UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
OR
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number: 001-32846
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)
Maeve Carton
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.
Title of Each Class | Name of Each Exchange On Which Registered | ||
CRH plc | |||
Ordinary Shares/Income Shares of€0.34 each | The New York Stock Exchange* | ||
American Depositary Shares, each representing the right to receive | The New York Stock Exchange | ||
CRH America Inc. | |||
4.125% Notes due 2016 guaranteed by CRH plc | The New York Stock Exchange | ||
6.000% Notes due 2016 guaranteed by CRH plc | The New York Stock Exchange | ||
8.125% Notes due 2018 guaranteed by CRH plc | The New York Stock Exchange | ||
5.750% Notes due 2021 guaranteed by CRH plc | The New York Stock Exchange |
* | Not for trading but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission. |
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 issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Ordinary Shares/Income Shares of€0.34 each ** | |||||
5% Cumulative Preference Shares of€1.27 each | 50,000 | ||||
7% ‘A’ Cumulative Preference Shares of€1.27 each | 872,000 |
** | Each Income Share is tied to an Ordinary Share and may only be transferred or otherwise dealt with in conjunction with such Ordinary Share. |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YesxX 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¨ NoxX
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. YesxX 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¨ 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 | XAccelerated 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:
U.S. GAAP¨ | International Financial Reporting Standards as issued by the | Other¨ | ||
International Accounting Standards Board |
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¨ NoxX
*** | This requirement does not yet apply to the registrant. |
CRH plc Annual Report on Form 20-F in respect of the year ended 31 December 2014 | ||||||||||
Page | ||||||||||
1 | ||||||||||
2 | ||||||||||
5 | ||||||||||
33 | ||||||||||
65 | ||||||||||
66 | ||||||||||
77 | ||||||||||
85 | ||||||||||
87 | ||||||||||
90 | ||||||||||
108 | ||||||||||
132 | ||||||||||
133 | ||||||||||
135 | ||||||||||
195 | ||||||||||
Cross Reference to Form 20-F Requirements
This table has been provided as a cross reference from the information included in this Annual Report to the requirements of thethis 20-F.
Page | ||||||||||
6 | ||||||||||
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Item 1. | Identity of Directors, Senior Management and Advisors | n/a | ||||||||
Item 2. | Offer Statistics and Expected Timetable | n/a | ||||||||
Item 3. | Key Information | |||||||||
A - Selected financial data | ||||||||||
B - Capitalisation and indebtedness | n/a | |||||||||
C - Reasons for the offer and use of proceeds | n/a | |||||||||
D - Risk factors | ||||||||||
Item 4. | Information on the Company | |||||||||
A - History and development of the | ||||||||||
9, 11, 15 | ||||||||||
C - Organisational structure | 11 | |||||||||
D - Property, plants and equipment | ||||||||||
Item 4A. | Unresolved Staff Comments | None | ||||||||
Item 5. | Operating and Financial Review and Prospects | |||||||||
A - Operating results | 31, 34, 66 | |||||||||
B - Liquidity and capital resources | 67 | |||||||||
C - Research and development, patent and licenses, etc. | 32 | |||||||||
D - Trend information | 66 | |||||||||
E - Off-balance sheet arrangements | 69 | |||||||||
F - Tabular disclosure of contractual obligations | 69 | |||||||||
G - Safe Harbor | 9 | |||||||||
Item 6. | Directors, Senior Management and Employees | |||||||||
A - Directors and senior management | 87 | |||||||||
B - Compensation | 108 | |||||||||
C - Board practices | 90 | |||||||||
D - Employees | 32 | |||||||||
E - Share ownership | 121, 197 | |||||||||
Item 7. | Major Shareholders and Related Party Transactions | |||||||||
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C - Interests of experts and counsel | n/a | |||||||||
Item 8. | Financial Information | |||||||||
A - Consolidated statements and other financial information | ||||||||||
- | ||||||||||
- | ||||||||||
B - Significant changes | 68 | |||||||||
Item 9. | The Offer and Listing | |||||||||
A - Offer and listing details | ||||||||||
B - Plan of distribution | n/a | |||||||||
C - Markets | 196 | ||||||||
D - Selling shareholders | n/a | ||||||||
E - Dilution | n/a | ||||||||
F - Expenses of the issue | n/a | ||||||||
Item 10. | Additional Information | ||||||||
A - Share capital | n/a | ||||||||
B - Memorandum and articles of association | |||||||||
D - |
CRH 1
E - Taxation | 202 | ||||||||
F - Dividends and paying agents | n/a | ||||||||
G - Statements by experts | n/a | ||||||||
H - Documents on display | |||||||||
I - Subsidiary information | n/a | ||||||||
Item 11. | Quantitative and Qualitative Disclosures about Market Risk | ||||||||
Item 12. | Description of Securities Other than Equity Securities | ||||||||
A - Debt | n/a | ||||||||
B - Warrants and | n/a | ||||||||
C - Other | n/a | ||||||||
D - American | |||||||||
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PART II | |||||||||
Item 13. | Defaults, Dividend Arrearages and Delinquencies | None | |||||||
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | None | |||||||
Item 15. | Controls and Procedures | ||||||||
Item 16A. | Audit Committee Financial Expert | ||||||||
Item 16B. | Item 16B. Code of Ethics | ||||||||
Item 16C. | Principal Accountant Fees and Services | ||||||||
Item 16D. | Exemptions from the Listing Standards for Audit Committees | n/a | |||||||
Item 16E. | Purchases of Equity Securities by the Issuer | ||||||||
Item 16F. | Change in Registrant’s Certifying Accountant | None | |||||||
Item 16G. | Corporate Governance | ||||||||
Item 16H. | Mine Safety Disclosures | ||||||||
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PART III | |||||||||
Item 17. | Financial Statements | n/a | |||||||
Item 18. | Financial Statements | ||||||||
Item 19. | Exhibits | ||||||||
CRH 1 |
Dear Shareholder,
In the Chief Executive’s introduction to last year’s Annual Report, Albert Manifold set out the areas of focus for management in 2014. He highlighted dynamic portfolio management together with maintaining CRH’s traditional tight cost control, capital discipline and focus on returns as being key to driving growth and to rebuilding margins in the coming years.
A significant amount of progress has been made in the past 12 months, which is reflected in the results and performance for 2014. In particular, we are pleased with progress in the multi-year divestment programme and the related reshaping of the Group’s portfolio.
The Group’s financial strength was further enhanced during the year by two bond issuances, co-ordinated by Maeve Carton, our Finance Director, and her team, in the amounts of €600 million and CHF330 million. The record low coupons achieved by the Group for these bonds reflect our track record in debt markets and the value that results from our investment grade credit ratings.
In respect of 2014, the Board is recommending a final dividend of 44c per share. If approved at the 2015 Annual General Meeting, this will maintain the full-year dividend at 62.5c per share.
During the last year, my non-executive colleagues and I have spent a considerable amount of time working with the executive Directors and the wider management team on reviewing and refining the Group’s strategy in the context of the evolution of key markets and products over time and in setting the priorities for the Group. On 1 February 2015 we announced that CRH had entered into a binding commitment to acquire certain assets from Lafarge S.A. (“Lafarge”) and Holcim Ltd (“Holcim”) for a total enterprise value of €6.5 billion, subject to: (i) CRH shareholder approval at an Extraordinary General Meeting to be held on 19 March 2015; (ii) the successful completion of the
2 CRH
proposed merger of Lafarge and Holcim; and (iii) the completion of certain local reorganisations by Lafarge and Holcim in advance of the acquisition. The Board believes that this acquisition, which arises from regulatory requirements for industry deconsolidation in connection with the merger of Lafarge and Holcim, represents a compelling strategic opportunity for the Group, and that our financial, capital and operational discipline has positioned the Group to take advantage of this unique opportunity at this time. The placing of approximately 74 million shares in CRH plc, which completed on 5 February 2015, raised €1.6 billion as part of the financing of this acquisition. Further details are set out on page 44 and in note 33 to the Consolidated Financial Statements.
In 2015, in addition to the integration plan for the Lafarge/Holcim assets, on the approval of shareholders, the Board will continue to focus on talent management, cyber security, and working towards the achievement of sustainability, safety and environmental priorities. In relation to safety, 2015 will see the introduction of a new Chairman’s award for safety excellence in the Group.
During 2014, the Board redoubled its ongoing focus on the area of compliance and ethics to ensure that CRH’s processes are robust and in line with best practice across the Group. In the current training cycle a further 32,000 employees participated in Code of Business Conduct training. A further 11,000 also undertook advanced instruction on changing regulatory environments, anti-bribery rules, competition law and other relevant areas such as corruption and fraud. We remain vigilant in our business practices in this area and are responsive to all regulatory agencies.
Notwithstanding this work, as we announced in May 2014 the Swiss Competition Commission has an open investigation in respect of practices in the sanitary building products sector in Switzerland and its Secretariat has recommended that the industry, of which certain CRH group companies are members, be fined. Engagement with the Swiss Competition Commission is ongoing and CRH is responding vigorously to the allegations made by the Secretariat. In doing so, we maintain our initial assessment that the case is ill-founded and that the proposed fine in respect of the Group is unjustified.
Two new non-executive Directors joined the Board in recent months. Pat Kennedy was appointed in January 2015 while Lucinda Riches has been appointed with effect from 1 March 2015. Their biographies, along with those of the rest of the Board are set out on pages 87 to 89. Further details on the ongoing process of Board renewal are set out in theNomination & Corporate Governance Committee Report on page 93.
All Directors will retire at the Annual General Meeting on Thursday, 7 May 2015, with those eligible offering themselves for re-election. I strongly recommend that shareholders vote in favour of each of the individuals putting themselves forward for re-election.
As part of the Board’s planned renewal process, John Kennedy and Dan O’Connor will step down from the Board at the conclusion of the 2015 Annual General Meeting on 7 May 2015. On behalf of the Board, I would like to thank John and Dan for their commitment and great service to CRH over many years.
Finally, I would like to take the opportunity to thank Albert and his team for their significant achievements over the past year.
Nicky Hartery,Chairman
CRH 3 |
4 CRH
CRH 5 |
Introduction and Performance IndicatorsMeasures
Reconciliation of EBITDA (as defined)* and Operating Profit (by segment) to Group Profit
| ||||||||||||||||||||||||||||||||||||
Continuing operations - year ended 31 December
| ||||||||||||||||||||||||||||||||||||
Group operating profit before depreciation and amortisation (EBITDA (as defined)*)
| Depreciation, amortisation and impairment
| Group operating profit1
| ||||||||||||||||||||||||||||||||||
2014 €m | 2013 €m | 2012 €m | 2014 €m | 2013 €m | 2012 €m | 2014 €m | 2013 €m | 2012 €m | ||||||||||||||||||||||||||||
Europe Heavyside | 380 | 326 | 426 | 229 | 721 | 239 | 151 | (395 | ) | 187 | ||||||||||||||||||||||||||
Europe Lightside | 94 | 71 | 78 | 23 | 43 | 29 | 71 | 28 | 49 | |||||||||||||||||||||||||||
Europe Distribution | 190 | 186 | 217 | 78 | 80 | 72 | 112 | 106 | 145 | |||||||||||||||||||||||||||
Europe | 664 | 583 | 721 | 330 | 844 | 340 | 334 | (261 | ) | 381 | ||||||||||||||||||||||||||
Americas Materials | 609 | 557 | 555 | 254 | 331 | 276 | 355 | 226 | 279 | |||||||||||||||||||||||||||
Americas Products | 263 | 246 | 204 | 118 | 178 | 118 | 145 | 68 | 86 | |||||||||||||||||||||||||||
Americas Distribution | 105 | 89 | 83 | 22 | 22 | 24 | 83 | 67 | 59 | |||||||||||||||||||||||||||
Americas | 977 | 892 | 842 | 394 | 531 | 418 | 583 | 361 | 424 | |||||||||||||||||||||||||||
Total Group | 1,641 | 1,475 | 1,563 | 724 | 1,375 | 758 | 917 | 100 | 805 | |||||||||||||||||||||||||||
Profit on disposals | 77 | 26 | 230 | |||||||||||||||||||||||||||||||||
Finance costs less income | (246 | ) | (249 | ) | (256 | ) | ||||||||||||||||||||||||||||||
Other financial expense | (42 | ) | (48 | ) | (49 | ) | ||||||||||||||||||||||||||||||
Share of equity accounted investments’ profit/(loss) |
| 55 | (44 | ) | (84 | ) | ||||||||||||||||||||||||||||||
Profit/(loss) before tax | 761 | (215 | ) | 646 | ||||||||||||||||||||||||||||||||
Income tax expense | (177 | ) | (80 | ) | (106 | ) | ||||||||||||||||||||||||||||||
Group profit/(loss) for the financial year | 584 | (295 | ) | 540 | ||||||||||||||||||||||||||||||||
1 Throughout this document, Group operating profit as shown in the Consolidated Financial Statements excludes profit on disposals.
|
|
Calculation of EBITDA (as defined)* Net Interest Cover
| ||||||||||||
2014 €m | 2013 €m | 2012 €m | ||||||||||
Interest | ||||||||||||
Finance costs1 | 254 | 262 | 271 | |||||||||
Finance income1 | (8 | ) | (13 | ) | (15 | ) | ||||||
Net interest | 246 | 249 | 256 | |||||||||
EBITDA (as defined)* | 1,641 | 1,475 | 1,563 | |||||||||
Times | ||||||||||||
EBITDA (as defined)* net interest cover (EBITDA (as defined)* divided by net interest) | 6.7 | 5.9 | 6.1 | |||||||||
1 These items appear on the Consolidated Income Statement on page 135.
|
|
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
6 CRH |
Forward-Looking Statements
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 (including the statements under “2012 Outlook” on page 40 and under “Outlook” in each of the segment review sections). These statements may generally, but not always, be identified by the use of words such as “anticipates”, “should”, “expects”, “estimates”, “believes”, “intends” or similar expressions. By their nature, forward-looking statements involve risk and uncertainty because they reflect the Company’s 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 forward-looking statements, certain of which are beyond our control, and which include, among other things, those factors identified in the Risk Factors section.
CRH Website
Information on or accessible through our website,www.crh.com,, other than the item identified as the Annual Report onForm 20-F, does not form part of and is not incorporated into this document. References in this document to other documents on the CRH website such as the Circular to shareholders in respect of the proposed Acquisition, are included only as an aid to their location. The Group’s website provides the full text of the Annual and Interim Reports, the Annual Report on Form 20-F, which is filed annually with the United States Securities and Exchange Commission, trading statements, interim management statements, and copies of presentations to analysts and investors.investors and circulars to shareholders. News releases are made available, in the News & Events section of the website, immediately after release to the Stock Exchanges.
The Consolidated Financial Statements of CRH plc have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issuedadopted by the International Accounting Standards Board.
Selected financial data has been presented for the five years ended on 31 December 20112014 on pages 5 and 6.page 8. For the three years ended 31 December 2011,2014, the selected financial data areis qualified in theirits entirety by reference to, and should be read in conjunction with, the audited Consolidated Financial Statements, the related Notes and the Business Performance Review section included elsewhere in this Annual Report on Form 20-F (“Annual Report” or “Form 20-F”).
Non-GAAP Performance IndicatorsMeasures
CRH uses a number of non-GAAP performance indicatorsmeasures to monitor financial performance. These are summarised below and discussed later in this report.
Net Debt.Netdebt Net debt is used by management as it gives a more complete picture of the Group’s current debt situation than total interest-bearing loans and borrowings. Net debt is provided to enable investors to see the economic effect of gross debt, related hedges and cash and cash equivalents in total. Net debt is a non-GAAP measure and comprises current and non-current interest-bearing loans and borrowings, cash and cash equivalents liquid investments and current and non-current derivative financial instruments. A reconciliation of total interest-bearing loans and borrowings to net debt is set out in note 2520 to the Consolidated Financial Statements.
EBITDA (as defined).EBITDA is defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of associates’ profitequity accounted investments’ result after tax and is quoted by management to aid investors in their analysis of the performance of the Group and to assist investors in the comparison of the Group’s performance with that of other companies. EBITDA (as defined) and operating profit results by segment are monitored by management in order to allocate resources between segments and to assess performance. Given that net finance costs and income tax are managed on a centralised basis, these items are not allocated between operating segments for
the purpose of the information presented to the Chief Operating Decision-Maker.
CRH 3
Introduction and Performance Indicators
Reconciliation of EBITDA (as defined)* and Operating Profit (by segment) to Group Profit
Continuing operations - year ended 31 December | ||||||||||||||||||||||||||||||||||||||||||||||||
Materials | Products | Distribution | Total Group | |||||||||||||||||||||||||||||||||||||||||||||
2011 €m | 2010 €m | 2009 €m | 2011 €m | 2010 €m | 2009 €m | 2011 €m | 2010 €m | 2009 €m | 2011 €m | 2010 €m | 2009 €m | |||||||||||||||||||||||||||||||||||||
Group operating profit before depreciation and amortisation (EBITDA (as defined)*) |
| |||||||||||||||||||||||||||||||||||||||||||||||
Europe | 436 | 423 | 434 | 194 | 198 | 283 | 267 | 214 | 204 | 897 | 835 | 921 | ||||||||||||||||||||||||||||||||||||
Americas | 530 | 566 | 670 | 164 | 154 | 173 | 65 | 60 | 39 | 759 | 780 | 882 | ||||||||||||||||||||||||||||||||||||
966 | 989 | 1,104 | 358 | 352 | 456 | 332 | 274 | 243 | 1,656 | 1,615 | 1,803 | |||||||||||||||||||||||||||||||||||||
Depreciation and amortisation (including asset impairment charges) |
| |||||||||||||||||||||||||||||||||||||||||||||||
Europe | 172 | 172 | 177 | 128 | 187 | 167 | 77 | 79 | 67 | 377 | 438 | 411 | ||||||||||||||||||||||||||||||||||||
Americas | 266 | 278 | 263 | 122 | 178 | 150 | 20 | 23 | 24 | 408 | 479 | 437 | ||||||||||||||||||||||||||||||||||||
438 | 450 | 440 | 250 | 365 | 317 | 97 | 102 | 91 | 785 | 917 | 848 | |||||||||||||||||||||||||||||||||||||
Group operating profit† |
| |||||||||||||||||||||||||||||||||||||||||||||||
Europe | 264 | 251 | 257 | 66 | 11 | 116 | 190 | 135 | 137 | 520 | 397 | 510 | ||||||||||||||||||||||||||||||||||||
Americas | 264 | 288 | 407 | 42 | (24 | ) | 23 | 45 | 37 | 15 | 351 | 301 | 445 | |||||||||||||||||||||||||||||||||||
528 | 539 | 664 | 108 | (13 | ) | 139 | 235 | 172 | 152 | 871 | 698 | 955 | ||||||||||||||||||||||||||||||||||||
Profit on disposals |
| 55 | 55 | 26 | ||||||||||||||||||||||||||||||||||||||||||||
Finance costs (net) |
| (257 | ) | (247 | ) | (297 | ) | |||||||||||||||||||||||||||||||||||||||||
Group share of associates’ profit after tax |
| 42 | 28 | 48 | ||||||||||||||||||||||||||||||||||||||||||||
Profit before tax |
| 711 | 534 | 732 | ||||||||||||||||||||||||||||||||||||||||||||
Income tax expense |
| (114 | ) | (95 | ) | (134 | ) | |||||||||||||||||||||||||||||||||||||||||
Group profit for the financial year |
| 597 | 439 | 598 |
Net Interest Ratio.Cover.Net Interest Ratio EBITDA net interest cover is used by management as a measure matchingwhich matches the earnings and cash generated by the business to the underlying funding costs. Net Interest RatioEBITDA (as defined)* net interest cover is presented to provide a greater understanding of the impact of CRH’s debt and financing arrangements and, as discussed in note 23 to the Consolidated Financial Statements, is a metric used in lender covenants. It is the ratio of EBITDA (as defined)* to net interest and is calculated as follows:
Calculation of EBITDA (as defined)* to Net Interest Ratio
2011 €m | 2010 €m | 2009 €m | ||||||||||
Net Interest | ||||||||||||
Finance costs1 | 262 | 255 | 305 | |||||||||
Finance income1 | (33 | ) | (37 | ) | (35 | ) | ||||||
Other financial expense1 | 28 | 29 | 27 | |||||||||
Net interest expense | 257 | 247 | 297 | |||||||||
EBITDA (as defined)* | 1,656 | 1,615 | 1,803 | |||||||||
times | ||||||||||||
EBITDA (as defined)* to net interest ratio (EBITDA (as defined)* divided by net interest expense) | 6.4 | 6.5 | 6.1 |
4 CRH
Introduction and Performance Indicators
on page 6.
The definitions and calculations used in lender covenant agreements include certain specified adjustments to the amounts included in the Consolidated Financial Statements. The ratios as calculated on the basis of the definitions in those covenants are disclosed in note 23 to the Consolidated Financial Statements.
Organic Revenue, Organic Operating Profit. CRH pursues a strategy of growth through acquisitions and investments, with€610 €188 million spent on acquisitions and investments in 2011 (2010:€5672014 (2013: €720 million); these acquisitions. Acquisitions completed in 2013 and 2014 contributed to the change inincremental sales revenue of €237 million and operating profit of €4 million in 2011, adding incremental revenue of€805 million2014. Proceeds from divestments and incremental operating profit of€49 million compared with 2010. Proceeds (including net debt assumed by the purchasers) from disposal of non-current assets and businessesasset disposals amounted to€492 €345 million (2010:€188(2013: €283 million). The sales impact of divested activities in 20112014 was a negative€469 €25 million and because these operations generated net losses in 2010,2013, the disposal impact at operating profit level was a contribution of€16m €1 million compared with 2010. Exchange translation movements had ato 2013.
During 2014, the US Dollar remained relatively minor impact on 2011 results with a strengtheningstable at approximately 1.33 against the euro, however the weakening of currencies like the Swiss FrancUkrainian Hryvnia and Canadian Dollar, partly offset by a weakeningthe strengthening of Sterling, were the US Dollar and Polish Zloty averageprincipal factors behind the exchange rates.effects disclosed on page 67. Because of the impact of acquisitions, divestments, exchange translation and other non-recurring items 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, like-for-like 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 and divestments, the impact of exchange translation and the impact of any non-recurring items. In the Business Performance Review section 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 for the Group and by segment is presented with the discussion of each segment’s performance in tables contained in the segment discussion commencing on page 45.70.
Consolidated Income Statement Data
Year ended 31 December
2011 €m | 2010 €m | 2009 €m | 2008 €m | 2007 €m | ||||||||||||||||
(Amounts in millions, except per share data and ratios) | ||||||||||||||||||||
Revenue | 18,081 | 17,173 | 17,373 | 20,887 | 20,992 | |||||||||||||||
Group operating profit | 871 | 698 | 955 | 1,841 | 2,086 | |||||||||||||||
Profit attributable to equity holders of the Company | 590 | 432 | 592 | 1,248 | 1,430 | |||||||||||||||
Basic earnings per Ordinary Share1 | 82.6c | 61.3c | 88.3c | 210.2c | 236.9c | |||||||||||||||
Diluted earnings per Ordinary Share1 | 82.6c | 61.2c | 87.9c | 209.0c | 234.8c | |||||||||||||||
Dividends paid during calendar year per Ordinary Share1 | 62.5c | 62.5c | 62.2c | 61.8c | 52.8c | |||||||||||||||
Average number of Ordinary Shares outstanding (millions of shares)1 | 714.4 | 704.6 | 670.8 | 593.9 | 603.6 | |||||||||||||||
Ratio of earnings to fixed charges (times)2 | 2.4 | 2.1 | 2.4 | 3.9 | 5.0 |
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
All data relates to continuing operations
CRH 7 |
Introduction and Performance Measures |continued
| ||||||||||||||||||||
Year ended 31 December (amounts in millions, except per share data and ratios)
| ||||||||||||||||||||
2014 | 20131 | 20122 | 20112 | 20102 | ||||||||||||||||
€m | €m | €m | €m | €m | ||||||||||||||||
Consolidated Income Statement Data | ||||||||||||||||||||
Revenue | 18,912 | 18,031 | 18,084 | 18,081 | 17,173 | |||||||||||||||
Group operating profit | 917 | 100 | 805 | 871 | 698 | |||||||||||||||
Profit/(loss) attributable to equity holders of the Company | 582 | (296 | ) | 538 | 580 | 432 | ||||||||||||||
Basic earnings/(loss) per Ordinary Share | 78.9c | (40.6c | ) | 74.6c | 81.2c | 61.3c | ||||||||||||||
Diluted earnings/(loss) per Ordinary Share | 78.8c | (40.6c | ) | 74.5c | 81.2c | 61.2c | ||||||||||||||
Dividends paid during calendar year per Ordinary Share | 62.5c | 62.5c | 62.5c | 62.5c | 62.5c | |||||||||||||||
Average number of Ordinary Shares outstanding3 | 737.6 | 729.2 | 721.9 | 714.4 | 704.6 | |||||||||||||||
Ratio of earnings to fixed charges (times)4 | 2.6 | 0.75 | 2.6 | 2.4 | 2.1 | |||||||||||||||
All data relates to continuing operations | ||||||||||||||||||||
Consolidated Balance Sheet Data | ||||||||||||||||||||
Total assets | 22,017 | 20,429 | 20,900 | 21,384 | 21,461 | |||||||||||||||
Net assets6 | 10,198 | 9,686 | 10,589 | 10,593 | 10,411 | |||||||||||||||
Ordinary shareholders’ equity | 10,176 | 9,661 | 10,552 | 10,518 | 10,327 | |||||||||||||||
Equity share capital | 253 | 251 | 249 | 247 | 244 | |||||||||||||||
Number of Ordinary Shares3 | 744.5 | 739.2 | 733.8 | 727.9 | 718.5 | |||||||||||||||
Number of Treasury Shares and own shares3 | 3.8 | 6.0 | 7.4 | 8.9 | 9.5 | |||||||||||||||
Number of Ordinary Shares net of Treasury Shares and own shares3 | 740.7 | 733.2 | 726.4 | 719.0 | 709.0 |
1 | 2 On 1 January 2013, the Group adopted IFRS 11 Joint Arrangements and |
| 4 For the purposes of calculating the ratio of earnings to fixed charges, in accordance with Item 503 of Regulation S-K, earnings have been calculated by adding: |
CRH 5
Introduction and Performance Indicators
Consolidated Balance Sheet Data
2011 €m | 2010 €m | 2009 €m | 2008 €m | 2007 €m | ||||||||||||||||
(Amounts in millions) | ||||||||||||||||||||
Total assets | 21,387 | 21,461 | 20,283 | 21,121 | 19,788 | |||||||||||||||
Net assets1 | 10,583 | 10,411 | 9,710 | 8,157 | 8,020 | |||||||||||||||
Ordinary shareholders’ equity | 10,508 | 10,327 | 9,636 | 8,086 | 7,953 | |||||||||||||||
Equity share capital | 247 | 244 | 241 | 186 | 186 | |||||||||||||||
Number of Ordinary Shares2* | 727.9 | 718.5 | 710.5 | 608.3 | 606.9 | |||||||||||||||
Number of Treasury Shares and ownshares* | 8.9 | 9.5 | 12.8 | 17.1 | 0.9 | |||||||||||||||
Number of Ordinary Shares net of Treasury Shares and own shares2* | 719.0 | 709.0 | 697.7 | 591.2 | 606.0 |
| 6 Net assets is calculated as the sum of total assets less total liabilities. |
8 CRH |
Forward-Looking Statements
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 including the statements under: “Strategy Review – Chief Executive’s Introduction – Outlook for 2015”; in the “Business Performance Review – Finance Director’s Introduction” with respect to our belief that the Group has sufficient resources to meet its debt obligations and capital and other expenditure requirements in 2015; in the “Business Performance Review” section with respect to our expectations regarding economic activity and fiscal developments in our operating regions; our expectations for the residential, non-residential and infrastructure markets, our expectation for operating profits and/or margins in 2015 under the heading ‘Outlook’ in each of the six operating segment reviews; under the heading “Strategy Review - Proposed Acquisition - Announced February 2015” with respect to the expected benefits and reasons for the proposed Acquisition, the timing of regulatory approvals and other conditions and the timing for completion of the proposed Acquisition; under the heading “China and India – Equity Accounted Investments – Outlook” with respect to future market conditions in China and India; and under the heading “Risk Factors – Financial instruments” with respect to the expected PBITDA/net interest cover as a result of the proposed Acquisition. These forward-looking statements may generally, but not always, be identified by the use of words such as “will”, “anticipates”, “should”, “expects”, “is expected to”, “estimates”, “believes”, “intends” or similar expressions.
By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future and reflect the Company’s current expectations and assumptions as to such 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 forward-looking statements, certain of which are beyond our control and which include, among other things: economic and financial conditions generally in various countries and regions where we operate; the pace of recovery in the overall construction and building materials sector; demand for infrastructure, residential and non-residential construction in our geographic markets; increased competition and its impact on prices; increases in energy and/or raw materials costs; adverse changes to laws and regulations; adverse political developments in various countries and regions; failure to complete or successfully integrate acquisitions; and the specific factors identified in the discussions accompanying such forward-looking statements and under “Risk Factors” in this document.
Statements Regarding Competitive Position and Construction Activity
Statements made in the Description of the Group and in the Business Performance Review sections referring to the Group’s competitive position are based on the Group’s belief, and in some cases rely on a range of sources, including investment analysts’ reports, independent market studies and the Group’s internal assessment of market share based on publicly available information about the financial results and performance of market participants.
Unless otherwise specified, references to construction activity or other market activity relate to the relevant market as a whole and are based on publicly available information from a range of sources, including independent market studies, construction industry data and economic forecasts for individual jurisdictions.
Seasonality
Activity in the construction industry is characterised by cyclicality and is dependent to a considerable extent on the seasonal impact of weather in the Group’s operating locations, with activity in some markets reduced significantly in winter due to inclement weather. First-half sales accounted for 44% of full-year 2014 (2013: 44%), while EBITDA (as defined)* for the first six months of 2014 represented 31% of the full-year out-turn (2013: 27%).
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
CRH 9 |
Introduction and Performance Measures |continued
Exchange Rates
In this Form 20-F, references to “US$”, “US Dollars” or “US cents” are to the United States currency, references to “euro”, “euro cent”, “cent”, “c” or “€“€” are to the euro currency and “Stg£“Stg£” or “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”), Turkish Lira (“TRY”), Indian Rupee (“INR”), Ukrainian Hryvnia (“UAH”) and Israeli Shekel (“ILS”).
Merely forFor 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 Federal Reserve Bank of New York Noon Buying Rate (the “FRB Noon Buying Rate”) on 31 December 20112014 was€1 €1 = US$1.29731.2101 and on 236 March 20122015 was€1 €1 = US$1.3263.1.0855.
6 CRH
Introduction and Performance Indicators
The following table below sets forth, for the periods and dates indicated, the average, high, low and end-of-period exchange rates in US Dollars per€1 €1 (to the nearest cent) using the FRB Noon Buying Rate. These rates may vary slightly from the rates used for translating foreign currencies into euro in the preparation of the Consolidated Financial Statements (see page 145).
For a discussion on the effects of exchange rate fluctuations on the financial condition and results of the operations of the Group, see the Business Performance Review section beginning on page 66.
Years ended 31 December | Period End | Average Rate1 | High | Low | ||||||||||||
2007 | 1.46 | 1.38 | 1.49 | 1.29 | ||||||||||||
2008 | 1.39 | 1.47 | 1.60 | 1.24 | ||||||||||||
2009 | 1.43 | 1.40 | 1.51 | 1.25 | ||||||||||||
2010 | 1.33 | 1.32 | 1.45 | 1.20 | ||||||||||||
2011 | 1.30 | 1.40 | 1.49 | 1.29 | ||||||||||||
2012 (through 23 March 2012) | 1.33 | 1.31 | 1.35 | 1.27 | ||||||||||||
Months ended | ||||||||||||||||
September 2011 | 1.34 | 1.37 | 1.43 | 1.34 | ||||||||||||
October 2011 | 1.39 | 1.37 | 1.42 | 1.33 | ||||||||||||
November 2011 | 1.35 | 1.36 | 1.38 | 1.32 | ||||||||||||
December 2011 | 1.30 | 1.32 | 1.35 | 1.29 | ||||||||||||
January 2012 | 1.31 | 1.29 | 1.32 | 1.27 | ||||||||||||
February 2012 | 1.34 | 1.32 | 1.35 | 1.31 | ||||||||||||
March 2012 (through 23 March 2012) | 1.33 | 1.32 | 1.33 | 1.30 |
Exchange Rates
| ||||||||||||||||
Years ended 31 December
| Period End
| Average Rate1
| High
| Low
| ||||||||||||
2010 | 1.33 | 1.32 | 1.45 | 1.20 | ||||||||||||
2011 | 1.30 | 1.40 | 1.49 | 1.29 | ||||||||||||
2012 | 1.32 | 1.29 | 1.35 | 1.21 | ||||||||||||
2013 | 1.38 | 1.33 | 1.38 | 1.28 | ||||||||||||
2014 | 1.21 | 1.32 | 1.39 | 1.21 | ||||||||||||
2015 (through 6 March 2015) | 1.09 | 1.11 | 1.20 | 1.09 | ||||||||||||
Months ended
| ||||||||||||||||
September 2014 | 1.26 | 1.29 | 1.31 | 1.26 | ||||||||||||
October 2014 | 1.25 | 1.27 | 1.28 | 1.25 | ||||||||||||
November 2014 | 1.24 | 1.25 | 1.26 | 1.24 | ||||||||||||
December 2014 | 1.21 | 1.23 | 1.25 | 1.21 | ||||||||||||
January 2015 | 1.13 | 1.16 | 1.20 | 1.13 | ||||||||||||
February 2015 | 1.12 | 1.14 | 1.15 | 1.12 | ||||||||||||
March 2015 (through 6 March 2015) | 1.09 | 1.11 | 1.12 | 1.09 |
1 | The average of the US Dollar/euro exchange rate on the last day of each month during the period or in the case of monthly averages, the average of all days in the month, in each case using the FRB Noon Buying Rate. |
The above rates may vary slightly from the rates used for translating foreign currencies into euro in the preparation of the Consolidated Financial Statements (see page 117).
For a discussion on the effects of exchange rate fluctuations on the financial condition and results of the operations of the Group, see the Business Review section beginning on page 38.
CRH 7
|
| ||||
8 CRH
DescriptionHistory, Development andOrganisational Structure of the GroupCompany
DESCRIPTION OF THE GROUP
History, Development and Organisational Structure of the Company
CRH public limited company is the parent company for anof a diversified international group of companies engaged in the manufacture and supply of a wide range ofwhich provide building materials across the spectrum of the construction industry – from building foundations to frame and inroofing, to fitting out the operation of builders’ merchantinginterior space and “Do-It-Yourself” (“DIY”) stores.improving the exterior environment, onsite works and infrastructural projects, our materials and products are used extensively.
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 and domiciled in the Republic of Ireland. CRH is a public limited company operating under the Companies Acts of Ireland, 1963 to 20092013 and the Investment Funds, Companies and Miscellaneous Provisions Act, 2006, each as amended. The Group’s worldwide headquarters are located in Dublin, Ireland. ItsOur principal executive offices are located at Belgard Castle, Clondalkin, Dublin 22 (telephone: +353 1 404 1000). The Company’s registered office is located at 42 Fitzwilliam Square, Dublin 2, Ireland and itsour US agent is Oldcastle, Inc., 375 Northridge Road,900 Ashwood Parkway, Suite 600, Atlanta, Georgia 30350.30338. The Company is the holding company of the Group, with direct and indirect share and loan interests in subsidiaries, joint ventures and associates. From Group headquarters, a small team of executives exercisesexercise strategic control over itsour decentralised operations.
CRH, which has a premium listing on The London Stock Exchange Limited (“London Stock Exchange”), is also one of the largest companies, 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 the United Kingdom and its
CRH’s American Depositary Sharesshares are listed on the New York Stock Exchange (“NYSE”) in the United States. The market capitalisation of CRH as of 31 December 20112014 was€11 €14.7 billion.
In December 2011, changes in the Group’s listing arrangements facilitated the inclusionCRH is a constituent member of CRH in the FTSE 100 index and FTSE All-Share indices, a move which we believe will increase the Group’s attractiveness to a wider international investor base. CRH continues to be included in the MSCI Euro indices, the EuroStoxx indices and in the ISEQ 20 and ISEQ Overall indices, among others.20.
For reporting purposes,As outlined in note 1 to the Consolidated Financial Statements, in conjunction with the ongoing portfolio review, the Group reorganised its European business in 2014 and is organised into six business segments comprising Europe Materials (including activities in Chinawhich form the operational organisational structure and India), Americas Materials (in the United States), Europe Products (including activities in Australia), Americas Products (in the United States, Mexico, Canada, Chile and Argentina), Europe Distribution and Americas Distribution (in the United States). The activities of the various segments are briefly described below as follows:
Materialsbusinesses are predominantly engagedoutlined further in the production and sale of a range of primary materials including cement, aggregates, readymixed concrete, asphalt/bitumen and agricultural and/or chemical lime.
Productsbusinesses are predominantly engaged in the production and sale of architectural and structural concrete products, clay products, fabricated and tempered glass products, construction accessories and the provision of a wide range of inter-related products and services to the construction sector.
Distribution businesses encompass builders merchanting activities and Do-It-Yourself (DIY) stores engaged in the marketing and sale of supplies to the construction sector and to the general public.sections that follow.
In the detailed description of the Group’s business that follows, estimates of the Group’s various aggregateaggregates 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 36 countries, mainly in
CRH 9
Description of the Group
DESCRIPTION OF THE GROUP
Western Europe and North America as well as, tois a lesser degree, in developing economies in Eastern Europe, South America, the Mediterranean basin, China, India and Australia,leading global building materials group employing approximately 76,000 people at closeover 3,300 locations worldwide. For over four decades, CRH has developed and implemented a proven model of business improvement. By building better businesses across our international operations, we have grown to 3,600 locations.be a leader in the global building materials industry. We operate in 34 countries and we are the largest building materials company in North America, a regional leader in Europe, and have strategic positions in Asia.
The principal subsidiary joint ventureundertakings and associated undertakingsequity accounted investments are listed in Exhibit 8. The operational organisational structure is detailed above.
CRH strategy is8 to sustain and grow a geographically diversified business with exposure to all segments of construction demand, enabling CRH to achieve its vision of being a responsible international leader in building materials delivering superior performance and growth.
CRH’s Business Model
CRH strives to outperform in its business operations, develop its people and build regional market leadership positions across an actively managed portfolio, while a federal structure effectively combines large company resources and local company entrepreneurship. The portfolio is well balanced across geographies, sector end-uses, and both new and RMI (repair, maintenance and improvement) construction, thus providing exposure to multiple demand drivers which help smooth the effects of varying economic cycles.
With a rigorous approach to capital allocation and a strong focusthis Annual Report on cash generation, CRH reinvests in its existing assets and acquires well-run, value-creating businesses while seeking exposure to new development opportunities and creating platforms for future growth. In a fragmented industry, CRH typically acquires small to mid-sized companies which complement the existing network; however this is augmented from time to time with larger transactions where we see compelling value. This sustainable business model and overall strategic approach has enabled CRH to deliver superior long-term performance through the business cycle.Form 20-F.
Developed Economies
In the developed world, CRH’s strategic focus is to continue to reinvest in its established platforms for operational efficiency, product quality and customer service. The development of these businesses is primarily through bolt-on acquisitions which enhance vertical integration, bolster our strong long-term permitted reserves positions and fill out regional and product level positions. In Western Europe and North America CRH has built a balanced portfolio of businesses which service the breadth of building materials demand from the fundamentals of heavy materials and elements to construct the frame, through value-added exterior products that complete the building envelope, to distribution channels which service construction fit-out and renewal. In many of its regions, CRH’s diverse business base is uniquely positioned to provide a broad product offering to the construction industry. While our heavyside building materials operations support the Group’s exposure to new-build construction, the lightside of our product range enables CRH to participate in the growing RMI markets of mature economies.
Developing Economies
In emerging regions, CRH’s strategy is to target premium assets as an initial footprint, usually in cement and often in partnership with strong local established businesses. We identify entry platforms that have well-located quality operations and good regional market positions and which have the potential to develop further downstream into integrated building materials businesses as construction markets become more sophisticated over time. In the mid-1990s, CRH applied this approach to its entry into the Polish market and today the Group is the leading integrated building materials company in Poland. CRH is now replicating this approach in its platforms in Ukraine, India and China. As these markets develop, more sophisticated construction methods will emerge and, as has been our experience in Eastern Europe, a wide range of value-added construction products will be required, enabling CRH to roll out a broader range of products over time across the industry.
10 CRH
Description of the Group
DESCRIPTION OF THE GROUP
Sector exposure and end-use (EBITDA (as defined)*)
CRH 11
Description of the Group
DESCRIPTION OF THE GROUP
12 CRH
Description of the Group
DESCRIPTION OF THE GROUP
CRH 13
Description of the Group
DESCRIPTION OF THE GROUP
Maeve Carton was appointed Finance Director and became a CRH Board Director in May 2010. Since joining CRH in 1988, she has held a number of roles in the Group Finance area and was appointed Group Controller in 2001 and Head of Group Finance in January 2009. She has broad-ranging experience of CRH’s reporting, control, budgetary and capital expenditure processes and has been extensively involved in CRH’s evaluation of acquisitions. Prior to joining CRH, she worked for a number of years as a chartered accountant in an international accountancy practice.
Myles Leewas appointed a CRH Board Director in November 2003. He 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 and to the position of Finance Director in November 2003. A civil engineer and chartered accountant, he has 30 years’ experience of the building materials industry and of CRH’s international expansion. He was appointed Group Chief Executive with effect from January 2009.
