedarf and Richner operations, a performance well above initial expectations from Gétaz Romang and a successful integration of all three businesses, resulted in a highly satisfactory 2007 performance. In addition, two further acquisitions added three branches to the existing network.
Austria: Quester, our Austrian builders merchants company, failed to benefit in 2007 from the positive market conditions and from re-organisation measures taken in 2006. As a result, revenue, operating profit and margins were lower than 2006. In response, further restructuring initiatives were implemented from mid-2007. Taking account of these restructuring costs, Quester was loss-making at operating profit level in 2007.
Germany: Bauking, in which we have a 47.82% stake, operates primarily in the northwest of Germany. After a good start to 2007 due to mild winter weather, the expiry of home ownership grants and the increase in value added tax (VAT) effective 1 January 2007 began to impact from the second quarter. As a result, organic revenue was lower than in 2006. However, with relentless cost control, organic operating profit was maintained and, with an active year on the development front, overall revenue and operating profit advanced.
The DIY Europe platform operates under five different brands: Gamma (The Netherlands and Belgium), Karwei (The Netherlands), Hagebau (Germany), Maxmat (Portugal) and BricoHouse (Spain).
The Netherlands: After some flat years, 2007 saw a healthy increase in the total DIY market underpinned by increasing consumer confidence. The mild winter and sunny spring period resulted in a very successful garden season, while good promotional campaigns and sharp formula management resulted in an increase in market share. Organic revenue and operating profit advanced strongly. In addition, two stores were added from one acquisition, and three greenfield stores were opened.
Belgium: Gamma Belgium showed a healthy increase in both revenue and operating profit but, in the absence of new greenfield store openings, market share declined.
Germany: Bauking operates DIY stores under the brand name Hagebau. In a very competitive market which was depressed by the effect of the VAT increase, Baukings Hagebau stores reported revenue and operating profit in line with 2006. From two acquisitions Bauking added 14 Hagebau stores bringing its total network to 54 stores.
Portugal: Despite generally weak economic conditions, organic revenue at Maxmat remained at 2006 levels. With the lifting of legal limitations on new store openings, Maxmat greenfielded seven new stores in 2007 and introduced the Maxgarden concept. Start-up losses for the new openings resulted in lower operating profit than in 2006.
Spain: We entered the Spanish DIY market in May 2007 with the acquisition of a 60% interest in a small business in the Alicante/Valencia region.
In 2007, the Americas Materials Division was the second largest contributor to Group revenue and operating profit.
Americas Materials had another good year in 2007 with continuing success in recovering higher energy and other input costs and in delivering an improvement in heritage operating profit margin for the third consecutive year. After a record net acquisition spend of 1.1 billion (US$1.4 billion) in 2006, our main development focus during the first half of 2007 was on integrating APAC, the major 2006 transaction, which performed well ahead of expectations in 2007. The significant incremental contribution from APAC, combined with a 2007 acquisition spend of 0.6 billion (US$0.9 billion) arising mainly in the second half of the year, and the strong organic heritage performance, resulted in another record year of revenue and operating profit for the Division.
Despite record high crude oil prices bitumen costs increased a relatively modest 5%. Energy used at our asphalt plants, consisting of fuel oil, recycled oil and natural gas, had a composite cost decrease of 7%. The cost of diesel fuel and gasoline used to power our mobile fleet increased by 6%. Against this backdrop, overall prices increased 7% for aggregates, 8% for readymixed concrete and 12% for asphalt, the product most impacted by input cost increases.
Non-residential demand continued to improve and somewhat offset the significant decline in new residential construction. Overall funding available for highway projects showed further growth on 2006 levels. However, with relatively fixed highway budgets, the volume of activity was again impacted by the strong price increases necessary to recover continuing higher input costs. Total volumes, including acquisition effects, increased 5% for aggregates, 2% for readymixed concrete and 14% for asphalt. Heritage volumes declined 7% for aggregates, 13% for readymixed concrete and 13% for asphalt.
The overall 2007 Divisional margin of 10.5% (2006: 9.9%) again reflected the dampening effect of APACs profitable but lower margin business mix. The operating margin excluding APAC again advanced to 12.1% (2006: 11.2%).
In 2007, New Hampshire and Vermont enjoyed good trading in solid markets. Massachusetts had another favourable year with good demand and a continuing positive pricing environment. The states of Maine and Connecticut both reduced highway spending and higher prices impacted volumes at the municipal and local level resulting in profit declines in these areas. Overall, operating profit improved. September saw the acquisition of Burgess Brothers based in Bennington, Vermont, which establishes a presence for our business in a new market area in the state.
New York/New Jersey
Our New York/New Jersey businesses had record results mainly due to asphalt margin expansion. In Upstate New York, our Albany operations once again increased profit despite challenging market conditions. Recent years have seen significant contraction in the Rochester region with many large local employers continuing to scale back their activities. However, 2007 brought some improvement in local demand and our Rochester operations reported higher income. Work continued on our major project to double aggregates production capacity at our key West Nyack quarry, just north of New York City. A readymixed concrete producer based in Utica, New York was acquired in July.
The newly formed Mid-Atlantic region delivered positive results. Despite continued poor markets in Michigan, our operations delivered good results reflecting strong cost control and reduced fixed overhead. The slowing economy in Pennsylvania and Delaware resulted in revenue declines for heritage operations, although cost and price initiatives achieved earnings on par with prior year. At end-August, McMinns Asphalt and Prospect Aggregates, a vertically integrated materials business based near Lancaster, Pennsylvania was acquired, adding well-located reserves and providing a good growth platform for further vertically integrated expansion.
Other transactions included the Delaware component of the readymixed concrete and concrete products assets, acquired from US Concrete in November, and the January 2007 purchase of a crushing facility adjacent to an existing Materials Division quarry in Virginia.
This region delivered record results in the year with solid contributions from APACs operations in the region, improvements in pricing and good benefits from its winter-fill programme. Our bitumen storage capacity in this region mitigated significant bitumen cost increases during the busy highway paving season. Transactions completed during 2007 included the April purchase of a 1 million tonne per annum Cleveland, Ohio-based asphalt producer; the August acquisition of a small asphalt producer based in Ridgeland, South Carolina; and in November the addition of the Knoxville, Tennessee component of the readymixed concrete and concrete products assets acquired from US Concrete.
Our West region had another excellent year in 2007. Local economies were mixed, but remained strong overall with solid non-residential and highway markets offsetting weak residential demand. Once again, Utah and Idaho saw significant profit gains due to a better pricing environment in solid markets for all products, and volume gains associated with major projects. In Washington, results improved significantly. Our operations in Wyoming, Montana, South Dakota, Colorado, and New Mexico had another record year. Our Iowa operations suffered profit declines as a result of weak residential demand. The major acquisitions completed during 2007 were the purchase in August of Eugene Sand & Gravel, based in Eugene, Oregon and of Cessford Construction, which operates in central and eastern Iowa and in west central Illinois; in November we acquired HK Contractors, based in Idaho Falls. These combined with five smaller bolt-on deals plus the acquisition of former Cemex assets in Arizona contributed to a busy development year in this region.