Albert Manifoldwas appointed Chief Operating Officer of CRH and to the CRH Board with effect from January 2009. He joined CRH in 1998. Prior to joining CRH he was Chief Operating Officer with a private equity group. He has held a variety of senior positions, including Finance Director of the Europe Materials Division and Group Development Director of CRH. Prior to his current appointment, he was Managing Director, Europe Materials.
| ![]() |
14 CRH
Description of the Group
DESCRIPTION OF THE GROUP
Doug Black, a BS in Mathematical Science/Civil Engineering and MBA, joined CRH in 1995 as Vice-President Business Development and in 1996 helped establish Oldcastle Distribution with the acquisition of Allied Building Products. Doug was President of Oldcastle Precast Southeast from 1996 to 2000, was promoted to Chief Operating Officer Oldcastle Architectural in 2000 and was President and Chief Executive Officer (CEO) Oldcastle Architectural from 2002 to July 2006. Doug was appointed CEO Americas Materials in 2008 after two years serving as President of this Division and became President and Chief Operating Officer, Oldcastle, Inc. (the holding company for CRH’s operations in the Americas) in February 2012.
Henry Morris, a mechanical engineer and MBA, joined Irish Cement Limited as a graduate. He held a number of operational roles in CRH’s cement business prior to his appointment as Managing Director of CRH’s Aerobord business in 1990. Henry left the Group to join Barlo Group plc in 1993 and returned to CRH in 2001 as Regional Director, Finland and Switzerland. He was appointed Chief Operating Officer, Europe Materials in 2007 and Managing Director of the Division in January 2009.
Erik Bax, a building & construction engineer and MBA, joined CRH in 1984 as Manager, New Business at Vaculux and was appointed Managing Director Vaculux in 1993. He subsequently held a number of senior positions in Europe Products & Distribution. Erik became Managing Director CRH Europe Building Products in 2003 and Managing Director CRH Europe Distribution in 2007. He was appointed Managing Director of CRH Europe Products & Distribution in 2010.
Mark Towe was appointed a CRH Board Director with effect from July 2008. A United States citizen, he joined CRH in 1997. In 2000, he was appointed President of Oldcastle Materials, Inc. and became the Chief Executive Officer of this Division in 2006. He was appointed to his current position of Chief Executive Officer of Oldcastle, Inc. (the holding company for CRH’s operations in the Americas) in July 2008. With approximately 40 years’ of experience in the building materials industry, he has overall responsibility for the Group’s aggregates, asphalt and readymixed concrete operations in the United States and its products and distribution businesses in the Americas.
CRH 15
Description of the Group
DESCRIPTION OF THE GROUP
With effect from January 2011, as part of an organisational alignment to accelerate the capture of market growth opportunities while streamlining common business processes and functions, the Architectural, Precast and MMI groups within Americas Products were combined to form a new product group - Building Products - under the leadership of Keith Haas.
This reorganisation has proved very successful and we have now further re-aligned our management structure in the Americas. With effect from 20 February 2012, Doug Black, previously Chief Executive Officer (CEO) of Americas Materials, took on the role of President and Chief Operating Officer (COO) of Oldcastle, Inc. (holding company for CRH’s operations in the Americas) reporting to Oldcastle CEO, Mark Towe. Randy Lake took over from Doug as CEO of Americas Materials, again with effect from 20 February 2012. Keith Haas took on expanded responsibilities with the absorption of our BuildingEnvelope™ operations into the Building Products structure. Randy and Keith, together with Bob Feury, CEO of Americas Distribution, all report to Doug in his role as COO, Oldcastle.
Francisco Irazusta joined Europe Products & Distribution in early 2011 and has assumed responsibility for our Products operations reporting to Erik Bax, Managing Director, Europe Products & Distribution.
In July 2011 Bill Sandbrook resigned from our US operations to take up a position elsewhere in the industry. We thank Bill for his long and committed service over many years.
The average number of employees for the past three financial years is disclosed in note 7 to the Consolidated Financial Statements on page 126.
No significant industrial disputes have occurred at any of CRH’s factories or plants during the past five years. The Group believes that relations with its employees and labour unions are satisfactory.
16 CRH
Description of the Group
DESCRIPTION OF THE GROUP
The percentage of Group revenue and operating profit for each of the six reporting segments for 2011, 20102014, 2013 and 20092012 is as follows:
Business Overview
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
2014
| 2013
| 2012
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Operating | Operating | Operating | ||||||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | Revenue
| profit
| Revenue
| profit
| Revenue
| profit
| ||||||||||||||||||||||||||||||||||||||||||||
Revenue | Operating profit | Revenue | Operating profit | Revenue | Operating profit | |||||||||||||||||||||||||||||||||||||||||||||||
Share of revenue and operating profit | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Europe Materials1 | 17% | 30% | 16% | 36% | 16% | 27% | ||||||||||||||||||||||||||||||||||||||||||||||
Europe Heavyside1 | 21% | 16% | 21% | (395% | ) | 22% | 23% | |||||||||||||||||||||||||||||||||||||||||||||
Europe Lightside | 5% | 8% | 5% | 28% | 5% | 6% | ||||||||||||||||||||||||||||||||||||||||||||||
Europe Distribution | 21% | 12% | 22% | 106% | 22% | 18% | ||||||||||||||||||||||||||||||||||||||||||||||
Americas Materials | 24% | 30% | 26% | 41% | 25% | 43% | 27% | 39% | 26% | 226% | 27% | 35% | ||||||||||||||||||||||||||||||||||||||||
Europe Products | 15% | 8% | 16% | 2% | 17% | 12% | ||||||||||||||||||||||||||||||||||||||||||||||
Americas Products | 13% | 5% | 14% | -3% | 14% | 2% | 17% | 16% | 17% | 68% | 15% | 11% | ||||||||||||||||||||||||||||||||||||||||
Europe Distribution | 24% | 22% | 21% | 19% | 21% | 14% | ||||||||||||||||||||||||||||||||||||||||||||||
Americas Distribution | 7% | 5% | 7% | 5% | 7% | 2% | 9% | 9% | 9% | 67% | 9% | 7% | ||||||||||||||||||||||||||||||||||||||||
Total | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% |
1 | See “Business Operations in |
CRH 11 |
Operational Snapshot |sector exposure and end-use based on 2014 EBITDA (as defined)*
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
** | Net assets at 31 December 2014 comprise segment assets less segment liabilities as disclosed in note 1 to the Consolidated Financial Statements. |
† | Including equity accounted investments. |
12 CRH |
1 | Throughout this document annualised volumes have been used which reflect the full-year impact of acquisitions made during the year and may vary from actual volumes produced. |
2 | Throughout this document tonnes denote metric tonnes (i.e. 1,000 kilogrammes). |
CRH 13 |
14 CRH
CRH 15
Business Operations in Europe
Europe Heavyside
In 2014, the Group reorganised its European business by integrating its former Materials Division with the concrete and clay businesses of the former Products Division into one Heavyside organisation. The purpose of this reorganisation is to enable CRH to maximise the benefits and synergies of our operating plant network in both Western and Eastern European markets.
Europe Materials’Heavyside’s strategy is to build strongleading regional positions in businesses that are vertically integrated and which have the potential to grow further in the large European construction markets. We deliver our strategy through a focus on a balanced exposure to demand, product penetration and on maximising the benefits of scale and best practice. Our business is differentiated and achieves competitive advantage through a commitment to constant product, process and end-use improvement.
Europe Heavyside is organised into two regional positions. Operatingdivisions: Western Europe, which comprises our cement, aggregates, asphalt, concrete and clay operations primarily in 20 countries, theSwitzerland, Germany, UK, Benelux, France, Denmark, Ireland and Spain, and Eastern Europe which includes our cement, aggregates, asphalt and concrete businesses in Poland, Ukraine and Finland. The business model of vertical integration is founded in resource-backed cement and aggregates assets, which support the manufacture and supply of cement, aggregates, readymixed and precast concrete, concrete landscaping and asphalt products. WithConsequently, a key focus for the Heavyside Division is the ongoing process of extending and adding to reserves. We operate a network of well-invested facilities Europe Materials focuses
and place great emphasis on operational excellence initiatives which includeacross the business. CRH’s approach to Building Better Businesses ensures a focus on achieving greater production efficiencies and realising operational, logistical and procurement synergies across our network. A commitment to a sustainable future results in greater use of alternative fuels and the manufacture of low carbon cements, while the scale of our operations provides economies in purchasing and logistics management.cements.
DevelopmentOur development focus is centred on bolt-on acquisitions for synergies, reserves and further vertical integration, in addition to opportunities in contiguous regions to extend and strengthen regional positions. Europe Materials has championed CRH’s entry intopositions; this includes developing markets in Eastern Europe that offer long-term growth potential, with entry via cement and aggregates assets and the potential to roll out its operational excellence programmes and a vertical integration approach over time. In total, the context of the detailed review of the portfolio undertaken by the Group during 2014, CRH announced in December 2014 that it had reached agreement to dispose of its clay and concrete businesses in the UK. The transaction closed in the first quarter of 2015.
Europe MaterialsHeavyside employs approximately 11,60019,100 people at close to 650 locations.800 locations in 21 countries.
Marlux/Stradus Infra created award winning water permeable paving - Virage, shown in this picture. These innovative tiles provide creative opportunities for architects and consumers, where multiple different patterns can be composed with just one element. |
Cement
Aggregates
Asphalt
Readymixed Concrete
Lime
Concrete Products
Estonia, Finland, Ireland, Poland,
Portugal (49%), Spain, Tunisia (49%), Ukraine
CRH 17
Description of the Group
DESCRIPTION OF THE GROUP
Cement is a primary building material used in the construction industry. It is manufactured by heatingreacting limestone with small quantities of other materials in a kiln through a carefully controlled chemical process thathigh temperature process. This produces clinker, which is then milled into a fine powder to become cement. Cement production is capital-intensive. Cement is used principally as a binding agent to bind other materials together—itstogether – most common usecommonly it is to mix itmixed with sand, stone or other aggregates and water to form concrete.water. Cement customers primarily comprise concrete producers and merchants supplying construction contractors and others. Where CRH has both cement and concrete operations, a significant portion of cement sales wouldis typically be supplied to those concrete operations. While cement or clinker may be imported from other countries, competition comes mainly from other large cement producers located within each country. CRH’s cement activities in Belgium and the Netherlands relate to cement transport and trading.
Aggregates are naturally occurring sand, gravel or crushed stone deposits such as granite, limestone and sandstone. Limestone reserves, which are used to supplyRecycled (end-of-life) concrete increasingly features as an aggregate. CRH cement plants are generally located at or near each plant and are generally owned by CRH.the limestone reserves used to supply the plants. In Finland, CRH buys the aggregatesaggregate raw materials for its two cement plants as the Group does not own limestone reserves near the plants. For additional information on the location and adequacy of all of the Group’s mineral reserves, see the Property, Plants and EquipmentMineral Reserves section on pages 2628 and 29.
Concrete Products and Readymixed Concrete: In addition to 28.readymixed concrete CRH manufactures other 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. Principal raw materials include cement, crushed stone and sand and gravel, all of which are readily available locally.
TheClay Products group principally produces clay facing bricks, pavers, blocks and rooftiles.
Aggregates, asphalt and related services are sold principally to local governmental highway authorities and to contractors, while readymixedcontractors. Readymixed concrete, and concrete products (manufactured mainly at locations with aggregates on site and including block, masonry, pipe, rooftiles and paving) and clay products are sold to both the public and private construction sectors. Competition comes mainly from other large aggregates, asphalt, readymixed concrete, and concrete products producers and clay producers, as well as from a variety of smaller manufacturers in local economies.
The division is organised geographically by country/region.
Joint Venture Interests
CRH holds 49% of Secil, a Portuguese manufacturer of cement and readymixed concrete acquired by CRH in 2004, and has joint management control of this business. In Portugal, Secil operates three integrated cement plants, a number of readymixed concrete plants and hard rock quarries, and produces precast concrete products and mortars. Secil is also a prominent producer of cement in southeastern Tunisia and has 51% investments in an integrated cement plant in Lebanon and a cement grinding operation located in the south of Angola.
CRH holds 50% joint venture stakes in Denizli Cimento, an integrated cement and readymixed concrete business in Turkey, andequity interest in My Home Industries Limited (“MHIL”), a cement producer headquartered in Hyderabad serving the Andhra Pradesh regionand Telangana regions of Southeastsoutheast India. In November 2014, CRH disposed of its 50% equity interest in Denizli Çimento, an integrated cement and readymixed concrete business in Turkey. Details of this disposal are set out in note 4 to the Consolidated Financial Statements on page 151.
Associate Interests
CRH hasholds a 26% equity interest in Corporación Uniland S.A.Yatai Building Materials Company’s cement operations (“Uniland”Yatai Cement��), a major Spanish manufacturer of cement, readymixed concrete, mortar and aggregates with additional cement and readymixed concrete interestsoperations in Tunisia.
Jilin, Heilongjiang and Liaoning provinces in northeastern China. CRH has a 25% equity interest in Mashav, the holding company for the sole producer of cement in Israel.
In 2009, CRH acquired a 26% equity interest in Yatai Building Materials Company’s cement operations (Yatai Cement), with cement and concrete operations in Jilin, Heilongjiang and Liaoning provinces in northeastern China.
18 CRH
Description of the Group
DESCRIPTION OF THE GROUPProducts and Services - Locations1
Cement
Belgium, Finland, Ireland, Netherlands, Poland, Spain, Switzerland, Ukraine, United Kingdom
Aggregates
Estonia, Finland, Ireland, Latvia, Netherlands, Poland, Slovakia, Spain, Switzerland, Ukraine
Asphalt
Ireland, Poland, Switzerland
Readymixed Concrete
Belgium, Estonia, Finland, Ireland, Netherlands, Poland, Russia, Spain, Switzerland, Ukraine
Lime
Ireland, Poland
Concrete Products
Belgium, Denmark, Estonia, Finland, France, Germany, Hungary, Ireland, Netherlands, Poland, Romania, Slovakia, Spain, Switzerland, United Kingdom, Ukraine
Clay Products
Germany, Netherlands, Poland, United Kingdom
1 | Excludes joint venture and associate interests. Results for these entities are equity accounted in the Consolidated Financial Statements. |
CRH 17 |
Business Operations in Europe| continued
Europe Lightside
Europe Lightside produces and supplies high-value, award-winning products, expert solutions and other technologies for often challenging construction projects. The Division is organised into four business areas: Construction Accessories, Shutters & Awnings, Fencing and Cubis (composite access chambers). We buy, build and grow business units with market-leading positions and strong growth prospects, selling through a range of flagship brands at a regional and European level.
The Lightside Division grows both organically and by acquisition to create leading positions within our chosen markets. We maximise synergies across the business in the areas of performance improvement, procurement, talent management and product development.
We have a relentless focus on innovation. Lightside customers are specialist end-users, including architects and engineers. Using our pan-European presence and scale, we work closely with them to develop design solutions that are approved and certified for individual target markets.
We draw upon an outstanding record of enabling mature and high-growth businesses alike to expand their offerings, and develop their markets. Lightside has achieved consistently attractive returns. The resilience of these returns reflects active, balanced management of our product range and our geographic and business-cycle exposures.
Our development strategy is to deepen our positions in existing markets and technologies in developed European markets, to broaden our product range in selected growth categories, and to expand our presence in developing regions outside Europe as construction markets in those areas become more sophisticated.
This strategy complements CRH’s aim to provide innovative solutions that meet the longer-term opportunities presented by economic development, changing demographics and sustainability.
Employees total approximately 5,000 people at circa 100 operating locations in 17 countries.
OurConstruction Accessories businesses supply a broad range of connecting, fixing and anchor systems to the construction industry.
Shutters & Awnings serve the attractive RMI and residential end-use markets, supplying sun protection, energy-saving, and outdoor living technologies.
Fencing designs, manufactures and installs fully integrated perimeter security solutions.
Cubis manufactures composite access chambers and access covers for telecoms, rail, roads, water and power.
Competition comes mainly from a limited number of multi-country Lightside suppliers as well as from a variety of smaller manufacturers in local economies and some from more traditional products/solutions (substitutes).
Products and Services - Locations
Construction Accessories
Australia, Austria, Belgium, China, Czech Republic, France, Germany, Ireland, Italy, Malaysia, Netherlands, Norway, Poland, Spain, Switzerland, Sweden, United Kingdom
Shutters & Awnings
Germany, Netherlands, United Kingdom
Fencing and Cubis (Composite Access Chambers)
France, Germany, Ireland, Netherlands, Sweden, United Kingdom
18 CRH |
Europe Distribution
Europe Distribution’s strategy is to grow its network presence in the largely unconsolidated core European markets while also investing in other attractive segments of building materials distribution. Operational excellence is delivered through optimising the supply chain and providing superior customer service.
We have leading General Builders Merchant positions in the Netherlands, Switzerland, northern Germany, Austria and France which service the growing repair, maintenance and improvement construction sector. Our businesses cater to the needs of small and medium-sized builders, selling a range of bricks, cement, roofing and other building products.
Our specialist Sanitary, Heating and Plumbing (“SHAP”) business services the needs of plumbers, heating specialists and installers in Belgium, Germany and Switzerland.
In addition, Europe Distribution operates under four DIY brands: GAMMA (Netherlands and Belgium), Karwei (Netherlands), Hagebau (Germany) and Maxmat (Portugal) selling to DIY enthusiasts and home improvers.
Significant opportunities remain to expand our existing network and to gain exposure to rising RMI demand and new growth platforms.
Europe Distribution employs over 11,600 people at 659 locations.
Professional Builders Merchants
Professional Builders Merchants cater to the heavyside sector and competition is encountered primarily from other merchanting chains and local individual merchants. CRH operates 167 branches in the Benelux and in Switzerland, the Group has a strong position as the largest builders merchant. CRH is a major regional distributor in France, with 52 locations. The Group also has a strong regional presence in the northwest of Germany.
Sanitary, Heating and Plumbing (SHAP)
Our SHAP business has been key to strengthening our exposure to growing RMI market demand. It operates in Belgium, Germany and Switzerland with a total network of 132 branches. In Switzerland, the Group has a strong position as the only country-wide supplier of SHAP products.
DIY
CRH operates 135 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. In Germany, Bauking operates 30 DIY stores under the brand name Hagebau. In Portugal, Maxmat is a 50% joint venture cash and carry DIY chain with 30 stores.
Associate Interests
CRH holds a 21.13% equity interest in Samse S.A., a publicly-quoted distributor of building materials to the merchanting sector in the Rhône-Alpes region.
Products and Services - Locations1
Professional Builders Merchants
Austria, Belgium, France, Germany, Netherlands, Switzerland
Sanitary, Heating and Plumbing (“SHAP”)
Benelux, Germany, Switzerland
DIY Stores
Belgium, Germany, Netherlands
1 | Excludes joint venture and associate interests. Results for these entities are equity accounted in the Consolidated Financial Statements. |
CRH 19 |
CRH 21
Business Operations in the Americas
Americas Materials
Americas Materials’ strategy is to build strong regional leadership positions underpinned by well-located, long-term reserves. OperatingWe are the largest producer of asphalt and the third largest producer of both aggregates and readymixed concrete in the United States. We operate nationally in 44 states with 12.4over 13 billion tonnes of permitted aggregates reserves of which circa 80% are owned, thisowned. The business is vertically integrated from primary resource quarries into aggregates, asphalt and readymixed concrete products. With 65%60% exposure to infrastructure, the business is further integrated into asphalt paving services through which it is a principalthe leading supplier of product to US highway repair and maintenance demand.demand in the United States.
Our national network of operations and deep local market knowledge drive local performance and national synergies in procurement, cost management and operational excellence. In a largely unconsolidated sector where the top ten industry participants account for just 30% of US aggregates production, 25% of asphalt production and 20%25% of readymixed concrete production, CRHCRH’s strategy is structured and positionedto position the business to participate as the industry consolidates further.
Americas Materials employs approximately 17,80018,400 people at close to 1,200 operating locations.
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The Division is the largest asphalt producer and the third-largest producer of both aggregates and readymixed concrete in the US. For additional information on the location and adequacy of all of the Group’s mineral reserves, see the Property, Plants and EquipmentMineral Reserves section on pages 26 to 28.28 and 29.
The DivisionAmericas Materials 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 DivisionAmericas Materials also has a broad commercial base, supplying stone, readymixed concrete and asphalt for industrial, office, shopping mall and private residential development and refurbishment.
The Americas Materials Division is organised geographically into East and West, containingdivided into four and three divisionsfurther sub-regions respectively.
East:
Northeast (including operations in Maine, New England,Hampshire, Vermont, Massachusetts, Rhode Island, New York, New Jersey and Connecticut);
Mid-Atlantic (Pennsylvania, Delaware, Virginia, West Virginia, Maryland, Kentucky eastern Tennessee and North Carolina);
Central (Ohio, Indiana and Michigan); and
Southeast (Alabama, Georgia, Mississippi, South Carolina and Florida).
West:
Central West (Texas, Oklahoma,(Oklahoma, Arkansas, Mississippi, western Tennessee, Missouri, Kansas, Iowa, Nebraska, Minnesota, Illinois, South Dakota and South Dakota)Texas);
Mountain West (Colorado, Wyoming, Utah, Montana, New Mexico, southern Idaho, Nevada and Arizona); and
Northwest (Washington, Oregon, Montana and northern Idaho).
CRH 19
Description of the Group
DESCRIPTION OF THE GROUPProducts and Services - Locations
Aggregates
Business Operations in Europe Products
Europe Products’ strategy is to build and grow scalable businesses in the large European construction markets. The strategy is delivered by increasing the penetration of CRH products, developing positions to benefit from scale and best practice. We create competitive advantage through product, process and end-use innovation, while maintaining a balanced exposure to demand drivers.
Operating in 19 countries, this business is a regional leader in concrete products, concrete landscaping, clay products, construction accessories and entrance control systems. Leveraging the benefits of our regional platforms, we realise operational and procurement synergies across the network. Pan-European product development provides construction solutions which increase efficiencies on site, creating more design freedom for architects and enhancing the built environment. Europe Products’ development strategy is to further penetrate the growing RMI markets of developed Europe and to broaden the product range in developing regions as construction markets in those regions become more sophisticated. This Segment employs approximately 16,600 people at close to 400 operating locations.United States
Asphalt
United States
Readymixed Concrete
United States
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Concrete Products
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. Principal raw materials include cement, crushed stone and sand and gravel, all of which are readily available locally.
Clay Products
The Clay Products group principally produces clay facing bricks, pavers, blocks and rooftiles, with the Ibstock operation in the UK being the largest business.
Building Products
The Building Products group is active in lightside building materials and is the European market leader in outdoor security and construction accessories.
The Construction Accessories group is a market leader in construction accessories in Europe, supplying metal-based accessories, including stainless steel fixing systems, for the construction and precast concrete industries.
The Fencing & Security business unit is mainly active in the non-residential construction market. The business unit comprises Fencing & Security (“F&S”), Shutters & Barriers (“S&B”), Access Control and Roller Shutters & Awnings (“RSA”) businesses which specialise in entrance control and climate control products.
20 CRH
Description of the Group
DESCRIPTION OF THE GROUP
F&S, together with Access Control, 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 RSA group specialises in developing, assembling and distributing roller shutter and awning systems.
Following rigorous strategic analysis, we decided at the end of 2009 to exit the Insulation and Climate Control sectors as we no longer saw a route to becoming a pan-European leader in these segments. The first half of 2011 saw completion of this divestment.
Business Operations in Americas Products
Americas Products’ strategy is to build a national footprint of an optimised portfolio of businesses which offer regional leadershiphave leading market positions across a fullbalanced range of Buildingproducts and end-use segments. Our activities are organised into three product groups under the Oldcastle brand: Architectural Products (precast(concrete masonry and architectural concrete,hardscapes, clay and fencing products,brick, packaged lawn and garden products, packaged cement mixes, fencing); Precast (utility, drainage and packaged concrete mixes)structural precast, construction accessories); and BuildingEnvelope™® solutions (glass (architectural glass and aluminium glazing systems) under the Oldcastle brand name. A. The Group’s commitment to Building Better Businesses ensures a coordinated approach at both a national and regional level achieveslevels to achieve economies of scale and facilitatesto facilitate the sharing of best practices which drive operational and commercial improvement. ThroughInnovation is a hallmark of the business, and through Oldcastle’s North American research and development centre,centres, a continuous pipeline of innovative value-added products and design solutions areis maintained.
OperatingIn the context of the detailed review of the portfolio undertaken by the Group during 2014, CRH announced in 40December 2014 that it had reached agreement to dispose of its Glen-Gery clay business in the United States. The transaction closed in the first quarter of 2015.
A national business operating in 39 US states, six Canadian provinces, Mexico and South America. CRH has the breadth of product range and national footprint to providethat combines providing a national service to customers with the personal touch of a local supplier. Focussing on strategic accounts and national accounts,influencers in the newconstruction supply chain, the Oldcastle Building Solutions initiativegroup provides an additional platformavenue for growth as it is uniquely positioned in the industry to offer solutions to customerscreate value for stakeholders across all phases of building construction. Employees total
The number of employees in this division totals approximately 14,90017,700 at close to 380nearly 400 locations.
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Building Products
Architectural Products Group (“APG”) , which is a leading North American producer of concrete masonry and hardscape products, packaged lawn and garden products, prepackaged cement mixes, clay brick and lightweight aggregates, services the USUnited States and eastern Canada from 234249 operating locations in 39 states and twosix Canadian provinces. The residential and non-residential sectors combined account for 95% of APG’s output, a significant proportion of which is used in the RMI and DIYDo-It-Yourself (“DIY”) sectors. Competition for APG arises primarily from other locally-owned products companies. Principal raw material supplies are readily available.
APG’s concrete masonry products are used for cladding, walls and foundations. Hardscape products comprise pavers, retaining wall products and patio products.
Lawn and garden products, mainly bagged and bulk mulch, soil and specialty stone products, are marketed to major DIY and homecenter chains across the United States. Cementitious dry-mixes,
CRH 21
Description of the Group
DESCRIPTION OF THE GROUP
Cement mixes, marketed under thebrands such as Sakrete® and ProSpec® brands,, and lightweight aggregateaggregates are also important product lines. Merchants Metals is also part of APG, also includes Glen-Gery Corporation, a clay brick producer located primarilyleading manufacturer and distributor of fencing and related products, used by the residential, non-residential and infrastructure sectors.
CRH 23 |
Business Operations in the northeast and midwest regions of the United States and includes Merchants Metals, which supplies thousands of specialised products used in concrete construction activities.Americas| continued
Americas Productscontinued
The Precast group produces precast, prestressed and polymer concrete products, small plastic box enclosures and concrete pipe in the USUnited States and Canada with 8479 operating locations in 2524 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, and street and highway products such as median barriers, culverts and short span bridges. 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.
The Precast group’s Building Systems and Modular groupbusiness manufactures and installs pre-stressedprestressed concrete flooring plank, modular precast structures and other products. These products are used mainly in structures such as hotels, apartments, dormitories and prisons.
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.
Precast also includes the Meadow Burke operations, a leading manufacturer and distributerwhich supplies thousands of fencing and relatedspecialised products used by the residential, non-residential and infrastructure sectors.in concrete construction activities.
BuildingEnvelope™
BuildingEnvelope™BuildingEnvelope® (“BE”) custom manufactures architectural glass and engineered aluminium glazing systems for multi-storey commercial, institutional and residential construction. With close to 4,100approximately 4,800 people and 52 locations in 2322 states and four Canadian provinces, BE is the largest supplier of high-performance glazing products and services in North America, delivering to all of the top 50 MSAs (MetropolitanMetropolitan Statistical Areas)Areas (MSAs) in the USUnited States and to Canada.
Tempered glass and engineered aluminium glazing systems are building products with major applications in the RMI construction sector and have 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 engineeredEngineered aluminium glazing systems product range includesinclude a broad range of storefront and entrances, curtain wall and architectural windows.
South America
CRH operates five differentsix 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, 330 kilometres southwest of Buenos Aires and a greenfield manufacturing facility in Cordoba, which commenced production in 2009.Cordoba. Cormela acquired during 2008, produces clay block at a facility in Campana, 60 kilometres (“km”) from Buenos Aires.
Ladrillos Olavarria (LOSA), acquired in 2013, produces clay blocks and floor tiles from a plant located in Olavarría. Superglass (Argentina) and Vidrios Dell Orto (Chile) fabricate tempered, laminated and insulated glass.
Comercial Duomo is a specialised construction products retailer and wholesaler in Chile which was acquired in 2008.Chile.
22 CRH
Description of the Group
DESCRIPTION OF THE GROUPProducts and Services - Locations
Architectural Concrete
Business Operations in Europe Distribution
Europe Distribution’s strategy is to seek opportunities to increase its network density in the largely unconsolidated core European markets while also investing in other attractive segments of building materials distribution. Organisational initiatives leverage expertise between DIY and builders merchants and use best-in-class IT to deliver operational excellence, optimise the supply chain and provide superior customer service.
From a solid base in the Netherlands, CRH has extensively expanded its leading Builders Merchants positions in Switzerland, Germany, Austria and France in addition to growing its DIY “Gamma” format in the Benelux. Substantial opportunities remain to increase our existing network in core European markets and to establish new platforms aimed at growing our exposure to RMI market demand. A recent example is CRH’s entry into the developing Sanitary, Heating and Plumbing (“SHAP”) distribution market through the acquisition of a Swiss provider of high-end sanitary ware, since replicated in contiguous markets in Germany and Belgium. Europe Distribution employs approximately 12,100 people at over 760 operating locations.Canada, United States
Clay
Argentina, United States
Precast Concrete, Pipe and Prestress Products
Canada, United States
Glass Fabrication
Argentina, Canada, Chile, United States
Glazing Systems
Canada, United States
Concrete Accessories
United States
Fencing Products
Mexico, United States
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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. In Switzerland, the Group has a strong position as the largest builders merchant and the only country-wide supplier of SHAP products. CRH is a major regional distributor in France, with 100 locations. In 2010, CRH acquired an additional 50% of Bauking, in which CRH already had a 47.82% stake. Bauking is a major regional player in the northwest of Germany with 81 locations. Sax Sanitair, acquired in August 2010, is a leading SHAP distributor in Belgium where the group now has 20 SHAP locations.
In addition, CRH holds a 21.13% equity interest in Samse S.A., a publicly-quoted distributor of building materials to the merchanting sector in the Rhône-Alpes region.
During 2011 we sold our activities in Afast B.V., a specialist roofing business as well as our 35% equity interest in Trialis, a General Builders Merchant in France.
DIY
The DIY Europe platform operates under five different brands: GAMMA (the Netherlands and Belgium), Karwei (the Netherlands), Hagebau (Germany) and Maxmat (Portugal) selling to DIY enthusiasts and home improvers. CRH operates 138 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. In Germany, Bauking operates 51 DIY stores under the brand name Hagebau. In Portugal, Maxmat is a 50% joint venture cash and carry DIY chain with 33 stores.
CRH 23
Description of the Group
DESCRIPTION OF THE GROUP
Business Operations in Americas Distribution
Americas Distribution’sDistribution strategy is focussed on being the leading supplier to contractors of choice to the professionalExterior Products such as roofing and siding contractor and to applyingsiding. We also apply this successful distribution model to the Interior Products demand segment. such as ceilings and walls.
Demand in the Exterior Products business is largely influenced by residential and commercial replacement activity with the key products having an average life spanlifespan of 25 to 30 years. The
Demand for Interior Products division has less exposure to replacement activity as demand is largely driven by the new residential, multi-family and commercial construction market. State-of-the-artmarkets.
Through CRH’s commitment to continuous business improvement, we employ state-of-the-art IT systems, disciplined and focussed cash and asset management, and well-established procurement and commercial systems which support supply chain optimisation and enable CRHus to provide superior customer service.
GrowthAmericas Distribution operates in 31 states, and growth opportunities include investment in new regions,and existing markets, in complementary private label and energy-efficientenergy-saving product offerings, and in other attractive building materials distribution segments that service professional dealer networks. Employees total
The Division employs approximately 3,3003,800 people at over 190 operating198 locations.
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OldcastleAmericas Distribution, trading primarily as Allied Building Products (“Allied”), is a large distributor in the Roofing/Siding segmentroofing, siding and interior products segments in the United States. Demand is largely influenced byAllied’s Exterior Products segment distributes both commercial and residential roofing, siding and commercial replacement activity, with the keyrelated products having an average life spanand accounts for approximately 60% of roughly 25 years.annualised Distribution sales. Allied’s Interior Products segment accounts for approximately 34% of annualised Distribution sales. The primary customers are drywalldistributes primarily to specialised contractors who are mainly involved in new residential, multi-family and new commercial construction.
24 CRH
Description of the GroupProducts and Services - Locations
DESCRIPTION OF THE GROUP
Exterior Products
United States
Interior Products
United States
Development and Portfolio Review
Acquisition and investment spend amounted to€0.5 billion in 2009 on a total of 17 transactions. First-half expenditure of€0.3 billion included the purchase of a 26% associate stake in Yatai Cement, the leading cement manufacturer in northeastern China, plus six other acquisitions across the Group’s Materials and Distribution segments. Second-half spending of€0.2 billion principally comprised four important bolt-on transactions in the Americas Materials Division completed in November/December plus six smaller Materials transactions in Poland, China and the US.
Total acquisition spend (including debt acquired and deferred and contingent acquisition consideration) for 2010 was€567 million, which included 28 traditional bolt-on acquisitions. First half expenditure of€159 million included 13 acquisitions across the Materials segments of the Group’s businesses in Europe and the United States, and a further investment in northeastern China where an associate, Yatai Building Materials, continued to expand its position. The second half of the year saw a welcome pick-up in the pace of development activity with total expenditure of€408 million. This included a series of nine further bolt-on acquisitions by the Americas Materials business, extending their geographic reach; in total in 2010, acquisitions by this Division added a total of 579 million tonnes of well-located aggregates reserves across the United States. In Europe in the second half of the year, the Group added to its materials footprint in Switzerland, and, with the buyout of an additional 50% of the Bauking joint venture, substantially expanded the Group’s presence in the attractive German distribution market.
Total acquisition spend for 2011 amounted to€610 million on a total of 45 bolt-on transactions which will contribute annualised sales of circa€500 million, of which€157 million has been reflected in our 2011 results. Expenditure of€163 million in the first half included 22 acquisition and investment initiatives across all six operating segments strengthening our existing market positions and adding valuable and well-located aggregates reserves. The second half of the year saw a step-up in the pace of development activity with expenditure of€447 million on 23 acquisitions including the VVM Group in Belgium, an important strategic add-on for our existing Benelux-based Cementbouw business. We also saw a welcome return to development activity in our Americas Distribution business which added a total of 24 branches in 4 transactions in the second half of 2011.
Total proceeds from completed disposals in 2011 amounted to€492 million. The previously announced divestments of Europe Products’ Insulation and Climate Control businesses, together with the disposal of our 35% associate investment in the Trialis distribution business in France, were completed in the first half of the year, while the second half saw the sale of our seawater magnesia operation in Ireland. The sales impact of these disposals, and of the disposal in November 2010 of our Ivy Steel business in the United States, was a reduction of€469 million in 2011.
CRH 25
CRH 25 |
Description of the Group
DESCRIPTION OF THE GROUP
Property, Plants and Equipment
At 23 March 2012, CRH and its joint ventures had a total of 2,615 building materials production locations and had a total of 955 Merchanting & DIY locations. 1,496 locations are leased, with the remaining 2,074 locations held on a freehold basis. Further details on locations and products produced are provided under the Business Overview section. None of CRH’s individual properties are of material significance to the Group.
The most significant subsidiary locations are the cement facilities in Ireland, Finland, Poland, Switzerland and Ukraine. The capacity for these locations is as follows:
Subsidiary | Country | No. of Plants | Clinker Capacity (tonnes per hour) | |||
Irish Cement | Ireland | 2 | 440 | |||
Finnsementti | Finland | 2 | 180 | |||
Grupa Ożarów | Poland | 1 | 340 | |||
JURA-Holding | Switzerland | 2 | 116 | |||
OJSC Podilsky Cement | Ukraine | 1 | 445 |
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. Further information in relation to the Company’s accounting policy and process governing any impairment of property, plant and equipment is given on pages 109 and 110 and in note 14 to the Consolidated Financial Statements on page 133.
In Poland, CRH operates a modern dry-process kiln at Ożarów, approximately 170 km south east of Warsaw, with a total annual clinker production capacity of 2.6 million tonnes. Management is reviewing the timing of the requirement for additional cement capacity in Poland, and accordingly further expenditure on the expansion project at Ożarów which was announced in 2007 has been postponed.
The Group operates one cement plant in southwest Ukraine which produced 1.4 million tonnes of cement in 2011. Conversion of the wet-process cement plant to a dry-process plant with 2.5 million tonnes clinker capacity began in August 2011 with the commissioning period complete by year-end. The€242 million investment project was the first-ever joint implementation project registered by the United Nations, and the new production line is delivering significant efficiency savings and reduced CO2 emissions.
26 CRH
DescriptionChina and India– Equity Accounted Investments
China
Market conditions in China remained challenging during 2014 as government policies to rebalance the economy towards a more sustainable growth model impacted on industrial and real estate activity. This resulted in a slowdown which created an unfavourable short-term environment for the construction sector. Profitability at our 26% associate, Yatai Building Materials, which is a market leader in Northeast China with a capacity of 32 million tonnes of cement, was affected by lower volumes and selling prices; partially offset by improved operational efficiencies and reduced costs.
India
CRH has a cement capacity of 8 million tonnes across three locations in Southern India, where it operates through a 50% joint venture; My Home Industries Limited (“MHIL”). The regional market has a cement consumption of 75 million tonnes and MHIL is the Groupmarket leader in the southern states of Andhra Pradesh and Telangana.
In 2014, MHIL posted a 25% increase in volumes following the acquisition of Sree Jayajothi Cements Limited in late 2013 and has also made significant gains in adjoining states. Prices were under pressure in the first half due to poor demand, but improved later in the year. Volume growth and acquisition synergies resulted in higher trading profit in 2014.
Outlook
In China trading conditions looking forward are expected to recover as the country’s underlying urbanisation trends drive investment in infrastructure and property. Business performance will be further helped by stricter government measures to reduce overcapacity combined with internal commercial and operational excellence initiatives.
Demand for cement in India is expected to show strong growth of over 8% with the government providing a boost to public infrastructure spending and various housing projects in both urban and rural areas.
Products and Services - Locations
DESCRIPTION OF THE GROUP
Cement
China, India
Aggregates
China, India
Readymixed Concrete
China, India
Precast Concrete
China
Construction Accessories
China
Pictured outside the My Home Industries (MHIL) office, in Hyderabad, India, is the Hyderabad Metro Rail, a rapid transit system currently under construction. To date, MHIL has supplied over 19,000 tonnes of cement to the project which is expected to be completed by July 2017. |
Activities with Reserves Backing1
| ||||||||||||||||||||||||||||||||||||||||
Property acreage (hectares)2 | Percentage of mineral reserves by rock type | |||||||||||||||||||||||||||||||||||||||
Physical Location | Number of quarries/ pits | Owned | Leased | Proven & probable reserves3 | Years to depletion4 | Hard rock | Sand & gravel | Other | 2014 Annualised extraction5 | |||||||||||||||||||||||||||||||
Europe Heavyside | ||||||||||||||||||||||||||||||||||||||||
Cement | Ireland | 2 | 249 | - | 217 | 133 | 100% | - | - | 2.0 | ||||||||||||||||||||||||||||||
Poland | 2 | 293 | - | 185 | 49 | 93% | 6% | 1% | 4.0 | |||||||||||||||||||||||||||||||
Spain | 1 | 32 | - | 86 | 602 | 100% | - | - | 0.2 | |||||||||||||||||||||||||||||||
Switzerland | 3 | 165 | 6 | 26 | 17 | 92% | - | 8% | 1.6 | |||||||||||||||||||||||||||||||
Ukraine | 8 | 871 | - | 164 | 62 | 98% | - | 2% | 3.0 | |||||||||||||||||||||||||||||||
Aggregates | Finland | 157 | 685 | 399 | 190 | 15 | 70% | 30% | - | 11.6 | ||||||||||||||||||||||||||||||
Ireland | 128 | 5,091 | 70 | 897 | 85 | 84% | 16% | - | 10.8 | |||||||||||||||||||||||||||||||
Poland | 10 | 466 | - | 182 | 20 | 70% | 30% | - | 8.5 | |||||||||||||||||||||||||||||||
Spain | 11 | 172 | 184 | 98 | 43 | 99% | 1% | - | 2.3 | |||||||||||||||||||||||||||||||
Other | 40 | 287 | 526 | 173 | 22 | 74% | 26% | - | 7.7 | |||||||||||||||||||||||||||||||
Lime | Ireland, Poland | 2 | 105 | - | 46 | 46 | 100% | - | - | 0.8 | ||||||||||||||||||||||||||||||
Clay6 | UK, Poland | 51 | 2,793 | 189 | 109 | 49 | - | 5% | 95% | 2.4 | ||||||||||||||||||||||||||||||
Subtotals | 415 | 11,209 | 1,374 | 2,373 | 82% | 13% | 5% | |||||||||||||||||||||||||||||||||
Americas Materials | ||||||||||||||||||||||||||||||||||||||||
Aggregates | East | 274 | 24,793 | 5,095 | 9,181 | 125 | 87% | 13% | - | 77.3 | ||||||||||||||||||||||||||||||
West | 469 | 20,651 | 16,067 | 4,042 | 76 | 44% | 56% | - | 58.5 | |||||||||||||||||||||||||||||||
Subtotals | 743 | 45,444 | 21,162 | 13,223 | 74% | 26% | - | |||||||||||||||||||||||||||||||||
Americas Products | ||||||||||||||||||||||||||||||||||||||||
Clay6 | United States | 25 | 1,640 | 308 | 76 | 59 | - | - | 100% | 1.6 | ||||||||||||||||||||||||||||||
Group totals | 1,183 | 58,293 | 22,844 | 15,672 | 75% | 24% | 1% |
1 The disclosures made in this category refer to those facilities which are engaged in on-site processing of reserves in the various forms. |
2 1 hectare equals approximately 2.47 acres. |
3 Where reserves are leased, the data presented above is restricted to include only that material which can be produced over the life of the contractual commitment inherent in the lease; the totals shown pertain only to amounts which are proven and probable. All of the proven and probable reserves are permitted and are quoted in millions of tonnes. |
4 Years to depletion is based on the average of the most recent three years annualised production. |
5 Annualised extraction is quoted in millions of tonnes. |
6 Includes 104 million tonnes of proven and probable reserves in relation to businesses classified as held for sale. See further details in note 4 to the Consolidated Financial Statements. |
The Group’s reserves for the production of primary building materials (which encompass cement, lime, aggregates (stone, and sand &and gravel), clay products, asphalt, readymixed concrete and concrete products) fall into a variety of categories spanning a wide number of rock types and geological classifications—classifications – see the table on the next pageabove setting out the activities with reserves backing.