We achieved significant synergies through overhead reductions and by shifting the business emphasis from construction to materials. Although APACs structurally lower margins (due to higher sales, lower margin construction sales) again impacted Americas Materials overall operating margin in 2007, organic trading in the business for 2007 was well ahead of expectations. The integration programme was completed on schedule and overall performance was well ahead of expectations.
CYDI and the former Cemex assets in Florida acquired during 2007 complement APACs operations in the state. In addition two other acquisitions during 2007 served to expand APACs aggregates and asphalt activities in Texas and Oklahoma respectively.
Architectural Products (APG):
APG faced difficult trading conditions in 2007 due to the sharp and continuing slowdown in the residential construction sector and weaker demand from the homecenter channel. These negative influences were partially offset by strong non-residential construction which limited the decline in organic revenue to approximately 10%. Despite the reduction in sales, strong margin management, a significant turnaround in our Lawn & Garden bagged soil and mulch activities and a strong performance from our Canadian operations broadly maintained profit and improved overall operating margin compared with 2006.
APG completed 12 acquisitions in 2007. These included the purchase of concrete block operations, masonry distribution businesses and other bolt-on acquisitions in masonry, packaged soils and mulches, and packaged specialty concrete products.
The continued strength of the non-residential construction sector during the year was offset by a very weak residential sector. However, margins were sustained by good cost control and effective price management and operating profit was only slightly behind a record 2006.
Internal developments completed during 2007 included the commissioning of the new concrete pipe production plant in the Panhandle region of Florida and the completion of two major concrete pipe plant expansions in eastern Pennsylvania and Utah.
Precast completed two acquisitions in 2007the acquisition of a plastic and polymer box manufacturer with plants in California, Kentucky and Ohio, expanding our position in concrete, polymer and concrete small box enclosures, and the purchase of a concrete manhole producer in Southern California, adding to our market position in that region.
The acquisition of the Vistawall group in June 2007, a leading vertically integrated manufacturer of a broad range of architectural aluminium glazing systems, provides scale and critical mass for the Glass groups growth strategy to assemble a unique product and service bundle of architectural glass and architectural aluminium glazing systems.
Trading conditions in the architectural glass market weakened in the second half of 2007, although continued demand for high-performance energy-efficient architectural glass products and value-added fabrication services resulted in similar organic revenue and operating profit. This, combined with an excellent first time contribution from Vistawall due to strong demand for storefront, curtain wall systems and operable windows, enabled the group to achieve a record performance in 2007.
Revenue and profitability in MMIs fencing division (which depends to an important degree on residential applications) declined significantly due to the dramatic fall in residential construction activity and price development which failed to keep up with increasing steel costs. The residential downturn also impacted certain product categories in the welded wire reinforcement division and this weakness was not sufficiently offset by demand from the commercial and infrastructure sectors. Although disappointing volumes and pricing were also factors for the construction accessories division (especially in the state of Florida), MMI performed relatively well in 2007 particularly in those products used in tilt-up wall construction and as anchoring systems for building facades and structural components.
Our operations in Argentina and Chile had another record year in a robust economic environment. In Argentina, the recent capacity expansion made in our ceramic tile business resulted in further strong gains in revenue and profit. Our Chilean glass business performed extremely well.
2007 was a challenging year for Americas Distribution in both its business sectors. Roofing/Siding demand declined in almost all areas reflecting the downturn in both new and remodel activity. Florida was particularly impacted due to the absence of extensive 2006 roofing/siding repair activity which followed active hurricane seasons in both 2004 and 2005. Hawaii and the Pacific Northwest were the bright spots for the year.
Interior Products performed well despite a generally weakening background and significant price deflation in gypsum wallboard and, with the benefits of good contributions from acquisition activity in recent years particularly in Hawaii, Texas and North Carolina, profit was maintained.
Against this backdrop, 2007 operating profit for Americas Distribution declined by 26% before translation effects; while down from the record 2006 level, the operating profit margin of 5.3% was resilient in the circumstances.
Critical Accounting Policies
The Consolidated Financial Statements are prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB).
These accounting principles require management to make certain estimates, judgements and assumptions. Management believes that the estimates, judgements and assumptions upon which it relies are reasonable based on the information available to it at the time that those estimates, judgements and assumptions are made. These estimates, judgements and assumptions can affect the reported amounts of assets and liabilities as of the date of the Consolidated Financial Statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are material differences between these estimates, judgements or assumptions and actual results, the Groups Consolidated Financial Statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by IFRS, and does not require managements judgements in its application. There are also areas in which managements judgements in selecting among available alternatives would not produce a materially different result.
The significant accounting policies adopted by the Group are set out in Statement of Significant Accounting Policies (pages F-6 to F-19), while the other Notes to the Financial Statements (pages F-20 to F-85) contain the disclosures required by IFRS as issued by the IASB.
The accounting policies which involve significant estimates, judgements or assumptions, the actual outcome of which could have a material impact on the Groups results and financial positions, are:
Measurement of environmental liabilities
The measurement of environmental liabilities is based on an evaluation of currently available facts with respect to each individual site and considers factors such as existing technology, currently enacted laws and regulations and prior experience in remediation of contaminated sites. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, the protracted length of the clean-up periods and evolving technologies. Environmental remediation costs are accrued when environmental assessments and the need for remediation are probable and the costs can be reasonably estimated. The liabilities recorded are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The environmental liabilities provided for in the Consolidated Financial Statements reflect the information available to management at the time of determination of the liability, and involve inherent uncertainties as described above, many of which are not under managements control. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future accounting periods.
For further discussion related to environmental matters, see Item 4Information on the CompanyEnvironmental Regulations on pages 26 to 27.
The Group is currently involved in various claims and legal proceedings. On a periodic basis, the status of each significant matter is reviewed by management and the Groups potential financial exposure is assessed. If the potential loss from any claim or legal proceeding is considered probable, and the amount can be estimated, a liability is recognised for the estimated loss. Because of the uncertainties inherent in such matters, the related provisions are based on the best information available at the time; the issues taken into account by management and factored into the assessment of legal contingencies include, as applicable, the status of settlement negotiations, interpretations of contractual obligations, prior experience with similar contingencies/claims, the availability of insurance to protect against the downside exposure and advice obtained from legal counsel and other third parties. As additional information becomes available on pending claims, the potential liability is reassessed and revisions are made to the amounts accrued where appropriate. Such revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial position of the Group.