Reserve estimates are generally prepared by third-party experts (i.e. geologists or engineers) prior to acquisition; this procedure
is a critical component in the Group’s due diligence process in connection with any acquisition. Subsequent to acquisition, estimates are typically updated by company engineers and/or geologists and are reviewed annually by corporate and/or Divisionaldivisional staff. However, where deemed appropriate by management, in the context of large or strategically important deposits, the services of third-party consultant geologists and/or engineers may be employed to validate reserves quantities outside of the aforementioned due diligence framework on an ongoing basis. The Group has not
28 CRH |
employed third-parties to review reserves over the three-year period ending 31 December 20112014 other than in business combination activityactivities and specific instances where such review was warranted.
Reserve estimates are subject to annual review by each of the relevant operating entities across the Group. The estimation process distinguishes between owned and leased reserves segregated into permitted and unpermitted as appropriate and includes only those permitted reserves which are proven and probable. The term “permitted” reserves refers to those tonnages which can currently be mined without any environmental or legal constraints. Permitted owned reserve estimates are based on estimated recoverable tonnes whilst permitted leased reserve estimates are based on estimated total recoverable tonnes which may be extracted over the term of the lease contract.
Proven and probable reserve estimates are based on recoverable tonnes only and are thus stated net of estimated production losses and other matters factored into the computation (e.g. required slopes/benches). In order for reserves to qualify for inclusion in the “proven and probable” category, the following conditions must be satisfied:
Thethe reserves must be homogeneous deposits based on drill data and/or local geology; and
Thethe deposits must be located on owned land or on land subject to long-term lease.
None of CRH’s mineral-bearing properties areis individually material to the Group.
CRH 27
Description of the Group
DESCRIPTION OF THE GROUPProperty, Plants and Equipment
At 6 March 2015, CRH had a total of 2,380 building materials production locations and 857 Merchanting and DIY locations. 1,461 locations are leased, with the remaining 1,776 locations held on a freehold basis.
The most significant subsidiary locations are the cement facilities in Ireland, Finland, Poland, Switzerland, Ukraine and Spain. The capacity for these locations is set out in the table to the right. Further details on locations and products manufactured are provided in the Business Operations sections on pages 14 to 25. None of CRH’s individual properties is of material significance to the Group.
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. Further information in relation to the Group’s accounting policy and process governing any impairment of property, plant and equipment is given on page 141 and in note 13 to the Consolidated Financial Statements on page 158.
Significant Locations – Clinker Capacity
|
| |||||||||||
Subsidiary
| Country
| Number
| Clinker Capacity
| |||||||||
Irish Cement | Ireland | 2 | 288 | |||||||||
Finnsementti | Finland | 2 | 181 | |||||||||
Grupa Ożarów | Poland | 1 | 342 | |||||||||
JURA-Holding | Switzerland | 2 | 116 | |||||||||
OJSC Podilsky Cement | Ukraine | 1 | 313 | |||||||||
Cementos Lemona | Spain | 1 | 92 |
Activities with Reserves Backing*1
Physical location | Number of | Property acreage (hectares)2 | Proven & | Years to | Percentage of mineral rock type | 2011 | ||||||||||||||||||||||||||||||||
Owned | Leased | | Hard rock | | | Sand & gravel | | Other | ||||||||||||||||||||||||||||||
Europe Materials | ||||||||||||||||||||||||||||||||||||||
Cement | Ireland | 2 | 249 | - | 131 | 67 | 100 | % | - | - | 1.0 | |||||||||||||||||||||||||||
Poland | 2 | 252 | - | 68 | 19 | 97 | % | - | 3 | % | 3.1 | |||||||||||||||||||||||||||
Switzerland | 3 | 165 | - | 11 | 8 | 95 | % | - | 5 | % | 1.1 | |||||||||||||||||||||||||||
Ukraine | 4 | 295 | - | 107 | 61 | 69 | % | - | 31 | % | 2.1 | |||||||||||||||||||||||||||
Other | 20 | 621 | 359 | 525 | 90 | 66 | % | - | 34 | % | 5.5 | |||||||||||||||||||||||||||
Aggregates | Finland | 158 | 490 | 315 | 193 | 11 | 60 | % | 40 | % | - | 20.4 | ||||||||||||||||||||||||||
Ireland | 95 | 4,711 | 72 | 850 | 66 | 83 | % | 17 | % | - | 10.6 | |||||||||||||||||||||||||||
Poland | 12 | 1,575 | 206 | 258 | 29 | 55 | % | 45 | % | - | 10.6 | |||||||||||||||||||||||||||
Spain | 8 | 68 | 197 | 106 | 62 | 100 | % | - | - | 1.2 | ||||||||||||||||||||||||||||
Other | 42 | 527 | 575 | 333 | 32 | 85 | % | 15 | % | - | 10.4 | |||||||||||||||||||||||||||
Lime | Ireland /Poland | 3 | 465 | - | 50 | 36 | 100 | % | - | - | 1.0 | |||||||||||||||||||||||||||
Subtotals | 349 | 9,418 | 1,724 | 2,632 | 77 | % | 15 | % | 8 | % | ||||||||||||||||||||||||||||
Americas Materials | ||||||||||||||||||||||||||||||||||||||
Aggregates | East | 262 | 23,689 | 4,607 | 7,757 | 118 | 89 | % | 11 | % | - | 68.1 | ||||||||||||||||||||||||||
West | 429 | 20,483 | 15,817 | 4,661 | 102 | 42 | % | 58 | % | - | 48.5 | |||||||||||||||||||||||||||
Cement | American Cement | 1 | 51 | - | 10 | 60 | 100 | % | - | - | 0.2 | |||||||||||||||||||||||||||
Subtotals | 692 | 44,223 | 20,424 | 12,428 | 72 | % | 28 | % | ||||||||||||||||||||||||||||||
Europe Products | ||||||||||||||||||||||||||||||||||||||
Clay | UK, Poland | 56 | 3,009 | 717 | 122 | 53 | - | 5 | % | 95 | % | 2.0 | ||||||||||||||||||||||||||
Americas Products | ||||||||||||||||||||||||||||||||||||||
Clay | United States | 25 | 1,510 | 308 | 76 | 54 | - | - | 100 | % | 1.1 | |||||||||||||||||||||||||||
Group totals | 1,122 | 58,160 | 23,173 | 15,258 | 71 | % | 26 | % | 3 | % |
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 or resources such as cement, liquid bitumen, steel, gas, fuel and other energy supplies, the cost of which can fluctuate significantly and consequently have an adverse impact on CRH’s business. CRH is not generally dependent on any one source for the supply of these materials or resources, 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.
28 CRH
Description of the GroupMine Safety Disclosures
DESCRIPTION OF THE GROUPThe information concerning mine safety violations and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is included in Exhibit 99.1 to this Annual Report on Form 20-F.
CRH 29 |
2014
Total acquisition and investment activity for 2014 amounted to €188 million on a total of 21 bolt-on transactions which will contribute annualised sales of approximately €182 million, of which €122 million has been reflected in our 2014 results.
Our Heavyside operations in Europe acquired selected readymixed concrete and aggregates assets of Cemex Ireland (including 12 million tonnes of high quality reserves) and a precast concrete business in Denmark. Our Europe Distribution business completed six acquisitions in the Benelux, France and Germany which added a total of nine branches to our network.
Eight bolt-on acquisitions were completed by our Americas Materials Division in 2014 across the United States adding over 230 million tonnes of aggregates reserves. Our Americas Products Division completed five transactions in the Precast, Architectural Products and Construction Accessories businesses.
A total of 16 divestments, together with asset disposals during the year, generated proceeds of €345 million.
In Europe, the disposal of CRH’s 50% equity stake in Denizli Çimento, the Group’s only involvement in the Turkish construction market, was the largest single divestment to complete in 2014, realising proceeds of €170 million. The Heavyside Division also disposed of a number of readymixed concrete and concrete products businesses, while all three European Divisions realised proceeds from the disposal of surplus assets. As most of the divested entities had been equity-accounted by CRH, the impact of these divestments on Group sales is not material.
In the Americas, our Materials Division disposed of several non-core operations across the United States. The Products Division sold five operations in the Precast, Architectural Products and Building Envelope businesses.
Transactions amounting to a further €0.58 billion were signed in 2014. The disposal of the Group’s clay and concrete businesses in the UK and the US closed in the first quarter of 2015.
2013
Total acquisition and investment activity for 2013 amounted to €720 million on a total of 28 bolt-on transactions. Eight transactions were completed by our Europe Heavyside operations, including the acquisition of Cementos Lemona in Spain as part of the asset swap in which we divested our 26% stake in Corporacion Uniland. In September 2013 the Group became the leading cement producer in Ukraine with the acquisition of Mykolaiv Cement in the Lviv region. Two other transactions strengthened our aggregates position in Northern Ireland and expanded our network of cement import facilities in Britain while an acquisition in Belgium established the Group as market leader in the prestressed hollowcore flooring segment. Three acquisitions in the Europe Distribution segment added 13 branches to our network of builders merchants across the Benelux and France. Our joint venture business in India also strengthened its market position in Southern India with the acquisition of Sree Jayajothi Cements in August 2013.
In the Americas, the Materials Division completed 10 bolt-on transactions across its operations in 2013, adding 457 million tonnes of strategically-located aggregates reserves, primarily in the Eastern region of the United States. Our Products business significantly expanded its presence in the high growth region of Western Canada with an acquisition which complements the footprint of our existing North American architectural products business and forms a platform for further bolt-on opportunities. Three other acquisitions in the Products segment strengthened our local market positions. The Distribution business completed three acquisitions adding eight locations to our network.
Proceeds from divestments during 2013, including €144 million relating to the transfer of Uniland, amounted to €283 million.
2012
The €669 million of development activity during 2012 reflected CRH’s long-term, value-based approach to developing the Group’s balanced portfolio. Excluding net deferred payments, total acquisition spend for 2012 amounted to €548 million on a total of 36 bolt-on transactions. Expenditure of €263 million in the first half of 2012 included 18 acquisition and investment initiatives which strengthened our existing market positions and added valuable and well-located aggregates reserves. In the second half of 2012 the Group completed 18 transactions at a total cost of €404 million (€285 million cash spend excluding deferred payments), with the largest transaction being a majority stake in Trap Rock Industries, an integrated aggregates and asphalt business in New Jersey. Total proceeds from completed disposals in 2012 amounted to €784 million. The major disposals were the divestment in May 2012 of our 49% stake in Portuguese cement producer Secil and the sale in April of our wholly-owned Magnetic Autocontrol business.
30 CRH |
The Environment and Government Regulations
Introduction
The most important environmental government regulations relevant to CRH as a building materials company are those environmental laws and regulations relevant to our extractive and production processes. In the European Union, operations are subject to national environmental laws and regulations, most of which now emanate from European Union Directives and Regulations. In the United States, operations are subject to Federal and State environmental laws and regulations. In other jurisdictions, national environmental laws apply.
Environmental Compliance Policy
In order to comply with the above suite of environmental regulations, affecting its operations, CRH has developed the following Group environmental policy, approved by the CRH Board and applied across all Group companies, which is to:
comply, atas a minimum, with all applicable environmental legislation and continuallycontinuously improve our environmental stewardship, towardsaiming all the time to meet or exceed industry best practice;
ensure that our employees and contractors respect their environmental responsibilities;
address proactively address the challenges and opportunities of climate change;
optimise our use of energy and all resources;
promote environmentally-drivenenvironmentally driven product innovation and new business opportunities; and
develop positive relationships and strive to be good neighbours in every community in which we operate.
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 Sustainability Manager and hissustainability team in carrying out a detailed assessment of Group environmental performance, which is reviewed by the CRH Board.
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 22 of the world’s major cement producers, promoting greater sustainability in the cement industry.
In 2007,Having achieved its initial CO2 reduction commitment three years ahead of target in 2012, CRH committed tohas now pledged a 15%25% reduction in its specific net CO2 cement plant emissions by 20152020, compared with theto 1990 specific emissions for the samelevels. The Group is progressing towards achieving this commitment, which covers a defined portfolio of plants. This reduction is on track,Group cement
plants, and is being achieved through major capital investmentconfident that its ongoing strategic programmes will deliver this commitment by the target date.
Through its membership of the CSI of the WBCSD and regional industry associations including the European Cement Association (CEMBUREAU) and the European Lime Association (EuLA) in its cement activities.
Europe and the National Asphalt Pavement Association (NAPA) and the Portland Cement Association (PCA) in the United States, CRH is operating successfullyactively involved in global and regional discussions on the climate change agenda. Relevant facilities in Europe operate within the National Allocation Plans under the European EmissionsEU Emission Trading Scheme for Greenhouse Gas emissions through actively implementing carbon reduction strategies. Through relevant trade associations and the CSI of the WBCSD, CRH is actively engaged in industry initiatives to develop appropriate carbon mitigation strategies post 2012.
CRH has implemented capital expenditure programmes in its cement operations in Europe to reduce carbon emissions in the context of the European Union commitment to reduce Greenhouse Gasgreenhouse gas emissions by 20% by 2020. The European Union is committed to increasing this target to 30% should an international agreement be concluded. In addition, the European Union is targeting reductions of 40% by 2030 and suggesting further reductions for 2040 and 2050. Achieving such reductions would represent a significant extra constraint on cement operations in Europe.
CRH 29
Description of the Group
DESCRIPTION OF THE GROUP
US Federal and State laws are developing proactively to address carbon emissions. The Group will incur costs in monitoring and reporting emissions. Ultimately a “cap and trade” scheme may be implemented and may impact on the Group’s current cement operation in the US andimplemented; depending on the scope of the legislation, this could significantly impact asphalt operations in the US.United States. As of 236 March 2012,2015, the Group is not aware of any schemes that would materially affect its US operations.
Possible Environmental Liabilities
At 236 March 20122015 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.
Governmental Policies
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.
CRH 31 |
Group companies are parties to various legal proceedings, including some in which claims for damages have been asserted against the companies. Having taken appropriate advice, we believe that the aggregate outcome of such proceedings will not have a material effect on the Group’s financial condition, results of operations or liquidity.
Details ofregarding the ongoing legal casepending investigation by the Competition Commission in Switzerland involving CRH’s interest in SecilCRH plc’s Swiss subsidiaries BR Bauhandel AG, Gétaz-Miauton SA and Regusci Reco SA are set out in note 232 to the Consolidated Financial Statements on page 122.185.
The information concerning mine safety violations and other regulatory matters required by Section 1503(a)In May 2012 the Group disposed of its 49% investment in its Portuguese joint venture Secil to our former joint venture partner, Semapa (SGPS, S.A.), following the ruling of the Dodd-Frank Wall Street ReformArbitral Tribunal in Paris that the exercise of a call option for the purchase of CRH’s 49% shareholding in Secil by Semapa was valid and Consumer Protection Actboth parties were therefore obligated to complete the sale and purchase of CRH’s share in Secil. As disclosed in our previous Annual Reports, Semapa initiated legal proceedings in November 2011 to appeal against the Tribunal ruling and these proceedings were dismissed by the Cour D’Appel on 10 September 2013. On 12 February 2014, Semapa filed an appeal with the Cour de cassation and this appeal is includedongoing. No provision has been made in exhibit 99.1 to this Annual Report on Form 20-F.
Seasonality and Weather Patterns
Activityrespect of these proceedings in the construction industry is characterised by cyclicality and is dependent to a significant extent on the seasonal impact of weather in the Group’s operating locations with activity in some markets reduced significantly in winter due to inclement weather. First-half sales accounted for 45% of full-year 2011 (2010: 45%), while EBITDA (as defined)* for the first six months of 2011 represented 35% of the full-year out-turn (2010: 32%).Consolidated Financial Statements.
Research and development is not a significant focus of CRH’s business.the Group. CRH’s policy is to expense all research and development costs as they occur.
The average number of employees for the past three financial years is disclosed in note 5 to the Consolidated Financial Statements on page 152. No significant industrial disputes have occurred at any of CRH’s factories or plants during the past five years. The Group believes that relations with its employees and labour unions are satisfactory.
32 CRH |
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34 | ||||
37 | ||||
40 | ||||
44 | ||||
47 | ||||
52 | ||||
CRH 33 |
Strategy Review1
Chief Executive’s Introduction
When I joined CRH in 1998, I quickly learned that a philosophy of business improvement is ingrained in the history of the Group. At CRH, we seek to build better businesses each and every day. As the construction industry emerges from a tumultuous few years, our approach has never been more relevant and there is nowhere I would rather be at this moment in time than in this Group, in this industry, at this point in the business cycle.
2014 was a year of good progress for CRH. We were able to use the underlying strength of our business to capitalise on the recovering markets and deliver a return to profit and margin growth.
This progress was made possible by the hard decisions and hard work undertaken by the Board, management and staff of CRH over the course of the previous seven years since the onset of the global financial crisis. As a result of this, the Group ended 2014 in a position of real strength across our key metrics – strategic, operational and financial.
It is particularly pleasing to report that improvements in performance were achieved last year across all of our Divisions, leading to a double-digit percentage increase in EBITDA (as defined)*.
The year began well in Europe, aided by favourable early-season weather conditions compared with the prolonged winter of the previous year. Conversely, first-half trading in the Americas was impacted by very severe weather conditions for a second consecutive year. However, strengthening economic recovery in the United States drove construction activity as the year progressed and enabled our Americas businesses to perform strongly in the second half, when we began to see an easing of trends in Europe.
Like-for-like sales were ahead by 5% in the first half of the year and rose by 3% in the second, resulting in a full-year increase of 4%. The US Dollar/euro average exchange rate of 1.3290 (2013: 1.3281) was relatively unchanged from prior year. Overall sales of €18.9 billion were achieved, an increase of 5%. EBITDA (as defined)* for the year was €1.641 billion, up 11%.
Throughout recent times, the Group has maintained its commitment to ongoing cost control, strong cash generation efficiency and disciplined financial management. Further progress was achieved in these areas in 2014 including an additional €118 million of targeted cost savings delivered by year-end.
The reorganisation of our European businesses was largely completed during the year and we now have an integrated heavyside materials and products organisation that is providing synergies across our operating plant network in European markets.
Development spend in 2014 was €0.19 billion on 21 transactions, a lower spend than in previous years. During 2014 we completed a detailed review of our portfolio and commenced a multi-year divestment programme, of businesses which no longer meet our returns and growth criteria, or for which we believe CRH is no longer the best long-term owner. We remain focussed on optimising our portfolio to meet our financial objectives and prioritising the allocation and reallocation of capital as we reset for growth and restore margins and returns to peak levels.
Portfolio Management is now embedded in our business model as a core competency and a key enabler of value creation within the Group. The discipline of this process encourages optimal capital efficiency and provides new opportunities for investment and acquisition, the drivers of value creation in our business.
On 1 February 2015, the Group announced that it had entered into a binding commitment to acquire certain assets from Lafarge and Holcim for an enterprise value of €6.5 billion. As noted by the Chairman in his review on pages 2 and 3 the transaction is subject to CRH obtaining shareholder approval and certain other conditions. Assuming these conditions are satisfied, we expect the acquisition to complete in mid-2015.
The acquisition involves a portfolio of quality assets with broad geographical and product spread. The businesses represented by these assets have market leading positions and
1 | See cautionary statement regarding forward-looking statements on page 9. |
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of |
34 CRH |
cover a range of segments in the building materials sector in both developed and emerging markets. On completion, the acquisition will strengthen our presence in important markets across North America, Western, Central and Eastern Europe in addition to providing new platforms for growth in the Philippines and Brazil. Further details are set out on page 44 and in note 33 to the Consolidated Financial Statements.
Acquiring these businesses represents a compelling opportunity for the Group to employ our proven strategy in a transformative way. Our approach to value creation is straightforward – we deploy capital efficiently, to support vertically integrated businesses, which we then improve with our unrelenting commitment to operational excellence. Through this systematic process, we create significant and sustainable shareholder value. We have followed this model successfully for decades and, we believe that this acquisition will deliver enhanced opportunities to roll out our vertical integration and bolt-on acquisition models.
Throughout the period of recession and downturn in construction activity that followed the global financial crisis, the Group maintained strict financial discipline. This discipline has served us well and has positioned us strongly to avail of the opportunity to acquire these businesses at an attractive valuation and at the right point of the business cycle. Upon completion, CRH will become the third largest building materials company in the world.
Outlook for 2015
In the United States, the pace of GDP growth is expected to pick up in 2015 and we believe that the fundamentals are in place for continued positive momentum in the economy. Demand in the residential construction market continues to expand, albeit at a more moderate rate, while recovery in the non-residential market is starting to gather pace. While the infrastructure market remains broadly stable, there is upside potential due to the growing economy and increased state spending.
In Europe, the general market environment continues to normalise across our main markets. The outlook for 2015 is somewhat mixed, particularly in the first half for which the 2014 comparatives reflect the benefit of very benign weather conditions. In our generally stable markets in Western Europe we expect to see some improvement in overall demand in 2015, particularly in residential activity. While the outlook in Ukraine remains very uncertain, we anticipate that demand will increase in Eastern Europe, driven primarily by an expected pick up in the roads programme in Poland towards the second half of the year.
With the improvements expected in market conditions across our main geographies, together with easing commodity prices, the benefits of cost efficiencies and a favourable foreign exchange translation effect, we expect 2015 to be a further year of progress.
Albert Manifold,Chief Executive
CRH 35
36 CRH
CRH 37
CRH Footprint
The Group has good balance across its operations in North America and Western Europe. Our heavyside building materials operations give us exposure to new-build and also to infrastructure repair, maintenance and improvement (RMI) construction. Elsewhere, our lightside and distribution businesses are mainly exposed to residential and non-residential markets, where we also have positions of scale, global brands and potential for growth.
Our strategic priority in these mature markets is to develop our businesses further through a dynamic allocation and reallocation of capital, investment in greenfield projects and
in acquisitions which meet our criteria of achieving vertical integration, and which add to reserves and expand our regional and product positions.
Elsewhere, in developing regions, such as Asia, our entry platforms tend to be in cement. Industrialisation, urbanisation and population growth are key drivers in these markets and CRH targets businesses that have the potential to develop further downstream into integrated building materials businesses as construction markets become more sophisticated.
38 CRH |
Portfolio Review
In 2014, in light of a vastly changed environment following the global financial crisis and recession of the previous seven years, CRH undertook a comprehensive review of its entire portfolio of businesses to determine which of those businesses offered the most attractive returns and potential for growth in the emerging new cycle. Following this review, a multi-year divestment programme has been initiated for up to €1.5 billion - €2 billion of assets. Portfolio Management is now an intrinsic part of the Group’s strategy and value creation model, which is outlined in the next section.
CRH’s vision is to be the leading |
CRH 39 |
At the core of the |
CRH’s business model has played an instrumental role in the consistent delivery by the Group of industry leading return on invested capital through the cycle. In the period 1970 – 2014, CRH has, in euro terms, delivered a formidable compound annual Total Shareholder Return (TSR) of 15.7%.
At the heart of this enduring performance is our long standing and relentless commitment to our value creation model, which is delivered by an international team of dedicated people.
The five elements of the model are:
40 CRH |
Balanced Portfolio
Building a balanced portfolio is a core constituent of our philosophy and a key determinant of value creation for CRH. The Group is a broad-based building materials business that is diversified with many products, geographies and sector end-uses. We are a multi-product company and the breadth and depth of our product range differentiates our positioning relative to peers in the industry.
Maintaining a balanced portfolio enables the Group to take advantage of differing demand cycles across our businesses. Diversification also opens up a greater number of opportunities for acquisitions, while having vertically integrated businesses creates potential for synergies and operational leverage.
Acquisition Model
Each year, the Group’s balanced portfolio grows, primarily by way of acquisition. For over four decades, CRH has successfully employed its unique acquisition model with a focus on adding small to mid-sized companies that complement and add value to our existing portfolio. On occasion, larger and/or step-change acquisitions are made when the value proposition and strategic rationale are compelling. Details of a proposed major acquisition in 2015 are set out on page 44 and in note 33 to the Consolidated Financial Statements.
Many of our core end markets in mature economies remain fragmented or relatively unconsolidated and will continue to offer growth opportunities via our proven acquisition model in the decades ahead.
Our acquisition model for creating new value and growth platforms also offers considerable long-term potential in developing economies, in particular those in Asia, where the Group is currently building select leading regional positions.
CRH 41 |
Building Better Businesses
Building Better Businesses is a core CRH competency. With over 3,300 operating locations in 34 countries worldwide, the potential for value creation is significant.
Through the extraction of inherent value in newly acquired businesses, and a focus on delivering organic performance improvement in existing businesses, our commitment to Building Better Businesses is a key component of the CRH value creation model.
Every day we strive to make improvements. Attention to detail by our 76,000 strong team, together with the multiplier effect of businesses involving millions of tonnes of aggregates, asphalt and cement, and millions of units of construction accessories and distribution stock keeping units, has a material and cumulative impact over time.
By leveraging the scale of the Group, benefits accrue in the areas of procurement, merchandising, selling prices, category management, distribution and IT. Through the sharing of knowledge, ongoing people development, optimisation of our networks, operational leverage and utilisation of the Group’s
financial strength, we can deliver greater value from these businesses.
CRH’s operations benefit from an active philosophy of continuous improvement. The Group provides guidance, support, functional expertise and control in the areas of performance measurement, financial reporting, cash management, strategic planning, business development, talent management, governance and compliance, risk management, sustainability, health & safety and environment.
Portfolio Management
Through the past number of very difficult years for the global construction industry, CRH has worked hard to position itself to maximise the opportunities presented by the coming growth cycle.
An objective of the ongoing Portfolio Management process is to create a narrower and deeper suite of businesses that are positioned either by virtue of size, product mix, location or
42 CRH |
operational expertise to benefit most from improvements in demand activity and pricing in their respective markets.
The impact of Portfolio Management on value creation is twofold: capital will be continuously released from low growth areas and reallocated to core businesses for growth, while balance sheet capacity will be enhanced to boost acquisition capabilities.
Financial Strength
Maintaining a position of financial strength is a cornerstone of the CRH business model and the Group adopts a rigorous commitment to financial discipline, strong cash generation and retaining balance sheet capacity.
Financial strength enables the Group to create value in two key ways: to provide the resources to fund value enhancing investments and long-term growth; and to reduce the cost of capital which ultimately translates into higher margins and profitability.
The combination of two key financial measures – robust cash generation and solid interest cover – support the investment grade credit ratings CRH enjoys. These ratings enable the Group to gain access to multiple sources of funding.
In recent times, our financial discipline has enabled the Group to secure lower and more diversified long-term interest rates on our debt, which will reduce the Group’s average interest rate from above 5% in 2012 to circa 3% from 2018 onwards.
Financial strength is a fundamental tenet of the business and has given CRH the capacity to increase or maintain the dividend payment to shareholders in each of the last 31 years.
The Shelly Company’s Smith Concrete supplied and delivered 14,715 m3 of concrete and over 45,000 tonnes of aggregates to the Zanesville, Ohio, Genesis Healthcare 2014 expansion project. Smith Concrete’s 4-H-themed readymix truck promotes the largest youth development organisation in the United States. |
CRH 43 |
Proposed Acquisition – Announced February 2015
Definitions:the following definitions apply throughout this Annual Report on Form-20-F, unless the context otherwise requires:
“NewCo Group”:the collection of newly incorporated or pre-existing subsidiaries of the Sellers which hold the assets for sale pursuant to the proposed Acquisition.
“proposed Acquisition”:the acquisition by CRH of the NewCo Group.
“Combined Group”:the CRH Group and the NewCo Group.
“Sellers”:Lafarge and Holcim.
On 7 April 2014, Lafarge S.A. and Holcim Ltd announced their intention to merge their businesses. In order to obtain the regulatory clearances necessary to complete the Merger, they agreed to divest certain of their businesses. The assets for sale are held by newly incorporated or pre-existing subsidiaries of the Sellers, collectively referred to as the NewCo Group.
As outlined in note 33 to the Consolidated Financial Statements, CRH announced on 1 February 2015 that it had entered into a Binding Offer Letter and Philippines SPA dated 31 January 2015 in which it has made a binding irrevocable offer to acquire the NewCo Group for an enterprise value of €6.5 billion. The cash consideration will be paid in a combination of euro, Sterling and Canadian Dollars.
The proposed Acquisition is subject to: (i) CRH shareholder approval at an Extraordinary General Meeting to be held on 19 March 2015; (ii) the successful completion of the proposed merger of Lafarge and Holcim; and (iii) the completion of certain local reorganisations by Lafarge and Holcim in advance of the proposed Acquisition.
A Circular has been distributed to shareholders to seek their approval of the proposed Acquisition and is available on the CRH website, www.crh.com1.
Information on the NewCo Group
The NewCo Group comprises a global portfolio of assets in the buildings materials industry. It is a global producer of cement, aggregates, ready-mix and related construction activities across four regional platforms in North America, Western Europe, Central and Eastern Europe and Emerging Markets. In 2013 the NewCo Group produced 23mt of cement, 79mt of aggregates, 8mt of asphalt and 10m m³ of ready-mix concrete. Approximately two-thirds of the NewCo Group’s revenue is generated in the European region. Outside Europe, Canada is the largest country in terms of estimated revenue for 2014.
The NewCo Group has market-leading positions and covers all segments of the building materials sector in developed, transition and emerging markets. It operates 24 integrated cement plants together with 10 grinding stations for a total capacity of approximately 36mt per annum. The NewCo Group has assets and approximately 15,000 employees across 11 countries:
Reasons for the proposed Acquisition
The NewCo Group represents high quality assets which are core strategic parts of both Lafarge’s and Holcim’s global portfolios. CRH believes the proposed Acquisition provides a compelling strategic fit for the Group for a number of reasons including:
Balance sheet strength remains a key focus for the Group. CRH remains strongly committed to investment grade credit ratings. Following CRH’s announcement confirming discussions were taking place with Lafarge and Holcim and the announcement, on 2 February 2015, of the proposed Acquisition, Standard and Poor’s Ratings Services and Moody’s Investors Service affirmed their pre-announcement investment grade ratings and their outlooks remain stable. Fitch Ratings put CRH’s pre-announcement ratings on Rating Watch Negative (changed from Negative Outlook).
1 Information on or accessible through our website such as the Circular does not form part of this document.
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CRH has a strategy of active portfolio management which will continue post acquisition of the NewCo Group. CRH is exploring options to involve partners for certain of the assets acquired to meet local regulatory requirements or our strategic objectives, though we have not entered into any such agreement concerning the assets of the NewCo Group as of 11 March 2015.
Principal terms and conditions of the proposed Acquisition
The CRH Group has (i) made a binding irrevocable offer to acquire the NewCo Group (excluding the Philippines business), and (ii) entered into the Philippines SPA to acquire the Philippines business.
Lafarge and Holcim may elect to accept the offer and have full discretion whether to do so. The offer will remain open for acceptance until the earlier of (a) two weeks following the conclusion of the works council consultation process and (b) 31 August 2015. If the Sellers accept the offer, the proposed share purchase agreement to be entered into between the parties will come into effect. This proposed agreement (the “Global SPA”) is conditional on:
The long stop date for the Global SPA is the earlier of (a) three months following completion of the merger between Lafarge and Holcim and (b) 31 December 2015 but in any case no earlier than 31 August 2015. The Global SPA provides for the payment of a termination fee by either side in certain circumstances as described in note 33 to the Consolidated Financial Statements.
CRH has committed to the Sellers to do all things necessary to obtain regulatory approvals required for certain parts of the NewCo Group. If certain approvals are not obtained by the long stop date, then the proposed Acquisition will proceed to completion in all jurisdictions other than those where regulatory approval has not been obtained and a divestiture trustee will be appointed to sell the businesses in those jurisdictions. Any loss or profit on such sale will be for the account of CRH.
The CRH Group has agreed to acquire the NewCo Group on a cash-free, debt-free basis, with normalised levels of working capital. The agreement contains customary warranties, including compliance with law, antitrust, environmental matters, litigation, tax and material contracts. It also indemnifies the CRH Group against any pre-closing tax liabilities subject to certain exclusions and limitations.
CRH has agreed that, for a period of not less than one year from closing of the agreement between the parties, it will maintain NewCo Group employee benefits on at least as favourable terms to the current terms, to not close a plant in that period, and not to engage in any collective redundancy programme or mass lay-off.
Where CRH disposes of any business within the NewCo Group within 18 months of closing of the agreement, it has agreed to share any profit on disposal equally with Lafarge and Holcim.
The Philippines SPA is a put and call options agreement dated 31 January 2015 between CRH International, CRH plc, Lafarge Holdings (Philippines) Inc., Calumboyan Holdings, Inc., Southwestern Cement Ventures, Inc., and Round Royal Inc. for the sale and purchase of the Philippines business being sold in connection with the proposed merger of Lafarge and Holcim. It is conditional on CRH entering into arrangements with a local partner in the Philippines so as to comply with the laws of the Philippines in relation to restrictions on foreign ownership of certain Philippine assets and if a local partner is not found on or before 15 August 2015, the assets will be sold with any profit on disposal split equally between CRH and the sellers under the Philippines SPA but any loss for the account of CRH. The Philippines SPA contains conditions to closing which are consistent with the conditions in the Global SPA and is also conditional upon completion of the Global SPA.
Financing
CRH proposes to finance the proposed Acquisition through existing cash resources, new bank facilities and the proceeds of a placing of new Ordinary Shares in CRH plc. The drawn amount of the loan facilities shall bear interest at the rate of EURIBOR plus a margin, which is subject to certain step-ups according to a time and credit ratings based schedule. The facilities consist of a €0.4 billion tranche with a maturity date of 31 December 2015, a €1.5 billion tranche with a maturity date of 30 June 2016, and a €1.0 billion tranche with a maturity date of 30 June 2018. Further details of the placing and the loan facilities are set out in note 33 to the Consolidated Financial Statements.
Dividend policy of the Combined Group
CRH has a strong dividend track record, being one of the few companies within the sector to have maintained its dividend throughout the downturn. Following completion of the proposed Acquisition, the dividend will remain a key focus for CRH. In this regard, while each dividend decision is made based on current trading and expectations regarding future performance, the Board anticipates that the proposed Acquisition will result in significant earnings accretion and enhanced cash generation for the Combined Group.
CRH 45 |
46 CRH
DESCRIPTION OF THE GROUPCRH 47
Environment & Climate Change
With a global base, CRH recognises the part it can play in improving the sustainability of the built environment. CRH is committed to the highest standards of environmental management and to addressing proactively the challenges and opportunities of climate change.
The Group implements programmes across its worldwide operations to promote energy and resource efficiency, achieve targeted air emission reductions, enhance biodiversity, restore worked-out quarries and, in addition, realise environmentally driven product and process innovation and new business opportunities.
In 2012, three years ahead of the target date, CRH achieved its commitment to reduce specific net carbon dioxide (CO2) emissions from cement plants by 15% on 1990 levels. CRH is now on track to achieving its 2020 commitment to a 25% reduction in specific net CO2 cement plant emissions on 1990 levels.
Further progress was made in 2014. CRH continued to increase sales of lower carbon products such as warm-mix asphalt, which now accounts for approximately 40% of CRH’s US asphalt sales. In Europe, CRH provides low carbon cement for sustainable construction and approximately one third of CRH’s cement plant fuel requirements are met by alternative fuels, generating cost benefits in addition to carbon savings.
As well as being recyclable themselves, many CRH products incorporate significant quantities of recycled and other alternative materials. In 2014, the Group used 19 million tonnes of externally sourced alternative materials to replace raw materials, including recycled asphalt pavement and shingles which together provide a fifth of asphalt requirements in US operations.
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People & Community
CRH believes that continued sustainable business success is built on maintaining excellent relationships with all stakeholders.
The Group is committed to fostering respect in the workplace and to developing an inclusive workforce based on merit and ability. Good people are at the heart of all successful organisations. It is a guiding Group philosophy to develop and nurture all employees, to provide training and skills learning, offering strong career paths and upskilling opportunities.
The Group endorses human and labour rights and supports the principles set out in the articles of the United Nations’ Universal Declaration of Human Rights and the International Labour Organisation’s Core Labour Principles. CRH operates a comprehensive Code of Business Conduct and has additionally implemented an Ethical Procurement Code and Supplier Code of Conduct.
The building materials industry traditionally attracts more male than female employees. In 2014, 18% of CRH’s employees were female. At Board level, CRH has three female directors including the Finance Director. Following the Annual General Meeting 25% of the CRH Board will be female.
CRH also recognises a wider responsibility beyond core business activities in the communities in which Group companies operate. It is Group policy to actively support and engage with our neighbours. In 2014, Group companies hosted over 600 stakeholder engagement events.
CRH assists local neighbourhood and community initiatives, in addition to supporting programmes in education, environmental protection and job creation. For example, during 2014, CRH’s US subsidiary, Oldcastle, continued in its national partnership with Habitat for Humanity and also continues to support the Wildlife Habitat Council.
CRH 49 |
Delivering Best-in-Class Governance
CRH is committed to adopting and maintaining best-in-class governance, which is a hallmark of successful organisations and businesses. At CRH, our values based approach to building and running a global business places an emphasis on respect for the law and an unrelenting commitment to compliance with the highest standards of business ethics.
CRH adopts an open and transparent environment in the workplace and we have developed an internal principle of conduct for all employees that there is ‘never a good reason to do the wrong thing’. Within this environment, we also foster a ‘speak up’ culture to empower and encourage participation among employees.
CRH’s Compliance & Ethics teams implement a Code of Business Conduct programme and work to ensure its
success. The Code of Business Conduct sets out policies and guidelines, training, and monitoring and review mechanisms.
In the current training cycle a further 32,000 employees participated in Code of Business Conduct training. A further 11,000 also undertook advanced instruction on changing regulatory environments, anti-bribery rules, competition law and other relevant areas such as corruption and fraud.
Further information is provided in the Corporate Governance section of this report on page 106.
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Managing Risk
Managing risk is an area of vital importance to CRH and the Group has adopted a formal Enterprise Risk Management (ERM) framework as a basis for assessing and mitigating risks associated with our range of businesses and corporate decisions.
The Group adopts the best international practice of incorporating the ‘three lines of defence’ structure into our corporate risk management: (i) local management,
(ii) divisional and corporate oversight, and (iii) the internal audit function.
The principal risks and uncertainties faced by the Group are outlined on pages 52 to 63 and are reported to the Audit Committee on a biannual basis.
Performance Reporting
CRH has formal structures in place to identify, evaluate and manage potential risks and opportunities in sustainability areas. Group performance in this regard, together with the effectiveness of actions, is reviewed regularly by the Board of Directors. CRH is committed to reporting on the breadth of its sustainability performance in a comprehensive and transparent manner and to publishing performance indicators and ambitions in key identified sustainability areas.
Oldcastle Precast provided Storm Capture® as a solution for the underground stormwater detention system at the new administration building site at Quantico National Cemetery, in Virginia – a military cemetery for veterans of the United States Armed Forces. |
CRH 51 |
This section describes the principal risks and uncertainties that could affect the Group’s (and if the proposed Acquisition (see page 44) is completed, the Combined Group’s) business. The risks and uncertainties listed below should be considered in connection with any forward-looking statements in this Form 20-F and the cautionary statements contained in the section “Introduction and Performance Indicators -Measures – Forward-Looking Statements”.
A. Economic, The Risk Factors have been grouped to focus on key strategic risks and operational risks
CRH operates in cyclical industries which are influenced by globalkey financial and national economic circumstances and the level of construction activity. Severe weather can reduce construction activity and lead to a decrease in demand for the Group’s products in areas affected by adverse weather conditions. The Group’s financial performance may also be negatively impacted by declines in governmental funding programmes (largely for infrastructure), unfavourable swings in fuel and other commodity/raw material prices and by lowered sovereign creditworthiness and related austerity measures. The adequacy and timeliness of management response to unfavourable events is critical.reporting risks.
The Group’s operating and financial performance is influenced by general economic conditions and the state of the residential, industrial and commercial and infrastructural construction markets in the countries in which it operates, particularly the European Union and North America.
The deterioration in Eurozone financial markets has contributed to global economic uncertainty. Whilst various actions have been taken by the European Commission, the European Central Bank, the International Monetary Fund and other parties to address the likely effects on the real economies of the participant countries and others, the success of these endeavours cannot be guaranteed.
In general, economic uncertainty exacerbates negative trends in construction activity leading to postponement in orders. Construction markets are cyclical and are affected by many factors that are beyond the Group’s control, including:
the price of fuel and principal energy-related raw materials such as bitumen and steel (which in 2011, accounted for approximately 9% of annual Group sales revenues);
the performance of national economies in the 36 countries in which CRH operates;
monetary policies in the countries in which CRH operates - for example, an increase in interest rates typically reduces the volume of mortgage borrowings thus impacting residential construction activity;
the allocation of government funding for public infrastructure programmes, such as the development of highways in the United States under the “Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users”; and
the level of demand for construction materials and services with sustained adverse weather conditions leading to potential disruptions or curtailments in outdoor construction activity.
A continuation of or deterioration in the current strained global economic conditions may result in further general reductions in construction activity (e.g. further austerity measures being contemplated in the Eurozone and the United States). Against this backdrop, the adequacy and timeliness of the actions taken by CRH’s management team are of critical importance in delivering financial performance.
Each of the above factors could have a material adverse effect on the Group’s operating results and the market price of CRH’s securities.
As an international business, CRH operates in many countries with differing, and in some cases potentially fast-changing, economic, social and political conditions. Changes in these conditions or in the governmental and regulatory requirements in any of the countries in which CRH operates, and in particular in developing markets, may adversely affect CRH’s business thus leading to possible impairment of financial performance and/or restrictions on future growth opportunities amongst other matters.
CRH 31
Description of the Group
DESCRIPTION OF THE GROUP
CRH operates mainly in western Europe and North America as well as, to a lesser degree, in developing countries/emerging markets in eastern Europe, South America, Turkey, China and India. The economies of these countries are at diverse stages of socioeconomic and macroeconomic development which could give rise to a number of risks, uncertainties and challenges; these would include the following:
changes in political, social or economic conditions;
trade protection measures and import or export licensing requirements;
potentially negative consequences from changes in tax laws;
labour practices and differing labour regulations;
ethical procurement;
unexpected changes in regulatory requirements; and
state-imposed restrictions on repatriation of funds.