Taxationcurrent and deferred
The Groups income tax charge is based on reported profit and expected statutory tax rates, various allowances and reliefs and tax planning opportunities available to the Group in the multiple tax jurisdictions in which it operates. The determination of the Groups provision for income tax requires certain judgements and estimates in relation to matters where the ultimate tax outcome may not be certain. In addition, the Group is subject to tax audits which can involve complex issues that could require extended periods for resolution. Although management believes that the estimates included in the Consolidated Financial Statements and its tax return positions are reasonable, no assurance can be given that the final outcome of these matters will not be different than that which is reflected in the Groups historical income tax provisions and accruals. Any such differences could have a material impact on the income tax provision and profit for the period in which such a determination is made. In managements opinion, adequate provisions for income taxes have been made.
Property, plant and equipment
With the exception of the one-time revaluation of land and buildings addressed in Note 13 to the Financial Statements on page F-40, items of property, plant and equipment are stated at historical cost less any accumulated depreciation and any accumulated impairments.
The Groups accounting policy for property, plant and equipment is critical because the carrying value of 8,888 million at 31 December 2008 represents a significant portion (42%) of total assets at that date.
In the application of the Groups accounting policy, judgement is exercised by management in the determination of residual values and useful lives. Depreciation is calculated to write-off the book value of each item of property, plant and equipment over its useful economic life on a straight-line basis. The residual values and useful lives of property, plant and equipment are reviewed, and adjusted if appropriate, at each balance sheet date. Impairments of property, plant and equipment are addressed in the section entitled Impairment of long-lived assets and goodwill below.
Impairment of long-lived assets and goodwill
The carrying value of long-lived assets (comprising property, plant and equipment and intangible assets other than goodwill) is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable; in the case of goodwill, impairment testing is required on an annual basis or at any time during the year if an indicator of impairment is considered to exist. Under IFRS, impairment is assessed by comparing the carrying value of an asset with its recoverable amount (being the greater of fair value less costs to sell and value-in-use). Fair value less costs to sell is defined as the amount obtainable from the sale of an asset or cash-generating unit in an arms length transaction between knowledgeable and willing parties, less the costs which would be incurred in disposal. Value-in-use is defined as the present value of the future cash flows expected to be derived through the continued use of an asset or cash-generating unit including those anticipated to be realised on its eventual disposal. The impairment process requires management to make significant judgements and estimates regarding the future cash flows expected to be generated by the use of, and if applicable the eventual disposition of, those assets, and regarding other factors to determine the fair value of the assets. The key variables which management must estimate include: sales volumes, prices and growth, production and operating costs, replacement capital expenditure and trade working capital requirements, tax, discount rates, market conditions, and other economic factors. Significant management judgement is involved in estimating these variables, and such estimates are inherently uncertain; however, the assumptions used are consistent with the Companys internal strategic planning. Management periodically evaluates and updates the estimates based on the conditions which influence these variables. The term of the discounted cash flow model is a significant factor in determining the fair value of the cash-generating units and is arrived at taking account of the Groups strong financial position, its established history of earnings growth and cash flow generation, its proven ability to pursue and integrate value-enhancing acquisitions, and the nature of building materials where obsolescence risk is very low.
The assumptions and conditions for determining impairments of property, plant and equipment and goodwill reflect managements best assumptions and estimates, but these items involve inherent uncertainties described above, many of which are not under managements control. As a result, the accounting for such items could result in different estimates or amounts if management used different assumptions or if different conditions occur in future accounting periods. A detailed discussion of the impairment methodology applied by the Group is provided on pages F-42 to F-44.
Pensions and other post-retirement benefits
The amounts recognised in the Consolidated Financial Statements relating to pension and other post-retirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including discount rates, expected return on plan assets, rate of increase in future compensation levels, mortality rates and healthcare cost trend rates. These assumptions are updated annually based on current economic conditions and, if required, also for any changes to the terms and conditions of the pension and post-retirement plans. These assumptions can be affected by (i) for the discount rate, changes in the rates of return on high-quality fixed income investments; (ii) for the expected return on plan assets, changes in the pension plans strategic asset allocations to various investment types or to long-term return trend rates in the capital markets in
which the pension fund assets are invested; (iii) for future compensation levels, future labour market conditions and (iv) for healthcare cost trend rates, the rate of medical cost inflation in the regions of the world where such benefits are offered to the Groups employees. The weighted average actuarial assumptions used to compute the pension and post-retirement benefit obligation for 2008 and 2007 are disclosed in Note 28 to the Financial Statements on pages F-64 to F-65. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Groups pension and other post-retirement obligations and expenses in future accounting periods.
The following provides sensitivity analysis on the key assumptions employed in the determination of pension scheme assets and liabilities:
Impact of Inflation
Inflation has not had a material effect on the Groups consolidated results of operations and financial condition during the three-year period ended 31 December 2008.
2008 compared with 2007
While spending a total of over 2 billion on acquisitions, investments and capital projects in 2008, the strong cash generation characteristics of the Group, partly offset by an adverse translation adjustment of 240 million, limited the increase in net debt to 928 million.
The comments below refer to the major components of the Groups cash flows as shown in the Group Cashflow Statement on page F-5. The changes in Group operating profit are discussed in the review of results by reporting segment above.
Cashflows from operating activities
The increased charges for depreciation and amortisation mainly reflect the impact of acquisitions completed in 2007 and 2008.
Net finance costs for the year of 343 million showed an increase compared with the 303 million reported for 2007. EBITDA/net interest cover for the year remained strong at 7.8 times (2007: 9.4 times), above the Groups comfort range of 6 to 6.5 times.
The following table summarises the increase during the year in working capital requirements allocated over the components of working capital and reconciling from opening 2008 to closing 2008:
The working capital increase (cash outflow) of 57 million for the year represents a good performance in managing receivables and payables in a challenging environment. Due to the seasonal nature of CRHs business, working capital movements exhibit a high degree of weather dependency and can significantly increase when measured during the peak season, generally May to September. The outflow as measured at 30 June 2008 amounted to 594 million.
Interest payments of 371 million in 2008 were 19 million higher than in 2007 due to higher average gross debt levels related to development activity.
The tax charge at 22.5% of Group profit before tax decreased compared with 2007 (24.5%). The decline in the tax charge largely reflects lower taxable profits in a number of the Groups overseas jurisdictions where higher tax rates apply. Accordingly, tax payments in 2008 were lower than in 2007.
Cashflows from investing activities
Capital expenditure of approximately 1 billion represented 5.0% of Group revenue (2007: 4.9%) and amounted to 1.33 times depreciation of 781 million (2007: 1.39 times). Of the total capital expenditure, 58% was invested in Europe with 42% in the Americas. The Groups capital expenditures included approximately 0.25 billion and 0.1 billion of investment in major cement plants in 2008 and 2007 respectively. Expenditure on these projects in 2009/2010 is estimated at 0.3 billion. A summary of the Groups future purchase commitments as at 31 December 2008 for property plant and equipment are set out in Note 13 to the Financial Statements (page F-40).