CRH faces strong volume and price competition across its activities. Given the commodity nature of many of its products, market share, and thus financial performance, will decline if CRH fails to compete successfully.
The competitive environment in which the Group operates can be significantly impacted by general economic conditions in combination with local factors including the number of competitors, the degree of utilisation of production capacity and the specifics of product demand. Across the multitude of largely local markets in which the Group conducts business, downward pricing pressure is experienced from time to time and the Group may not always be in a position to recover increased operating expenses (caused by factors such as increased fuel and raw material prices) through higher selling prices.
Existing products may be replaced by substitute products which CRH does not produce or distribute leading to losses in market share and constraints on financial performance.
A number of the products sold by CRH (both those manufactured internally and those distributed) compete with other building products that do not feature in CRH’s product range. Any significant replacement of the Group’s products by substitute products, which CRH does not produce or distribute, could adversely impact market share and results of operations in these markets.
Growth through acquisition is a key element of CRH’s strategy. CRH may not be able to continue to grow as contemplated in its business plan if it is unable to identify attractive targets, execute full and proper due diligence, raise funds on acceptable terms, complete such acquisition transactions, integrate the operations of the acquired businesses and realise anticipated levels of profitability and cash flows.
The Group’s acquisition strategy focuses on value-enhancing mid-sized acquisitions supplemented from time to time by larger strategic acquisitions into new markets or new building products, for example. As a result of the challenging trading backdrop to many of CRH’s businesses since onset of the financial crisis and the ensuing global economic downturn, management’s focus continues to be limited to acquisition opportunities that offer compelling value and exceptional strategic fit.
The realisation of CRH’s acquisition strategy is dependent on the ability to identify and acquire suitable assets at appropriate prices thus satisfying the stringent cash flow and return on investment criteria underpinning such activity. CRH may not be able to identify such companies, and, even if identified, may not be able to acquire them given a variety of factors including the outcome of due diligence processes, the ability to raise funds (as required) on acceptable terms, the need for competition authority approval in certain instances and competition for transactions from peers and other entities exploring acquisition opportunities in the building materials sector. The Group’s ability to realise the expected benefits from
32 CRH
Description of the Group
DESCRIPTION OF THE GROUP
acquisition activity depends, in large part, on its ability to integrate newly-acquired businesses 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 legacy business and, accordingly, may be deprived of the expected benefits thus leading to potential dissipation and diversion of Group management resources.
CRH does not have a controlling interest in certain of the businesses (i.e. associates and joint ventures) in which it has invested and may invest; these arrangements may require greater management of more complex business partner relationships. In addition, CRH is subject to various restrictions as a result of non-controlling interests in certain of its subsidiaries.
Given the absence of control in associates and, to a lesser extent, joint ventures, important decisions such as the approval of business plans and the timing and amount of cash distributions and capital expenditure, for example, may require the consent of CRH’s partners or may be approved without CRH’s consent (despite provisions in the purchase contract). These limitations could impair CRH’s ability to effectively manage and/or realise its strategic goals for these businesses.
The majority of CRH’s subsidiaries are wholly-owned with non-controlling interests (i.e. minority shareholders) accounting for an immaterial share of total equity. Various disadvantages may result from the participation of non-controlling interests whose objectives and concerns may not always align with those of CRH. The presence of non-controlling interests may, among other things, impede CRH’s ability to implement organisational efficiencies, transfer cash from one subsidiary to another and allocate assets in the most effective manner.
Given the decentralised structure of CRH, existing processes to recruit, develop and retain talented individuals and promote their mobility may be inadequate thus giving rise to difficulties in succession planning and potentially impeding the continued realisation of the Group’s core strategy of performance and growth.
The identification and subsequent assessment, management, development and deployment of talented individuals is of major importance in continuing to deliver on CRH’s core strategy of performance and growth and in ensuring that succession planning objectives for key executive roles throughout CRH’s international operations are satisfied. In recognition of these requirements, the human resource management framework focuses on the operation of integrated and targeted programmes of performance management, leadership development (including international assignments, where appropriate), coaching and mentoring inter alia; the appropriateness of these programmes is reviewed on a regular basis to ensure that they mirror best practices.
B. Financial and reporting risks
CRH uses financial instruments throughout its businesses giving rise to interest rate, foreign currency, credit/counterparty and liquidity risks. A downgrade of CRH’s credit ratings may give rise to increases in funding costs in respect of future debt and may impair the Group’s ability to raise funds on acceptable terms. In addition, against the backdrop of the heightened uncertainties, in particular in the Eurozone, insolvency of the financial institutions with which CRH conducts business (or a downgrade in their credit ratings) may lead to losses in CRH’s liquid investments, derivative assets and cash and cash equivalents balances or render it more difficult either to utilise the Group’s existing debt capacity or otherwise obtain financing for the Group’s operations.
CRH has incurred and will continue to incur significant amounts of debt in order to finance its business and ongoing acquisition programme. As at 31 December 2011, CRH had outstanding net indebtedness of approximately€3.5 billion (2010:€3.5 billion). A significant portion of the cash generated from operational activity is dedicated to the payment of principal and interest on indebtedness and is not available for other purposes. If CRH’s earnings were to decline significantly, difficulties may be experienced in servicing its debt instruments. In addition, in raising debt, CRH has entered into certain financing agreements containing restrictive covenants requiring CRH to maintain a certain minimum interest cover ratio and a certain
CRH 33
Description of the Group
DESCRIPTION OF THE GROUP
minimum net worth and placing a maximum limit on the ratio of net debt to net worth. These restrictions may limit CRH’s flexibility in planning for and reacting to competitive pressures and changes in business, industry and general economic conditions and may limit its ability to undertake acquisition activity and capitalise on other business opportunities. For further information on financial covenants, please see the “Liquidity and Capital Resources” section of the Business Review (page 43).
CRH is exposed to movements in interest rates which affect the amount of interest paid on floating rate borrowings and the return generated on its cash investments. As at 31 December 2011, 70% (2010: 75%) of CRH’s net debt was at fixed interest rates. For additional information on the value of debt and the impact of movements in interest rates, see notes 21 and 25 to the Consolidated Financial Statements.
Any material deterioration in CRH’s existing credit ratings may significantly reduce its access to the debt markets and result in increased interest rates on future debt. A downgrade in CRH’s credit ratings may result from factors specific to CRH or from other factors such as general economic weakness or sovereign credit rating ceilings.
CRH holds significant cash balances on deposit with a variety of highly-rated financial institutions (typically invested on a short-term basis) which, together with liquid investments and cash and cash equivalents at 31 December 2011, totalled€1.3 billion (2010:€1.8 billion). In addition to the above, CRH enters into derivative transactions with a variety of highly-rated financial institutions giving rise to derivative assets and derivative liabilities; the relevant balances as at 31 December 2011 were€205 million and€30 million respectively (2010:€208 million and€87 million). The counterparty risks inherent in these exposures may give rise to losses in the event that the relevant financial institutions suffer a ratings downgrade or become insolvent. In addition, certain of the Group’s activities (e.g. highway paving in the United States) give rise to significant amounts receivable from counterparties at the balance sheet date; at year-end 2011, this balance was€0.4 billion (2010:€0.4 billion). In the current business environment, there is increased exposure to counterparty default, particularly as regards bad debts.
CRH operates a number of defined benefit pension schemes in certain of its operating jurisdictions. The assets and liabilities of these schemes may exhibit significant period-on-period volatility attributable primarily to asset valuations, changes in bond yields and longevity. In addition to future service contributions, significant cash contributions may be required to remediate past service deficits.
The assumptions used in the recognition of assets, liabilities, income and expenses (including discount rates, expected return on plan assets, rate of increase in future compensation levels, mortality rates and healthcare cost trend rates) are updated annually based on market and economic conditions at the balance sheet date and for any relevant 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 anticipated inflation; (iv) for mortality rates, changes in the relevant actuarial funding valuations or changes in best practice; and (v) for healthcare cost trend rates, the rate of medical cost inflation in the relevant regions (items (i) and (iii) to (v) pertain to liabilities with item (ii) pertaining to assets). The weighted average actuarial assumptions used and sensitivity analysis in relation to the discount rates employed in the determination of pension and other post-retirement liabilities and the expected long-term rate of return on scheme assets are discloseddefinitions set out on page 156. A prolonged period of financial market instability would have an adverse impact on the valuations of CRH’s pension scheme assets.
In addition, a number of the defined benefit pension schemes in operation44 apply throughout the Group have reported material funding deficits thus necessitating reparation either in accordance with legislative requirements or as agreed with the relevant regulators. These obligations are reflected in the employer contributions disclosure on page 161. The extent of such contributions may be exacerbated over time as a result of a prolonged period of instability in worldwide financial markets.
34 CRH
Description of the Group
DESCRIPTION OF THE GROUP
In its worldwide insurance programme, the Group carries appropriate levels of insurance for typical business risks (including product liability) with various leading insurance companies. However, in the event of the failure of one or more of its insurance counterparties, the Group could be impacted by losses where recovery from such counterparties is not possible.
The Group’s insurance arrangements retain certain exposures in respect of a variety of liability/casualty insurances and property damage and business interruption insurance; amounts in excess of these predetermined self-insurance thresholds, together with umbrella arrangements, as appropriate, are arranged through leading, highly-rated global insurers and re-insurers giving rise to counterparty risks. The exposures borne by third-parties are, in general, subject to caps with any exposures in excess of those caps being borne by CRH. As at 31 December 2011, the total insurance provision, which is subject to periodic actuarial valuation and is discounted, amounted to€199 million (2010:€207 million); a substantial proportion of this figure pertained to claims which are classified as “incurred but not reported”.
CRH’s activities are conducted primarily in the local currency of the country of operation resulting in low levels of foreign currency transactional risk. The principal foreign exchange risks to which the Consolidated Financial Statements are exposed pertain to adverse movements in reported results when translated into euro (which is the Group’s functional and reporting currency) together with declines in the euro value of the Group’s net investments which are denominated in a wide basket of currencies other than the euro.
A significant proportion of the Group’s revenues, expenses, assets and liabilities are denominated in currencies other than the euro, principally US Dollars, Swiss Francs, Polish Zlotys and Pounds Sterling. From year to year, adverse changes in the exchange rates used to translate these and other foreign currencies into euro have impacted and will continue to impact the Group’s consolidated results and net worth. It is the Group’s policy to hedge partially its investment in foreign currencies by ensuringRisk Factors 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 Group’s Consolidated Financial Statements for the year ended 31 December 2011, see the Business Review section commencing on page 39 and notes 21 and 25 to the Consolidated Financial Statements.
Significant under-performance in any of CRH’s major cash-generating units may give rise to a material write-down of goodwill which would have a substantial impact on the Group’s 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. Under IFRS, goodwill and indefinite-lived intangible assets are not amortised but are subject to annual impairment testing. Other intangible assets deemed separable from goodwill arising on acquisitions are amortised. A detailed discussion of the impairment testing process, the key assumptions used, the results of that testing and the related sensitivity analysis is contained in note 15 to the Consolidated Financial Statements on pages 135 and 136.
Whilst a goodwill impairment charge would not impact cash flow, a full write-down at 31 December 2011 would have resulted in a charge to income and a reduction in equity of€4.3 billion (2010:€4.1 billion).
C. Compliance and regulatory risks
CRH is subject to stringent and evolving laws, regulations, standards and best practices in the area of Corporate Social Responsibility (comprising corporate governance, environmental management and climate change (specifically capping of emissions), health and safety management and social performance) which may give rise to increased ongoing remediation and/or other compliance costs and may adversely affect the Group’s reported results and financial condition.
CRH is subject to a broad and increasingly stringent range of existing and evolving governance, environmental, health and safety and other laws, regulations, standards and best practices in each of the
CRH 35
Description of the Group
DESCRIPTION OF THE GROUP
jurisdictions in which the Group operates giving rise to significant compliance costs, potential legal liability exposure and potential limitations on the development of the Group’s operations. These laws, regulations, standards and best practices relate to, amongst other things, climate change, noise, emissions to air, water and soil, the use and handling of hazardous materials and waste disposal practices. Given the above, the risk of increased environmental and other compliance costs and unplanned capital expenditure is inherent in CRH’s business and the impact of future developments in these respects on the Group’s activities, products, operations, profitability and cash flow cannot be estimated; there can therefore be no assurance that material liabilities and costs will not be incurred in the future.
Environmental and health and safety and other laws, regulations and standards 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 CRH’s 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; the associated remediation costs incurred to date have not been material. Despite CRH’s 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. These figures are not material infollow, unless the context of CRH. However, CRH cannot predict environmental matters with certainty, and 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 Group’s operations, which in turn could have a material adverse effect on CRH’s reputation, business, results of operations and overall financial condition.otherwise requires.
For additional information, see The Environment and Government Regulations section on pages 29 and 30.
CRH is subject to many laws and regulations (both local and international) throughout the many jurisdictions in which it operates and is thus exposed to changes in those laws and regulations and to the outcome of any investigations conducted by governmental, international and other regulatory authorities, which may result in the imposition of fines and/or sanctions for non-compliance.
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, anti-bribery, anti-corruption, governance and other matters. CRH mandates that its employees comply with its Code of Business Conduct which stipulates best practice in relation to regulatory matters; however, CRH 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.
36 CRH
Key Strategic Risk Factors | ||||
Industry cyclicality | ||||
Risk Factor | Discussion | |||
The level of construction activity in local and national markets is inherently cyclical being influenced by a wide variety of factors including global and national economic circumstances, ongoing austerity programmes in the developed world, governments’ ability to fund infrastructure projects, consumer sentiment and weather conditions. Financial performance may also be negatively impacted by unfavourable swings in fuel and other commodity/raw material prices. Failure of the CRH Group and/or the Combined Group to respond on a timely basis and/or adequately to unfavourable events beyond the CRH Group’s and/or the Combined Group’s control will adversely affect financial performance. | The CRH Group’s operating and financial performance is, and the Combined Group’s would be, influenced by general economic conditions and the state of the residential, industrial and commercial and infrastructure construction markets in the countries in which it operates, particularly in Europe and North America. Closing of the proposed Acquisition will extend or expand the geographic scope of the CRH Group’s existing heavyside activities in France & La Reunion, Germany, the United Kingdom, Hungary, Serbia, Romania, Slovakia, the United States, Canada, Brazil and the Philippines. In general, economic uncertainty exacerbates negative trends in construction activity leading to postponement in orders. Construction markets are inherently cyclical and are affected by many factors that are beyond the CRH Group’s control, including: | |||
— | the price of fuel and principal energy-related raw materials such as bitumen and steel (which accounted for approximately 9% of annual Group sales revenues in 2014); | |||
— | the performance of the national economies in the 34 countries in which the CRH Group operates (37 for the Combined Group); | |||
— | monetary policies in the countries in which the CRH Group operates — for example, an increase in interest rates typically reduces the volume of mortgage borrowings thus impacting residential construction activity; | |||
— | the allocation of government funding for public infrastructure programmes, such as the development of highways in the United States under the Moving Ahead for Progress in the 21st Century Act (“MAP-21”); and | |||
— | the level of demand for construction materials and services, with sustained adverse weather conditions leading to potential disruptions or curtailments in outdoor construction activity. | |||
While economic conditions appear to be improving in the United States, a prolongation of or further deterioration in economic performance in Europe may result in further general reductions in construction activity in that area. Against this backdrop, the adequacy and timeliness of the actions taken by the CRH Group’s management team are of critical importance in maintaining financial performance at appropriate levels. | ||||
Each of the above factors could have a material adverse effect on the CRH Group’s and/or the Combined Group’s operating results and the market price of CRH plc’s Ordinary Shares. | ||||
52 CRH |
Political and economic uncertainty | ||||
Risk Factor | Discussion | |||
or prospects of the CRH Group and/or the Combined Group thus leading to possible impairment of financial performance and/or restrictions on future growth opportunities. | The adverse developments in eurozone economic performance in recent years, together with ongoing austerity programmes in various countries in Europe, have contributed to heightened global uncertainty. These uncertainties include whether the euro will continue as a unit of currency. While various actions have been taken by central banks and other institutions to stabilise the economic situation, the success of these actions cannot be guaranteed. | |||
The CRH Group currently operates mainly in Western Europe and North America as well as, to a lesser degree, in developing countries/emerging markets in Eastern Europe, South America, China and India. The Combined Group would include a number of countries where the CRH Group does not currently have a significant presence, namely Serbia, Brazil and the Philippines. The economies of these countries are at varying stages of socioeconomic and macroeconomic development which could give rise to a number of risks, uncertainties and challenges and could include the following: | ||||
— | changes in political, social or economic conditions; | |||
— | trade protection measures and import or export licensing requirements; | |||
— | potentially negative consequences from changes in tax laws; | |||
— | labour practices and differing labour regulations; | |||
— | procurement which contravenes ethical considerations; | |||
— | unexpected changes in regulatory requirements; | |||
— | state-imposed restrictions on repatriation of funds; and | |||
— | the outbreak of armed conflict. | |||
With regard to Ukraine, where the CRH Group has significant business interests, the outlook remains uncertain and the implications for construction activity in 2015 and beyond are unclear. | ||||
Commodity products and substitution | ||||
Risk Factor | Discussion | |||
The CRH Group faces, and the Combined Group would face, strong volume and price competition across its product lines. In addition, existing products may be replaced by substitute products which the CRH Group and/or the Combined Group does not produce or distribute. Against this backdrop, if the CRH Group and/or the Combined Group fails to generate competitive advantage through differentiation and innovation across the value chain (for example, through superior product quality, engendering customer loyalty or excellence in logistics), market share, and thus financial performance, may decline. | The competitive environment in which the CRH Group operates, and the Combined Group would operate, can be significantly impacted by general economic conditions in combination with local factors including the number of competitors, the degree of utilisation of production capacity and the specifics of product demand. Across the multitude of largely local markets in which the CRH Group conducts business, and the Combined Group would conduct business, downward pricing pressure is experienced from time to time, and the CRH Group and/or the Combined Group may not always be in a position to recover increased operating expenses (caused by factors such as increased fuel and raw material prices) through higher sale prices. | |||
A number of the products sold by the CRH Group and/or the Combined Group (both those manufactured internally and those distributed) compete with other building products that do not feature in the existing product range. Any significant shift in demand preference from the CRH Group’s and/or the Combined Group’s existing products to substitute products, which the CRH Group and/or the Combined Group does not produce or distribute, could adversely impact market share and results of operations. | ||||
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Acquisition activity | ||
Risk Factor | Discussion | |
Growth through acquisition is a key element of the CRH Group’s strategy. The CRH Group and/or the Combined Group may not be able to continue to grow as contemplated in its business plan if it is unable to identify attractive targets (including potential new platforms for growth), execute full and proper due diligence, raise funds on acceptable terms, complete such acquisition transactions, integrate the operations of the acquired businesses and realise anticipated levels of profitability and cash flows. The CRH Group and/or the Combined Group may be liable for the past acts, omissions or liabilities of companies or businesses it has acquired, which may either be unforeseen or greater than anticipated at the time of the relevant acquisition. | The CRH Group’s acquisition strategy focuses on value-enhancing mid-sized acquisitions supplemented from time to time by larger strategic acquisitions into new markets or new building products. Subject to the factors highlighted below, the CRH Board intends that this will continue to be the case following completion of the proposed Acquisition. | |
The realisation of the CRH Group’s and/or the Combined Group’s acquisition strategy is dependent on the ability to identify and acquire suitable assets at appropriate prices thus satisfying the stringent cash flow and return on investment criteria underpinning such activities. The CRH Group and/or the Combined Group may not be able to identify such companies, and, even if identified, may not be able to acquire them because of a variety of factors including the outcome of due diligence processes, the ability to raise funds (as required) on acceptable terms, the need for competition authority approval in certain instances and competition for transactions from peers and other entities exploring acquisition opportunities in the building materials sector. If the proposed Acquisition is not completed, other acquisitions may not be identified and the Placing proceeds may be used for other corporate purposes. The CRH Group’s and/or the Combined Group’s ability to realise the expected benefits from acquisition activity depends, in large part, on its ability to integrate newly-acquired businesses in a timely and effective manner. Situations may arise where the CRH Group and/or the Combined Group may be liable for the past acts or omissions or liabilities of companies acquired; for example, the potential environmental liabilities addressed under the“Sustainability” Risk Factor below. Even if the CRH Group and/or the Combined Group is able to acquire suitable companies, it still may not be able to incorporate them successfully into the relevant legacy businesses and, accordingly, may be deprived of the expected benefits thus leading to potential dissipation and diversion of management resources and constraints on financial performance. See also “Risk Factors – Risks and Uncertainties Related to the Proposed Acquisition”. | ||
Joint ventures and associates | ||
Risk Factor | Discussion | |
The CRH Group does not have, and the Combined Group would not have, a controlling interest in certain of the businesses (i.e. joint ventures and associates) in which it has invested and may invest. The absence of a controlling interest gives rise to increased governance complexity and a need for proactive relationship management, which may restrict the CRH Group’s and/or the Combined Group’s ability to generate adequate returns and to develop and grow these businesses. | Due to the absence of full control of joint ventures and associates, important decisions such as the approval of business plans and the timing and amount of cash distributions and capital expenditures, for example, may require the consent of partners or may be approved without the CRH Group’s consent. | |
These limitations could impair the CRH Group’s and/or the Combined Group’s ability to manage joint ventures and associates effectively and/or realise the strategic goals for these businesses. In addition, improper management or ineffective policies, procedures or controls for non-controlled entities could adversely affect the business, results of operations or financial condition of the relevant investment and, by corollary, the CRH Group and/or the Combined Group. | ||
54 CRH |
Human resources | ||
Risk Factor | Discussion | |
Existing processes to recruit, develop and retain talented individuals and promote their mobility may be inadequate thus giving rise to employee/management attrition and difficulties in succession planning and potentially impeding the continued realisation of the core strategy of performance and growth. In addition, the CRH Group and/or the Combined Group is exposed to various risks associated with collective representation of employees in certain jurisdictions. These risks could include strikes and increased wage demands with possible reputational consequences. The performance of the Combined Group would, amongst other things, be dependent on the retention and motivation of certain key management currently employed within the entities the CRH Group is proposing to acquire. | The identification and subsequent assessment, management, development and deployment of talented individuals is of major importance in continuing to deliver on the CRH Group’s and/or the Combined Group’s core strategy of performance and growth and in ensuring that succession planning objectives for key executive roles throughout its international operations are satisfied. Programmes designed to focus on performance management skills and leadership development may not achieve their desired objectives. | |
The maintenance of positive employee and trade/labour union relations is key to the successful operation of the CRH Group and/or the Combined Group. Some of the CRH Group’s employees, and those employed in the NewCo Group, are represented by trade/labour unions under various collective agreements. For unionised employees, the CRH Group and the individual entities within the NewCo Group may not be able to renegotiate satisfactorily the relevant collective agreements upon expiration and may face tougher negotiations and higher wage demands than would be the case for non-unionised employees. In addition, existing labour agreements may not prevent a strike or work stoppage with any such activity creating reputational risk and potentially having a material adverse effect on the results of operations and financial condition of the CRH Group and/or the Combined Group. | ||
Corporate communications | ||
Risk Factor | Discussion | |
As a publicly-listed company, the CRH Group undertakes, and the Combined Group would undertake, regular communication with its stakeholders. Given that these communications may contain forward-looking statements, which by their nature involve uncertainty, actual results and developments may differ from those communicated due to a variety of external and internal factors giving rise to reputational risk. | The CRH Group places, and the Combined Group would place, great emphasis on timely and relevant corporate communications with overall responsibility for these matters being vested in senior management at the Group Head Office (largely the Chief Executive, the Finance Director, the Head of Investor Relations and the Group Director, Corporate Affairs) supported by engagement with highly experienced external advisors, where appropriate. The strategic, operational and financial performance of the CRH Group and of its constituent entities, including following the proposed Acquisition, the NewCo Group, is reported to the Board on a monthly basis with all results announcements and other externally-issued documentation (e.g. the Annual Report on Form 20-F) being discussed by the Board/Audit Committee prior to release. | |
Cyber and information technology | ||
Risk Factor | Discussion | |
As a result of the proliferation of information technology in the world today, the CRH Group is, and the Combined Group would be, dependent on the employment of advanced information systems and is exposed to risks of failure in the operation of these systems. Further, the CRH Group is, and the Combined Group would be, exposed to security threats to its digital infrastructure through cyber-crime which might lead to interference with production processes, manipulation of financial data, the theft of private data or misrepresentation of information via digital media. In addition to potential irretrievability or corruption of critical data, the CRH Group and/or the Combined Group could suffer reputational losses and incur significant financial costs in remediation. Such attacks are by their nature technologically sophisticated and may be difficult to detect and defend in a timely fashion. | The CRH Group attaches importance to addressing security and cyber threats to its digital infrastructure given the increasing sophistication and evolving nature of these threats. Such attacks may result in interference with production software, corruption or theft of sensitive data, manipulation of financial data accessible through its digital infrastructure, or reputational losses as a result of misrepresentation via social media and other websites. While the CRH Group has made a significant investment in upgrading its digital infrastructure and governance processes with the overall objective of further enhancing system security, there can be no assurance that future attacks will not be successful due to their increasing sophistication and the difficulties in detecting and defending against them in a timely fashion. | |
CRH 55 |
Sustainability | ||
Risk Factor | Discussion | |
The CRH Group is, and the Combined Group would be, subject to stringent and evolving laws, regulations, standards and best practices in the area of sustainability (comprising corporate governance, environmental management and climate change (specifically capping of emissions), health and safety management and social performance) which may give rise to increased ongoing remediation and/or other compliance costs and may adversely affect the CRH Group’s and/or the Combined Group’s business, results of operations, financial condition and/or prospects. | The CRH Group is, and the Combined Group would be, subject to a broad and increasingly stringent range of existing and evolving laws, regulations, standards and best practices with respect to governance, the environment and health and safety measures in each of the jurisdictions in which it operates/would operate giving rise to significant compliance costs, potential legal liability exposure and potential limitations on the development of its operations. These laws, regulations, standards and best practices relate to, amongst other things, climate change, noise, emissions to air, water and soil, the use and handling of hazardous materials and waste disposal practices. Given the above, the risk of increased environmental and other compliance costs and unplanned capital expenditure is inherent in conducting business in the building materials sector and the impact of future developments in these respects on the CRH Group’s and/or the Combined Group’s activities, products, operations, profitability and cash flow cannot be estimated; there can therefore be no assurance that material liabilities and costs will not be incurred in the future or that material limitations on the development of its operations will not arise. | |
Environmental and health and safety and other laws, regulations, standards and best practices may expose the CRH Group and/or the Combined Group to the risk of substantial costs and liabilities, including liabilities associated with assets that have been sold or acquired and activities that have been discontinued. In addition, many of the CRH Group’s manufacturing sites have a history of industrial use and, while strict environmental operating standards are applied and extensive environmental due diligence is undertaken in acquisition activity, some soil and groundwater contamination has occurred in the past at a limited number of sites. Although the associated remediation costs incurred to date have not been material, they may become more significant in the future. Despite the CRH Group’s policy and efforts to comply with all applicable environmental and health and safety laws, it may face increased remediation liabilities and additional legal proceedings concerning environmental and health and safety matters in the future. Based on information currently available, the CRH Group 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. These figures are not material in the context of the CRH Group. However, neither the CRH Group nor the Combined Group can predict environmental and health and safety matters with certainty, and 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 laws or increasingly strict enforcement by governmental authorities, could result in increased costs and liabilities or prevent or restrict some of the operations of the CRH Group and/or the Combined Group, which in turn could have a material adverse effect on the reputation, business, results of operations and overall financial condition of the CRH Group and/or the Combined Group. | ||
For additional information see also “Introduction – The Environment and Government Regulations”. | ||
56 CRH |
Laws and regulations | ||
Risk Factor | Discussion | |
The CRH Group is, and the Combined Group would be, subject to many local and international laws and regulations, including those relating to competition law, corruption and fraud, across many jurisdictions of operation and is/would be exposed to changes in those laws and regulations and to the outcome of any investigations conducted by governmental, international and other regulatory authorities, which may result in the imposition of fines and/or sanctions fornon-compliance, and may potentially inflict reputational damage. | The CRH Group is, and the Combined Group would be, subject to various statutes, regulations and laws applicable to businesses generally in the countries and markets in which it operates/would operate. These include statutes, regulations and laws affecting land usage, zoning, labour and employment practices, competition, financial reporting, taxation, anti-bribery, anti-corruption, governance and other matters. The CRH Group mandates that its employees comply with its Code of Business Conduct which stipulates best practices in relation to regulatory matters. Neither the CRH Group, nor the Combined Group, can guarantee that their employees will at all times be successful in complying with all demands of regulatory agencies in a manner which will not materially adversely affect the business, results of operations, financial condition or prospects of the CRH Group and/or the Combined Group. | |
The CRH Group seeks to comply fully with legislation such as the Foreign Corrupt Practices Act in the United States and the Bribery Act in the United Kingdom and has put in place significant internal controls and compliance policies and procedures. However, there can be no assurance that such established policies and procedures will afford adequate protection against fraudulent and/or corrupt activity and any such activity could have a material adverse effect on the CRH Group’s and/or the Combined Group’s business, results of operations, financial condition or prospects. | ||
Key Financial and Reporting Risk Factors | ||
Financial instruments (interest rate and leverage, foreign currency, counterparty, credit ratings and liquidity) | ||
Risk Factor | Discussion | |
The CRH Group uses, and the Combined Group would use, financial instruments throughout its businesses giving rise to interest rate and leverage, foreign currency, counterparty, credit rating and liquidity risks. A significant portion of the cash generated by the CRH Group and/or the Combined Group from operational activity is currently/would be dedicated to the payment of principal and interest on indebtedness. In addition, the CRH Group has entered into certain financing agreements containing restrictive covenants requiring it to maintain a certain minimum interest coverage ratio and a certain minimum net worth. A downgrade of the CRH Group’s and/or the Combined Group’s credit ratings may give rise to increases in funding costs in respect of future debt and may impair the CRH Group’s and/or the Combined Group’s ability to raise funds on acceptable terms. In addition, against the backdrop of heightened uncertainties in the eurozone, insolvency of the financial institutions with which the CRH Group and/or the Combined Group conducts business (or a downgrade in their credit ratings) may lead to losses in derivative assets and cash and cash equivalents balances or render it more difficult either to utilise existing debt capacity or otherwise obtain financing for operations. | Interest rate and leverage risks:The CRH Group’s exposures to changes in interest rates result from investing and borrowing activities undertaken to manage liquidity and capital requirements and stem predominantly from long-term debt obligations. Borrowing costs are managed through employing a mix of fixed and floating rate debt and interest rate swaps, where appropriate. As at 31 December 2014, the Group had outstanding net indebtedness of approximately €2.5 billion (2013: €3.0 billion). On Closing, the Combined Group will have significant outstanding indebtedness, which may impair its operating and financial flexibility over the longer term and could adversely affect its business, results of operations and financial position. This high level of indebtedness could give rise to the Combined Group dedicating a substantial portion of its cash flow to debt service thereby reducing the funds available in the longer term for working capital, capital expenditure, acquisitions, distributions to shareholders and other general corporate purposes and limiting its ability to borrow additional funds and to respond to competitive pressures. In addition, the increased level of indebtedness as a result of the proposed Acquisition may give rise to a general increase in interest rates borne and there can be no assurance that the Combined Group will not be adversely impacted by increases in borrowing costs in the future. For the year ended 31 December 2014, PBITDA/net interest (all as defined in the relevant agreements as discussed in note 23 to the Consolidated Financial Statements), which is the CRH Group’s principal financial covenant, was 7.0 times (2013: 6.3 times); we anticipate that, aside from the impact of once-off costs arising on acquisition, PBITDA/net interest cover will be largely unchanged as a result of the proposed Acquisition. The prescribed minimum PBITDA/net interest cover ratio is 4.5 times and the prescribed minimum net worth is €5 billion. Foreign currency risks:If the euro, which is the CRH Group’s reporting currency, weakens relative to the basket of foreign currencies in which net debt is denominated (principally the US Dollar, Pound Sterling and the Swiss Franc), the net debt balance would increase; the converse would apply if the euro was to strengthen. The CRH Group’s established policy to spread its net worth across the currencies of its operations, with the objective of limiting its exposure to individual currencies and thus promoting consistency with geographical balance, may not be successful. |
CRH 57 |
Financial instruments (interest rate and leverage, foreign currency, counterparty, credit ratings and liquidity) – continued | Counterparty risks: Insolvency of the financial institutions with which the CRH Group and/or the Combined Group conducts business, or a downgrade in their credit ratings, may lead to losses in derivative assets and cash and cash equivalents balances or render it more difficult either to utilise existing debt capacity or otherwise obtain financing for operations. The maximum exposure arising in the event of default on the part of the counterparty (including insolvency) is the carrying amount of the relevant financial instrument. | |
The CRH Group holds significant cash balances on deposit with a variety of highly-rated financial institutions (typically invested on a short-term basis) which, together with cash and cash equivalents at 31 December 2014, totalled €3.3 billion (2013: €2.5 billion). In addition to the above, the CRH Group enters into derivative transactions with a variety of highly-rated financial institutions giving rise to derivative assets and derivative liabilities; the relevant balances as at 31 December 2014 were €102 million and €23 million respectively (2013: €80 million and €53 million respectively). The counterparty risks inherent in these exposures may give rise to losses in the event that the relevant financial institutions suffer a ratings downgrade or become insolvent. In addition, certain of the CRH Group’s activities (e.g. highway paving in the United States) give rise to significant amounts receivable from counterparties at the balance sheet date; at year-end 2014, this balance was €0.5 billion (2013: €0.4 billion). In the current business environment, there is increased exposure to counterparty default, particularly as regards bad debts. | ||
Credit rating risks:A downgrade of the CRH Group’s and/or the Combined Group’s credit ratings may give rise to increases in funding costs in respect of future debt and may, among other concerns, impair its ability to access debt markets or otherwise raise funds or enter into letters of credit, for example, on acceptable terms. Such a downgrade may result from factors specific to the CRH Group and/or the Combined Group, including as a result of the increased indebtedness resulting from the proposed Acquisition, or from other factors such as general economic or sector-specific weakness or sovereign credit rating ceilings. | ||
Liquidity risks:The principal liquidity risks stem from the maturation of debt obligations and derivative transactions. The CRH Group aims to achieve flexibility in funding sources through a variety of means including (i) maintaining cash and cash equivalents with a number of highly-rated counterparties; (ii) limiting the maturity of such balances; (iii) meeting the bulk of debt requirements through committed bank lines or other term financing; and (iv) having surplus committed lines of credit. However, market or economic conditions may make it difficult at times to realise this objective. | ||
For additional information on the above risks see note 21 to the Consolidated Financial Statements. See also “Risk Factors – Risks and Uncertainties Related to the Proposed Acquisition”. | ||
58 CRH |
Defined benefit pension schemes and related obligations | ||
Risk Factor | Discussion | |
The CRH Group, and various entities within the NewCo Group, operate a number of defined benefit pension schemes and related obligations (e.g. termination indemnities and jubilee/long-term service benefits, which are accounted for as defined benefit) in certain of their operating jurisdictions. The assets and liabilities of defined benefit pension schemes may exhibit significant period-on-period volatility attributable primarily to asset values, changes in bond yields/discount rates and anticipated longevity. In addition to the contributions required for the ongoing service of participating employees, significant cash contributions may be required to remediate deficits applicable to past service. In addition, fluctuations in the accounting surplus/deficit may adversely impact credit metrics thus harming the CRH Group’s and/or the Combined Group’s ability to raise funds. | The assumptions used in the recognition of pension assets, liabilities, income and expenses (including discount rates, rate of increase in future compensation levels, mortality rates and healthcare cost trend rates) are updated based on market and economic conditions at the respective balance sheet date and for any relevant 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 future compensation levels, future labour market conditions and anticipated inflation; (iii) for mortality rates, changes in the relevant actuarial funding valuations or changes in best practice; and (iv) for healthcare cost trend rates, the rate of medical cost inflation in the relevant regions. The weighted average actuarial assumptions used and sensitivity analysis in relation to the significant assumptions employed in the determination of pension and other post-retirement liabilities are disclosed on pages 176 and 178. A prolonged period of financial market instability would have an adverse impact on the valuations of pension scheme assets. In addition, a number of the defined benefit pension schemes in operation throughout the CRH Group have reported material funding deficits thus necessitating remediation either in accordance with legislative requirements or as agreed with the relevant regulators. These obligations are reflected in the contracted payments disclosure on page 69. The extent of such contributions may be exacerbated over time as a result of a prolonged period of instability in worldwide financial markets. | |
Adequacy of insurance arrangements and related counterparty exposures | ||
Risk Factor | Discussion | |
The building materials sector is subject to a wide range of operating risks and hazards, not all of which can be covered, adequately or at all, by insurance; these risks and hazards would include climatic conditions such as floods and hurricanes/cyclones, seismic activity, technical failures, interruptions to power supplies, industrial accidents and disputes, environmental hazards, fire and crime. In its worldwide insurance programme, into which the NewCo Group would be assimilated, the CRH Group provides coverage for its operations at a level believed to be commensurate with the associated risks. In the event of failure of one or more of its insurance counterparties, the CRH Group and/or the Combined Group could be impacted by losses where recovery from such counterparties is not possible. | Insurance protection is maintained with leading, highly-rated international insurers with appropriate risk retention by wholly-owned insurance companies (captive insurers) and by insured entities in the context of the deductibles/excesses borne. The coverage includes property damage and business interruption, public and products liability/general liability, employer’s liability/workmens’ compensation, environmental impairment liability, automobile liability and directors’ and officers’ liability. Adequate coverage at reasonable rates is not always commercially available to cover all potential risks and no assurance can be given that the insurance arrangements in place would be sufficient to cover all losses or liabilities to which the CRH Group and/or the Combined Group might be exposed. The occurrence of a significant adverse event not covered, or only partially covered, by insurance could have a material adverse impact on the business, results of operations, financial condition or prospects of the CRH Group and/or the Combined Group. As at 31 December 2014, the total insurance provision, which is subject to periodic actuarial valuation and is discounted, amounted to €208 million (2013: €181 million); a substantial proportion of this figure pertained to claims which are classified as “incurred but not reported”. | |
CRH 59 |
Foreign currency translation | ||
Risk Factor | Discussion | |
The CRH Group’s activities are conducted primarily in the local currency of the country of operation resulting in low levels of foreign currency transactional risk. This situation is equally applicable to the activities of the NewCo Group. The principal foreign exchange risks to which the Consolidated Financial Statements of the CRH Group are exposed pertain to adverse movements in reported results when translated into euro (which is the CRH Group’s, and would be the Combined Group’s, reporting currency) together with declines in the euro value of net investments, which are denominated in a wide basket of currencies other than the euro. Closing of the proposed Acquisition will increase exposure to a number of currencies, which have hitherto been immaterial, and will introduce exposures to some new currencies. The most significant currency exposures for the Combined Group will be the US Dollar, the Canadian Dollar, the Swiss Franc, the Polish Zloty, the Pound Sterling and the Philippine Peso. | A significant proportion of the CRH Group’s revenues, expenses, assets and liabilities are denominated in currencies other than the euro, principally US Dollars, Swiss Francs, Polish Zlotys and Pounds Sterling. From year to year, adverse changes in the exchange rates used to translate these and other foreign currencies into euro have impacted and will continue to impact consolidated results and net worth. For additional information on the impact of foreign exchange movements on the Consolidated Financial Statements for the CRH Group for the year ended 31 December 2014, see the Business Performance Review section commencing on page 66 and note 21 to the Consolidated Financial Statements. | |
Goodwill impairment | ||
Risk Factor | Discussion | |
Significant under-performance in any of the CRH Group’s and/or the Combined Group’s major cash-generating units or the divestment of businesses in the future may give rise to a material write-down of goodwill, which would have a substantial impact on income and equity. | An acquisition generates goodwill to the extent that the price paid exceeds the fair value of the net assets acquired. Under IFRS, goodwill and indefinite-lived intangible assets are not amortised but are subject to annual impairment testing. Other intangible assets deemed separable from goodwill arising on acquisitions are amortised. A detailed discussion of the impairment testing process, the key assumptions used, the results of that testing and the related sensitivity analysis is contained in note 14 to the Consolidated Financial Statements on pages 159 and 160. | |
Whilst a goodwill impairment charge does not impact cash flow, a full write-down at 31 December 2014 would have resulted in a charge to income and a reduction in equity of €4.0 billion (2013: €3.7 billion). | ||
Inspections by the Public Company Accounting Oversight Board (“PCAOB”) | ||
Risk Factor | Discussion | |
Our auditors, like other independent registered public accounting firms operating in Ireland and a number of other European countries, are not currently permitted to be subject to inspection by the PCAOB, and as such, investors are deprived of the benefits of PCAOB inspections. | As a public company, our auditors are required by United States law to undergo regular PCAOB inspections to assess their compliance with United States law and professional standards in connection with their audits of financial statements filed with the SEC. Under Irish law, the PCAOB is currently unable to inspect and evaluate the audit work and quality control procedures of auditors in Ireland. Accordingly investors who rely on our auditors’ audit reports are deprived of the benefits of PCAOB inspections of auditors. | |
60 CRH |
Risks and Uncertainties Related to the Proposed Acquisition
This section documents the principal transaction-specific risks and uncertainties presented by the proposed Acquisition.
Closing of the proposed Acquisition is subject to the satisfaction (or waiver, where applicable) of various conditions precedent | ||||
Risk Factor | Discussion | |||
Closing of the proposed Acquisition is subject to the fulfilment of the following conditions: (i) the approval by CRH shareholders of the Resolution to undertake the proposed Acquisition at an Extraordinary General Meeting of CRH plc; (ii) successful completion of the proposed merger of Lafarge and Holcim; and (iii) the completion of certain local reorganisations by Lafarge and Holcim in advance of the proposed Acquisition. | There can be no guarantee that these conditions precedent will be met and that the proposed Acquisition will be completed as proposed or at all. | |||
A failure to consummate the proposed Acquisition would give rise to a number of risks. The most material of these risks are the following: | ||||
— | a decline in the market price of CRH’s Ordinary Shares; | |||
— | the incurrence of break fees as outlined on page 186; | |||
— | the failure to meet strategic objectives; and | |||
— | the incurrence of standby financing costs pending completion of the proposed Acquisition. | |||
Risks of executing the transaction could cause the market price of CRH’s Ordinary Shares to decline | ||||
Risk Factor | Discussion | |||
The market price of CRH’s Ordinary Shares may decline as a result of the proposed Acquisition. | Among other factors, the following could cause the market price of CRH’s Ordinary Shares to decline as a result of the proposed Acquisition: | |||
— | regulatory approvals may take longer than expected, may not be forthcoming or conditions may be imposed; | |||
— | the integration of the acquired businesses is delayed or unsuccessful leading to the failure to meet strategic objectives; | |||
— | the Combined Group does not achieve the anticipated benefits and synergies of the proposed Acquisition within the timescale envisaged by the CRH Board and management; and | |||
— | the effect of the proposed Acquisition on CRH’s consolidated financial results of operations falls short of the expectations of the CRH Board and management. | |||
CRH 61 |
The Combined Group may fail, or may take longer than currently anticipated, to realise the perceived benefits of the proposed Acquisition. In addition, the Combined Group may encounter difficulties in integrating the acquired entities into pre-existing organisational structures. | ||||
Risk Factor | Discussion | |||
There can be no assurance that the integration of the proposed Acquisition into the existing operations of the CRH Group will achieve the business growth opportunities, margin benefits, cost savings and other synergies anticipated by the CRH Board and management. Should the anticipated benefits and synergies fail to materialise or the quantum thereof falls short of expectations, the assumptions used to justify the consideration payable may prove to be incorrect and the results of operations and the financial condition of the Combined Group may be adversely affected. | The future prospects of the Combined Group will, in part, be dependent upon CRH’s ability to integrate the acquired entities. Some of the potential challenges in integration may not become known until after Closing. The key potential difficulties associated with integration of the NewCo Group could include the following: | |||
— | the complexity and costs of transferring employees and assets and consolidating and integrating operations, infrastructure, processes, procedures, systems, facilities, services and policies across different countries, jurisdictions, regulatory systems and cultures; | |||
— | ability to maintain employee engagement and retain and incentivise key employees; | |||
— | diversion of management time and resources away from the day-to-day operations of the CRH Group and disrupting business continuity; | |||
— | redeploying resources in different areas of operations causing disruption of the business; | |||
— | unforeseen legal, regulatory, contractual, labour and other issues arising from the proposed Acquisition together with ineffective mitigation thereof and limited recourse against the Sellers; | |||
— | unanticipated capital expenditure requirements; and | |||
— | the risk of the regulatory authorities requiring the CRH Group to sell assets below the valuation reflected in the purchase price. | |||
Difficulties experienced in the integration process could potentially lead to, amongst other matters, higher integration costs, lower benefits or cost savings, interruption of business operations and loss of customers, suppliers or key personnel, which could have a material adverse effect on the business, results of operations, overall financial condition and prospects of the Combined Group. | ||||
62 CRH |
Financing for the proposed Acquisition (i) will increase the CRH Group’s and/or the Combined Group’s leverage and interest costs; (ii) may reduce operating flexibility under existing financial covenants; and (iii) may adversely impact credit ratings and the ability to obtain additional financing for future opportunities | In order to finance the proposed Acquisition, the CRH Group plans to use existing cash resources and enter into new bank facilities (as well as using the proceeds of the placing by CRH of 74,039,915 new Ordinary Shares), which would increase its leverage and interest costs, may reduce its operating flexibility under the financial covenants for its existing debt and may adversely impact the CRH Group’s and/or the Combined Group’s credit ratings and its ability to obtain additional financing for future opportunities either in the medium or longer term. The incurrence of this additional indebtedness and the related increase in funding costs could result in downgrades of credit ratings potentially making future financing more difficult to obtain due to limitations imposed by financial covenants and perceptions about the CRH Group’s and/or the Combined Group’s ability to meet its debt obligations. | |
Transaction-related costs may exceed expectations | Should the proposed Acquisition proceed, CRH will incur costs in integrating the acquired entities and in delivering the synergies identified. The actual costs incurred may exceed current estimates and additional and unforeseen expenses may arise in connection with the proposed Acquisition. In addition, CRH has incurred and will incur legal, accounting and transaction fees and other costs relating directly to the proposed Acquisition, the majority of which are payable irrespective of Closing. Such costs could materially and adversely affect the realisation of synergies and the results of operations of the CRH Group and/or the Combined Group. | |
Reliance on third party information | Information has been provided to CRH by the Sellers in respect of the NewCo Group. Any failure by the Sellers to disclose matters that CRH is unaware of may affect the significance or accuracy of any such information. If any such undisclosed matters exist and are adverse to the NewCo Group, they may have an adverse effect on the Combined Group’s future financial condition and results of operations and/or may result in additional costs or liabilities to the Combined Group. | |
CRH 63 |
64 CRH
Preferred Materials performed the paving and supplied 36,240 tonnes of asphalt on Boyette Road, a 2.2 mile project in Lithia, Florida. |
Business Performance Review | ||||||
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– | Finance Director’s Introduction | 66 | ||||
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– | Contractual Obligations | 69 | ||||
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– | Operating Segment Reviews | 70 | ||||
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77 | ||||||
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CRH 65 |
CRH 37
BUSINESS REVIEW -Current Year
Chief Executive’s ReviewFinance Director’s Introduction
The following discussion should be read2014 was a year of growth for CRH, with improved performance in conjunction with the Consolidated Financial Statements of CRH that appear elsewhere in this Annual Report on Form 20-F.
The terms “ongoing”, “organic”, “underlying”, “like-for-like” and “heritage” have the same meaning in the discussion that follows.
Key Aspects of 2011 Results
Sales increased by just over 5% to€18.1 billion (2010:€17.2 billion). Underlying like-for-like sales advanced by just under 5% while incremental sales arising from 2010/2011 acquisitions outweighed the impact of business disposals and adverse exchange translation effects.
EBITDA (as defined)* amounted to€1,656 million, a€41 million increase on the€1,615 million reported for 2010. EBITDA (as defined)* is stated after charging costs of€61 million (2010:€100 million) associated with the Group’s ongoing restructuring initiatives.
Operating profit increased by 25% to€871 million (2010:€698 million) after restructuring and impairment charges of€82 million (2010:€202 million).
Profit before taxation of€711 million (2010:€534 million) showed an increase of 33% after charging total restructuring and impairment charges (including associates) of€93 million (2010:€224 million).
Earnings per share up 35% to 82.6c (2010: 61.3c) with dividend per share maintained at 62.5c. Dividend cover improved to 1.3 times from 1.0 times.
Year-end net debt of€3.5 billion† was in line with December 2010. CRH continues to have one of the strongest balance sheets in our sector with year-end net debt to EBITDA (as defined)* of 2.1 times and 2011 EBITDA (as defined)* to net interest ratio of 6.4 times.
My thanks to our world-wide team across 36 countries for their ongoing commitment and dedication throughout a challenging year.
|
38 CRH
Business Review
BUSINESS REVIEW -Current Year
Trading in the early months of 2011 benefited from a much more favourable weather backdrop than at the start of 2010. Reported sales revenue for the first half increaseddriven by 7%; on a like-for-like basis, excludingfavourable weather in Europe, and the impact of acquisitions, divestments and translation, underlying sales increased by 5%.
With increased strainssecond half benefiting from improved momentum in financial markets, the pace of underlying growth, particularly in core Eurozone markets, slowed through the third quarter while heavy September rainfall in parts of the United States also had an adverse impact. However,States. The Group continued to focus on cash generation finishing the year in a strong finishand flexible financial position. Net debt at year-end 2014 reduced by €0.5 billion compared to 2013. This was achieved with strong cash inflows from operations, and proceeds of €0.35 billion from disposals, partly offset by spend of €0.62 billion on acquisitions, investments and capital expenditure, and dividend payments of €0.36 billion.
Key Components of 2014 Performance
Overall sales for 2014 were 5% ahead of 2013, while organic sales from underlying operations were up 4%, reflecting strong favourable weather-impacted demand in Europe in the first half and increasing activity in the United States.
In Europe, after the encouraging start to the year with mild November/December weather conditions resulted in a 4% second-halfwhich saw like-for-like sales increase (5% underlying).
Overall sales revenue for the year of€18.1 billion was ahead of 2010. The underlying increase of 5% comprised a volume increase of approximately 3% and an increase of approximately 2% in average selling prices. This level of price increase, achieved in highly competitive markets, was not sufficient to recover the higher input costs experienced across the Group.
Europe Materials delivered improved overall profits despite energy input cost challenges and lower benefits fromby 6% helped by favourable early-season weather, trading in CO2 allowances. Results from operations in developing and stable regions, which account for roughly 85% of this segment’s EBITDA (as defined)*, were generally positive and benefited from acquisitions; however trading remained tough in the “austerity economies” of Ireland, Spain and Portugal, which together generated roughly 15% of segment EBITDA (as defined)*.
Europe Products made good overall progress in 2011, although with increasing uncertainty in Eurozone financial markets in the second half of the year sales momentum slowed compared with the first half. Higher restructuring costs and the absence of earnings from businesses disposed of resulted in a slight decline in overall EBITDA (as defined)*; however, with lower impairment charges operating profit showed a significant increase.
Europe Distribution had a landmark year as, assistedwas impacted by acquisitions, sales revenue exceeded the€4 billion level for the first time while margins moved ahead. Although demand moderated in the second half, this segment’s Repair, Maintenance and Improvement (RMI) exposure mitigated the slow-down.
The full year out-turn for Americas Materials was better than projected in our November trading statement as a favourable end to the construction season weather-wise enabled us to out-perform our earlier expectations. Total energy-related costs, including liquid asphalt, diesel, gasoline and fuel oils, as a proportion of segment sales, increased by over 2 percentage points. Against this backdrop, and with highly competitive markets, limiting the margin decline for this business to less than 1% was a considerable achievement.
Americas Products delivered improved results and a return to operating profit following significant impairment costs and tough trading in 2010. With higher fuel and other input costs, and the costs associated with the roll-out of the Building Solutions programme, like-for-like results in North America were below 2010. Lower profitability in Argentina led to a reduced contribution from South America.
Americas Distribution enjoyed good sales growth in 2011 and finished the year strongly. Although markets were competitive and product costs rose sharply, margins moved ahead at both EBITDA (as defined)* and operating profit level.
The cost reduction and operational excellence initiatives which commenced in 2007 continued in 2011 and cumulative annualised savings from these actions over the five years to 2011 now stand at€2 billion. The incremental savings generated in 2011 amounted to€154 million but were more than offset by input cost increases that were not recovered in pricing.
CRH 39
Business Review
BUSINESS REVIEW -Current Year
In Europe, the European Central Bank’s Long Term Refinancing Operations which commenced in late December have eased the pressures on funding in the Eurozone banking sector. However, the banking sector remains highly leveraged and continuing reductions in bank balance sheets are leading to lower corporate and personal lending. These factors are contributing to the current uncertainty in relation to the growth outlook for Europe in 2012. In the Americas, the flow of economic data in the US has been incrementally positive since the third quarter of 2011, with ongoing favourable job creation numbers and an improving growth outlook after a soft patch in the economy in mid-2011. These indicators suggest that the US should avoid a double-dip recession with some commentators now projecting more robust GDP growth in 2012 than that achieved overall in 2011.
It is still too early to assess the effect of recent financial market volatility on European construction prospects for 2012 although first half demand seems likely to suffer some impact. Nevertheless, for the year as a whole we currently expect resilient demand in Poland and Germany and only modest declines from a strong 2011 in Finland and Switzerland (these four countries accounted for roughly a quarter of 2011 Group sales), while our recently-commissioned cement plant in Ukraine will yield major operational improvements. Activity in our other European markets is likely to be more subdued than in 2011. While the outlook for the Benelux and France (together almost 20% of 2011 Group sales) has weakened, our significant RMI exposures in these countries should once again support performance in 2012. In the Americas, indications of a likely pick-up in new housing activity in the US have strengthened over recent months while there is increasing evidence that non-residential markets are beginning to bottom out. With the current extension to the Federal Highway Funding programme expiring at end-March, political debate on a renewed programme, or on further extensions to the existing programme, has intensified. Our expectation is that an extension at a funding level close to that provided for 2011 will eventually be agreed for 2012.
Assuming no major economic or energy market dislocations, we expect to generate further like-for-like revenue growth in 2012 with the achievement of targeted price increases a key priority. This combined with benefits from acquisitions completed in 2011 leads us to expect further progress in the year ahead.
40 CRH
Business Review
BUSINESS REVIEW -Current Year
Key Components of 2011 Performance
€ million | Revenue | EBITDA (as defined)* | Operating profit | Profit on disposals | Finance costs | Associates’ profit after tax | Pre-tax profit | |||||||||||||||||||||
2010 as reported | 17,173 | 1,615 | 698 | 55 | (247 | ) | 28 | 534 | ||||||||||||||||||||
Exchange effects | (243 | ) | (24 | ) | (4 | ) | (1 | ) | 5 | - | - | |||||||||||||||||
2010 at 2011 exchange rates | 16,930 | 1,591 | 694 | 54 | (242 | ) | 28 | 534 | ||||||||||||||||||||
Incremental impact in 2011 of: | ||||||||||||||||||||||||||||
2010 and 2011 acquisitions | 805 | 78 | 49 | - | (8 | ) | - | 41 | ||||||||||||||||||||
2010 and 2011 divestments | (469 | ) | (1 | ) | 16 | 17 | 5 | (3 | ) | 35 | ||||||||||||||||||
Restructuring costs | - | 39 | 39 | - | - | - | 39 | |||||||||||||||||||||
Impairment charges | - | - | 81 | - | - | 11 | 92 | |||||||||||||||||||||
Ongoing operations | 815 | (51 | ) | (8 | ) | (16 | ) | (12 | ) | 6 | (30 | ) | ||||||||||||||||
2011 as reported | 18,081 | 1,656 | 871 | 55 | (257 | ) | 42 | 711 | ||||||||||||||||||||
% change | +5% | +3% | +25% | +33% |
The table above analyses the change in results from 2010 to 2011.moderating trends across all three segments. Overall like-for-like sales for the year increased by 2%. EBITDA
(as defined)* margin increased due to increased capacity utilisation, efficiency measures and cost saving actions.
Against an improving market backdrop as the year progressed, like-for-like sales in the Americas were up 8% in the second half, compared with a first half increase of 4%. In our Materials business, like-for-like sales improved throughout the year and finished 7% ahead. Our Products and Distribution businesses which were impacted by unfavourable weather patterns in the early part of the year, benefited from improving demand in the second half particularly from new residential construction, and like-for-like sales were 5% ahead of 2010, the first annual organic sales increase for the Group since 2007.2013. With higher sales revenue, improved efficiencies and lower restructuring costs,good cost control, EBITDA (as defined)* was ahead of last year, although the impact of significant energy-related cost increases, particularlymargins improved in all three Americas segments.
1 See cautionary statement regarding forward-looking statements on our materials businesses in both Europepage 9.
* Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Americas, limitedGroup’s share of equity accounted investments’ result after tax.
66 CRH
During 2014, the increase to €€41 million (+3%). The full year depreciationUS Dollar remained relatively stable at approximately 1.33 against the euro, however the weakening of currencies like the Ukrainian Hryvnia and amortisation expense, before impairment charges, was 6% lower than last year at €€764 million (2010: €815 million); this, combined with a €€81 million reduction in impairment charges, contributed to a 25% improvement in operating profit. Group operating profit margin improved to 4.8% (2010: 4.1%), the first increase in this metric since 2007. Additional detail on the sales, EBITDA (as defined)* and operating profits for each of CRH’s six reporting segments is set out in the Segment Reviews on pages 45 to 53.
Currency movements had a relatively minor impact on 2011 results, with a 12% strengthening of the average Swiss Franc exchange rate versus the euroArgentine Peso, partly offset by the weakerstrengthening of Sterling, were the principal factors behind the exchange effects shown in the table below. The average US Dollar (-5%) and average Polish Zloty (-3%) rates.
Acquisitions completed in 2010 and 2011 contributed incremental sales revenue of€805 million and operating profit of€49 million in 2011. The impact of divested activities was a negative€469 million in sales, and, as these operations generated net losses in 2010, the disposal impact at operating profit level was a contribution of€16 million.
We continue to review and, when required, extend our cost reduction programme. Costs of€61 million incurred in 2011 to implement these savings were€39 million lower (2010:€100 million).
Impairment charges for 2011 at€32 million were significantly lower (2010:€124 million), and included€11 million (2010:€22 million) related to our investment in associates.
Revenue from ongoing operations increased by€815 million (+5%) on a like-for-like basis in 2011, with the Europe segments accounting for 70%year-end 2014 exchange rates of the increase. Despitemajor currencies impacting on the recovery in sales, price competition remained intense and higher input costs, especially energy-related costs, were not fully recovered and as a result organic operating profit declined by€8 million.
Net finance costs of€257 million were slightly higher than 2010.
CRH 41
Business Review
BUSINESS REVIEW -Current Year
Key Financial Performance Indicators
Some key financial performance indicators which, taken together, are a measure of performance and financial strength,Group are set out below.on page 145.
2011 | 2010 | |||||||
EBITDA (as defined)* margin | 9.2% | 9.4% | ||||||
Operating profit margin | 4.8% | 4.1% | ||||||
EBITDA (as defined)* to net interest ratio | 6.4x | 6.5x | ||||||
Effective tax rate | 16.0% | 17.8% | ||||||
Shareholder return | +3% | -16% | ||||||
Net debt as % of total equity | 33% | 33% | ||||||
Net debt as % of market capitalisation | 32% | 32% |
The Group EBITDA (as defined)* margin declined by 0.2 percentage points asWe continued to advance the significant increasecost-reduction initiatives which have been progressively implemented since 2007 and which by year-end had generated cumulative annualised savings of over €2.5 billion. Total restructuring costs associated with these initiatives (which generated savings of €118 million in input costs was not fully recovered2014) amounted to €51 million in selling prices. Operating profit margin however improved by 0.7 percentage points in 2011 to 4.8%, reflecting the lower impairment charges this year. Management believes that the EBITDA (as defined)* to net interest ratio is useful to investors because it matches the earnings2014 (2013: €71 million) and cash generated by the business to the underlying funding costs. With similar levels of EBITDA (as defined)* and interest in both 2010 and 2011, EBITDA (as defined)* to net interest ratio was little changed at 6.4 times (2010: 6.5 times).were once again heavily focussed on our European Divisions.
The effective tax rate of 16% of pre-tax profit was lower than 2010 (17.8%), primarily reflecting the lower non-tax-deductible impairment charges.
The share price at 31 December 2011 was€15.36, 1% lower than the 2010 closing price (€15.50); however, with the 2011 dividend at 62.5c, the net return for shareholders for the year was a positive 3%. This follows returns of -16% in 2010 and +22% in 2009. With effect from 16 December 2011, CRH is included in the FTSE 100 and FTSE All Share indices. At year-end 2011, CRH’s market capitalisation was€11.0 billion (2010:€11.0 billion), ranking the Group at number three in its building materials peer group.
Total shareholders’ equity increased by€0.2 billion to€10.6 billion during 2011, with the net comprehensive income for the year of€0.5 billion and offset by dividends of€0.3 billion. Year-end total interest-bearing loans and borrowings decreased by€0.4 billion to€5.0 billion (2010:€5.4 billion). Year-end net debt of€3.5 billion† was broadly in line with year-end 2010, and accordingly the percentage of net debt to total equity remained at 33% at year-end 2011. With year-end market capitalisation broadly in line with year-end 2010, the debt/market capitalisation percentage also remained in line with 2010 at 32%.
Liquidity and Capital Resources – 20112014 compared with 20102013
The comments that follow refer to the major components of the Group’s cash flows as shown in the Consolidated Statement of Cash Flows on page 103.138.
Cash flows from operations
Net operatingThroughout 2014 the Group continued to keep a focus on cash inflows amounted to€1,026 millionmanagement, targeting in 2011, a reductionparticular working capital and capital expenditure. Year-end working capital of€365 million €2 billion represented just 10.6% of sales, an improvement compared with 2010, largely asyear-end 2013 (11.2%). This performance delivered a result of net working capital movements. Working capital levels are driven by trends in overall sales and also by seasonal weather patterns. The organic sales growth achieved in 2011, combined with the strong finish topositive movement (inflow) for the year as a result of better weather in November/December 2011 (compared with the same period in 2010), resulted in a net working capital outflow of€211€35 million in 2011 (2010: inflow of€142(2013: €77 million). Despite this net outflow, our working capital metrics for 2011 remained in line with 2010,
42 CRH
Business Review
BUSINESS REVIEW -Current Year
maintaining the strong progress achieved in 2009 and 2010. CRH believes that its current working capital is sufficient for the Group’s present requirements.
The key components Strong control of the movementspending on property, plant and equipment resulted in working capital are analysedlower cash outflows of €435 million (2013: €497 million), with spend in note 20 to the Consolidated Financial Statements.
Cash flows from investing and financing activities
At€576 million, capital expenditure represented 3.2% of Group revenue (2010: 2.7%) and amounted to 78%2014 representing 69% of depreciation (2010: 59%(2013: 74%).
Key Components of 2014 Performance
| ||||||||||||||||||||||||||||
€ million
| Revenue
| EBITDA
| Operating
| Profit on
| Finance
| Equity
| Pre-tax
| |||||||||||||||||||||
2013 | 18,031 | 1,475 | 100 | 26 | (297 | ) | (44 | ) | (215 | ) | ||||||||||||||||||
Exchange effects | (62 | ) | (11 | ) | (4 | ) | - | (1 | ) | 5 | - | |||||||||||||||||
2013 at 2014 exchange rates | 17,969 | 1,464 | 96 | 26 | (298 | ) | (39 | ) | (215 | ) | ||||||||||||||||||
Incremental impact in 2014 of: | ||||||||||||||||||||||||||||
- 2014 and 2013 acquisitions | 237 | 16 | 4 | - | - | (2 | ) | 2 | ||||||||||||||||||||
- 2014 and 2013 divestments | (25 | ) | - | 1 | 43 | - | (1 | ) | 43 | |||||||||||||||||||
- Restructuring costs | - | 20 | 20 | - | - | - | 20 | |||||||||||||||||||||
- Pension/CO2 gains | - | (23 | ) | (23 | ) | - | - | - | (23 | ) | ||||||||||||||||||
- Impairment charges | - | - | 601 | - | - | 105 | 706 | |||||||||||||||||||||
Ongoing operations | 731 | 164 | 218 | 8 | 10 | (8 | ) | 228 | ||||||||||||||||||||
2014 | 18,912 | 1,641 | 917 | 77 | (288 | ) | 55 | 761 |
† CRH’s share of after-tax profits of joint ventures and associated undertakings |
* Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax.
The Group completed 45 acquisitions and investment transactions
CRH 67 |
Business Performance Review| continued
Other major movements in 2011 spending a total of€610 million (2010:€567 million). Details of the acquisitions completed during 2011 are set out in note 31 to the Consolidated Financial Statements.
Proceeds (including net debt assumedduring the year comprised acquisition spend of €181 million on 21 transactions which was more than offset by purchasers)divestment and disposal proceeds of €345 million.
Cash dividend payments of €357 million and proceeds of €22 million from disposalexercise of non-current assetsshare options were similar to last year.
Year-end interest-bearing loans and businesses amountedborrowings increased by €0.3 billion to€492 million (2010:€188 million), reflecting €5.9 billion (2013: €5.5 billion). Net debt of €2.5 billion† at 31 December 2014 was €0.5 billion lower than year-end 2013. At year-end the divestment of our European Insulation and Climate Control businesses, Premier Periclase in Ireland and our 35% associate investment in the Trialis distribution business in France.
Exchange rate movements during 2011 increased the euro amount of net foreign currency debt by€59 million principally due to the 3% strengthening in the year-end exchange rate of the US$stronger US Dollar (1.2141 versus the euro from 1.3362compared with 1.3791 at end-2010 to 1.2939 at end-2011.year-end 2013) was the main factor in the negative translation and mark-to-market impact of €181 million on net debt.
BorrowingsThe Group is in a strong financial position. It is well funded and Credit Facilities
An analysis of the components of net debt, together with information on the currency and maturity profile of our debt and on the interest rates applicable to that debt, are set out in notes 22 to 25 to the financial statements.
Year-end 2011 net debt of€3.5 billion† was in line with year-end 2010. Net debt/EBITDAcover (EBITDA (as defined)* improved to 2.1/Net Interest) of 6.7 times (2010: 2.2 times) and EBITDA (as defined)* to net interest ratio foris significantly higher than the year was 6.4 times (2010: 6.5 times). 99% of the Group’s gross debt was term/bond debt or drawn under committed term facilities, 91% of which mature after more than one year.
In August 2011 CRH completed a new 5-year€1.5 billion committed revolving facility provided by 13 international banks and cancelled€0.6 billion of shorter-dated facilities. At year-end 2011, total undrawn committed bank facilities amounted to€1.9 billion; this, together with cash and liquid investments of€1.3 billion, leavesminimum requirements in the Group with significant liquidity at that date. Since year-end, the Group has issued€500 million in 7-year Eurobonds at a coupon rate of 5%, the Group’s lowest ever coupon for a maturity greater than 5 years which hascovenant agreements – further enhanced the Group’s financial resources. CRH believes that its current facilities are sufficient to meet its capital expenditure and other expenditure requirements for 2012.
CRH remains committed to maintaining an investment grade credit rating.
Lender Covenants
The Group’s major bank facilities and debt issued pursuant to Note Purchase Agreements in private placements require the Group to maintain certain financial covenants, details of which are set out in note 23 to the financial statements.Consolidated Financial Statements.
We successfully completed two bond issues during 2014: in July €600 million of 7-year euro bonds were issued with a coupon of 1.75% and in September we completed our first Swiss Franc bond issuance for a further CHF330 million of 8-year bonds with a coupon of 1.375% . These were the lowest-ever coupons obtained by the Group and reflect CRH’s commitment to managing debt and maintaining an investment grade credit rating.
The Group isremains in a very strong financial position with total liquidity at end 2014 of €5.9 billion comprising €3.3 billion of cash and cash equivalents on hand and €2.6 billion of committed undrawn facilities which do not aware of any stated events of default as defined inmature until 2019. These cash balances were enough to meet all maturing debt obligations for the Agreements asnext five years and the weighted average maturity of the balance sheet dateremaining term debt was eight years.
On 1 February 2015, CRH announced that it had made a binding irrevocable offer to acquire certain businesses and assets of Lafarge S.A. (“Lafarge”) and Holcim Ltd (“Holcim”) for a total enterprise value of €6.5 billion. The proposed Acquisition is subject to: (i) CRH shareholder approval at an Extraordinary General Meeting to be held on 19 March 2015; (ii) the successful completion of the proposed merger of Lafarge and Holcim; and (iii) the completion of certain local reorganisations by Lafarge and Holcim in advance of the acquisition.
The Board believes that this acquisition, which arises from the decision by Lafarge and Holcim to divest certain of their businesses and assets in order to obtain regulatory clearances necessary to complete their merger, represents a compelling strategic opportunity for CRH. The acquisition will be funded through a combination of €2 billion from existing cash resources, the proceeds of €1.6 billion from the placing, which completed on 5 February 2015, of 74,039,915 Ordinary Shares in CRH plc (which rank pari passu in all respects with the existing Ordinary Shares including the right to receive all future dividends declared or paid after the date of this Annual Report.
CRH 43
Business Review
BUSINESS REVIEW -Current Year
Off-Balance Sheet Arrangements
CRH does not have any off-balance sheet arrangements that have, or are reasonably likely to have a, current or future effect on CRH’s financial condition, changesthe placing) and by new debt facilities in financial condition, revenues or expenses, resultsthe amount of operations, liquidity, capital expenditures or capital resources that is material to investors.
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 2011 is as follows:
Payments due by period | Total €m | Less than 1 year €m | 1-3 years €m | 3-5 years €m | More than 5 years €m | |||||||||||||||
Interest-bearing loans and borrowings* | 4,710 | 511 | 1,484 | 1,645 | 1,070 | |||||||||||||||
Finance leases | 25 | 3 | 6 | 3 | 13 | |||||||||||||||
Estimated interest payments on contractually-committed debt and finance leases** | 1,377 | 287 | 478 | 280 | 332 | |||||||||||||||
Deferred acquisition consideration | 151 | 28 | 64 | 30 | 29 | |||||||||||||||
Operating leases | 1,250 | 251 | 368 | 247 | 384 | |||||||||||||||
Purchase obligations† | 293 | 248 | 33 | 7 | 5 | |||||||||||||||
Retirement benefit obligation commitments†† | 81 | 8 | 16 | 14 | 43 | |||||||||||||||
Total | 7,887 | 1,336 | 2,449 | 2,226 | 1,876 |
Financial Risk Management
The Board of Directors sets the treasury policies and objectives of the Group, which include controls over the procedures used to manage financial market risks. Qualitative and quantitative information about management of market risks€2.9 billion. Further details are set out in detail belowon page 44 and in note 2133 to the Consolidated Financial Statements.
Other than the events above, no significant changes have occurred since the balance sheet date.
Business Performance Reviews
The sections on pages 70 to 76 outline the scale of CRH’s business in 2014, and provide a more detailed review of performance in each of CRH’s six reporting segments.
Quantitative and Qualitative Information about Market Risk
The Group addresses the sensitivity of the Group’s interest rate swaps and debt obligations to changes in interest rates in a sensitivity analysis technique that measures the estimated impacts on the income statement and on equity of either an increase or decrease in market interest rates or a strengthening or weakening in the US Dollar against all other currencies, from the rates applicable at 31 December 2011,2014, for each class of financial instrument with all other variables remaining constant. The Group hastechnique used a sensitivity analysis technique that measures the estimated impact on profit before tax in the Consolidated Income Statement and on total equity arising on net year-end floating rate debt and on year-end equity, based on either an increase/decrease of 1% and 0.5% in floating interest rates or a 5% and 2.5% strengthening/weakening in the US$/€/US$ exchange rate, from the rates applicable at 31 December 2011, with all other variables remaining constant.rate. The US$/€/US$ rate has been selected for this sensitivity analysis given the materiality of the Group’s activities in the United States. This analysis, set out in note 21 to the Consolidated Financial Statements, is for illustrative purposes only as in practice interest and foreign exchange rates rarely change in isolation.
Quantitative and Qualitative information and sensitivity analysis of market risk is contained in notes 21-2520 to 24 to the Consolidated Financial Statements.
Other than the Eurobond issue referred to in the “Borrowings and Credit Facilities” section on page 43 (see also note 23 to the Consolidated Financial Statements), no significant changes have occurred since the balance sheet date.
44 CRH
Business Review
BUSINESS REVIEW -Current Year
Europe Materials
2011 overview
Results | % Change | 2011 | 2010 | Total Change | Analysis of change | |||||||||||||||||||||||||||||||||
€ million | Organic | Acquisitions | Divestments | Restructuring | Exchange | |||||||||||||||||||||||||||||||||
Sales revenue | +12% | 2,985 | 2,665 | +320 | +243 | +110 | -35 | - | +2 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | +3% | 436 | 423 | +13 | -18 | +17 | -1 | +14 | +1 | |||||||||||||||||||||||||||||
Operating profit | +5% | 264 | 251 | +13 | -13 | +10 | - | +14 | +2 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 14.6% | 15.9% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 8.8% | 9.4% | ||||||||||||||||||||||||||||||||||||
Restructuring costs amounted to€19 million (2010:€33 million); no impairment charges were incurred (2010: nil) |
Like-for-like sales increased by 9% in 2011, with improved construction activity in the more stable European economies and stronger growth in the developing economies to the east more than offsetting declines in western and south-western Europe. With the benefit of contributions from acquisitions, profits were ahead of last year; however good improvements in pricing as the year progressed, together with greater alternative fuel usage, did not offset the impact of lower benefits from trading of CO2 allowances and margins declined. Excluding the impact of CO2 allowances (€38 million in 2011 compared with€67 million in 2010), underlying EBITDA (as defined)* increased by€11 million for the year (and by€33 million in the second half), EBITDA (as defined)* margin was stable and our operating profit margin improved.
2011 saw a further pick-up in acquisition activity with€232 million spent on a total of 7 transactions, of which the most significant was the expansion of the Division’s activities in Benelux with the acquisition of VVM, a cement grinding and readymixed concrete business in Belgium. We continued to invest in our associate Yatai Building Materials as it expanded its presence in northeastern China. In 2011 we sold Premier Periclase, our Irish seawater magnesia operation.
Ireland, Portugal, Spain
In Ireland, activity again fell and cement volumes were 16% lower than 2010. Our cost and capacity reduction programmes continued during 2011. With lower restructuring charges operating losses reduced compared with 2010. In Portugal, activity levels, particularly in the public sector, fell steeply and cement volumes were 15% lower. Our 49% joint venture, Secil, was impacted by the reduced domestic construction activity, although prices improved and Secil maintained a high level of exports. Overall operating profit was down on 2010. In Spain, construction activity fell by a further 19% with declines across all sectors and results were lower than 2010.
Switzerland, Finland, Benelux
Construction activity in Switzerland remained robust in 2011; however, the strength of the Swiss Franc contributed to some pricing pressures in the second half of the year. With the help of acquisitions, volumes in both our cement and aggregates operations continued to be strong and operating profit improved. Construction output in Finland grew by almost 3%, led by increased activity in the residential sector. Non-residential construction recovered slightly, while infrastructure volumes were steady. Overall cement volumes increased by 14% and this, combined with good volumes in our downstream businesses, ongoing cost reduction programmes and increased use of alternatives fuels, led to increased operating profit. In the Benelux, our readymixed concrete and aggregates business benefited from higher volumes; in an increasingly competitive environment underlying operating profit was marginally ahead of 2010. VVM, acquired in August 2011, has traded in line with expectations.
As disclosed in note 20 to the Consolidated Financial Statements, net debt comprises interest-bearing loans and borrowings, cash and cash equivalents, and derivative financial instruments. |
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of |
68 CRH |
Off-Balance Sheet Arrangements
CRH 45does not have any off-balance sheet arrangements that have, or are reasonably likely to have a, current or future effect on CRH’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Business Review
BUSINESS REVIEW -Current Year
CentralAn analysis of the maturity profile of debt, finance and Eastern operating leases, purchase obligations, deferred and contingent acquisition consideration and pension scheme contribution commitments at 31 December 2014 is as follows:
Contractual Obligations
| ||||||||||||||||||||
Payments due by period
| Total
| Less than
| 1-3 years
| 3-5 years
| More than
| |||||||||||||||
Interest-bearing loans and borrowings1
| 5,742 | 452 | 1,372 | 1,036 | 2,882 | |||||||||||||||
Finance leases
| 13 | 2 | 4 | 3 | 4 | |||||||||||||||
Estimated interest payments on contractually-committed debt and finance leases2
| 1,149 | 253 | 364 | 227 | 305 | |||||||||||||||
Deferred and contingent acquisition consideration
| 207 | 59 | 118 | 16 | 14 | |||||||||||||||
Operating leases3
| 1,390 | 310 | 414 | 249 | 417 | |||||||||||||||
Purchase obligations4
| 263 | 226 | 30 | 3 | 4 | |||||||||||||||
Retirement benefit obligation commitments5
| 154 | 26 | 49 | 31 | 48 | |||||||||||||||
Total
| 8,918 | 1,328 | 2,351 | 1,565 | 3,674 |
1 Of the €5.7 billion total gross debt, €0.1 billion is drawn on revolving facilities which may be repaid and redrawn up to the date of maturity. The interest payments are estimated assuming these loans are repaid on facility maturity dates. | ||
2 These amounts have been estimated on the basis of the following assumptions: (i) no change in variable interest rates; (ii) no change in exchange rates; (iii) that all debt is repaid as if it falls due from future cash generation; and (iv) none is refinanced by future debt issuance. | ||
3 Includes €54 million in relation to businesses classified as held for sale. See further details in note 4 to the Consolidated Financial Statements. | ||
4 Includes contracted for capital expenditure. A summary of the Group’s future purchase commitments as at 31 December 2014 for capital expenditure are set out in note 13 to the Consolidated Financial Statements. These expenditures for replacement and new projects are in the ordinary course of business and will be financed from internal resources. | ||
5 Represents the contracted payments related to our pension schemes in the United Kingdom and Ireland. This includes €65 million in relation to schemes reclassified as held for sale. See further details in note 27 to the Consolidated Financial Statements. |
CRH 69 |
Europe Eastern Mediterranean, AsiaHeavyside
In Poland, construction activity was very strong particularly
Results
|
|
|
Analysis of change
|
| ||||||||||||||||||||||||||||||||||||||||||||
€ million
| % Change
| 2014
| 2013
| Total Change
| Organic
| Acquisitions
| Divestments
| Restructuring/ Impairment
| Pension/ CO2 gains
| Exchange
| ||||||||||||||||||||||||||||||||||||||
Sales revenue | 4% | 3,929 | 3,786 | 143 | 105 | 51 | -4 | - | - | -9 | ||||||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | 17% | 380 | 326 | 54 | 47 | 2 | 1 | 22 | -11 | -7 | ||||||||||||||||||||||||||||||||||||||
Operating profit | 138% | 151 | -395 | 546 | 73 | -2 | 1 | 489 | -11 | -4 | ||||||||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin |
| 9.7% | 8.6% | |||||||||||||||||||||||||||||||||||||||||||||
Operating profit/sales |
| 3.8% | -10.4% | |||||||||||||||||||||||||||||||||||||||||||||
No pension restructuring gains were recorded (2013: €12 million) Gains from CO2trading amounted to €9 million (2013: €8 million) |
|
Restructuring costs amounted to €15 million (2013: €37 million) Impairment charges of €35 million were incurred (2013: €502 million) |
| |||||||||||||||||||||||||||||||||||||||||||||
The commentary below excludes the impact of impairment charges on operating profit.
Excellent weather conditions, especially in the first quarter, provided a platform for a like-for-like sales increase of 7% in the first six months. With sales marginally behind 2013 in the second half, ofoverall like-for-like sales for the year. Ouryear increased by 3%. The EBITDA (as defined)* margin improved significantly due to increased capacity utilisation, efficiency measures, cost savings and relatively stable input costs.
Western Europe
Sales increased by 4% in 2014 with double-digit growth in Ireland and the UK partly offset by declines in the Benelux and France. EBITDA (as defined)* increased significantly, mainly driven by excellent results in the UK.
With the residential construction market remaining strong in Switzerland, our cement volumes were up 16%, and aggregates and concrete volumes were also well8% ahead of 2010 mainly due2013, although we continued to completion of infrastructure projectsexperience price pressure. Prices in advance of the European football championship in mid-2012. Activity indownstream businesses were stable while volumes declined slightly. Overall operating profit declined. In the UK the residential market started to recover after tworemained very strong both for our clay and concrete businesses, and sales and operating profit increased during the year. There was a mixed outcome in the Benelux. While overall demand in the Netherlands was weak, years. Some price improvement was achieved which, combinedresulting in lower volumes for readymixed concrete and landscaping products, cement volumes remained in line with the increased volumes,prior year and in Belgium were better than in 2013. Both markets experienced significant price pressure and operating profit was lower than prior year. In Ireland an increase in residential activity in Dublin resulted in a significant improvementhigher volumes, however prices remained competitive due to overcapacity in the market. Overall operating profit was in line with 2013.
Construction output in France continued to decline and precast concrete volumes fell sharply resulting in lower operating profit. In Ukraine,Germany, volumes were higher in our concrete landscaping activity and prices remained under pressure; underlying operating profit was in line with 2013. Residential activity in Denmark improved, and although pricing remained difficult due to the overcapacity in the market; operating profit increased. In Spain, the decline in national cement volumes moderated, while volumes for our cement business in the Basque region were slightly ahead of 2013; overall operating profit was ahead of the 2013 outcome.
Eastern Europe
Our operations benefited from favourable weather at the start of the year, with like-for-like sales up 17%. Although clinker production from9% in the new kiln commencedfirst half. However, sales fell by 6% in the second half, results were affectedresulting in a marginal increase in like-for-like sales for the year overall. The slight improvement was achieved against a backdrop of political turmoil in Ukraine offset by improved demand in Poland. A relatively stable input cost environment, together with ongoing efficiency measures, resulted in an overall stable EBITDA (as defined)* margin.
Construction output in Poland increased by 5% in 2014, reflecting an early start to the higher running costs ofseason due to very mild weather in the old plantfirst quarter, stronger economic growth and a pick-up in the overall operating result was lower. In Turkey, while domesticpreviously sluggish residential sector. National cement volumes for our 50% joint venture in the Aegean regionyear increased by 20% compared with 2010, export6%. Our readymixed concrete and landscaping volumes fell, resultingalso increased. While prices for many of our products remained under pressure, operating profit in a total net volume increasePoland increased due to strong volumes and the benefit of 7%. Operating profit was higher than 2010. In southern India, market demand weakened across our 50% cement joint venture’s core markets; however, price improvements delivered higher operating profit. In China, further growthpreviously implemented cost-reduction programmes. Despite the uncertain political backdrop in construction, driven primarily by improved residential activityUkraine and a 13% reduction in national construction output, our like-for-like cement volumes were only down 1% on 2013 reflecting the concentration of our plants in western Ukraine and the ongoing commitment and dedication of our Ukrainian-based team. Due to better pricing, continued roll-out of major infrastructure projects, saw cement demand grow by over 10% in the northeastern region, where our wholly-owned and 26% associate operations are located. In this environment, volumes, selling prices and profitability moved ahead strongly.
Outlook - Europe Materials
The outlook remains challenging for Ireland, Portugal and Spain. However, capacity reduction,focus on cost efficiencies and improved usethe full-year benefit of alternative fuels should help our businesses to maintain margins. We expectthe acquisition of Mykolaiv, operating profit in local currency was ahead of 2013. Construction output in Finland remained relatively weak in 2014 mainly as a modestresult of a continuing decline in overallhousing starts and a 2% drop in our cement volumes. Volumes and prices in readymixed concrete and aggregates were also under pressure and operating profit was below 2013. Sales and operating profit were ahead in 2014 in our concrete products operations in Romania, Hungary and Slovakia as a result of improved activity.