Spend on acquisitions and investments in 2008 (including advances to joint ventures, purchase of trade investments and deferred and contingent consideration paid during the year) amounted to approximately 1 billion. This compared with 2 billion in 2007 and reflects a deliberate curtailment of development activity in the second half of 2008 as the economic environment deteriorated. Details of the acquisitions completed during 2008 are set out in Note 34 to the Financial Statements (pages F-78 to F-84).
Cashflows from financing activities
Proceeds from issue of shares comprise issues under Group share option and share participation schemes of 6 million (2007: 36 million).
The outflow of 383 million in respect of ordinary shares purchased reflects the repurchase of approximately 18.2 million Ordinary Shares under the share purchase programme which was announced in January 2008 and terminated in November 2008. Two million of these Ordinary Shares were used to satisfy the
exercise of share options during the year and the proceeds from option holders is included in the net cost of share purchases. During 2007, the Group purchased 310,000 existing Ordinary Shares in respect of commitments under the Performance Share Plan at a cost of 10 million; the remainder (21 million) represented the net cost to the Group of share options exercised during the year.
The increase in dividends paid from 250 million in 2007 to 347 million in 2008 reflects the 25% increase in the final 2007 dividend and the 2.5% increase in the interim 2008 dividend both of which were paid during the course of 2008.
Cash and cash equivalents
Cash and cash equivalents decreased by 207 million to 799 million at 31 December 2008 from 1,006 million at 31 December 2007 with net cash outflows of 194 million and a negative foreign exchange translation of 13 million. Currency analysis of the cash and cash equivalents balances is as follows (all at floating interest rates):
At year-end 2008, 87% of the Groups cash, short-term deposits and liquid resources had a maturity of six months or less.
Net debt at 31 December 2008
Year-end net debt of 6.1 billion (2007: 5.2 billion) includes 153 million (2007: 164 million) in respect of the Groups proportionate share of net debt in joint venture undertakings. Details of the components of net debt are set out in Note 25 to the Financial Statements (pages F-58 to F-61).
Year-end debt increased by 928 million, after a combined spend of 2.1 billion on acquisitions and capital expenditure, 0.4 billion on share buyback and after an adverse translation of 0.2 billion mainly attributable to the stronger year-end rate for the US dollar. This resulted in an increase in the ratio of net debt to equity by 10.4 percentage points to 75.3% compared with 64.9% in 2007. EBITDA interest cover including joint ventures (as defined on pages 29 to 30) was 7.8 times in 2008 (2007: 9.4 times). The year-end net debt/EBITDA ratio was 2.3 times (2007: 1.8 times).
At the end of 2008, 48% of the Groups net debt was at interest rates which were fixed for an average period of 6.7 years. The euro accounted for approximately 42% of net debt at the end of 2008 and 45% of the euro component of net debt was at fixed rates. The US dollar accounted for approximately 48% of net debt at the end of 2008 and 59% of the US dollar component of net debt was at fixed rates.
The Group finished 2008 in a strong financial position with 98% of the Groups gross debt drawn under committed term facilities, 88% of which mature after more than one year. In addition, at year-end the Group held 1.6 billion of undrawn committed facilities (which includes 0.3 billion in respect of the Groups share of facilities available to joint ventures), which had an average maturity of 1.9 years.
Shareholders equity at 31 December 2008
Total shareholders equity increased by 137 million to 8.157 billion during the year ended 31 December 2008. This increase reflects net proceeds of 28 million from equity issues, 1.248 billion of net profit retained, dividends paid of 369 million, the add-back of 24 million reflecting the expensing of employee share options, a net amount of 383 million relating to the purchase during 2008 of treasury and own shares, a loss in currency translation effects on the Groups net investment in different currencies of 97 million, a net loss on cash flow hedges of 28 million, deferred and current tax gains (net) recognised directly within equity of 58 million, actuarial losses on defined benefit pension schemes amounting to 348 million and an increase of 4 million in minority interest.
As announced on 7 November 2008, the share repurchase programme launched on 3 January 2008, which was limited to a maximum of 5% of the 547 million Ordinary Shares in issue at December 2007, was terminated following the repurchase of approximately 18.2 million Ordinary Shares, equivalent to 3.3% of Ordinary Shares in issue at year-end 2007, at an average price of 22.30 per Ordinary Share.
In March 2009 CRH raised 1.24 billion, net of expenses, through the issue of 152,087,952 new Ordinary Shares in a fully underwritten Rights Issue on the basis of 2 new Ordinary Shares for every 7 existing Ordinary Shares. 500 million of the net proceeds from the Rights Issue was used to make an early repayment of borrowings under existing facilities provided by lenders.
2007 compared with 2006
The comments below refer to the major components of the Groups cash flows in 2007 as shown in the Group Cash Flow Statement on page F-5.
Cash flows from operating activities
The changes in Group operating profit are discussed in the review of results by reporting segment above.
The charge for depreciation and amortisation of intangible assets of 774 million was 85 million higher than 2006 (689 million) mainly reflecting the impact of acquisitions completed in 2006 and 2007.
While the substantial acquisition activity over the past two years resulted in a significant increase in net finance costs to 303 million (2006: 252 million), EBITDA/net interest cover for the year remained very comfortable at 9.4 times (2006: 9.7 times).
The following table summarises the decrease during the year in working capital requirements allocated over the components of working capital and reconciling from opening 2007 to closing 2007:
As shown in the table above, the working capital decrease (cash inflow) for 2007, based on year-end working capital balances, amounted to 261 million. Due to the seasonal nature of CRHs business, working capital movements exhibit a high degree of weather dependency and can significantly increase when measured during the peak trading season, generally May to September. The outflow as measured at 30 June 2007 amounted to 330 million. A strong focus on working capital management across the Groups heritage operations combined with a significant reduction in working capital levels at APAC, associated with the scaling back of its low margin contracting activities, resulted in a working capital decrease for the year of 261 million compared with a 132 million increase in 2006.
Interest payments of 352 million in 2007 were 99 million higher than in 2006 due to higher average gross debt levels related to acquisition activity.
Taxation payments were slightly higher than 2006.
Cash flows from investing activities
The 2007 cash outflow from investing activities (acquisitions, investments and capital projects) amounted to 3,033 million (2006: 2,904 million) and included deferred acquisition consideration paid during 2007 in respect of acquisitions in previous years and excluded deferred consideration relating to 2007 acquisitions payable in future years. This figure also excluded net debt of 222 million (2006: 239 million) assumed on acquisition.