Outlook
Western Europe: In the Netherlands we expect to see further improvements in the residential sector, which should have a positive impact in 2015, while the non-residential and infrastructure sectors are expected to improve marginally. In Switzerland construction activity in Switzerland, Finland and the Benelux. The pace of construction demand in Poland and Ukraine should be robust in the run up to the EURO 2012 football championship while a full year’s contribution from our new cement plant in Ukraine will result in cost efficiencies and improved margins. Cement demand is expected to continuedecline slightly but remain on a relatively high level with some improvement from larger infrastructure (tunnel) projects, which are expected to grow in both of our Asian markets, albeit at a slower rate as tighter government fiscal strategy impacts the level of construction activity.
Americas Materials
2011 overview
Results | Analysis of change | |||||||||||||||||||||||||||||||||||||
€ million | % Change | 2011 | 2010 | Total Change | Organic | Acquisitions | Divestments | Restructuring | Exchange | |||||||||||||||||||||||||||||
Sales revenue | - | 4,395 | 4,417 | -22 | +59 | +130 | - | - | -211 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | -6% | 530 | 566 | -36 | -37 | +20 | - | +8 | -27 | |||||||||||||||||||||||||||||
Operating profit | -8% | 264 | 288 | -24 | -28 | +10 | - | +8 | -14 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 12.1% | 12.8% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 6.0% | 6.5% | ||||||||||||||||||||||||||||||||||||
Restructuring costs were€9 million (2010:€17 million); no impairment charges were incurred (2010: nil) |
While sales revenue remained stable, energy cost increases and pricing pressures presented considerable challenges throughout 2011. Aggressive actions to reduce variable and fixed costs moderated the decline in operating profit. Overall US Dollar EBITDA (as defined)* was 2% lower than 2010 with operating profit down 4%.
Americas Materials completed 19 acquisitions in 2011 with a total spend of€218 million, adding 23 quarries (538 million tonnes of reserves), 13 asphalt plants and 9 readymixed concrete plants with annual production of 5.5 million tonnes of aggregates, 1.6 million tonnes of asphalt and 0.3 million cubic metres of readymixed concrete.
Energy and Other Costs
The price of bitumen, a key component of asphalt mix, rose by 14% in 2011 following a similar increase in 2010. Prices of diesel and gasoline, important inputs to aggregates, readymixed concrete and paving
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of |
46 CRH
Business Review
70 CRH |
commence in 2015. The outlook for construction output in Belgium is flat. Ireland should continue to grow with overall construction activity mainly driven by the residential segment. France is expected to decline further especially in the infrastructure sector. The outlook for Germany and Denmark is positive, but showing only modest growth. Spain remains challenging and we expect that 2014 was the bottom of the cycle, with moderate improvements anticipated in 2015. Europe Lightside Results Analysis of change € million % 2014 2013 Total Organic Acquisitions Restructuring/ Pensions Exchange Sales revenue EBITDA (as defined)* Operating profit EBITDA (as defined)* margin Operating profit/sales No pension restructuring gains were recorded (2013: €1 million) The commentary below excludes the impact of impairment charges on operating profit. 2014 saw good progress for Europe Lightside, with our portfolio of businesses benefiting from mild weather early in the year. Like-for-like sales were 6% ahead of 2013, helped by good export levels to markets outside of Europe. Market demand in the Netherlands and France remained weak, while activity in Germany, Belgium and Switzerland was more resilient. The UK experienced robust growth, particularly in residential construction. With the benefit of new product innovation, market share gains and cost reduction initiatives, the Division achieved substantial growth in both EBITDA (as defined)* and operating profit margins. Construction Accessories This division supplies a broad range of connecting, fixing and anchor systems to the construction industry. Like-for-like sales grew by almost 6% in 2014, with a significant increase in operating profit.Engineered Accessories benefited from new product innovation and previous restructuring initiatives. Our businesses in Germany and the UK delivered strong growth in operating profits, while Switzerland also performed well. The more commodity-focussedBuilding Site Accessories businesses had a mixed year, with better performances in the UK, Belgium and Spain offset by rationalisation costs and more difficult trading conditions in Germany and France. Shutters & Awnings Our operations in this division serve the attractive RMI and residential end-use markets, supplying sun protection, energy- saving, and outdoor living technologies. The Netherlands business benefited from the introduction of innovative new products with strong margins. The UK business also delivered improved sales and margins. In Germany, strong demand for our awnings products was offset by a weaker performance in the shutters business due to lower exports to France and restructuring measures. Overall, like-for-like sales and operating profits increased. Fencing & Cubis OurPermanent Fencing business again experienced difficult markets, especially in the Netherlands, although a number of initiatives contributed to improved sales and operating profits. Despite challenging market conditions, results forMobile Fencing were only slightly lower year-on-year, as a result of various operational excellence measures.Cubis, our composite access chamber business, had another good year in which sales and operating profits increased due to strong UK demand and the introduction of a range of new products. Outlook While we are positive about the UK and Switzerland in 2015, we expect France to remain challenging, and are cautious about the outlook for Germany and the Netherlands. Given Europe Lightside’s robust business mix, we anticipate further organic growth in 2015, achieved through new products, maximising export opportunities and a continued RMI focus. This growth, combined with commercial and operational excellence programmes, is expected to deliver further improvement in our operating profit in the year ahead.BUSINESS REVIEW -Eastern Europe:Current Year The growth in activity in Poland during 2014 is expected to continue to be led by a pick-up in road programme activity in the second half of 2015. The outlook for Ukraine is uncertain; we expect construction activity to decline, and the local currency is expected to remain very weak. The outlook remains challenging for Finland, although with the benefits of cost efficiencies we expect to improve margins. Further growth is expected in Romania, Hungary and Slovakia.
Change
Change
Impairment 7% 913 856 57 53 - - - 4 32% 94 71 23 22 - 1 -1 1 154% 71 28 43 31 - 14 -1 -1 10.3% 8.3% 7.8% 3.3% Restructuring costs amounted to €5 million (2013: €6 million) No impairment charges were recorded (2013: €13 million) * Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax.
CRH 71 |
Europe Distribution
Results
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Analysis of change
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| ||||||||||||||||||||||||||||||||||||||||
€ million
| %
| 2014
| 2013
| Total
| Organic
| Acquisitions
|
Restructuring/
| Pensions
| Exchange
| |||||||||||||||||||||||||||||||||||
Sales revenue | 2% | 3,999 | 3,936 | 63 | 7 | 41 | - | - | 15 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | 2% | 190 | 186 | 4 | 15 | - | - | -11 | - | |||||||||||||||||||||||||||||||||||
Operating profit | 6% | 112 | 106 | 6 | 14 | -1 | 4 | -11 | - | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin |
| 4.8% | 4.7% | |||||||||||||||||||||||||||||||||||||||||
Operating profit/sales |
| 2.8% | 2.7% | |||||||||||||||||||||||||||||||||||||||||
No pension restructuring gains were recorded (2013: €11 million)
|
| Restructuring costs amounted to €4 million (2013: €4 million) No impairment charges were recorded (2013: €4 million)
|
|
With the benefit of mild weather in the early months of 2014, first-half like-for-like sales increased by 30%4%. Although the Netherlands saw some recovery in consumer confidence as the year progressed, financing conditions remained tight; our other key markets, particularly Switzerland, France and 28%Germany, experienced more subdued demand and intense competition. While sales in the third quarter declined by 4% on a like-for-like basis, by December activity had flattened to a level similar to last year, resulting in a full-year like-for-like sales outturn that was broadly similar to 2013. With the benefit of procurement and other commercial excellence initiatives, and in spite of the absence in 2014 of the once-off pension gain of €11 million reported in 2013, overall operating profit and margin was ahead of last year.
Six builders merchants acquisitions were completed in 2014 at a total cost of €27 million. In the Benelux, we acquired seven branches mainly to expand our footprint in our growing builders merchants platform in Belgium. We also acquired two branches in northern France, strengthening our network in Normandy.
Professional Builders Merchants
Overall operating profit for our wholly-owned professional builders merchants business, which operates 343 branches in six countries, was ahead of 2013. Mild first-quarter weather together with the incremental contribution from acquisitions offset weaker demand as the year progressed, resulting in full-year sales in line with the previous year. Operating profit advanced mainly due to procurement initiatives in the Benelux and France and ERP optimisation in Austria. Sales in the Benelux ended slightly ahead of 2013 due mainly to our recent Belgian acquisitions with operating profit well ahead as a result of procurement and cost savings initiatives. In Switzerland, sales finished slightly behind 2013, with the main driver for lower sales being a softening of local residential markets in particular; operating profit was impacted by lower volumes and pricing pressure partly coming from the strong Swiss Franc. Our builders merchants activities in Germany made a strong start to the year in mild weather; this moderated as the year progressed leaving full-year sales and operating profit slightly ahead of prior year. Sales in France were slightly ahead of 2013 due to acquisition contributions, while operating profit improved following a continued focus on pricing, purchasing and cost control. Sales levels in Austria were slightly behind 2013, although operating profit was ahead due to measures taken to leverage the recently implemented ERP system.
Sanitary, Heating and Plumbing (“SHAP”)
Sales in our SHAP business, which operates 132 branches, were ahead of 2013 due to an organic improvement in our Belgian businesses which continue to perform strongly. Sales in our German business moderated in the second half, finishing broadly in line with prior year. Due to the challenging market conditions in Switzerland, results were lower compared with 2013. Underlying operating profit for our SHAP activities in 2014 was broadly in line with 2013 as organic improvement in Belgium was offset by weaker Swiss results.
DIY
Our wholly-owned DIY business operates 184 stores in the Netherlands, Germany and Belgium. Similar to our other businesses, DIY made a strong start to 2014 with garden sales in particular benefiting from mild weather conditions. Despite improving consumer confidence and mild weather, competition remained intense in the Dutch market with high levels of price discounting featuring prominently during the year. Overall sales ended broadly in line with 2013 in both the Netherlands and Belgium. Sales in our DIY business in Germany were higher than the previous year in part due to recent greenfield investments. Overall operating profit for the DIY business was ahead of the prior year with weaker pricing in the Netherlands more than offset by cost savings initiatives, lower restructuring costs and a good performance in our German DIY business.
Outlook
While the Dutch economy continues to show progress, as seen in improving consumer confidence indicators, underlying financing conditions remain somewhat constrained and therefore we expect measured progress in 2015. The German market outlook remains broadly positive despite some moderation in economic growth. Markets in Austria are expected to be flat in 2015. In Switzerland, consistent with recent Euroconstruct indicators, residential markets in particular are expected to be subdued, so we remain cautious for 2015. Construction activity in France is also expected to be constrained in the near term. Overall 2015 is likely to be another challenging year, but we expect improved operating profit due mainly to further initiatives in commercial and operational excellence programmes and our continued focus on cost-reduction measures.
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
72 CRH |
Americas Materials
Results
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Analysis of change
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| ||||||||||||||||||||||||||||||||||||||||
€ million
|
%
| 2014
| 2013
| Total
| Organic
| Acquisitions
| Divestments
| Restructuring/
| Exchange
| |||||||||||||||||||||||||||||||||||
Sales revenue | 7% | 5,070 | 4,721 | 349 | 317 | 37 | -2 | - | -3 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | 9% | 609 | 557 | 52 | 42 | 7 | - | 3 | - | |||||||||||||||||||||||||||||||||||
Operating profit | 57% | 355 | 226 | 129 | 61 | 5 | - | 63 | - | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin |
| 12.0% | 11.8% | |||||||||||||||||||||||||||||||||||||||||
Operating profit/sales |
| 7.0% | 4.8% | |||||||||||||||||||||||||||||||||||||||||
| Restructuring costs amounted to €9 million (2013: €12 million) No impairment charges were recorded (2013: €60 million)
|
|
The commentary below excludes the impact of impairment charges on operating profit.
After the early months of 2014 which were impacted by harsh winter weather, trading conditions improved as the year progressed, led by improved residential and non-residential segments and stable infrastructure. Americas Materials delivered another year of growth, with like-for-like sales revenues growing 7% and overall EBITDA (as defined)* increasing 9% compared to 2013. Positive trends in pricing continued for the third year in a row for aggregates and readymixed concrete, with asphalt pricing also improving in 2014.
Americas Materials completed eight acquisition transactions in 2014 at a total cost of €91 million, adding over 230 million tonnes of aggregates reserves, 2 operating quarries, 6 asphalt plants and 2 aggregates terminals, with annual production of 4.3 million tonnes of aggregates and 0.2 million tonnes of asphalt. In addition divestments during the year generated proceeds of €12 million.
Energy and related costs: The price of bitumen, a key component of asphalt mix, increased by 3% in 2014 following a 4% decrease in 2013. Prices for diesel and gasoline, important inputs to aggregates, readymixed concrete and paving operations, decreased by 2% and 3% respectively. The price of energy used at our asphalt plants, consisting of fuel oil, recycled oil, electricity and natural gas, increased by 19%. As a result, energy costs as a proportionremained flat. Recycled asphalt and shingles accounted for approximately 22% of sales rose by over two percentage points. Against this backdrop and with ongoing competitive pressures, we continued to improve efficiency, reduce cost, increase the use of recycled materials, and raise quality and service levels to customers while maintaining price discipline. As a result, our overall margin decline was limited to less than one percentage point.total asphalt requirements in 2014, lessening demand on virgin bitumen.
Aggregates
Aggregates:Like-for-like volumes increased by 4%, with6% from 2013 while total aggregates volumes including acquisitions upincreased 10%. Volume gains were driven primarily by an increase in sales of lower value materials on a number of large projects. Accordingly, average like-for-likeAverage prices fell by 1% reflecting the lower value product mix. Operating profit improved as gains in efficiency more than offset higher energy costs, resulting in a 2% reduction in unit production costs.
Asphalt
Like-for-like volumes were 1% lower than in 2010. Including acquisitions, volumes were flat. Unit cost increased 8% with higher bitumen and burner fuel cost more than offsetting the benefit of greater recycled asphalt usage. Challenging trading conditions limited our like-for-like asphalt price increase to 5% and accordingly our overall margin for this business declined.
Readymixed Concrete
Volumes increased by 10% on a like-for-like basis with total volume including acquisitions up 13%. In a very competitive environment average prices declined by 1%2% on a like-for-like basis and 1% overall compared with 2013. These price and volume increases, together with efficient cost control, resulted in improved margin for our aggregates business.
Asphalt: Volumes increased 5% on a like-for-like basis and 6% overall compared to 2013. Volume increases together with pricing increases of 1% increase in unit cost, margins declined. With bettercontributed to an overall asphalt margin expansion.
Readymixed Concrete: Like-for-like volumes however, profitability was similarincreased 6% while total volumes including acquisitions were up 7% compared with 2013. Average prices increased 4% on both a like-for-like and an overall basis, contributing to last year.margin expansion for this business.
Paving and Construction Services
WhileServices: With flat federal funding and pockets of increased state infrastructure spending, like-for-like sales revenue remained broadly unchanged, margins were lower dueincreased 2% and overall sales including acquisitions increased 3%. Bidding continued to continued severe competition for infrastructure projects and rising input and energy costs.be under pressure in a competitive environment. However, efficient cost controls enabled overall margin to improve by 0.5% in 2014.
Regional Performance
East
The East region comprisingcomprises operations in 2223 states, is organised into four divisions; the most important states in the regionof which are Ohio, New York, Florida, Michigan, New Jersey, Pennsylvania and West Virginia. After a harsh winter, the Northeast division was able to take advantage of favourable weather and improving economic conditions during the remainder of the year with operating profit growing strongly compared with 2013. Operating profit was more stable in the Mid-Atlantic and Central divisions where very wet conditions hampered activity in the peak production months. The strong residential and non-residential markets in Florida contributed to higher volumes, better prices and margin growth in the Southeast division. Overall operating profit for the East region was higher than in 2013, with overall volumes 7%, 6% and 5% ahead of prior year for aggregates, asphalt and readymixed concrete respectively.
West
The West region has operations in 21 states, the most important of which are Utah, Texas, Washington, Iowa, Kansas and Colorado. All three divisions, Central West, Northwest, and Mountain West reported higher operating profit. Early season earnings improvements throughout the West continued into the autumn and early winter, with modest price gains building on strong operating and overhead cost management across the product lines. Recovery in construction margins provided very positive year-on-year improvements from this line of business. Overall West volumes increased 15%, 4% and 9% ahead of 2013 for aggregates, asphalt and readymixed concrete respectively.
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
CRH 73 |
Americas Materials |continued
Outlook
We expect that US GDP growth in 2015 will be similar to 2014 and that housing will continue to recover. We also expect non-residential construction to show modest gains. Federal funding for infrastructure is expected to be flat in 2015. A more robust federal highway bill is being explored by Congress and has the support of the President, but if passed the impact would most likely be evident in 2016 and beyond. State fiscal conditions are improving with certain states passing infrastructure funding measures.
We expect 2015 volumes for aggregates and asphalt to show single-digit growth and readymixed concrete volumes to be up slightly
more due to improving residential markets. Targeted price increases in all product lines, combined with cost controls and stable/improving energy markets are expected to lead to another year of margin expansion in 2015.
Americas Products
Results
|
|
| Analysis of change
|
| ||||||||||||||||||||||||||||||||||||||||
€ million
|
%
| 2014
| 2013
| Total
| Organic
| Acquisitions
| Divestments
| Restructuring/
| Exchange
| |||||||||||||||||||||||||||||||||||
Sales revenue | 5% | 3,225 | 3,068 | 157 | 169 | 75 | -19 | - | -68 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | 7% | 263 | 246 | 17 | 24 | 6 | -1 | -7 | -5 | |||||||||||||||||||||||||||||||||||
Operating profit | 113% | 145 | 68 | 77 | 24 | 2 | - | 50 | 1 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin |
| 8.2% | 8.0% | |||||||||||||||||||||||||||||||||||||||||
Operating profit/sales |
| 4.5% | 2.2% | |||||||||||||||||||||||||||||||||||||||||
Restructuring costs amounted to €18 million (2013: €11 million) Impairment charges of €14 million were incurred (2013: €71 million)
|
|
The commentary below excludes the impact of impairment charges on operating profit.
Our Products business in the Americas is located primarily in the United States but also in Canada, Mexico and South America. Construction activity in the eastern and northern parts of North America was hampered by unseasonably wintry weather into May. Good weather in the second half of the year and an ongoing pick-up in US macroeconomic fundamentals, particularly stronger labour markets and consumer confidence, led to improved trading results in the remainder of the year. Overall like-for-like sales increased by 6%. With improving market conditions, input cost pressures accelerated but were more than offset by the effects of improved operational efficiencies and targeted price increases. Combined with the benefits of organic growth, cost reduction initiatives and contributions from acquisitions, Americas Products achieved a 7% increase in EBITDA (as defined)* and improved margins.
Five bolt-on acquisitions were completed in 2014 at a total spend of €60 million. The acquisition by our Architectural Products Group (“APG”) of Hope Agri Products, a supplier of packaged mulches and soils, extended our footprint into the growing Texas market; while five divestments in 2014 generated net proceeds of €50 million.
Architectural Products
APG is a leading supplier of masonry and hardscape products, packaged lawn and garden products, clay brick and fencing solutions. In addition to contractor-based new construction, the DIY and professional RMI segments are significant end-users. The business benefited from improving private residential and non-residential construction and increasing RMI spend. In general, activity was more robust in the West and South, while trading in the Midwest, Northeast, and Eastern Canada started slowly during the first four months due to unseasonably bad weather. The strengthening housing market, together with product innovation and commercial initiatives, drove gains across nearly all business segments resulting in a 7% increase in like-for-like sales compared with 2013. While our markets remain competitive, the combination of cost reduction measures and selected price improvements broadly offset the impact of higher input costs. Overall, APG recorded strong improvements in operating profit and margin for the year.
Precast
The Precast group manufactures a broad range of value-added concrete and polymer-based products primarily for utility
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
74 CRH |
infrastructure applications. In addition, the business is a leading manufacturer of accessories to the concrete construction industry. While public infrastructure spend remained subdued, the business saw an otherwise improved market environment in 2014 and registered solid sales gains as growth initiatives continued to deliver. Operating profit increases were achieved in most precast markets although selected areas were slow to recover from the weather-impacted start to the year. Our utility enclosures and construction accessories businesses also continued to grow and improve. Overall, like-for-like sales rose by 5%, operating profit was marginally ahead and backlogs continued to improve.
BuildingEnvelope®
The BuildingEnvelope® group is North America’s leading supplier of architectural glass and aluminium glazing systems that close the building envelope. New non-residential building activity, a key market segment for this business, experienced improved market conditions and healthy increases in demand in 2014. Sales growth was also driven by ongoing initiatives to gain market share and differentiate the business through innovative product and technology offerings. Organic sales rose 2%, slightly less than the overall market, as our Engineered Glazing Systems (“EGS”) division
concentrated on completing existing major project work. The Architectural Glass and Storefront division continued to benefit from an improved pricing environment, resilient non-residential RMI activity and a generally more favourable product mix. With a tight focus on cost control, product quality and improved processes, the business delivered operating profit and margin improvements.
South America
Our South American operations were negatively impacted by challenging economic conditions and operating profit was lower than 2010.in 2013. Slow economic growth and high inflation led to lower volumes and higher operating costs in the Argentine clay products businesses. Our Chilean business also recorded reduced profits due to soft demand in a very competitive market.
Outlook
Based on the improving macroeconomic backdrop, which will benefit both residential and non-residential construction demand, we expect further organic sales growth in 2015. Combined with the impact of 2014 acquisitions and divestments, and the benefits of internal growth and cost initiatives, we expect to record improved operating profit and margin in 2015.
Americas Distribution
Results
|
|
| Analysis of change
|
| ||||||||||||||||||||||||||||||||||||
€ million
|
%
| 2014
| 2013
| Total
| Organic
| Acquisitions
| Restructuring
| Exchange
| ||||||||||||||||||||||||||||||||
Sales revenue | 7% | 1,776 | 1,664 | 112 | 80 | 33 | - | -1 | ||||||||||||||||||||||||||||||||
EBITDA (as defined)* | 18% | 105 | 89 | 16 | 14 | 1 | 1 | - | ||||||||||||||||||||||||||||||||
Operating profit | 24% | 83 | 67 | 16 | 15 | - | 1 | - | ||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 5.9% | 5.3% | ||||||||||||||||||||||||||||||||||||||
Operating profit/sales | 4.7% | 4.0% | ||||||||||||||||||||||||||||||||||||||
No restructuring costs were recorded (2013: €1 million)
|
|
Americas Distribution, trading as Allied Building Products (“Allied”), experienced improved performance across its activities in 2014, leading to strong overall reported results. Both business divisions benefited from sales growth providing increased operating profit compared to 2013. Performance in our Mid-Atlantic divisionExterior Products business was led by strong demand in our Midwest (Chicago) and Mountain (Colorado) markets aided by early storm activity. The Northeast and West Coast markets experienced modest setbacks due to the completion of Hurricane Sandy rebuilding efforts in New York/New Jersey and exceptionally dry and drought-like weather patterns experienced in California.
The Interior Products business continued to show growth as both volumes and pricing improved throughout the year. The strongest gains were experienced in our Atlantic markets, in part due to the full-year effect of our prior year acquisitions, and also the
Southwest and West markets which were driven by multi-family construction.
In 2014, Allied management maintained its focus on improving employee safety, controlling variable costs, streamlining administrative procedures and eliminating redundant processes. The simplification of our business processes, along with the ongoing evolution of our organisational structure and go-to-market strategies, is aimed at improving business integration and enhancing operating leverage, allowing for greater economies of scale as our business, and the overall market, grows.
While no acquisitions were completed within the Americas Distribution group in 2014, we have continued to build on our organic greenfield and service centre strategy by opening six bolt-on locations within some of our key existing markets. Our service
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
CRH 75 |
Americas Distribution |continued
centre model enables us to improve customer service, consolidate fixed costs and more efficiently leverage branch assets. Progress continued to be made in 2014 to increase brand awareness ofTri-Built, our proprietary private label brand, as both sales and product offerings grew. The addition of our new service centre locations combined with the continued growth of our Tri-Built private label brand and our commitment to developing our people continued to differentiate Allied in the marketplace.
Exterior Products
The Exterior Products business is largely comprised of both commercial and residential roofing, siding and related products, and is the third largest distributor in the United States. Exterior Products demand is greatly influenced by residential and commercial replacement activity (75% of sales volume is RMI-related). Commercial roofing experienced modest industry-wide growth while residential roofing shipments saw a slight decline leading to an overall flat market from 2013. As a result, product mix shifted more towards lower-margin commercial products. Additionally, with no volume growth, markets across the industry remained very competitive leading to pricing pressure in all regions. In spite of flat market conditions and the pressures mentioned above, the Exterior Products division reported modest sales growth and operating profit just slightly behind prior year.
Interior Products
The Interior Products business, which is the third largest specialty distributor in the United States, sells gypsum wallboard, acoustical ceiling systems and related products to specialised contractors. The primary market is new construction including residential, multi-family and commercial, with limited exposure to the repair and remodel market. Performance in this business was strong in 2011. Despiteall markets with increased volumes and prices of core products contributing to higher sales and improved operating margins. In addition, a more favourable mix toward higher-margin core products combined with efficiency initiatives implemented in recent years, helped to drive improved sales and operating profit for 2014.
Outlook
The overall outlook for 2015 is encouraging as commercial and residential construction is expected to grow. While headwinds are expected to continue in our Exterior Products business, as pricing pressures remain and only modest growth is expected, our Interior Products business continues to experience favourable markets, with another year of sales and profit growth expected. Overall, the expected benefits of the six service centre additions in 2014 combined with our continued focus on efficiency and cost control should provide a year of further improvement in operating performance in 2015.
76 CRH |
Business Performance Review – Prior Year
Trading conditions in 2013 proved challenging, especially in the first half of the year, and the Group continued to focus on cash generation finishing the year in a strong and flexible financial position. With increased cash inflows from operations and proceeds from disposals, net debt at year-end 2013 remained broadly in line with 2012 despite a total spend of €1.2 billion on acquisitions, investments and capital expenditure and cash dividend payments which at €368 million were similar to 2012.
While reported sales for 2013 were similar to 2012, organic sales from underlying operations fell by 2%, reflecting difficult market conditions in Europe and poor weather across the Group in the first half.
In Europe the decline in like-for-like sales moderated to less than 1% in the second half of 2013, a significant improvement on the weather-impacted decline of 10% in the first half. This resulted in a full-year reduction of 5% in underlying European sales in 2013, which was partly offset by contributions from acquisitions to give a 3% overall decline. Lower sales impacted EBITDA (as defined)* margin, which despite intense management focus and internal actions, fell in all European segments in response to competitive market pressures.
Against an improving backdrop as 2013 progressed, like-for-like sales in the Americas were up 5% in the second half, compared with a first half which saw organic volumes down by 1%. In our Materials business, which was impacted by unfavourable weather patterns in the early part of 2013, like-for-like sales were 3% lower than 2012; however, with good contributions from
acquisitions overall US Dollar sales revenue was in line with 2012. Our Products and Distribution businesses continued to benefit from improving demand, particularly from new residential construction, and like-for-like sales were 8% ahead of 2012. With higher sales and good cost control, EBITDA (as defined)* margins improved in all three Americas segments.
Operating profit fell significantly from 2012, due principally to the non-cash impairment charge of €650 million taken largely as a result of the comprehensive portfolio review in 2013. The initial phase of this review identified business units that would not meet our returns criteria, and an orderly disposal process is underway. The Europe segment accounted for the majority of the write-down. The portfolio review also identified further impairments of €105 million in respect of equity accounted investments.
During 2013 the euro strengthened by more than 3% against the US Dollar, resulting in an adverse translation impact on the Group’s results; this is the principal factor behind the exchange effects shown in the table below.
We continued to advance the significant cost-reduction initiatives which have been progressively implemented since 2007 and which by year-end 2013 had generated cumulative annualised savings of almost €2.4 billion. Total restructuring costs associated with these initiatives (which generated savings of €195 million in 2013) amounted to €71 million in 2013 (2012: €60 million) and were once again heavily focussed in our European Divisions.
Key Components of 2013 Performance
| ||||||||||||||||||||||||||||
€ million
| Revenue
| EBITDA
| Operating
| Profit on
| Finance
| Equity
| Pre-tax
| |||||||||||||||||||||
2012 | 18,084 | 1,563 | 805 | 230 | (305 | ) | (84 | ) | 646 | |||||||||||||||||||
Exchange effects | (404 | ) | (36 | ) | (19 | ) | (1 | ) | 5 | (2 | ) | (17 | ) | |||||||||||||||
2012 at 2013 exchange rates | 17,680 | 1,527 | 786 | 229 | (300 | ) | (86 | ) | 629 | |||||||||||||||||||
Incremental impact in 2013 of: | ||||||||||||||||||||||||||||
- 2013 and 2012 acquisitions | 672 | 73 | 43 | - | (3 | ) | 3 | 43 | ||||||||||||||||||||
- 2013 and 2012 divestments | (42 | ) | - | 2 | (191 | ) | (2 | ) | 4 | (187 | ) | |||||||||||||||||
- Restructuring costs | - | (11 | ) | (11 | ) | - | - | - | (11 | ) | ||||||||||||||||||
- Pension/CO2 gains | - | (29 | ) | (29 | ) | - | - | - | (29 | ) | ||||||||||||||||||
- Impairment charges | - | - | (622 | ) | - | - | 41 | (581 | ) | |||||||||||||||||||
Ongoing operations | (279 | ) | (85 | ) | (69 | ) | (12 | ) | 8 | (6 | ) | (79 | ) | |||||||||||||||
2013 | 18,031 | 1,475 | 100 | 26 | (297 | ) | (44 | ) | (215 | ) | ||||||||||||||||||
† CRH’s share of after-tax profits of joint ventures and associated undertakings
|
|
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
CRH 77 |
Business Performance Review – Prior Year |continued
Liquidity and Capital Resources – 2013 compared with 2012
The comments that follow refer to the major components of the Group’s cash flows as shown in the Consolidated Statement of Cash Flows on page 138.
Throughout 2013 the Group continued to keep a very sharp focus on cash management, targeting in particular working capital and capital expenditure. Year-end 2013 current working capital of €2.0 billion represented just 11.2% of sales, an improvement compared with year-end 2012 (11.5%). This performance delivered net inflows for 2013 of €77 million (2012: outflows of €58 million). Strong control of spending on property, plant and equipment resulted in lower cash outflows of €497 million (2012: €544 million), with spend in 2013 representing 74% of depreciation (2012: 79%).
Other major cash flow movements during 2013 comprised acquisition spend of €676 million on 28 transactions, including €144 million in respect of the asset exchange in Spain which is also included in the total proceeds from disposals and investments of €266 million.
Cash dividend payments of €368 million and proceeds of €19 million from exercise of share options were very similar to 2012.
Year-end 2013 interest-bearing loans and borrowings increased by €0.7 billion to €5.5 billion (2012: €4.8 billion). At year-end 2013, net debt of €2.97 million† was just €64 million higher than year-end 2012. The weaker US Dollar (1.3791 versus the euro at year-end 2013 compared with 1.3194 at year-end 2012) was the main factor in the positive translation and mark-to-market impact of €87 million on net debt.
CRH’s share price increased by 20% in 2013 to €18.30 at year-end; combined with the maintained dividend of 62.5c, shareholder returns were 24% in 2013 and resulted in net debt as a % of market capitalisation decreasing to 22% (2012: 26%).
† As disclosed in note 20 to the Consolidated Financial Statements, net debt comprises interest-bearing loans and borrowings, cash and cash equivalents, and derivative financial instruments.
78 CRH |
Europe Heavyside – 2013
Results
|
|
|
Analysis of change
|
| ||||||||||||||||||||||||||||||||||||||||||||
€ million
| %
| 2013
| 2012
| Total
| Organic
| Acquisitions
| Divestments
|
Restructuring/
| Pension/
| Exchange
| ||||||||||||||||||||||||||||||||||||||
Sales revenue | -5% | 3,786 | 3,972 | -186 | -258 | +125 | -8 | - | - | -45 | ||||||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | -23% | 326 | 426 | -100 | -61 | +9 | +1 | -2 | -41 | -6 | ||||||||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin |
| 8.6% | 10.7% | |||||||||||||||||||||||||||||||||||||||||||||
Operating profit | n/m | -395 | 187 | 582 | -58 | +1 | +3 | -483 | -41 | -4 | ||||||||||||||||||||||||||||||||||||||
Pension restructuring gains amounted to €12 million (2012: €30 million) Gains from CO2trading were €8 million (2012: €31 million)
|
| Restructuring costs amounted to €37 million (2012: €35 million) Impairment charges of €502 million were incurred (2012: €21 million)
|
|
EBITDA (as defined)* above includes pension restructuring gains and gains from CO2 trading. Operating profit is also stated after impairment charges; the net €482 million adverse impact of these items has been excluded from the commentary that follows.
Adverse weather in the first half of 2013, combined with significant overcapacity in very competitive markets, resulted in like-for-like sales for the year overall being down by 7% versus 2012. Our cement operations experienced weak volumes in Poland, Finland and Benelux, in particular, combined with further, albeit more modest, declines in construction activity in Ireland. The UK market was the only major market showing growth in 2013, benefiting from strong residential markets. However, our continued cost reduction and efficiency measures partly offset the impact of lower demand. Overall, EBITDA (as defined)* margin excluding pensions and CO2 gains was 8.1% compared with 9.2% in 2012.
On the development front during 2013, we concluded an asset swap in February in which we acquired Cementos Lemona in the Basque region in Spain in exchange for our 26% stake in Corporacion Uniland. In September 2013 we became the market leader in Ukraine through the acquisition of Mykolaiv Cement. We completed two smaller transactions in 2013 strengthening our presence in Northern Ireland and expanding our network of cement import facilities in Britain. In addition, we acquired a manufacturer of pre-stressed hollow core elements in Belgium, expanding and strengthening our position as market leader in Belgium’s pre-stressed hollow core flooring segment.
Western Europe
Construction spend in Switzerland increased again in 2013 with the residential market remaining one of the major drivers of activity and infrastructure spend continuing weakat good levels. With the benefit of mild weather in the fourth quarter of 2013, construction remained strong to the end of the year. Our cement volumes were 12% higher than 2012 benefiting both from increased infrastructure projects and large individual projects. Aggregates and readymixed concrete volumes continued the slightly upward trend of recent years. Sales prices, particularly cement, saw some slippage in 2013 due to the continued strong Swiss Franc. Operating profit was ahead of 2012. New residential markets in the Southeast,UK experienced significant growth due to the government’s “Help to Buy” scheme and industry brick volumes finished 9% ahead of 2012. Selling price increases were
also achieved and, despite higher natural gas costs, operating resultprofit was higher than 2010 asahead of 2012. Our clay businesses in the Netherlands were impacted by weaker residential demand in very competitive markets, with volumes and prices under pressure. In 2013, we decided to close part of our clay business in the Netherlands, contributing to the overall increase in restructuring initiatives positivelycharges compared with 2012. Operating results for our Clay business overall were broadly in line with 2012. Our cement and readymixed concrete businesses in the Netherlands and Belgium were impacted performance. Operatingby falling construction activity in 2013. Lower volumes, together with pricing pressure in very competitive markets, resulted in lower operating profit in spite of the benefits from ongoing cost reduction programmes. Profitability in our NortheastStructural Concrete business in the Benelux was in line with 2012 with lower organic results offset by the contribution from the acquisition during 2013. Our operations in Denmark, Germany and Central divisionsFrance all saw weaker activity levels in 2013. The decline in construction activity in Ireland moderated in 2013 and cement volumes were similar to 2012 levels. With a lower cost base, operating losses declined. In Spain, while construction activity fell by a further 23% with declines across all sectors, our like-for-like results were in line with 2012 due to the benefit of previously-implemented cost reduction programmes. Trading in our newly-acquired cement business Cementos Lemona was in line with expectations.
Eastern Europe
A pick-up in second-half construction activity in Poland was insufficient to offset the weather-impacted first half of 2013; national construction output fell by an estimated 11% in 2013 and cement volumes fell 9%. The residential sector remained sluggish throughout 2013 with new starts down over 11%. Infrastructure activity picked up as the year progressed and the second half of 2013 saw the restart of a number of stalled projects. Mild weather late in 2013 enabled construction to continue until year-end. Against the improving backdrop our second-half cement volumes increased by 8% compared with 2012, reducing the decline in our full-year 2013 volumes to 11%. Our aggregates and readymixed concrete volumes also declined year-on-year. Prices for all products remained under pressure in very competitive markets, and overall operating profit in Poland was lower than 2012. In Ukraine, while the first half of 2013 was negatively impacted by the prolonged winter conditions, demand was much stronger in the second half
* Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax.
CRH 79 |
Europe Heavyside – Prior Year |continued
and national cement volumes for the year were down 3% compared with 2012. Our like-for-like volumes were 13% ahead of 2012 in the second half of 2013, bringing our full-year volumes almost in line with 2012 (down 1%) and overall operating profit in Ukraine was broadly similar to 2012.
In Finland, construction spend was down in 2013 mainly due to reduced residential activity. The government introduced two stimulus packages related mainly to the residential and RMI sectors, but execution was slow. With increasing levels of public debt,
spending on infrastructure was reduced and progress on a number of large projects was delayed. While our businesses delivered modest price increases in cement, aggregates and readymixed concrete, cement and aggregates volumes were lower in 2013 and overall operating profit was below 2012. In South-Eastern Europe, our concrete and clay operations were negatively impacted by fragile markets and strong competition, with 2013 operating profit and margins down versus 2012.
Europe Lightside – 2013
Results
|
|
|
Analysis of change
|
| ||||||||||||||||||||||||||||||||||||||||||
€ million
| %
| 2013
| 2012
| Total
| Organic
| Acquisitions
|
Divestments
| Restructuring/
| Pension
| Exchange
| ||||||||||||||||||||||||||||||||||||
Sales revenue | -4% | 856 | 888 | -32 | -30 | +33 | -28 | - | - | -7 | ||||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | -9% | 71 | 78 | -7 | -7 | +2 | -1 | -1 | +1 | -1 | ||||||||||||||||||||||||||||||||||||
EBITDA (as defined)* |
| 8.3% | 8.8% | |||||||||||||||||||||||||||||||||||||||||||
Operating profit | -43% | 28 | 49 | -21 | -10 | - | -1 | -11 | +1 | - | ||||||||||||||||||||||||||||||||||||
Pension restructuring gains amounted to €1 million (2012: nil)
|
|
| Restructuring costs amounted to €6 million (2011: €5 million) Impairment charges of €13 million were incurred (2012: €3 million)
|
|
EBITDA (as defined)* above includes pension restructuring gains and operating profit is also stated after impairment charges; the net €12 million adverse impact of these items has been excluded from the commentary that follows.
Our Lightside business in Europe is located primarily in Germany, the UK, Netherlands, Switzerland, Belgium and France. The division is one-third exposed to repair activity and two-thirds exposed to new build work. Construction activity in most of these markets was severely impacted by the prolonged winter conditions in the early months of 2013. Although the Lightside business was less impacted due to its greater exposure to the repairs sector, weaker trading in key markets in the first half led to a reduction in overall operating profit in 2013. Trading levels in the second half of 2013 were broadly in line with 2012, leading to an overall full-year like-for-like sales decline of 3% versus 2012. Our markets remained weak in the Netherlands where new-build activity continued to deteriorate, while Switzerland, Belgium and France were somewhat more resilient. In Germany the market backdrop was more mixed with declines in non-residential and infrastructure activity offset by improving residential RMI activity. The UK was the only moderatelymajor market showing growth in 2013, benefiting from strong residential markets. Despite a sharp focus on continued cost discipline, overcapacity in some more competitive markets led to margin erosion, impacting negatively on overall profitability. In response to these challenging markets, as in prior years, we continued to engage in a number of restructuring measures to help realign our cost base to lower volumes.
Construction Accessories
With lower construction activity in our major markets, 2013 operating profit was behind 2012 due to lower volumes and continuing margin pressure in parts of the business. Difficult European markets, combined with the adverse weather effect in the first half of 2013, negatively impacted profits. However, the export side of our business and the UK performed solidly.
Shutters & Awnings
This business, which is concentrated in Germany and the Netherlands, benefited from stable demand in 2013, despite difficult markets, and with the contribution from 2012 acquisitions, 2013 operating profit was ahead of 2012.
Fencing & Cubis
Our Fencing business in the Netherlands suffered declining sales in 2013 due to intense competition and a weather-impacted first half of the year. Price pressure was a key feature in this market, but a recovery in the German side of this business offset this somewhat. We also benefited from a shift in product mix in our UK Fencing & Security businesses, which helped to improve margins. The Mobile Fencing business also experienced difficult markets, however, due to cost reduction measures, 2013 operating profit and margin were in line with 2012. Cubis, our composite access chambers business, benefited from a robust UK market which drove higher sales and profits in 2013.
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
80 CRH |
Europe Distribution – 2013
Results
|
|
|
Analysis of change
|
| ||||||||||||||||||||||||||||||||||||||||
€ million
| %
| 2013
| 2012
| Total
| Organic
| Acquisitions
|
Restructuring/
| Pensions
| Exchange
| |||||||||||||||||||||||||||||||||||
Sales revenue | -1% | 3,936 | 3,956 | -20 | -175 | +180 | - | - | -25 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | -14% | 186 | 217 | -31 | -47 | +7 | -1 | +11 | -1 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin |
| 4.7% | 5.5% | |||||||||||||||||||||||||||||||||||||||||
Operating profit | -27% | 106 | 145 | -39 | -48 | +4 | -5 | +11 | -1 | |||||||||||||||||||||||||||||||||||
Pension restructuring gains amounted to €11 million (2012: nil)
|
|
| Restructuring costs amounted to €4 million (2012: €3 million) Impairment charges of €4 million were incurred (2012: nil)
|
|
EBITDA (as defined)* above includes pension restructuring gains and operating profit is also stated after impairment charges; the net €7 million impact of these items has been excluded from the commentary that follows.
The Distribution business was also impacted by the adverse first-half weather conditions in 2013. This together with weak construction activity and low consumer confidence, particularly in the Netherlands (which accounts for almost 30% of 2013 Distribution sales), contributed to a 4% reduction in like-for-like sales in 2013, the impact of which was largely offset by the incremental impact of acquisitions completed in 2012 and 2013. Following sharp profit reductions in the first half of 2013, the second half saw a moderation in the rate of decline which, combined with previous restructuring efforts and cost saving initiatives and certain pension curtailment benefits, limited the overall decline in full-year EBITDA (as defined)* to 14%.