Capital expenditure of 1,028 million represented 4.9% of Group revenue (2006: 4.4%) and amounted to 1.39 times depreciation (2006: 1.25 times). Of the total capital spend, 50% was invested in Europe with 50% in the Americas.
Total proceeds from the sale of investments and property, plant and equipment of 156 million in 2007 reduced by 96 million from 2006, which included selective APAC asset disposals, subsequent to the acquisition of APAC by CRH, of approximately 0.2 billion.
Cash flows from financing activities
Proceeds of 36 million (2006: 87 million) from share issues reflected the issue of shares under Group share option and share participation schemes.
Dividends paid increased from 197 million to 250 million, reflecting the increase in both final 2006 (39%) and interim 2007 (48%) dividends per share which were paid during the course of 2007.
Cash and cash equivalents
Cash and cash equivalents decreased by 96 million to 1,006 million at 31 December 2007 from 1,102 million at 31 December 2006 with net cash outflows of 144 million partly offset by a negative foreign exchange translation of 35 million. Currency analysis of the cash and cash equivalents balances is as follows (all at floating interest rates):
Net debt at 31 December 2007
Year-end net debt of 5,163 million (2006: 4,492 million) includes 164 million (2006: 248 million) in respect of the Groups proportionate share of net debt in joint venture undertakings. The reduction in joint venture debt reflects the fact that following the August 2007 buy-out of the remaining 55% of Cementbouw B.V. its net debt is no longer included in the joint venture total.
Exchange rate movements during 2007 reduced the euro amount of net foreign currency debt by 237 million principally due to the 12% revaluation of the euro against the US dollar from 1.3170 at the end of 2006 to 1.4721 at the end of 2007. The favourable translation adjustment in 2006 also reflected a 12% revaluation of the euro versus the US dollar from 1.1797 at the end of 2005 to 1.3170 at the end of 2006.
Year-end debt increased by 671 million, resulting in an increase in the ratio of net debt to equity increasing by 1.3 percentage points to 64.9% compared with 63.6% in 2006. EBITDA interest cover including joint ventures (as defined on pages 29 to 30) was 9.4 times in 2007 (2006: 9.7 times).
Shareholders equity at 31 December 2007
Total shareholders equity increased by 916 million to 8,020 million during the year ended 31 December 2007. This increase reflects net proceeds of 104 million from equity issues and 1,135 million of profit retained (after dividends paid of 318 million and the add-back of 23 million reflecting the expensing of employee share options), less a loss in currency translation effects on the Groups net investment in different currencies, primarily the US dollar, of 410 million, net gain on cash flow hedges less deferred tax of 8 million, consideration of 31 million net for the purchase of Ordinary Shares by the Trustees of the Employee Benefit Trust, deferred and current tax charge on items taken directly to equity of 74 million, actuarial gains on defined benefit pension schemes amounting to 159 million, and an increase of 25 million in minority interest.
Borrowings and Credit Facilities
The Group uses financial instruments throughout its businesses: interest-bearing loans and borrowings, cash and cash equivalents, short-dated liquid investments and finance leases are used to finance the Groups operations; trade receivables and trade payables arise directly from operations; and derivatives, principally interest rate and currency swaps and forward foreign exchange contracts, are used to manage interest rate risks and currency exposures and to achieve the desired profile of borrowings. The Group does not trade in financial instruments nor does it enter into any leveraged derivative transactions.
The main risks attaching to the Groups financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. Commodity price risk is of minimal relevance given that exposure is confined to a small number of contracts entered into for the purpose of hedging future movements in energy costs. The Board reviews and agrees policies for the prudent management of each of these risks.
The Group finished 2008 in a strong financial position with 98% of the Groups gross debt drawn under committed term facilities, 88% of which mature after more than one year. These committed facilities are mainly with a number of international banks. Commitment fees are paid on the unused portion of the lines of credit, and borrowings under the facilities were at prevailing money market rates. In addition, at year-end, the Group held 1,566 million of undrawn committed facilities. The maturity schedule is disclosed in Note 23 to the Financial Statements on page F-55.
At 31 December 2008, gross debt (including finance leases) amounted to 7,298 million (2007: 6,498 million) of which approximately 63% was at fixed interest rates (2007: 54%).
An analysis of the maturity profile of debt, finance and operating leases, purchase obligations, deferred acquisition consideration and pension scheme contribution commitments at 31 December 2008 is as follows:
On 18 April 2008, CRH Finance (U.K.) PLC. issued UK£250 million notes with a coupon of 8.25% maturing on 24 April 2015. CRH plc unconditionally guaranteed the due and punctual payment of the principal and interest due on the notes.
On 23 July 2008, CRH America Inc issued US$650 million notes with a coupon of 8.125% maturing on 15 July 2018. CRH plc unconditionally guaranteed the due and punctual payment of the principal and interest due on the notes.
During 2008, CRH also arranged 0.5 billion of new bank term finance and renewed and extended 1.7 billion of existing bank facilities. These facilities are mainly with a number of international banks. Borrowings under these facilities were at prevailing market rates. The Group continues to assess conditions in the international debt capital markets with a view to further debt issuance at the appropriate time and is committed to maintaining an investment grade credit rating.
In March 2009, CRH extended the maturity of 247 million of debt to 2011 and 425 million of debt to 2012. This debt was due to mature in 2010. As disclosed in Item 8Financial Information, 500 million of the net proceeds from the Rights Issue was used to make an early repayment of borrowings under existing facilities provided by lenders.
A significant portion of the Groups debt is provided in the form of revolving facilities; these may be repaid and re-drawn during their period of availability. In the absence of future acquisitions, the Groups strong cash generation would likely lead to the rapid repayment of revolving facilities (in advance of the actual maturity date of the facility and with a consequent reduction in future interest charges and payments).
Detailed information in relation to the average and effective interest rates applicable to Group debt (distinguishing between fixed rate debt and gross debt including and excluding derivatives) is provided in Note 25 to the Financial Statements on page F-60. In addition, a detailed breakdown of fixed and floating rate debt and derivatives by maturity dates is provided in Item 11Quantitative and Qualitative Disclosures about Market Risk on pages 91 to 95.
Interest Rate Swap Agreements
In order to manage interest rate risk, the Group enters into interest rate swap agreements to alter the interest payable on debt from fixed to variable and vice versa. While the Group is exposed to market risk to the extent that receipts and payments under interest rate agreements are affected by market interest rates, the combination of interest rate swaps and fixed rate debt reduces the Groups interest rate market risk by fixing interest rates on a portion of the Groups net debt in individual currencies. The majority of these swaps are designated under IAS 39 to hedge underlying debt obligations; undesignated financial instruments are termed not designated as hedges in the analysis of derivative financial instruments in Note 24 to the Financial Statements (pages F-56 to F-57).