Our professional builders merchants network was strengthened by three acquisitions during 2013. In the Benelux, we acquired a well-established seven-branch builders merchant, which complements our existing Dutch business, and a two-branch Belgian operator. We also acquired four branches in northern France increasing our Normandy network to 19 locations.
Professional Builders Merchants
Overall 2013 results for our wholly-owned professional builders merchants business, which operates 349 branches in six countries, were lower than in 20102012. The incremental contribution from acquisitions more than offset the shortfall in like-for-like sales in the Benelux where weak markets, especially in Dutch residential and new-build, continued to impact performance. Despite strong cost control and economies of scale from acquisitions, operating profit was behind 2012. Sales levels in France were slightly lower for 2013 overall but operating profit improved due to the continued focus on pricing, purchasing and cost control. In Switzerland, the strength of the Swiss Franc continued to affect competitiveness contributing to a decline in sales and, despite significantthe ongoing roll-out of various excellence programmes, both operating margin pressures and particularlyprofit were also lower than 2012. Sales levels in Austria were severely impacted by the bad weather in the first quarter of 2013 and operational challenges due to a system implementation, resulting in operating
profit that was significantly behind 2012. Despite the severe impact of the bad weather in early 2013, our builders merchants activities in Germany saw improved trading from April onwards and, together with better margins and good cost control, resulted in operating profit for the year that was in line with 2012.
DIY
Our wholly-owned DIY business operates 196 stores in the Netherlands, Germany and Belgium. Operating profit for 2013 was lower than in 2012. In the Netherlands, the combination of the very severe weather during the first quarter of 2013 and the continued weakness in consumer confidence resulted in sales levels in our Dutch DIY business that were significantly lower than 2012 and operating profit declined despite restructuring and cost-saving measures. In Belgium, our DIY activities proved more resilient and reported similar sales and operating profit in 2013 to those achieved in 2012. In a challenging environment for the German DIY sector, sales in our German DIY business were also impacted by the adverse weather and, despite continued cost focus, operating profit and margin were lower than 2012.
Sanitary, Heating and Plumbing
2013 sales for our SHAP business, which operates 126 branches, were ahead of 2012 due to an organic improvement in our German and Belgian businesses together with the incremental impact of the two Belgian acquisitions completed in the second half of 2012. Due to the challenging market conditions in Switzerland, 2013 results were lower compared with 2012. Overall operating profit for our SHAP activities was ahead of 2012 assisted by the contribution from acquisitions.
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
CRH 81 |
Americas Materials – 2013
Results
|
|
|
Analysis of change
|
| ||||||||||||||||||||||||||||||||||||||||
€ million
| %
| 2013
| 2012
| Total
| Organic
| Acquisitions
| Divestments
|
Restructuring/
| Exchange
| |||||||||||||||||||||||||||||||||||
Sales revenue | -3% | 4,721 | 4,886 | -165 | -147 | +141 | - | - | -159 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | - | 557 | 555 | +2 | -15 | +33 | - | +2 | -18 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin |
| 11.8% | 11.4% | |||||||||||||||||||||||||||||||||||||||||
Operating profit | -19% | 226 | 279 | -53 | -12 | +26 | - | -58 | -9 | |||||||||||||||||||||||||||||||||||
| Restructuring costs amounted to €12 million (2012: €14 million) Impairment charges of €60 million were incurred (2012: nil)
|
|
The commentary below excludes the adverse impact of impairment charges on operating profit.
Adverse weather conditions in 2013, which had resulted in a 25% decline in first-half US$ EBITDA (as defined)*, continued to impact operations in July and in the early weeks of August. Trading conditions proved much more favourable thereafter through to November and second-half US$ EBITDA (as defined)* was ahead of the corresponding period in 2012. Positive first-half trends in pricing continued into the second half of 2013. Though overall like-for-like sales revenue was 3% lower than 2012, contributions from acquisitions resulted in overall US$ EBITDA (as defined)* for 2013 being 4% ahead of 2012.
A total of 10 acquisitions were completed in 2013 at a cost of €77 million, adding 457 million tonnes of reserves, 13 operating quarries, 5 strategic reserves locations, 6 asphalt plants and 7 readymixed concrete plants with annual production of 2.0 million tonnes of aggregates, 0.4 million tonnes of asphalt and 0.1 million cubic metres of readymixed concrete.
Energy and related costs: The price of bitumen, a key component of asphalt mix, declined by 4% in 2013 following a 7% increase in 2012. Prices for diesel and gasoline, important inputs to aggregates, readymixed concrete and paving operations, decreased by 2% and 3% respectively. The price of energy used at our asphalt plants, consisting of fuel oil, recycled oil, electricity and natural gas, fell by 1%. Recycled asphalt and shingles accounted for approximately 20% of total asphalt requirements in 2013. Wider use of warm-mix asphalt continued to deliver cost and customer benefits. With the positive effects of lower bitumen costs and further increased use of recycled asphalt, unit costs reduced by 2% from 2012.
Aggregates: 2013 like-for-like volumes were slightly ahead of 2012 while total volumes including acquisitions increased 7%. Average prices increased by 3% on a like-for-like basis and 2% overall compared with 2012. Price increases together with efficient cost control resulted in an improved margin for this business in 2013.
Asphalt: Impacted by poor weather and a later start to paving projects, like-for-like volumes were down 7% in 2013 with total volumes including acquisitions down 3%. While the average like-for-like sales price fell 1% in 2013 and overall average price fell 2%, with the benefit of the 4% reduction in bitumen costs, margin per unit was maintained in 2013.
Readymixed Concrete: Like-for-like volumes decreased 2% in 2013 while total volumes including acquisitions were up 2% compared with 2012. With average prices 4% higher on a like-for-like basis and up 5% overall, margins improved in 2013.
Paving and Construction Services: The poor first-half weather also contributed to a later start on paving projects, resulting in 2013 sales being 5% lower than 2012, and a reduction of 6% on a like-for-like basis in 2013. Pricing remained under pressure in a competitive bidding environment; however, efficiency improvements enabled an improvement in overall margin.
Regional Performance
East
The East region comprises operations in 22 states, the most important of which are Ohio, New York, Florida, Michigan, New Jersey, Pennsylvania and West Virginia. The adverse weather conditions in the springfirst half of 2013 had the greatest impact on the Mid-Atlantic division, which reported lower results than in 2012. In the Northeast division, 2013 results benefited from the inclusion of acquisitions completed at the end of 2012, and autumn.operating results improved. The Central division profits were broadly consistent with 2012 with lower volumes offset by improved prices. The residential market in Florida continued its upward trend contributing to strong volumes, better prices and margin growth, and positively impacting performance in the Southeast division. Overall 2013 operating profit for the East region was higher than 2012 with volumes 8%, 4% and 9% ahead of 2012 for aggregates, asphalt and readymixed concrete respectively.
West
The West region also has operations in 22 states, the most important of which are Utah, Texas, Washington, Missouri, Iowa, Kansas and Mississippi, and is organised into three divisions. Overall operating profit was lower. In ourMississippi. Poor weather conditions that persisted through to mid-August affected 2013 results in both the Central West and Mountain West divisions, with a reduction in large infrastructure contracts in Utah further contributing to the lower outcome in Mountain West compared with 2012. More positively, the Northwest division which experienced disruptions to first-half construction activitysaw substantial improvement over 2012’s record lows. With overall declines in certain markets causedasphalt and readymixed concrete volumes of 14% and 3% respectively, only partly offset by the floodingincreases in aggregates volumes of the Mississippi river and its tributaries,4%, 2013 operating profit was lower than in 2010 as both public and private activity declined. Our Mountain West and Northwest divisions benefited from large jobs and moderately improved market demand leading to increases in volume. Both of these divisions delivered improved profits.2012.
Outlook - Americas Materials
The US housing market appears to have stabilised and we have seen some expansion in commercial activity underpinned by growth in the manufacturing and energy sectors. Overall we expect commercial
CRH 47
Business Review
BUSINESS REVIEW -Current Year
and residential demand to be flat to slightly up in 2012. The most recent extension of the federal highway programme expires on 31 March, 2012. We anticipate a new bill or further extensions to be achieved over the coming months with funding for highways close to that in 2011. Ongoing state and local government fiscal pressures coupled with the roll-off of the federal stimulus bill will likely result in moderately lower Infrastructure volume for the year as a whole.
Overall, we expect 2012 volume for our mix of business to be relatively flat with 2011. Our focus for 2012 is therefore to achieve further price increases and efficiency improvements against a continuing challenging input cost backdrop.
Europe Products
2011 overview
Results | % Change | 2011 | 2010 | Total | Analysis of change | |||||||||||||||||||||||||||||||||
€ million | Organic | Acquisitions | Divestments | Restructuring/ Impairment | Exchange | |||||||||||||||||||||||||||||||||
Sales revenue | -6% | 2,648 | 2,817 | -169 | +175 | +20 | -364 | - | - | |||||||||||||||||||||||||||||
EBITDA (as defined)* | -2% | 194 | 198 | -4 | +9 | +3 | -8 | -8 | - | |||||||||||||||||||||||||||||
Operating profit | n/m | 66 | 11 | +55 | +19 | +1 | +3 | +31 | +1 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 7.3% | 7.0% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 2.5% | 0.4% | ||||||||||||||||||||||||||||||||||||
Restructuring costs amounted to€24 million (2010:€16 million); impairment charges of€15 million were incurred (2010:€54 million) |
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of |
Overall, Europe
82 CRH |
Americas Products experienced better trading conditions– 2013
Results
|
|
|
Analysis of change
|
| ||||||||||||||||||||||||||||||||||||||||
€ million
| %
| 2013
| 2012
| Total
| Organic
| Acquisitions
| Divestments
|
Restructuring/
| Exchange
| |||||||||||||||||||||||||||||||||||
Sales revenue | +9% | 3,068 | 2,806 | +262 | +219 | +166 | -6 | - | -117 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | +21% | 246 | 204 | +42 | +37 | +21 | - | -9 | -7 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin |
| 8.0% | 7.3% | |||||||||||||||||||||||||||||||||||||||||
Operating profit | -21% | 68 | 86 | -18 | +49 | +12 | - | -76 | -3 | |||||||||||||||||||||||||||||||||||
Restructuring costs amounted to €11 million (2012: €2 million) Impairment charges of €71 million were incurred (2012: €4 million)
|
|
The commentary below excludes the adverse impact of impairment charges on operating profit.
A recovery in 2011 although it was a mixed picture across our various businesses, and reported results were impacted by divestments completed during 2011. The first half was helped by significantly better weather conditions, particularlyresidential construction in the early monthsUnited States and an ongoing pick-up in overall economic activity helped Americas Products improve its results in 2013. Like-for-like sales were 8% ahead of 2012. The impact of input cost pressures was more than offset by a continued tight focus on operational efficiency and targeted pricing improvements. As a result, with the year,benefit of organic growth, modest pricing benefits, cost reduction initiatives and like-for-like sales grew by 8%. The second half sawcontributions from acquisitions, the rate of growthsegment achieved a significant increase in organic sales moderate to 4% as weakening consumer confidence and further austerity measures in the Eurozone economies contributed to negative sentiment. With lower restructuring and impairment charges, second-half operating profit improved versus 2010.and margin in 2013.
2011 sawFour acquisitions were completed in 2013 at a total spend of €123 million. Of particular note was the completionacquisition by our Architectural Products Group (“APG”) of hardscape and masonry operations both in Western Canada (seven facilities) and the divestmentCarolinas (14 plants), extending our footprints of our Insulationcore product categories into new markets. The Canadian acquisition establishes APG as the only coast-to-coast manufacturer of masonry and Climate Control businesses, inhardscape products.
Architectural Products
APG is a leading supplier of masonry and hardscape products, packaged lawn and garden products, clay brick and fencing solutions. In addition to some smallercontractor-based new construction, the DIY and professional RMI segments are significant end-users. After a slow start to 2013, the business disposals. The table above reflects the impact in 2011 of the disposal of these businesses, which had incurred a net loss in 2010benefited from improving new residential construction, increasing RMI spend and which accounted for€48 million of the total€54 million restructuring charges in 2010.
Concrete Products
Activity levels in 2011 were supported by more benign winterfavourable weather conditions in the first and fourth quarter compared with 2010. Against this, weakening consumer sentiment in the second half of the year,year. However, overall growth was dampened somewhat by weak recovery in the non-residential segment. Generally activity was more robust in the West and South while remaining more challenged in the Northeast, Midwest and Eastern Canada. The improving housing market, together with product innovation and commercial initiatives, drove gains across most businesses while further cost reduction measures and selected price improvements offset the impact of government austerity measures and higher energy input costs, resulted in slower activity in the Netherlands. This was partly offset by resilient demand in Germany and an improved performance in Denmark. With the strong first and fourth quarter performance,costs. Overall, APG recorded a higher operating profit for the full year was significantly higher than 2010.
Our Architectural operations (tiles, pavers, blocks) were impacted by weaker consumer confidence in the second half of the year, in particular within the garden segment in Benelux, and revenues were lower than 2010. In the Netherlands, weaker government and municipal spending had a negative impact on demand. Our German operations, where we have invested in three additional plants, showed a strong performance in 2011. Overall operating profit was ahead of 2010. Our Structural operations reported operating profit well ahead of 2010 on the back of restructuring initiatives in previous years in all markets. In Denmark, our results advanced strongly. Our sand lime block business in the Netherlands and our Belgian specialty
48 CRH
Business Review
BUSINESS REVIEW -Current Year
business, which supplies the residential, industrial and agricultural sector, continued to deliver strong results. Within central and eastern Europe, Hungary experienced a recovery and trading conditions in Poland remained positive. With lower restructuring costs, operating profit for the structural business was well ahead of last year.
Clay Products
In the UK new house completions increased during 2011; however, this improvement was partly offset by a decline in housing repair and maintenance activity, and industry brick volumes were largely in line with 2010. Although delays in recovering significant energy cost increases impacted our business, overall operating profit was ahead of 2010 as a result of efficiencies and once-off gains resulting from our restructuring programme. In Mainland Europe our markets remained challenging. Operating profit was lower than 2010 as a result of significant production cutbacks to reduce stock levels and two further plant closures in Germany.
Building Products
This group reported2013, reflecting a 3% increase in like-for-like sales, margin improvement and a solid contribution from continuingrecent acquisitions.
Precast
The Precast group manufactures a broad range of value-added concrete and polymer-based products primarily for utility
infrastructure applications. The business saw an improved market environment in 2013 and registered solid gains as growth initiatives continued to deliver. Improvements were seen in most regions with particular progress in the Great Plains, northern California and Mid-Atlantic regions. Commercial and infrastructure markets remained generally subdued but residential demand, as well as energy and environment-related markets, continued to show positive trends. In our traditional utility and structural precast products businesses volumes increased 5% over 2012 and higher input costs were recovered through price increases. Overall like-for-like sales increased by 6% in 2013 and operating profit advanced significantly in 2013.
BuildingEnvelope®
The BuildingEnvelope® group is North America’s leading supplier of architectural glass and aluminium glazing systems to close the building envelope. New non-residential building activity, a key market segment for this business, was largely flat in 2013 resulting in challenging market conditions. Despite this backdrop, ongoing initiatives to gain market share and differentiate the year. Volumesbusiness through innovative product and technology offerings drove solid top-line growth. Organic sales rose 14% in 2013, outpacing the overall market. The Architectural Glass and Storefront division benefited from an improved pricing environment, resilient non-residential RMI activity and a generally more favourable product mix. Our Engineered Glazing Systems division enjoyed increased slightly, however market pressureactivity as major project work progressed. With a tight focus on cost control, product quality and improved processes, the business delivered operating profit improvement in 2013.
South America
2013 results for our operations in Argentina improved compared with 2012; production and sales mix changes contributed to an increase in volumes, prices and higher raw material input costs negatively affected margins, causing operating profit from continuing businesses to be marginally behind last year. Our Construction Accessories business, which is the market leader in Western Europe, started the year well with increased volumesmarginal contribution in the first half. Duefloor and wall tile segments. Results from our businesses in Chile were down on 2012 with modest gains in specialised construction products offset by lower prices in our glass products due to the economic uncertainty, volumes fell in the second halfincreased competition. Overall 2013 sales and with increasing pressure on margins; overall operating profit for the year was broadlyour South American operations were higher than in line with 2010. The Outdoor Security business, specialising in entrance control and perimeter protection solutions, showed a mixed picture. Fencing had to cope with weaker volumes and fierce competition, resulting in a lower operating profit outcome. Our Shutters & Barriers business did very well in the beginning of 2011, but faced a more difficult second half with lower volumes than last year; however, with tight cost control, and a good market position, results were ahead of last year.2012.
Outlook - Europe Products
Our Products businesses, which are predominantly located in the Netherlands, Germany, Belgium and France, are exposed to new construction. Given the most recent economic developments in the Eurozone, we are more cautious in relation to the outlook for 2012. A rapid and continuing decline of consumer confidence, low activity levels in residential and non-residential markets and further austerity measures announced by governments to reduce budget deficits, make for an uncertain outlook in 2012. However, the German and Danish markets continue to be robust and to perform well and we expect benefits from our ongoing restructuring measures.
Americas Products
2011 overview
Results | % Change | 2011 | 2010 | Total | Analysis of change | |||||||||||||||||||||||||||||||||
€ million | Organic | Acquisitions | Divestments | Restructuring/ Impairment | Exchange | |||||||||||||||||||||||||||||||||
Sales revenue | -4% | 2,378 | 2,469 | -91 | +51 | +37 | -70 | - | -109 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | +6% | 164 | 154 | +10 | -26 | +7 | +8 | +25 | -4 | |||||||||||||||||||||||||||||
Operating profit | n/m | 42 | (24 | ) | +66 | -16 | +6 | +13 | +61 | +2 | ||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 6.9% | 6.2% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 1.8% | -1.0% | ||||||||||||||||||||||||||||||||||||
Restructuring costs amounted to€4 million (2010:€29 million); impairment charges of€4 million were incurred (2010:€40 million) |
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of |
CRH 49
Business Review
BUSINESS REVIEW -Current Year
2011 saw the pace of decline in our markets moderate significantly, and we saw some top-line growth in the year. Overall like-for-like sales were 2% ahead compared with 2010. Organic profits and margins were impacted by higher fuel and other input costs, and by costs associated with the first-year roll-out of our Building Solutions programme. However, higher sales, together with the benefit of ongoing cost reduction initiatives, lower restructuring and impairment costs and a full year of our reorganised Building Products group, resulted in a significant improvement in overall operating profit to€42 million (2010: loss of€24 million).
Our Building Products group completed 4 bolt-on transactions during 2011. The acquisition of a leading paving manufacturer in Canada in May was the largest transaction; this complements and strengthens our existing business in eastern Canada. In our masonry business, we acquired a small block manufacturer and distributor in Indiana in July. Our Lawn and Garden business closed on a small mulch and soils supplier serving the greater Boston market in December, while our Precast business unit acquired a Florida-based highway barrier and specialty precast manufacturer in the first half of 2011. The impact of divestments shown in the table above reflects the effect of the disposal in late 2010 of the loss-making Ivy Steel business acquired as part of the 2006 MMI acquisition.
Building Products
With effect from January 2011 our architectural products and precast groups, together with the retained MMI construction accessories and fencing businesses, were combined to form the Building Products Group. This group has been successful in capturing market growth opportunities while saving costs by applying common business processes and functions.
With the benefit of acquisitions, our Architectural Products business showed modest sales growth in 2011, against a background of continuing soft residential and non-residential markets. Our Canada business, which had held up well in recent years, slowed in 2011. However, we benefited from continued stability across the full breadth of architectural products in our businesses which supply both the DIY and professional RMI segments. Cost reduction and rationalisation measures partly offset the impact of higher input costs. Results from the fencing business improved, and significantly reduced losses were recorded. Overall, this business recorded an increase in underlying operating profit for the year.
Our Precast business again suffered from weak demand and competitive pricing pressures across its markets. Further declines in the commercial sector in particular impacted results, and full-year volumes were flat compared with 2010. Our enclosures business, which had been challenged in recent years, showed a welcome improvement in profitability; however, this was more than offset by margin declines in our traditional precast activities. The construction accessories business (formerly part of MMI) was successfully absorbed into the precast organisation and losses reduced. Overall operating profit was lower, despite further progress in reducing costs.
BuildingEnvelope™
Non-residential sector activity was again depressed in 2011, providing another year of very challenging markets for this group. Despite these market conditions, we were able to increase sales by 9% and improve our competitive position in our traditional Architectural Glass and Storefront business. Our ongoing efforts to maintain market share, together with tight cost controls and improved processes, resulted in improved operating profit in this business after a poor 2010. Our Engineered Glazing Systems business also improved and continued to generate favourable margins through strong execution on some large jobs which were completed in 2011.
South America
While our Chile businesses continued to perform well, operating profit in our Argentina operations was much lower. Our ceramic tile business suffered from significant price competition, cost inflation pressures, and periodic production disruptions caused by natural gas shortages. Overall, while sales were higher, operating profit in our South American operations was significantly lower.
50 CRH
Business Review
BUSINESS REVIEW -Current Year
Outlook - Americas Products
There are increasing signs that residential construction activity has finally stabilised, while the rate of decline in the non-residential sector has slowed. Against this backdrop we expect further modest sales growth in 2012. This combined with further progress on, and benefit from, the cost and streamlining measures mentioned above, gives cause for cautious optimism for an improved operating profit outcome for 2012.
Europe Distribution
2011 overview
Results | Analysis of change | |||||||||||||||||||||||||||||||||||||
€ million | % Change | 2011 | 2010 | Total Change | Organic | Acquisitions | Divestments | Restructuring/ Impairment | Exchange | |||||||||||||||||||||||||||||
Sales revenue | +22% | 4,340 | 3,566 | +774 | +154 | +486 | - | - | +134 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | +25% | 267 | 214 | +53 | +12 | +32 | - | - | +9 | |||||||||||||||||||||||||||||
Operating profit | +41% | 190 | 135 | +55 | +19 | +23 | - | +6 | +7 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 6.2% | 6.0% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 4.4% | 3.8% | ||||||||||||||||||||||||||||||||||||
Restructuringcosts amounted to€4 million (2010:€4 million); impairment charges of€2 million were incurred (2010:€8 million) |
|
CRH 83 |
2011 saw satisfactory like-for-like sales growth in most of our markets with both the new residential and RMI sectors benefiting from benign winter conditions at the beginning and end of the year. While the first half of the year saw a 7% increase in like-for-like sales, this moderated in the second half to bring the full year organic sales increase to 4%. Overall operating profit and margins for the year improved as a result of better cost control and our focus on commercial excellence and procurement optimisation.
Recent acquisitions have enhanced the geographic balance of Europe Distribution’s business: in 2011, approximately 35% of Europe Distribution’s sales arose in the Benelux, with Switzerland accounting for almost 30%, Germany for approximately 20% and other countries, mainly France and Austria, accounting for the remaining 15%. The December 2010 acquisition of an additional 50% of Bauking in Germany, and the full-year inclusion of Sax Sanitair in Belgium (acquired in August 2010), contributed strongly to the increase in overall operating profit. In 2011 EuropeAmericas Distribution acquired three Belgian specialist merchants in SHAP materials, adding a total of 10 branches to Sax Sanitair’s existing network.
Professional Builders Merchants
With 419 locations in six countries, Professional Builders Merchants has strong market positions in all its regions. Overall operating profit for this business improved in 2011.
While markets in Benelux remained stable, both sales and operating profit increased during 2011. Sales levels in France increased significantly compared with 2010; despite some pressure on margins, profitability improved strongly reflecting the impact of the restructuring actions initiated in 2010. Our operations in Switzerland had another good year as a result of strong margin management and the roll-out of various excellence programmes. Austria, which has seen a turnaround in performance in recent years, delivered a good increase in sales and a strong improvement in both margin and operating profit. In Germany, like-for-like sales in Bauking improved significantly during 2011, with strong market growth and integration benefits positively impacting operating profit.
Sanitary, Heating and Plumbing
Our SHAP business in Germany and Switzerland again proved to be a stable performer in 2011 with robust sales and further improved operating profit performance. Our business in Belgium performed strongly and– 2013
CRH 51
Business Review
Results
|
|
|
Analysis of change
|
| ||||||||||||||||||||||||||||||||||||||||
€ million
|
%
| 2013
| 2012
| Total
| Organic
| Acquisitions
| Divestments
| Restructuring/
| Exchange
| |||||||||||||||||||||||||||||||||||
Sales revenue | +6% | 1,664 | 1,576 | +88 | +112 | +27 | - | - | -51 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* | +7% | 89 | 83 | +6 | +8 | +1 | - | - | -3 | |||||||||||||||||||||||||||||||||||
EBITDA (as defined)* margin |
| 5.3% | 5.3% | |||||||||||||||||||||||||||||||||||||||||
Operating profit | +14% | 67 | 59 | +8 | +10 | - | - | - | -2 | |||||||||||||||||||||||||||||||||||
| Restructuring costs amounted to €1 million (2012: €1 million)
|
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BUSINESS REVIEW -Current Year
exceeded expectations. With a total of 103 branches in three countries, our expanded SHAP business is taking shape in line with our strategy to build a European platform in the growing repair, maintenance and improvement focussed SHAP market.
DIY
Our DIY platform in Europe operates a network of 241 stores under four different brands; Gamma and Karwei in the Benelux, Bauking in Germany and MaxMat in Portugal. With lower restructuring costs in 2011, overall DIY operating profit was ahead of 2010.
In the Netherlands, weakening consumer confidence as the year progressed resulted in lower sales in 2011. Despite this market development, we were able to maintain our operating profit with better margins as a result of a successful purchasing programme, our strong focus on efficient store operations and cost-control programmes. In Belgium our network of 19 stores reported stable sales but better operating profit. With increasing consumer confidence and continued strong focus on costs, operating profit for Bauking’s 47-store DIY network in Germany improved to satisfactory levels. The economic environment in Portugal became more difficult and sales declined further; operating results remained at the level of 2010.
Outlook - Europe Distribution
After a successful 2011 we believe that market circumstances may deteriorate somewhat in 2012. We continue to have favourable expectations with our strong footprint in the German, Austrian, Swiss and Belgian markets; however, for the Netherlands and France the outlook has weakened. With 65% end-use sector exposure to RMI and with continuing operational excellence programmes we expect to see an improvement in 2012.
Americas Distribution
2011 overview
Results | Analysis of change | |||||||||||||||||||||||||||||||||||||
€ million | % Change | 2011 | 2010 | Total Change | Organic | Acquisitions | Divestments | Restructuring | Exchange | |||||||||||||||||||||||||||||
Sales revenue | +8% | 1,335 | 1,239 | +96 | +133 | +22 | - | - | -59 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | +8% | 65 | 60 | +5 | +9 | -1 | - | - | -3 | |||||||||||||||||||||||||||||
Operating profit | +22% | 45 | 37 | +8 | +11 | -1 | - | - | -2 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 4.9% | 4.8% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 3.4% | 3.0% | ||||||||||||||||||||||||||||||||||||
Restructuringcosts were€1 million (2010:€1 million); no impairment charges were incurred (2010: nil) |
|
Americas Distribution, trading as Allied Building Products (Allied)(“Allied”), showedexperienced solid performance across its activities in 2013 and reported good growth in 2011. Activity levels in both segments of ouroverall results. Both business improveddivisions continued to advance and although gross margins came under some pressure as suppliers implemented price increases,sales and operating profit were ahead of 2012. Performance in our Exterior Products business was led by a strong Northeast and the rebuilding efforts following Hurricane Sandy. The Interior Products business continued to show growth as both volumes and pricing improved significantly over 2010.throughout 2013.
Allied’s organisation structure was further streamlined in 2011, providing opportunity to consolidate its market footprint and position the group for future opportunities. The business has continuedIn 2013, Allied management maintained its focus on purchasing, logisticsstreamlining administrative procedures and pricing initiatives and rationalisationeliminating redundant processes through a significant internal initiative. This simplification of administrative and geographic oversight functions, thereby increasing efficiency, control and profitability. This aggressive operating approach again benefited 2011 operating results.
After three years of curtailed development activity during which the business responded to the difficult macro-economic environment with organisational changes and other cost saving initiatives, Allied had a
52 CRH
Business Review
BUSINESS REVIEW -Current Year
busy year in 2011processes, along with the completionongoing evolution of six acquisitions. The largest transaction,our organisational structure, is aimed at improving acquisition integration and enhancing operating synergies and should allow for greater economies of scale as our business, and the acquisition of Unitedoverall markets, grow.
We completed three small transactions in 2013. A three-branch Interior Products a 15-branch exterior distributor headquartered in Minnesota, and with branches in Minnesota, Wisconsin, North and South Dakota and Nebraska, was completed in December. United brings our network of branchescompany based in the Northern Plains to 26,Baltimore/Washington, D.C. market was acquired in April and is expected to improve significantly the operational efficiency and effectiveness of our existing businesses while increasing our sales footprint in the region. In September, the acquisition of Pacific Source, a four-branch distributor providing Hawaiian builders withInterior Products business based in northern Florida was added in October 2013. Certain assets of a broad range of products required to complete building projects, extended Allied’s existing footprint in Hawaii while providing the opportunity to generate significant fixed cost synergies. The other transactions included a four-branch distributor in Philadelphia, a two-branchsmall distressed business in Detroit and two single-branch opportunitiesHouston were also acquired to provide a platform for an Exterior Products strategy in Atlanta and Austin.Texas.
TriBuilt,Progress continued to be made in 2013 to increase brand awareness of Tri-Built, Allied’s proprietary private label brand, continuedas both sales and product offerings grew. Additionally, Allied implemented a new greenfield and service centre strategy in order to gain strength ashelp drive growth in existing markets. The new products were addedservice centre model will enable us to improve customer service, consolidate fixed costs and market acceptance grew. The TriBuilt label has helpedmore efficiently leverage branch assets. This new customer service platform, together with our process and procedure streamlining efforts and our commitment to employee development, continue to further help differentiate Allied in the market while building an exclusive brand identity. In addition, a merchandising initiative was launched to enhance the look and feel of branch showrooms and increase the number of products available to contractors at point of purchase. The reconfigured showrooms provide a one-stop-shop for customers while increasing sales of higher margin tools and accessories.marketplace.
Exterior Products
Allied is oneExterior Products are largely comprised of the top three roofing and siding distributors inproducts, the United States. Demanddemand for which is greatly influenced by residential and commercial replacement activity (75% of sales volume is RMI-related) with key products having an average life span of 25 years. Volumes improved in line with national shipmentsAllied continued to maintain its position as one of asphalt shingles up 13%the top three roofing and siding distributors in the year; thisUnited States. Strong growth was however from a very low 2010 base. Regionally,experienced in the Northeast Mid-Atlantic, Upper Midwestin 2013 driven by the rebuilding efforts following Hurricane Sandy. However, competitive pressures across the industry continued as the overall market contracted from 2012 leading to price pressure in all regions.
A regional restructuring was completed in 2013 with the focus on reducing costs and California markets have held up better andimproving customer service, which allowed us to maintain operating margin at a level consistent with 2012. Overall the Exterior Products division recorded furtherreported sales growth and a good advance in operating profit for the year, despite costs associated with flood damage arising from substantial September rainfall in the Northeast.ahead of 2012.
Interior Products
ThisThe Interior Products business sells wallboard, steel studs and acoustical ceiling systems to specialised contractors and has low exposure to weather-driven replacement activity; however, it is heavily dependent on the new residential and commercial construction market.market, having low exposure to weather-driven replacement activity. Allied is the third largestthird-largest Interior Products distributor in the US. The new construction market appears to have stabilised at historically low activity levels; shipments of wallboard, a good barometer of market activity, were generally unchanged for the yearUnited States. Performance in Allied’s market areas. Salesthis business was strong in all markets in 2013 with increased volumes and operating performance improved, with notable recovery in someprices of our Western markets, helped by an increase in market share,core products contributing to higher sales and improved operating margin, which further benefited from the lower cost base and the consolidation of smaller and underperforming locations.
Outlook - Americas Distribution
With good indications that we have finally reached a trough in residential activity, we look to continuing improved performance in our RMI-focussed Exterior Products business. However, commercial construction activity continues to decline modestly, impacting the short-term outlook for our Interior Products segment. Overall, with the benefit of the consolidation and cost reduction measures outlined above, we are looking to a year of further progress in 2012.
CRH 53
Business Review
BUSINESS REVIEW -Prior Year
Summary of 2010 Results
Trading in the first half of 2010 was especially difficult with weather conditions in the early months even more severe than in the weather-affected first quarter of 2009. Reported sales revenues for the first half declined by 8% (10% excluding acquisition and exchange translation effects), EBITDA (as defined)* fell 20% and operating profit and profit before tax were down 51% and 77% respectively.
The second half of 2010 showed a moderation in the rate of decline. Second half sales were ahead of second half 2009 (down 3.5% excluding acquisitions and translation effects), while EBITDA (as defined)* declined by 5%; operating profit was down 19% and profit before tax 18% lower than the second half of 2009.
Europe Materials benefitedresulting from cost reduction measures and trading in CO2 allowances which resulted in EBITDA (as defined)* and operating profit levels close to 2009 levels. Pricing generally was more challenging than in 2009 even in those markets which enjoyed good volume growth. Europe Products & Distribution saw operating profits fall by approximately 40% with practically all the decline attributable to Products activities. Once again repair, maintenance & improvement (RMI) oriented Distribution operations proved more resilient with operating profit only marginally below 2009 levels.
Americas Materials benefited from infrastructure projects funded by the American Recovery and Reinvestment Act. However, weaker than expected third quarter activity levels in markets supported totally by State and Municipal funds led to a sharp revision in our full year expectations for the Division and to a decline of 29% in full year operating profit in euro terms.
Our Products operations in the Americas which rely predominantly on US residential and non-residential construction suffered severely. This, combined with impairment charges, was only partly offset by a much-improved performance in RMI-oriented Distribution activities, and resulted in operating profit for the Americas Products & Distribution Division well below 2009.
Throughout the year our management teams Group-wide continued to build on the cost reduction and operational excellencesavings initiatives commencedundertaken in 2007. Cumulative annualised savings from these cost actions over the five years 2007 to 2011 are estimated at€2.0 billion. These painful but necessary adjustments have been essential in protecting profitability and cash flow and in positioning the Group for eventual recovery in our markets.recent years.
Key Components of 2010 Performance
Table 1
€ million | Revenue | EBITDA (as defined)* | Operating profit | Profit on disposals | Finance costs | Associates’ profit after tax | Pre-tax profit | |||||||||||||||||||||
2009 as reported | 17,373 | 1,803 | 955 | 26 | (297 | ) | 48 | 732 | ||||||||||||||||||||
Exchange effects | 671 | 78 | 46 | 1 | (8 | ) | 2 | 41 | ||||||||||||||||||||
2009 at 2010 exchange rates | 18,044 | 1,881 | 1,001 | 27 | (305 | ) | 50 | 773 | ||||||||||||||||||||
Incremental impact in 2010 of: | ||||||||||||||||||||||||||||
2009/2010 acquisitions | 304 | 40 | 26 | - | (6 | ) | - | 20 | ||||||||||||||||||||
Restructuring costs | - | 105 | 105 | - | - | - | 105 | |||||||||||||||||||||
Impairment costs | - | - | (61 | ) | - | - | (22 | ) | (83 | ) | ||||||||||||||||||
Ongoing operations | (1,175 | ) | (411 | ) | (373 | ) | 28 | 64 | - | (281 | ) | |||||||||||||||||
2010 as reported | 17,173 | 1,615 | 698 | 55 | (247 | ) | 28 | 534 | ||||||||||||||||||||
% change | -1% | -10% | -27% | -27% |
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of |
84 CRH |
54 CRH
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Business Review
86 CRH
Nicky Hartery Chairman Appointed to the Board:June 2004 Nationality:Irish Age:63 Committee membership:Acquisitions Committee; Finance Committee; Nomination & Corporate Governance Committee; Remuneration Committee | ![]() | Skills and experience: Nicky was Vice President of Manufacturing and Business Operations for Dell Inc.’s Europe, Middle East and Africa (EMEA) operations from 2000 to 2008. 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.Qualifications: C.Eng, FIEI, MBA. External appointments:Chief Executive of Prodigium, a consulting company which provides business advisory services; non-executive director of Musgrave Group plc, a privately-owned international food retailer, Eircom Limited, a telecommunications services provider in Ireland, and of Finning International, Inc., the world’s largest Caterpillar equipment dealer. | ||
Albert Manifold Chief Executive Appointed to the Board:January 2009 Nationality:Irish Age:52 Committee membership:Acquisitions Committee | ![]() | Skills and experience:Albert was appointed a CRH Board Director in January 2009. He joined CRH in 1998. Prior to joining CRH, he was Chief Operating Officer with a private equity group. While at CRH, he has held a variety of senior positions, including Finance Director of the Europe Materials Division, Group Development Director and Managing Director of Europe Materials. He became Chief Operating Officer in January 2009 and was appointed Group Chief Executive with effect from 1 January 2014.Qualifications: FCPA, MBA, MBS. | ||
Maeve Carton Finance Director Appointed to the Board:May 2010 Nationality:Irish Age:56 Committee membership:Acquisitions Committee; Finance Committee | ![]() | Skills and experience:Since joining CRH in 1988, Maeve has held a number of roles in the Group Finance area and was appointed Group Controller in 2001, Head of Group Finance in January 2009 and to the position of Finance Director in May 2010. She has broad-ranging experience of CRH’s reporting, control, budgetary and capital expenditure processes and has been extensively involved in CRH’s evaluation of acquisitions. Prior to joining CRH, she worked for a number of years as a chartered accountant in an international accountancy practice.Qualifications: MA, FCA. External appointments:Board member of the National Treasury Management Agency (NTMA), a state body that provides asset and liability management services to the Irish Government. | ||
Mark S. Towe Chief Executive Officer Oldcastle, Inc. Appointed to the Board:July 2008 Nationality:United States Age:65 Committee membership:Not applicable | ![]() | Skills and experience:Mark joined CRH in 1997 and was appointed a CRH Board Director with effect from July 2008. In 2000, he was appointed President of Oldcastle Materials, Inc. and became the Chief Executive Officer of this Division in 2006. He was appointed to his current position of Chief Executive Officer of Oldcastle, Inc. (the holding company for CRH’s operations in the Americas) in July 2008. With over 40 years’ of experience in the building materials industry, he has overall responsibility for the Group’s aggregates, asphalt and readymixed concrete operations in the United States and its products and distribution businesses in the Americas. | ||
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Board of Directors| continued
Ernst J. Bärtschi Non-executive Director Appointed to the Board:October 2011 Nationality:Swiss Age:62 Committee membership:Audit Committee(Financial expert); Finance Committee | ![]() | Skills and experience: Ernst was Chief Executive of Sika AG, a manufacturer of speciality chemicals for construction and general industry, until 31 December 2011. Prior to joining Sika, he worked for the Schindler Group and was Chief Finance Officer between 1997 and 2001. Over the course of his career he has gained extensive experience in India, China and the Far East generally.Qualifications: LIC.OEC.HSG. External appointments:Chairman of the Board of Directors of Conzetta AG, a broadly diversified Swiss company, member of the board of Bucher Industries AG, a mechanical and vehicle engineering company based in Switzerland; member of the advisory board of China Renaissance Capital Investment Inc., a private equity investment company in Hong Kong, China. | ||
William P. Egan Non-executive Director Appointed to the Board:January 2007 Nationality:United States Age:69 Committee membership:Nomination & Corporate Governance Committee; Remuneration Committee | ![]() | Skills and experience:Bill is founder and General Partner of Alta Communications and Marion Equity Partners LLC, Massachusetts-based venture capital firms. He is past Chairman of Cephalon Inc., and past President and Chairman of the National Venture Capital Association. He was until May 2014, director of the Irish venture capital company Delta Partners Limited.Qualifications: BA, MBA. External appointments:He serves on the boards of several communications, cable and information technology companies. | ||
Utz-Hellmuth Felcht Non-executive Director Appointed to the Board:July 2007 Nationality:German Age:67 Committee membership: Acquisitions Committee; Finance Committee | ![]() | Skills and experience:Utz-Hellmuth was, until May 2011, Chairman of the Supervisory Board of Süd-Chemie Aktiengesellschaft. He was also Chief Executive of Degussa AG, Germany’s third largest chemical company, until May 2006, and a partner in the private equity group One Equity Partners Europe GmbH until July 2014. External appointments:Chairman of the Supervisory board of German rail company Deutsche Bahn AG and director of Jungbunzlauer Holding AG. | ||
John W. Kennedy Non-executive Director Appointed to the Board:June 2009 Nationality:Irish Age:64 Committee membership:Acquisitions Committee; Finance Committee | ![]() | Skills and experience:John is past Chairman of Wellstream Holdings plc. In a 40 year career, he has served as Executive Vice President of Halliburton Company, President of Dresser Enterprises and Chief Operations Officer of Brown and Root Services. He is a past director of the UK Atomic Energy Authority and Integra Group.Qualifications: M.Sc, BE, C.Eng, FIEE. External appointments:Non-executive Chairman of Lamprell plc; director of Maxwell Drummond International Limited and BiFold Group Limited. | ||
Patrick J. Kennedy Non-executive Director Appointed to the Board:January 2015 Nationality:Irish Age:61 Committee membership:Acquisitions Committee; Audit Committee | ![]() | Skills and experience:Pat was Chairman of the Executive Board of Directors of SHV Holdings (SHV), a large family-owned Dutch multinational company with a diverse range of operational and investment activities, including the production and distribution of energy, the provision of industrial services, heavy lifting and transport solutions, cash and carry wholesale and the provision of private equity. He retired from SHV mid-2014. During a 32 year career with SHV, he held various leadership roles across SHV’s diverse portfolio of businesses, while living in various parts of the world, and was a member of the Executive Board of SHV from 2001, before becoming Executive Chairman in 2006.Qualifications: MBS, BComm. | ||
88 CRH |
Donald A. McGovern, Jr. Non-executive Director* Appointed to the Board:July 2013 Nationality:United States Age:63 Committee membership: Nomination & Corporate Governance Committee; Remuneration Committee | ![]() | Skills and experience: Don retired from PricewaterhouseCoopers (PwC) in June 2013, following a 39 year career with the firm. During that time he was Vice Chairman, Global Assurance at PwC, a position he had held since July 2008 and directed the US firm’s services for a number of large public company clients. He also held various leadership roles in PwC and was, from July 2001 to June 2008, a member of, and past lead director for, the Board of Partners and Principals of the US firm as well as a member of PwC’s Global Board.Qualifications: CPA, MBA. External appointments:Director of Neuraltus Pharmaceuticals, Inc. * Don McGovern is Senior Independent Director | ||
Heather Ann McSharry Non-executive Director Appointed to the Board:February 2012 Nationality:Irish Age:53 Committee membership:Audit Committee; Finance Committee | ![]() | Skills and experience:Heather Ann is a former Managing Director Ireland of Reckitt Benckiser and Boots Healthcare and was previously anon-executive director of Bank of Ireland plc and IDA Ireland.Qualifications: BComm, MBS. External appointments:Non-executive director of Greencore Group plc and Jazz Pharmaceuticals plc; Chairman of the Bank of Ireland Pension Fund Trustees Board; director of Ergonomics Solutions International and the Institute of Directors. | ||
Dan O’Connor Non-executive Director Appointed to the Board:June 2006 Nationality:Irish Age:55 Committee membership:Nomination & Corporate Governance Committee; Remuneration Committee | ![]() | Skills and experience:Dan is a former President and Chief Executive Officer of GE Consumer Finance - Europe and a former Senior Vice-President of GE. He was Executive Chairman of Allied Irish Banks, p.l.c. until October 2010.Qualifications: BComm, FCA. External appointments:Director of Glanbia plc, an Irish food company and International Personal Finance plc, a consumer lending business. | ||
Henk Rottinghuis Non-executive Director Appointed to the Board:February 2014 Nationality:Dutch Age:58 Committee membership: Acquisitions Committee; Audit Committee | ![]() | Skills and experience:Henk has a background in distribution, wholesale and logistics. He was until 2010, Chief Executive Officer at Pon Holdings B.V., a large, privately held international company which is focussed on the supply and distribution of passenger cars and trucks, and equipment for the construction and marine sectors. He was also a member of the Supervisory Board of the Royal Bank of Scotland N.V. and the retail group Detailresult Groep.Qualifications: Master’s degree in Dutch Law. External appointments:Chairman of the Supervisory Board of Stork Technical Services and member of the Supervisory Board of the retail group Blokker Holding B.V. | ||
Lucinda Riches Non-executive Director Appointed to the Board:March 2015 Nationality:British Age:53 Committee membership:Nomination & Corporate Governance Committee; Remuneration Committee | ![]() | Skills and experience:Lucinda spent the majority of her career in investment banking, including 21 years in UBS Investment Bank and its predecessor firms where she worked until 2007. She held senior management positions in the UK and the US, including Global Head and Chairman of the UBS Capital Markets Group and Vice Chairman of the Investment Banking Division.Qualifications: Master’s in Philosophy, Politics and Economics and a Master’s in Political Science. External appointments:Non-executive director of UK Financial Investments Limited, which manages the UK government’s investments in financial institutions. She is also a non-executive director of Diverse Income Trust plc, Graphite Enterprise Trust plc, the British Standards Institution and a non-executive member of the Partnership Board of King & Wood Mallesons LLP. She is also a trustee of Sue Ryder. | ||
CRH 89 |
CRH plc has a secondary listing on the Irish Stock Exchange. For this reason, CRH plc is not subject to the same ongoing listing requirements as would apply to an Irish company with a primary listing on the Irish Stock Exchange. For further information, shareholders should consult their own financial adviser. Further details on the Group’s listing arrangements, including its premium listing on the London Stock Exchange, are set out on page 92. | Chairman’s Introduction The following report outlines our approach to corporate governance and how we implement the 2012 UK Corporate Governance Code (the 2012 Code). The reports from the Chairmen ofAudit, Nomination&Corporate Governance andRemuneration Committees on pages 97, 102 and 108 respectively highlight the key areas of focus for, and the background to the principal decisions taken by, those Committees. In relation to 2014, we complied in full with the provisions of the 2012 Code. We also have procedures in place for compliance with our obligations under the applicable rules and regulations issued by the United States Securities and Exchange Commission. Board Renewal and Re-election We have recently appointed two new non-executive Directors to the Board. Pat Kennedy, former Chief Executive of SHV Holdings, a large family owned Dutch multi-national company with a diverse range of operational and investment activities, was appointed in January 2015. Lucinda Riches, who spent the majority of her career in investment banking, including 21 years in UBS Investment Bank and its predecessor firms where she worked in senior management positions in the UK and the US, was appointed on 1 March 2015. Their biographies, along with those of the other Board members are set out on pages 87 to 89. The Group’s approach to Board renewal and succession planning is set out on page 93 and in theNomination & Corporate Governance Committee section. |
90 CRH
Last year, I reported that the Board had set itself the goal of increasing the number of female Directors to circa 25% of the Board by the end of 2015. In this regard, I am pleased to report that, following the 2015 Annual General Meeting, to be held in early May, one quarter of the Board will be female.