Currency Swap Agreements
The Group enters into currency swap agreements to manage the Groups mix of fixed and floating debt by currency to ensure that the debt funding sources match the currency of Group operations.
The Company has given letters of guarantee to secure obligations of subsidiary undertakings as follows: 7,051 million in respect of loans, bank advances, derivative obligations and future lease obligations (2007: 6,205 million), 7 million in respect of deferred and contingent acquisition consideration (2007: 6 million), 419 million in respect of letters of credit (2007: 284 million) and 43 million in respect of other obligations (2007: 50 million).
The Company has not guaranteed any debt or other obligations of joint ventures or associates.
CRH believes that its current working capital cash flows and cash generated from operations together with funds raised through its borrowing facilities are sufficient to meet its capital expenditure and other expenditure requirements for 2009.
Off-Balance Sheet Arrangements
CRH does not have any off-balance sheet arrangements, as such term is defined for the purposes of Item 5.E of Form 20-F, that have or are reasonably likely to have a current or future effect on CRHs financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Material Commitments for Capital Expenditure
At 31 December 2008, capital expenditure contracted for but not provided in the Consolidated Financial Statements amounted to 433 million and capital expenditure commitments authorised by the Directors but not contracted for amounted to 133 million. CRH expects that capital expenditure for the year 2009 will be lower than the amount spent in 2008, which amounted to 1,039 million. These expenditures will be financed from internal resources and management estimates that 2009 expenditure will be split approximately 65% in Europe and 35% in the Americas for replacement and new projects. The level of capital expenditure is regularly reviewed during the year and may be increased or decreased in the light of prevailing economic and market conditions and other financial considerations.
The overall level of government capital expenditures and the allocation by state entities of available funds to different projects as well as interest rate and tax policies directly affect the overall levels of construction activity. The terms and general availability of government permits required to conduct Group business also has an impact on the scope of Group operations. As a result such governmental decisions and policies can have a significant impact on the operating results of the Group.
Research & Development
Research and development is not a significant focus of CRHs business. CRHs policy is to expense all research and development costs as they occur.
Trading in the first four months of 2009 has proved extremely challenging compared with the equivalent period in 2008 which benefited from generally positive trading in Europe and a relatively mild winter. Demand patterns across most markets have been impacted by weakening economic activity; this has been exacerbated by the most severe winter for many years in both Europe and North America, and by continuing inclement weather through March and April in a number of our regions. As a result the normal seasonal second quarter demand pick-up has to-date not been as strong as expected and the profit outcome for the first half of this year will show a sharper decline than that previously anticipated.
However, the continuation of a more stable backdrop for energy and other input costs together with benefits from the infrastructure stimulus package in the United States should encourage activity as the year progresses and the underperformance anticipated in the first half is expected to moderate in the seasonally more profitable second half of the year.
Despite the very challenging trading backdrop, CRHs operating cash flow* to-date is in line with 2008 reflecting tight working capital control and ongoing capital expenditure restraint. We continue to advance
actively the various commercial and cost initiatives already underway across our operations, and to identify new measures, to ensure that the Group is positioned to deal with whatever trading circumstances may evolve over the coming months.
The recent Rights Issue which raised 1.24 billion, net of expenses, combined with the Groups pre-existing financing capacity, leaves CRH well placed to take advantage of appropriate development opportunities in our traditional rigorous and disciplined fashion.
Europe Materials operations in Poland and Finland were most impacted by the harsh winter with year-to-date cement volumes down by over one-third in both markets; however, recent weeks have seen improved trading conditions in Poland as major infrastructure projects get underway. While weather also had an impact in Ireland and the Ukraine, economic contraction has been the main contributor to a fall of approximately 50% in cement volumes in both countries. In Portugal, domestic cement sales are down 25% compared with the very strong start in 2008. In Switzerland, year-to-date cement volumes are well ahead of last year reflecting strong volumes to major tunnel projects which were unaffected by weather conditions. Cement pricing trends to date across all our major markets are positive relative to the same period in 2008.
Europe Products experienced underlying sales declines of approximately 25% through January and February from the very strong trading levels in early 2008. Sales in March and April, which included the Easter period in both years, have continued to lag 2008 although to a much lesser extent than in earlier months and cumulative sales to end April, on a like-for-like basis, are approximately 20% behind 2008. While all operations have been impacted, the Building Products businesses have proved more resilient helped by ongoing activity in non-residential segments.
To date sales in CRHs Europe Distribution businesses have proved more robust than in our Products operations due to higher repair, maintenance and improvement (RMI) exposure and good trading in the Benelux DIY activities over Easter. As a result, the like-for-like percentage sales decline to end-April is approximately half that experienced in our Products activities.
Overall, for our European operations the trading environment is, as anticipated, proving much more demanding than in 2008 which, following a strong start, witnessed declining economic activity from about mid-year. Against this backdrop, and with significant benefits from ongoing restructuring, we expect that the pace of year-on-year declines will ease in the months ahead.
In Americas Materials, poor weather and lower private sector demand resulted in like-for-like volumes in aggregates and asphalt down roughly 30% for the first four months. However, pricing has continued to be strong and operational best practice efforts focussed on optimising payroll and maintenance costs through the winter months have yielded significant benefits. Early indications, as the main highway construction season gets underway across our markets, suggest that the pace of infrastructure project approvals under the American Recovery and Reinvestment Act (economic stimulus bill) is accelerating and that these are likely to more than offset reductions in spending for the year as a whole on public projects financed from state and local budgets.
Americas Products has seen continuing declines in US residential construction through the first four months of the year while the slow-down in our non-residential markets which began to emerge in the latter half of 2008 has become more evident. As a result like-for-like sales in US dollar across our Products activities for the first four months are down approximately 20% on the equivalent period in 2008.
Roofing/Siding volumes in Americas Distribution have been impacted by poor weather conditions and weaker consumer confidence across the country, except for the mid-West region where storm activity has
boosted re-roofing demand. Interior products volumes have also suffered as a result of weakness in the non-residential segment. These factors, together with intense price competition, have resulted in a high-teen percentage decline in underlying US dollar sales.
Overall while we expect continuing challenging trading conditions in residential and non-residential markets in the US our cost reduction programmes in these segments are delivering strongly. We anticipate a good pick up in infrastructure activity in the coming months as spending under the stimulus package gains momentum and, with the continuation of a more stable backdrop for energy and other input costs, we look to a strong performance from our Materials operations in the more important second half trading period.
ITEM 6DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The Board of Directors manages the business of the Company. The Directors, other than the non-executive Directors, serve as executive officers of the Company.
Directors and Senior Management
At the Annual General Meeting on 6 May 2009 in accordance with the Articles of Association and best practice in relation to the re-election of directors, Bill Egan, Jan Maarten de Jong and Myles Lee retired from the Board and, being eligible, were re-elected. In accordance with the provisions of Article 109, Glenn Culpepper, Albert Manifold, Liam OMahony and Mark Towe retired and, being eligible, were re-elected.
Glenn Culpepper joined CRH in 1989. A United States citizen, he has held a variety of positions in the Groups United States operations and was appointed Chief Financial Officer of Oldcastle Materials in 1995. He was appointed to his current position and a CRH Board Director with effect from 1 January 2009.
Bill Egan became a non-executive Director in January 2007. He is founder and General Partner of Alta Communications and Marion Equity Partners LLC, Massachusetts-based venture capital firms. He is Past President and Chairman of the National Venture Capital Association and is a trustee of the University of Pennsylvania and a member of the board of overseers of the Wharton School of Finance at the University of Pennsylvania. He is a director of Cephalon, Inc. and the Irish venture capital company Delta Partners Limited. He also serves on the boards of several privately held communications, cable and information technology companies.
Utz-Hellmuth Felcht became a non-executive Director in July 2007. A German national, he was, until May of 2006, Chief Executive of Degussa GmbH, Germanys third largest chemical company. He is on the board of CIBA AG and is a partner in the private equity group One Equity Europe GmbH. He is a member of the Advisory Board of Hapag-Lloyd and of the Supervisory Boards of SGL Carbon AG, Jungbunzlauer Holding AG and Süd-Chemie Aktiengesellschaft.
N. Hartery CEng, FIEI, MBA
Nicky Hartery became a non-executive Director in June 2004. He was, until October 2008, Vice President of Manufacturing, Business Operations and Customer Experience for Dell Europe, the Middle East and Africa. Prior to joining Dell, he was Executive Vice President at Eastman Kodak and previously held the position of President and Chief Executive Officer at Verbatim Corporation, based in the United States. He is a director of eircom Limited.
J.M. de Jong
Jan Maarten de Jong, a Dutch national, became a non-executive Director in January 2004. He is Vice Chairman of the Supervisory Board of Heineken N.V. He is a former member of the Managing Board of ABN Amro Bank N.V. and continued to be a Special Advisor to the board of that company until April 2006. He also holds a number of other directorships of European companies including AON Groep Nederland B.V.
M. Lee BE, FCA
Myles Lee joined CRH in 1982. Prior to this he worked in a professional accountancy practice and in the oil industry. He was appointed General Manager Finance in 1988, Finance Director and a CRH Board Director in November 2003 and became Group Chief Executive with effect from 1 January 2009.
Albert Manifold joined CRH in 1998. He has held a variety of senior positions in the Group, including Group Development Director, and was appointed Managing Director, Europe Materials in July 2007. He was appointed to his current position and a CRH Board Director with effect from 1 January 2009.
Kieran McGowan became Chairman of CRH in 2007 having been a non-executive Director since 1998. He retired as Chief Executive of IDA Ireland in December 1998. He is a director of a number of companies including Elan Corporation plc and United Drug plc.
T.V. Neill MA, MSc (Econ.)
Terry Neill became a non-executive Director in January 2004. He was, until August 2001, Senior Partner in Accenture and had been Chairman of Accenture/Andersen Consultings global board. He is a member of the Court of Bank of Ireland. He is also a member of the Governing Body of the London Business School, where he is Chair of the Finance Committee, and of the Trinity Foundation Board.
D.N. OConnor BComm, FCA
Dan OConnor became a non-executive Director in June 2006. He was, until March 2006, President and Chief Executive Officer of GE Consumer FinanceEurope and a Senior Vice-President of GE. He is a director of Allied Irish Banks, plc.
J.M.C. OConnor B.Soc.Sc., M.Soc.Sc., PhD
Joyce OConnor became a non-executive Director in June 2004. She is President Emeritus of the National College of Ireland. She currently chairs the Digital Hub Development Agency and the Dublin Inner City Partnership. She is a non-executive director of the Hugh Lane Gallery and a Patron of Caring for Carers Association of Ireland. She is a board member of the National Centre for Partnership and Performance and the Steering Group on Active Citizenship, a Council Member of the Dublin Chamber of Commerce and an Eisenhower Fellow.
W.I. OMahony BE, BL, MBA, FIEI
Liam OMahony joined CRH in 1971. He has held various senior management positions including Managing Director, Republic of Ireland and UK Group companies and Chief Executive of American operations. He joined the CRH Board in 1992 and became Group Chief Executive in January 2000, a position he held until the end of 2008. He is Chairman of Smurfit Kappa Group plc, a director of Project Management Limited and a member of The Irish Management Institute Council.
Mark Towe joined CRH in 1997. He was appointed President of Oldcastle Materials, Inc. in 2000 and became its Chief Executive Officer in 2006. He was appointed to his current position with effect from July 2008. A United States citizen, he is responsible for the Groups aggregates, asphalt and readymixed concrete operations in the United States and its products and distribution businesses in the Americas. He was appointed a CRH Board Director with effect from 31 July 2008.
The information on executive and non-executive Directors compensation, pension entitlements and options to purchase securities from the registrant or its subsidiaries is set out on pages R-1 to R-10 inclusive.
CRH has primary listings on the Irish and London Stock Exchanges and its ADSs are listed on the New York Stock Exchange (NYSE).
The Directors are committed to maintaining the highest standards of corporate governance and this statement describes how CRH applies the main and supporting principles of section 1 of the Combined Code on Corporate Governance (June 2008) published by the Financial Reporting Council in the UK.
The Board is responsible for the leadership and control of the Company. There is a formal schedule of matters reserved to the Board for consideration and decision. This includes Board appointments, approval of
strategic plans for the Group, approval of financial statements, the annual budget, major acquisitions and significant capital expenditure, and review of the Groups system of internal controls.
The Board has delegated responsibility for the management of the Group, through the Chief Executive, to executive management. The roles of Chairman and Chief Executive are not combined and there is a clear division of responsibilities between them, which is set out in writing and has been approved by the Board. The Chief Executive is accountable to the Board for all authority delegated to executive management.
The Board has also delegated some of its responsibilities to Committees of the Board. Individual Directors may seek independent professional advice, at the expense of the Company, in the furtherance of their duties as a Director.
The Group has a policy in place which indemnifies the Directors in respect of legal action taken against them.
It is the practice of CRH that a majority of the Board comprises non-executive Directors and that the Chairman be non-executive. At present, there are four executive and nine non-executive Directors. Biographical details are set out on pages 65 and 66. The Board considers that, between them, the Directors bring the range of skills, knowledge and experience, including international experience, necessary to lead the Company.
Directors are appointed for specified terms and subject to the Memorandum and Articles of Association of the Company.