In relation to each of the Directors putting themselves forward for reelection at the 2015 Annual General Meeting, I have conducted a formal evaluation of the performance of each Director, which included training needs where appropriate. I can confirm that each of the Directors continues to perform effectively and to demonstrate strong commitment to the role.
As referred to in my introduction on page 2, John Kennedy and Dan O’Connor, after many years’ service to CRH, will retire from the Board following the conclusion of the 2015 Annual General Meeting.
Board Effectiveness and Training
During the course of 2015, an external consultant will be engaged to facilitate the external evaluation of the effectiveness of the Board. The external evaluation will supplement our existing internal evaluation processes, details of which are set out on page 94. The last externally facilitated evaluation was carried out in 2012. Also this year, together with Don McGovern who took over as Senior Independent Director in January 2015, I will be reviewing the training arrangements we have in place for Directors with a view to partnering with an external firm to provide a range of programmes which Directors can avail of on an ongoing basis.
Talent Management / Succession Planning
Throughout its history, CRH’s approach to recruiting, developing and retaining talented executives has resulted in a long standing tradition of making internal appointments for critical senior roles and is an important component in the achievement of the Group’s strategic priorities. Nevertheless, the Board recognises that CRH’s evolving organisation structure and the expansion of the Group’s geographic footprint over time will bring additional challenges. In this regard, we will be working with the Chief Executive and the Group Human Resources and Talent Development Director to take a fresh look at our processes in 2015 and the coming years to ensure we have a pipeline of executives at all levels to match our needs.
Shareholder Engagement and Reporting
This year the Senior Independent Director and I will again hold meetings with large shareholders prior to the Annual General Meeting to discuss any areas of concern in relation to the agenda for that meeting or other topical governance-related matters. We appreciate the level of interest and engagement in this process, which provides us with an insight into the views of shareholders on CRH’s governance structures and in relation to recent or upcoming developments in this area. I am always available to meet with shareholders outside of this process should the need arise.
Conclusion
As a Board, we are committed to a process of continued improvement in our collective effectiveness. In this regard, I look forward to the feedback from our upcoming external evaluation process.
Nicky Hartery
Chairman
CRH 91 |
Corporate Governance Report |continued
Stock Exchange Listings and Corporate Governance Codes
CRH, which is incorporated in Ireland and subject to Irish company law, has a premium listing on the London Stock Exchange, a secondary listing on the Irish Stock Exchange and its American Depositary Shares are listed on the New York Stock Exchange.
This Report describes CRH’s governance principles and practice and the Group’s risk management and internal control systems. The Report also sets out how CRH applies the main and supporting principles of the 2012 UK Corporate Governance Code (the 2012 Code).
A copy of the 2012 Code can be obtained from the Financial Reporting Council’s website, www.frc.org.uk.
Board of Directors
What are the responsibilities
of the Board?
The Board is responsible for the leadership, oversight, control, development and long-term success of the Group. It is also responsible for instilling the appropriate culture, values and behaviour throughout the organisation.
There is a formal schedule of matters reserved to the Board for consideration and decision. This includes the matters set out in table 1 below.
Matters Reserved to the Board | Table 1 | |||||
Appointment of Directors | ||||||
Strategic plans for the Group | ||||||
Annual budget | ||||||
Major acquisitions and disposals | ||||||
Significant capital expenditure | ||||||
Approval of the Annual Report | ||||||
Approval of the Interim Results | ||||||
Issuance of guarantees |
The Group’s strategy, which is regularly reviewed by the Board, and its business model are summarised in the Strategic Report on pages 34 to 43.
The Board has delegated some of its responsibilities to Committees of the Board. The work of each Committee is set out on pages 97 to 131 of this Report. While
responsibility for monitoring the effectiveness of the Group’s risk management and internal control systems has been delegated to theAudit Committee*, the Board retains ultimate responsibility for determining the Group’s “risk tolerance” and annually considers a report in relation to the monitoring, controlling and reporting of identified risks and uncertainties. In addition, the Board receives regular reports from the Chairman of theAudit Committee in relation to the work of that Committee in the area of risk management.
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 Directors’ and Officers’ Liability insurance policy in place.
How do the roles of the Chairman and Chief Executive differ?
It has been CRH’s practice since the formation of the Group in the 1970s that the roles of Chairman and Chief Executive are not combined.
The Board has delegated responsibility for the management of the Group, through the Chief Executive, to executive management. There is a clear division of responsibilities between the roles of the Chairman and the Chief Executive, which is set out in writing and has been approved by the Board. A summary of the respective roles is set out in table 2 across.
What is the membership structure of the Board?
It is CRH’s practice that a majority of the Board comprises non-executive Directors.
At present, there are 3 executive and 11** non-executive Directors. Biographical details are set out on pages 87 to 89. Non-executive Directors are expected to challenge management proposals constructively and to examine and review management performance in meeting agreed objectives and targets. In addition, they are expected to draw on their experience and knowledge in respect of any challenges facing the Group and in relation to the development of proposals on strategy.
We consider the current size and composition of the Board to be within a range which is appropriate. We also believe that the current size of the Board is sufficiently large to enable its Committees to operate without undue reliance on individual non-executive Directors, while being dynamic and responsive to the needs of the Group. The spread of nationalities of the Directors reflects the geographical reach of the Group and we consider that the Board as a whole has the appropriate blend of skills, knowledge and experience, from a wide range of industries, regions and backgrounds, necessary to lead the Group.
None of the executive Directors is a non-executive director of another listed company.
The current membership structure of the Board is set out in table 3 on page 93.
Chairmanis responsible for | Table 2 | |||||
The efficient and effective working of the Board | ||||||
Ensuring that Board agendas cover the key strategic issues confronting the Group, that the Board reviews and approves management’s plans for the Group and that the Directors receive accurate, timely, clear and relevant information | ||||||
Making certain that the Board applies sufficient challenge to management proposals and examines and reviews management performance in meeting agreed objectives and targets | ||||||
Overseeing the search for new Board members | ||||||
Chief Executiveis responsible for | ||||||
Full day-to-day operational and profit performance of the Group and accountability to the Board for all authority delegated to executive management | ||||||
Executing strategy agreed with the Board and reporting regularly on the progress and performance of the Group | ||||||
Co-ordinating and overseeing the profitable growth of the Group’s diverse portfolio of international businesses | ||||||
Maximising the contribution of senior management to business planning, operational control and profit performance |
* In accordance with Regulation 91(6)(b) of the European Communities (Statutory Audits) (Directive 2006/43) Regulations 2010.
** Will reduce to nine following the conclusion of the 2015 Annual General Meeting.
92 CRH |
Corporate Governance Report| continued
How does the Board plan for succession and what is its policy on diversity?
BUSINESS REVIEW -The Board plans for its own succession with the assistance of thePrior YearNomination & Corporate Governance Committee.
For non-executive appointments, independent consultants are normally engaged to search for suitable candidates. The process to identify, evaluate and appoint a non-executive Director with the suitable experience, skills and time commitment takes into account both the needs of CRH and the tenure and skills of existing Board members. As a result, Board renewal and the appointment of non-executive Directors is a continuous process. The process put in place
in respect of appointments made since the 2013 Annual Report was published is set out in the Chairman’s introduction to theNomination & Corporate GovernanceCommittee’s Report on pages 102 and 103.
External consultants are engaged for executive Director recruitment if, and when, required. In the case of the Chief Executive role, the Board appoints a succession committee of long standing non-executive Directors, when required. The incumbent Chief Executive generally acts as advisor to that committee.
We are committed to ensuring that the Board is sufficiently diverse and appropriately balanced. In its work in the area of Board renewal, theNomination & Corporate Governance Committee looks at the following four criteria when considering non-executive Director candidates:
– | international business experience, particularly in the regions in which the Group operates or into which it intends to expand; |
– | skills, knowledge and expertise in areas relevant to the operation of the Board; |
– | diversity, including nationality and gender; and |
– | the need for an appropriately sized Board. |
During the ongoing process of Board renewal, each, or a combination, of these factors can take priority.
In 2014, the Board set itself the goal of increasing the number of female Board members to circa 25% by the end of 2015. Following the 2015 Annual General Meeting, this objective will have been achieved.
What criteria are used to determine the independence of non-executive Directors?
Table 1The Board considers the principles relating to independence contained in the 2012 Code, together with the guidance provided by a number of shareholder voting agencies, and takes into account a Director’s character, objectivity and integrity.
The independence of non-executive Board members is considered annually. The Board is assisted in this by the annual review carried out by the Senior Independent Director which addresses the independence of the individual members of the Board, and by the work of theNomination & Corporate Governance Committee, which annually reviews each Board member’s directorships, and considers any relevant business relationships between Board members. We have concluded that all of the non-executive Directors bring independent judgement to bear on issues of strategy, performance, resources, key appointments and standards, and have determined that each of the non-executive Directors is independent.
When was the Chairman appointed and does he have non-CRH commitments?
While the Chairman holds other directorships (see details on page 87), the Board considers that these do not interfere with the discharge of his duties to CRH.
Nicky Hartery was appointed Chairman of the Group in 2012. On his appointment as Chairman, he met the independence criteria
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Corporate Governance Report| continued
set out in the 2012 Code. During 2014, Nicky joined the Board of a Canadian listed company. The Board has satisfied itself that this would not impact on his role as CRH Chairman.
In February 2015, the Board considered the outcome of the annual review, carried out by the Senior Independent Director, of the performance of the Chairman, whose initial term of office is due to expire at the conclusion of the Annual General Meeting in May 2015. The Board, chaired by the Senior Independent Director for this purpose, resolved that Mr. Hartery’s term in office be extended for a further three years.
Who is the Senior Independent Director?
The Senior Independent Director is available to shareholders who have concerns that cannot be addressed through the Chairman, Chief Executive or Finance Director.
Don McGovern was appointed as Senior Independent Director in January 2015.
Who is the Company Secretary?
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.
Neil Colgan was appointed Company Secretary in June 2009. The appointment and removal of the Company Secretary is a matter for the Board.
For what period are non-executive Directors appointed?
Non-executive Directors are typically expected to serve two three-year terms, although they may be invited by the Board to serve for further periods.
The standard terms of the letter of appointment for non-executive Directors, which states that they are generally expected to serve two terms of three years, are available for inspection at the Company’s registered office and at the Annual General Meeting. A non-executive Director’s term of office is subject to his/her annual re-election by shareholders and the letter of appointment does not provide for any compensation for loss of office.
How are the induction, training and development needs of Directors catered for?
The Chairman agrees a tailored and comprehensive induction programme with each new Director.
New Directors are provided with extensive briefing materials on the Group and its operations, the procedures relating to the Board and its Committees and their duties and responsibilities as Directors under legislation and regulations that apply to the Company.
A typical induction programme, which generally takes place over the first year of a Director’s appointment, would cover the topics set out in table 4 on page 95.
Sessions are held periodically with the Chairman at which progress is reviewed and feedback is sought.
For newly-appointed members of theAudit Committee, additional training arrangements include the topics set out in table 5 on page 95.
Members of theAudit Committee receive periodic updates on accounting developments.
Directors can also avail of opportunities to hear the views of, and meet with, the Group’s shareholders. Directors regularly receive copies of research and analysis conducted on CRH and the building materials sector. The Board receives regular updates from the external auditors in relation to regulatory and accounting developments. Updates in relation to other relevant matters, for example, changes in company law, are provided from time to time.
What processes are in place for appraising the performance of Directors and for evaluating the effectiveness of the Board and its Committees?
An annual review of individual Directors’ performance is conducted by the Chairman and each Director is provided with feedback gathered from other members of the Board.
The performance of individual Directors 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 fulfil
the role and to listen to and respect the views of other Directors and the management team. As part of that review process the Chairman discusses with each individual their training and development needs and, where appropriate, agrees suitable arrangements to be put in place to address those needs.
The Senior Independent Director conducts an annual review of Board effectiveness and the balance of skills, experience, independence and knowledge of the Company on the Board, the operation and performance of the Chairman, the Board and its Committees and the effectiveness of Board communications. This is achieved through discussion in one-toone sessions with each Director, aided by the completion by each Director of a questionnaire in advance. The meetings, which cover specific topics and allow for free-ranging discussion, provide a forum for an open and frank discourse. The Senior Independent Director circulates a written report to the Board, which summarises the outcome of the review and sets out the key componentsany recommendations from Board members in relation to areas where improvements can be made. Consideration of the Group’s performanceSenior Independent Director’s report is a formal agenda item at a scheduled Board meeting.
When was the last external Board evaluation completed and what was the outcome?
The 2012 evaluation was facilitated by ICSA Board Evaluation, which has an extensive record in 2010, analysing the changefacilitating evaluations in results from 2009 to 2010. Sales revenue for 2010 was broadlylarge listed companies both in line with 2009 at€17.2 billion. EBITDA (as defined)* for the year, after once-off charges of€100 million associated with our cost reduction programme, declined by 10% to€1.6 billion while operating profit declined 27% to€698 million. After impairment costs of€124 million (2009:€41 million), pre-tax profit declined by 27% to€534 million.
Exchange Translation Effects
Currency movements had an overall positive impact on 2010 results, principally due to a strengthening of the US Dollar, the Swiss FrancIreland and the Polish Zloty. The average 2010 US$/€UK. rate of 1.3257 was 5% stronger than in 2009 (1.3948), while the average Swiss Franc and Polish Zloty rates were 9% and 8% stronger respectively than in 2009.
Restructuring Costs
We continue to review and extend our cost reduction programme and we expect the initiatives taken in 2010, combined with the actions taken across the Group since 2007, to result in significant operational leverage when markets recover. Costs of€100 million incurred in 2010 to implement these savings were€105 million lower than last year (2009:€205 million).
Ongoing Operations
Revenue from ongoing operations declined by€1.2 billion (7%) on a like-for-like basis in 2010, with the reduction split broadly evenly between our Americas and Europe segments; this compares with a€4.1 billion reduction (19%) in ongoing revenue in 2009. With lower sales volumes, price competition intensified in many of our markets, putting margins under pressure; however, tight management of the controllable cost base partly offset these negative impacts resulting in a decline of€373 million in underlying operating profit; the corresponding decline in underlying operating profit in 2009 was€708 million.
Finance Costs
Net finance costs of€247 million were€50 million lower than 2009 reflecting lower interest rates and lower debt levels.
Key Financial Performance Indicators
Some key financial performance indicators which, taken together, are a measure of performance and financial strength, are set out below.
2010 | 2009 | |||||||
Operating profit margin | 4.1% | 5.5% | ||||||
EBITDA (as defined)* to net interest ratio | 6.5x | 6.1x | ||||||
Effective tax rate | 17.8% | 18.3% | ||||||
Shareholder return | -16% | 22% | ||||||
Net debt as % of total equity | 33% | 38% | ||||||
Net debt as % of market capitalisation | 32% | 28% |
Operating Profit Margin
Overall operating profit margin forAn externally facilitated Board evaluation was carried out by an independent third party, ICSA Board Evaluation in 2012, the Group fell by 1.4 percentage pointsoutcome of which was very positive. The recommendations were reported in 2010 to 4.1%, reflecting the market conditions discussed above.2012 Corporate Governance Report, a copy of which is available on the CRH website. The next external evaluation will be conducted during 2015.
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Corporate Governance Report| continued
Induction Programme | Table 4 | |||
Board Members | ||||
Topic | Sessions with | |||
Group strategy and finance: – Group strategy, the current challenges facing the Group and the trading backdrop – Financial reporting, trading results, acquisition models, funding sources/debt maturity, group treasury and credit rating metrics | Chief Executive, Finance Director, senior finance and treasury management | |||
Divisional strategy and structure: – Divisional strategy and organisational structure – Development priorities – IT strategy | Chief Executive, Heads of Divisions and senior operational management | |||
Senior management team: – Succession planning – Leadership development programmes – Remuneration trends | Chief Executive and Group Human Resources and Talent Development Director | |||
Directors’ legal duties and responsibilities: – Legal duties and responsibilities – Management of inside information – Dealings in CRH securities – Listing rule requirements | Finance Director, Company Secretary and the Group’s legal advisers | |||
Compliance & ethics, health & safety, risk management, investor relations and remuneration: – Compliance & ethics policies and the structures in place to ensure ongoing compliance – Health & safety programme, including the fatality elimination programme, and the Group’s Corporate Social Responsibility policies – Investor Relations programme and the views of the Group’s major investors – Enterprise Risk Management, insurance arrangements and captive insurance programme | Finance Director, executives responsible for the relevant area, the Group’s stockbrokers and theRemuneration Committee’s remuneration advisors |
Audit Committee | Table 5 | |||
Topic | Sessions with | |||
External Audit – Audit planning – Auditors’ responsibilities | Finance Director, senior finance management, Head of Internal Audit and external auditors | |||
Internal Audit – Strategy and workplan – IT audit |
What are the requirements regarding the retirement and re-election of Directors?
All Directors retire at each Annual General Meeting and, unless they are stepping down from the Board, submit themselves to shareholders for re-election.
Re-appointment of Directors retiring at Annual General Meetings is not automatic. Directors who are seeking re-election are subject to a satisfactory performance appraisal. All Directors are subject to the Memorandum and Articles of Association of the Company (a summary of provisions in the Memorandum and Articles of Association relating to the Directors is set out on pages 204 and 205).
How often does the Board meet?
Details of the number of Board and Committee meetings during 2014, and of Directors’ attendance at those meetings, is set out in table 11 on page 104.
There were eight full meetings of the Board during 2014.
Each year, additional meetings, to consider specific matters, are held if and when required. Prior to their appointment, potential non-executive Directors are made aware of the calendar of meetings and are asked to confirm that they are able to allocate sufficient time to meet the expectations of their role. The agreement of the Chairman is required before a Director accepts additional commitments that might impact adversely on the time he or she is able to devote to CRH.
The Board typically makes two visits each year to Board operations; one in Europe and one in North America. Each visit lasts between three and five days and incorporates a scheduled Board meeting. In 2014, these visits were to Amsterdam in the Netherlands and Los Angeles in the United States.
How are Board agendas determined?
The Chairman sets the agenda for each meeting in consultation with the Chief Executive and Company Secretary.
In setting the agendas, the Chairman ensures that sufficient time is allocated to strategy setting and review, performance monitoring, portfolio management, including acquisitions
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Typical Board Agenda Items | Table 6 | |||||
Recurring items on each agenda: – Minutes – Board matters (including Board Committee updates) – Trading results – Acquisitions/Disposals/Capital Expenditure Projects | ||||||
Periodic agenda items during the year: – Group strategy and Divisional strategy updates – Group budget – Full-year/interim financial results and reports – Investor interaction and feedback – Performance review of acquisitions against the original Board proposal following three years of Group ownership – Funding proposals – Human resources and succession planning – Risk management and internal controls – Compliance & Ethics – Health & Safety review, with a particular focus on the Group’s fatality elimination programme – Environmental review |
and divestments, succession planning and talent management. Board agendas typically cover items set out in table 6 above.
The non-executive Directors regularly meet before or after each Board meeting without executives being present.
The papers for meetings are generally circulated electronically in the week prior to the meeting.
How does the Board ensure its reports are “Fair, Balanced and Understandable”?
The Board collectively determines whether or not it is appropriate to include in the Annual Report a statement that the Board considers the document, taken as a whole, to be “Fair, Balanced and Understandable”.
The Group’s Financial Reporting and Disclosure Group (“FRADG”) reviews draft disclosures such as the annual and interim reports, and meets with the Finance Director to discuss proposed disclosures, in the context of whether draft reports fulfil the
criteria of being fair, balanced and understandable. The conclusions of the FRADG are reported to the Board. To ensure the Group’s disclosures are in line with evolving best practice in this area, the FRADG, which is made up of executives with responsibilities across a range of functions, regularly receives feedback from external experts who review published documents and provide guidance regarding developments. In the case of the Annual Report, to facilitate each Director’s individual review, the draft document is circulated to Board members circa two weeks prior to the finalisation of the report.
Are the Directors subject to securities dealing policies or codes?
Directors are required to obtain clearance from the Chairman and Chief Executive before dealing in CRH securities.
Details of the CRH shares held by Directors are set out on page 121.
CRH has a policy on dealings in securities that applies to all Directors and senior management. Directors and senior management are prohibited from dealing in CRH securities during designated prohibited periods and at any time at which the individual is in possession of inside information (as defined in the Market Abuse (Directive 2003/6/EC) Regulations 2005). The policy adopts the terms of the Model Code, as set out in the Listing Rules published by the UK Listing Authority subject to amendments in relation to Irish company law and taxation references.
What are the Committees of the Board?
The Board has established five permanent Committees to assist in the execution of its responsibilities.
The current permanent Committees1 of the Board are theAcquisitions Committee, theAudit Committee, theFinance Committee, theNomination & Corporate Governance Committee and theRemuneration Committee.
In addition, 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 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 and each member’s length of service is set out in the relevant sections in the remainder of this report. Attendance at meetings held in 2014 is set out in table 11 on page 104.
Chairmen of the Committees attend the Annual General Meeting and are available to answer questions from shareholders.
1 | The Terms of Reference of these Committees comply fully with the 2012 Code requirements; CRH considers that they are generally responsive to the relevant NYSE rules but may not address all aspects of these rules. |
96 CRH |
Audit Committee | ||||||||||
TheAudit Committee currently consists of four non-executive Directors considered by the Board to be independent1. The biographical details of each member are set out on pages 87 to 89. Together the members of the Committee bring a broad range of experience and expertise from a wide range of industries which is vital in supporting effective governance. The primary responsibilities of the Committee are to: – monitor the financial reporting process, the integrity of the financial statements, including the Annual and Interim Reports, preliminary results announcements, interim management statements and any other formal announcement relating to the financial performance of the Company, and to review significant financial reporting issues and judgements exercised in the preparation thereof; – monitor the audit of the financial statements; – keep under review the effectiveness of the Company’s internal financial controls and the internal control and risk management systems and review and approve statements to be included in the Annual Report regarding internal control and risk management; – review the Company’s arrangements for its employees to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters and review the Company’s procedures and systems for detecting fraud and preventing bribery; – keep under review the adequacy of the Group’s compliance and ethics function; – monitor and review the effectiveness of the internal audit function; – review the effectiveness of the audit process and the independence and objectivity of the external auditors; – develop and monitor the policy on non-audit services to be provided by the external auditors; – approve the remuneration and terms of engagement of the external auditors; – make recommendations to the Board in relation to the appointment or removal of the external auditor; – report to the Board on how it has discharged its responsibilities. The responsibilities of theAudit Committee are set out in full in its Terms of Reference, which are available on the CRH website, www.crh.com. 1 The Board has determined that all of the non-executive Directors on the Audit Committee are independent according to the requirements of Rule 10A 3 of the rules of the Securities and Exchange Commission. | Chairman’s overview On behalf of theAudit Committee, I am pleased to introduce theAudit Committee Report for the year ended 31 December 2014. The non-executive Directors who were members of the Committee during 2014, together with their record of attendance at Committee meetings, are identified in table 11 on page 104. A summary of recent and upcoming changes to the membership of theAudit Committee is set out in the Chairman’s overview section of theNomination & Corporate Governance Committee Report on page 103. Financial Reporting and External Audit In July 2014, the Committee met with Ernst & Young to agree the 2014 external audit plan. Table 7 on page 99 outlines the key areas identified as being potentially significant and how they were addressed by the Committee. Impairment Testing / Accounting for Divestments The Committee reviewed management’s goodwill impairment testing methodology and process, through discussion with both management and Ernst & Young, and found the methodology to be robust and the results of the testing process appropriate. The Committee also reviewed the re-assessment of the carrying value of the business units identified for divestment in 2013 (in respect of which an impairment charge of €683 million was recorded in the 2013 Consolidated Financial Statements). No goodwill impairments or reversal of previous impairments were recorded during the year (see note 14 on pages 159 to 161 for more details). However, a number of the business units identified for divestment met the ‘held for sale’ criteria contained within IFRS 5Non-current Assets Held for Sale and Discontinued Operations at 31 December 2014 and have been re-classified as such in the Consolidated Financial Statements (see note 4 on page 151 for more details). | |||||||||
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Enterprise Risk Management
During 2014 the Committee received and considered an update from management on progress in respect of the ongoing development of the Group’s enterprise risk management framework, which included detailed reports identifying the key risks at Divisional and Group level and the related mitigation steps. The Committee also considered an annual report on the assessment of risk management and internal control systems. This had regard to all material controls, including financial, operational and compliance controls that could affect the Group’s business. Further details in relation to the Group’s risk management and internal control systems are set out on page 105.
External Auditors
Ernst & Young have been the Group’s auditors since 1988. In last year’s report, I informed shareholders that the Committee had deferred making a decision on the timeframe for putting the external audit out to tender until the finalisation of EU legislation on the reform of the audit sector. This EU legislation, which includes a requirement for mandatory auditor rotation and will necessitate, in the case of CRH, an audit tender by the end of 2020, was enacted in June 2014. However, taking into account the differing requirements of the EU legislation and the 2012 Code (the current provision in the 2012 Code which would require a tender process in 2015 remains in place), and the organisational change in Europe (see page 16), the Committee has determined that it is not in the best interests of the Group to carry-out a tender at this time. The Committee will continue to review this position on an ongoing basis. In the interim, the Committee has again recommended to Board that the continuance in office of Ernst & Young should be subject to a non-binding
advisory vote at the 2015 Annual General Meeting.
Further details in relation to the external auditors, including information on how auditor objectivity and independence are maintained and how the effectiveness of the external audit is assessed, are included on pages 100 and 101.
Audit Committee Effectiveness and Priorities for 2015
During 2014 the Committee, together with the Finance Director and Company Secretary, carried out a review of the operation of the Committee. This involved an assessment of the Committee’s primary role and responsibilities, training arrangements for Committee members, the time allocated for consideration of key issues, the format and content of the information provided to the Committee and the priorities for 2015 and onwards. A number of helpful recommendations resulted from the process which I believe will further improve the efficiency and effectiveness of the Committee.
The key areas of focus for the Committee in 2015 will be on internal control, external audit planning, IT governance, cyber security and risk management.
Ernst Bärtschi
Audit Committee Chairman
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Corporate Governance Report |continued
Audit Committee Members
The biographies of the members of theAudit Committee are set out on pages 87 to 89.
The tenure of each Committee member is as follows:
E.J. Bärtschi | 3 years | |
H.A. McSharry | 3 years | |
H. Th. Rottinghuis | 0.75 years |
Mr. P.J. Kennedy joined the Committee with effect from 25 February 2015.
Mr. E.J. Bärtschi has been designated by the Board as the Committee’s Financial Expert.
The Committee reviewed its Terms of Reference in December 2014 and determined that no changes were required. The Terms of Reference, which were last updated in December 2013, are available on the CRH website.
Committee meetings
The Committee met ten times during 20141, with meetings held to coincide with key dates in the financial reporting and audit cycle. The Finance Director and the Head of Internal Audit generally attend Committee meetings. The external auditors, Ernst & Young, attend the majority of meetings and have direct access to the Chairman of the Committee. The Group Chairman, Chief Executive and other senior finance personnel attend meetings (or for particular agenda items) at the invitation of the Committee. During 2014, the Committee met with the Head of Internal Audit, and separately with the external auditors, in the absence of management. A typical calendar of meetings, which includes a general outline of the main agenda items, is set out in table 8 on page 100.
In February each year, the Chairman of the Committee formally reports to the Board on how the Committee has discharged its responsibilities in respect of the prior financial year.
Internal Audit
The Head of Internal Audit attends the majority of the meetings of theAudit Committee. The Committee agrees the Internal Audit strategy, its charter and the annual workplan, which is developed on a risk-based approach.
1 | Attendance by non-independent Directors and management is by invitation only. |
Areas identified for focus during the 2014 Audit Planning Process | Table 7 | |||
Area of Focus | Audit Committee Action | |||
Impairment of goodwill | For the purposes of its annual impairment testing process, the Group assesses the recoverable amount of each of CRH’s cash-generating units (CGUs – see details in note 14 to the Consolidated Financial Statements) based on a value-in-use computation. The annual goodwill impairment testing was conducted by management and papers outlining the methodology and assumptions used in, and the results of, that assessment were presented to theAudit Committee. Following its deliberations, theAudit Committee was satisfied that the methodology used by management (which was consistent with prior years) and the results of the assessment, together with the disclosures in note 14, were appropriate. A separate assessment was carried out in 2014 in respect of the business units identified in 2013 for divestment as part of the Group- wide portfolio review initiated in November of that year. A total impairment charge of€683 million (of which€315 million related to goodwill) was recorded in the 2013 Consolidated Financial Statements. The valuation of each business unit (based on the estimated fair value less costs of disposal) at year-end 2013 was reassessed in 2014 on a standalone CGU basis. The revised valuations were then compared with the carrying value of each business. TheAudit Committee reviewed and considered the methodology used by management in the reassessment process and was satisfied that it was appropriate. | |||
Impairment of property, plant and equipment and financial assets | In addition to the goodwill impairment testing process discussed above, the Group also annually assesses the need for impairment of other non-current assets (property, plant and equipment and financial assets) as and when indicators of impairment exist. TheAudit Committee considered the methodology used by management in that process and was satisfied that it was appropriate. | |||
Divestments – appropriate application of IFRS 5Non-current Assets Held for Sale and Discontinued Operations | In 2013, the Group announced that it had identified a number of business units for divestment globally. None of these businesses met the ‘held for sale’ criteria at 31 December 2013. However, the status of the businesses identified for divestment evolved during 2014 and those businesses which met the ‘held for sale’ criteria at 31 December 2014 have been reclassified as such in the Consolidated Financial Statements (see note 4 to the Consolidated Financial Statements for more details). Following detailed discussions with management and Ernst & Young, theAudit Committee was satisfied that the treatment in 2014 was appropriate. | |||
Contract revenue recognition | IAS 11Construction Contracts requires revenue and expenses to be recognised on uncompleted contracts, with the underlying principle that, once the outcome of a long-term construction contract can be reliably estimated, revenue and expenses associated with that contract should be recognised by reference to the stage of completion of the contract activity at the balance sheet date. If it is anticipated that the contract will be loss-making, the expected loss must be recognised immediately. Following discussions with management and Ernst & Young, theAudit Committee was satisfied that contract revenue recognition was not a material issue for the Group in 2014 as the majority of contracts were completed within the financial year. |
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Typical Audit Committee Calendar | Table 8 | |||||
Meeting | Activity | Attendees by invitation | ||||
February | – Consideration of the financial statements (including the report from the external auditors on Integrated Audit Results and Communications) – Approval of external audit fee – Annual review of external auditor independence – Annual assessment of risk management and internal control systems – Approval of Internal Audit workplan – Review of reports on the operation of the CRH Code of Business Conduct, the Competition/Anti-trust Compliance Code and the arrangements in place to enable employees to raise concerns, in confidence, in relation to possible wrongdoing in financial reporting or other matters – Enterprise Risk Management Review | Chief Executive and executives responsible for the relevant areas | ||||
March | – Review of Annual Report onForm 20-F | Senior finance personnel | ||||
May | – Review of interim management statement1 | Group Chairman and Chief Executive | ||||
June | – Meeting with Finance Director, Europe – Cyber Security Update | Senior Europe finance personnel | ||||
July | – Preliminary consideration of interim results – Approval of the external audit plan – Updates on accounting and auditing developments – Update on Internal Audit work/activities – Annual review of Committee effectiveness – Enterprise Risk Management Review | Chief Executive and executives responsible for the relevant areas | ||||
August | – Review of interim results announcement | Group Chairman and Chief Executive | ||||
September | – Meeting with the Chief Financial Officer for the Americas – Preliminary review of goodwill impairment and sensitivity analysis – Cyber Security Update | Senior Americas finance personnel | ||||
October | – Enterprise Risk Management Review – Preliminary review of interim management statement – Pensions Update | Executives responsible for the relevant areas | ||||
November | – Review of interim management statement1 | Group Chairman and Chief Executive | ||||
December | – Review of outcome of goodwill impairment and sensitivity analysis – Update on Internal Audit work/activities – Enterprise Risk Management Review – Approval of non-audit fees provided by external auditors – Review of the Committee’s performance and Terms of Reference | Senior finance personnel | ||||
¹ A Committee of the Group Chairman, Audit Committee Chairman, Chief Executive and Finance Director are authorised from time to time to review and approve the release of interim management statements. |
The Head of Internal Audit reports to theAudit Committee on the findings of internal audit reviews and related follow-ups and the outcome of control testing in connection with Section 404 of the Sarbanes-Oxley Act 20022.
In recent years, there has been a significant increase in the resources allocated to IT Audit. The Committee meets regularly with the senior IT Audit Manager to discuss IT Audit strategy, the key areas of focus and agrees the annual IT Audit workplan.
Assessments of the Internal Audit function have been carried out periodically by management and validated by an independent third party assessor. An external assessment, which principally involved a series of interviews with key stakeholders throughout the organisation, including the members of theAudit Committee, was commenced in December 2014. The results of that assessment will be presented to theAudit Committee for consideration in the first half of 2015.
Risk management and internal controls
The Board has delegated responsibility for monitoring the effectiveness of the Group’s risk management and internal control systems to theAudit Committee. Further details in relation to the Committee’s work in this area are set out in the section on Risk Management and Internal Controls on page 105.
External Auditors
There are no contractual obligations which act to restrict the Committee’s choice of external auditor. The Committee periodically considers the risk of withdrawal by Ernst & Young from the market and the potential impact on the Group, were that eventuality to materialise.
TheAudit Committee has put in place safeguards to ensure that the independence of the audit is not compromised. Such safeguards include:
– | seeking confirmation from the external auditors that they are, in their professional judgement, independent from the Group; |
– | obtaining from the external auditors an account of all relationships between the auditors and the Group; |
2 | A copy of Section 404 of the Sarbanes-Oxley Act 2002 can be obtained from the US Securities and Exchange Commission’s website www.sec.gov. |
100 CRH |
Corporate Governance Report| continued
– | monitoring the Group’s policy prohibiting the employment of former staff of the external auditors, who were part of the CRH audit team, in senior management positions with the Group until two years have elapsed since the completion of the audit; |
– | monitoring the number of former employees of the external auditors currently employed in senior positions in the Group and assessing whether those appointments impair, or appear to impair, the external auditors’ judgement or independence; |
– | considering whether, taken as a whole, the various relationships between the Group and the external auditors impair, or appear to impair, the auditors’ judgement or independence; |
– | reviewing the economic importance of the Group to the external auditors and assessing whether that importance impairs, or appears to impair, the external auditors’ judgement or independence. |
The Group external audit engagement partner is replaced every five years and other senior audit staff are rotated every seven years.
The Group has a policy governing the conduct of non-audit work by the auditors1. The policy, which was updated in 2012, is available on the CRH website. Under the policy, the external auditors are prohibited from performing services where they:
– | may be required to audit their own work; |
– | participate in activities that would normally be undertaken by management; |
– | are remunerated through a ‘success fee’ structure; and |
– | act in an advocacy role for the Group. |
Other than the above, the Group does not impose an automatic ban on the external auditors undertaking non-audit work. The external auditors are permitted to provide non-audit services that are not, or are not perceived to be, in conflict with auditor independence or prohibited by Rule 2-01 of SEC Regulation S-X, provided they have the skill and competence to carry out the work and are considered by the Committee to be the most appropriate party to undertake such work in the best interests of the Group.
The engagement of the external auditors to provide any non-audit services must be pre-approved by theAudit Committee or entered into pursuant to pre-approval policies and procedures established by the Committee. The pre-approval policy specifies the services that are prohibited and the services which have general pre-approval. The Committee has delegated to the Finance Director responsibility for confirming whether a service, which has general pre-approval, can be provided by Ernst & Young. In addition, Internal Audit reviews the pre-approval process to ensure that it is robust in addressing the requirements of the PCAOB and does not impinge on Ernst & Young’s independence. The Finance Director reports regularly to the Committee on services which have been approved.
In 2014, the external auditors provided a number of audit-related services, including Sarbanes-Oxley Section 404 attestation, and non-audit services, including due diligence services associated with proposed acquisitions and disposals. Ernst & Young were also engaged during 2014 in a number of jurisdictions in which the Group operates to provide help with local tax compliance, advice on taxation laws and other related matters; assignments which typically involve relatively small fees. TheAudit Committee is satisfied that the external auditors’ knowledge of the Group was an important factor in choosing them to provide these services. The Committee is also satisfied that the fees paid to Ernst & Young for non-audit work, which amounted to
1 | The term of any general pre-approval is 12 months from the date of pre-approval. |
11% of the total fee in 2014, did not compromise their independence or integrity. Details of the amounts paid to the external auditors during the year for audit and other services are set out in note 3 to the Consolidated Financial Statements on page 150.
TheAudit Committee’s primary means of assessing the effectiveness of the external audit process is by monitoring performance against the agreed audit plan. In addition, each year the Committee considers (i) the experience and knowledge of the Ernst & Young audit team; (ii) the results of post-audit interviews with management and theAudit Committee Chairman; (iii) the transparency reports issued under EU regulations by Ernst & Young Ireland; and (iv) where applicable, relevant reports by regulatory bodies on the performance of Ernst & Young. These annual procedures are supplemented by periodic formal reviews of the performance of Ernst & Young, the most recent of which took place in late 2014. The 2014 review captured the views of relevant stakeholders across the Group and members of the Committee. The preliminary results indicated a high level of satisfaction with Ernst & Young and