All of the Directors bring independent judgement to bear on issues of strategy, performance, resources, key appointments and standards. The Board has determined that each of the non-executive Directors is independent. In reaching that conclusion, the Board considered the principles relating to independence contained in the Combined Code and the guidance provided by a number of shareholder voting agencies. Those principles and guidance address a number of factors that might appear to affect the independence of Directors, including former service as an executive, extended service on the Board and cross-directorships. However, they also make clear that a Director may be considered independent notwithstanding the presence of one or more of these factors. This reflects the Boards view that independence is determined by a Directors character, objectivity and integrity. Where relevant, the Board took account of these factors and in each case was satisfied that the Directors independence was not compromised.
Mr. Kieran McGowan has been Chairman of the Group since May 2007. On his appointment as Chairman, Mr. McGowan met the independence criteria set out in the Combined Code. The Chairman is responsible for the efficient and effective working of the Board. He ensures that Board agendas cover the key strategic issues confronting the Group; that the Board reviews and approves managements plans for the Group; and that Directors receive accurate, timely, clear and relevant information. While Mr. McGowan holds a number of other directorships (see details on page 66), the Board considers that these do not interfere with the discharge of his duties to CRH.
Senior Independent Director
The Board has appointed Mr. Nicky Hartery as the Senior Independent Director. Mr. Hartery is available to shareholders who have concerns that cannot be addressed through the Chairman, Chief Executive or Finance Director.
The appointment and removal of the Company Secretary is a matter for the Board. All Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are complied with.
Terms of appointment
The standard terms of the letter of appointment of non-executive Directors is available, on request, from the Company Secretary.
Induction and development
New Directors are provided with extensive briefing materials on the Group and its operations. Directors meet with key executives and, in the course of twice-yearly visits by the Board to Group locations, see the businesses at first hand and meet with local management teams.
Details of remuneration paid to the Directors (executive and non-executive) are set out in the Report on Directors Remuneration on pages R-1 to R-10. Total executive and non-executive Directors remuneration is disclosed on pages R-4 to R-5. No Director has a service contract that provides for any benefits on termination of employment.
Details of the pension entitlements relating to the executive Directors are contained in the Report on Directors Remuneration on pages R-5 and R-6. Financial Information in respect of the Groups retirement benefit obligations in compliance with IAS 19 is contained in Note 28 to the Financial Statements on pages F-63 to F-71.
Share ownership and dealing
Details of the shares held by Directors are set out on page 78.
CRH has a policy on dealings in securities that applies to Directors and senior management. Under the policy, Directors are required to obtain clearance from the Chairman and Chief Executive before dealing in CRH shares. Directors and senior management are prohibited from dealing in CRH shares during designated prohibited periods and at any time during which the individual is in possession of price-sensitive information. The policy adopts the terms of the Model Code, as set out in the Listing Rules published by the UK Listing Authority and the Irish Stock Exchange.
The Senior Independent Director conducts an annual review of corporate governance, the operation and performance of the Board and its Committees and the performance of the Chairman. This is achieved through discussion with each Director.
A review of individual Directors performance is conducted by the Chairman and each Director is provided with feedback gathered from other members of the Board. Performance is assessed against a number of measures, including the ability of the Director to contribute to the development of strategy, to understand the major risks affecting the Group, to contribute to the cohesion of the Board, to commit the time required to fulfill the role, and to listen to and respect the views of other Directors and the management team.
Directors retirement and re-election
The Board has determined that when a non-executive Director has served on the Board for more than nine years, that Director will be subject to annual re-election. Of the remaining Directors, at least one-third retire at each Annual General Meeting and Directors must submit themselves to shareholders for re-election every three years. Re-appointment is not automatic. Directors who are seeking re-election are subject to a performance appraisal, which is overseen by the Nomination Committee.
Directors appointed by the Board must submit themselves to shareholders for election at the Annual General Meeting following their appointment.
Board succession planning
The Board plans for its own succession with the assistance of the Nomination Committee. In so doing, the Board considers the skill, knowledge and experience necessary to allow it to meet the strategic vision for the Group.
The Board engages the services of independent consultants to undertake a search for suitable candidates to serve as non-executive Directors.
There were nine full meetings of the Board during 2008. Details of Directors attendance at those meetings are set out in the table below. The Chairman sets the agenda for each meeting, in consultation with the Chief Executive and Company Secretary. Two visits are made each year by the Board to Group operations; one in Europe and one in North America. Each visit lasts between three and five days and incorporates a scheduled Board meeting. In 2008, these visits were to Germany/Belgium in Europe and to Seattle/Spokane, Washington in the United States. Additional meetings, to consider specific matters, are held when and if required. Board papers are circulated to Directors in advance of meetings.
Attendance at Board and Board Committee meetings during the year ended 31 December 2008
The non-executive Directors met twice during 2008 without executives being present.
The Board has established five permanent Committees to assist in the execution of its responsibilities. These are the Acquisitions Committee, the Audit Committee, the Finance Committee, the Nomination Committee and the Remuneration Committee. Ad hoc committees are formed from time to time to deal with specific matters.
Each of the permanent Committees has terms of reference, under which authority is delegated to them by the Board. The terms of reference are available on the Groups website, www.crh.com. The Chairman of each Committee reports to the Board on its deliberations and minutes of all Committee meetings are circulated to all Directors.
The current membership of each Committee is set out below. Attendance at meetings held in 2008 is set out in the table above.
Chairmen of the Committees attend the Annual General Meeting and are available to answer questions from shareholders.
During the year each of the relevant Committees reviewed its performance and terms of reference.
The role of the Acquisitions Committee is to approve acquisitions and capital expenditure projects within limits agreed by the Board.
The Audit Committee consists of four non-executive Directors, considered by the Board to be independent. The Board has determined that Mr. Jan Maarten de Jong and Mr. Dan OConnor are the Committees financial experts. It will be seen from the Directors biographical details, appearing on pages 65 to 66, that the members of the Committee bring to it a wide range of experience and expertise.
The Committee met thirteen times during the year under review. The Finance Director and the Head of Internal Audit normally attend meetings of the Committee, while the Chief Executive and other executive Directors attend when necessary. The external auditors attend as required and have direct access to the Committee Chairman at all times. During the year, the Committee met with the Head of Internal Audit and with the external auditors in the absence of management.
The main role and responsibilities are set out in written terms of reference and include:
These responsibilities are discharged as follows:
As noted above, one of the duties of the Audit Committee is to make recommendations to the Board in relation to the appointment of the external auditors. A number of factors are taken into account by the Committee in assessing whether to recommend the auditors for re-appointment. These include:
The Committee has put in place safeguards to ensure that the independence of the audit is not compromised. Such safeguards include:
The Group has a policy governing the conduct of non-audit work by the auditors. Under that policy, the auditors are prohibited from performing services where the auditors: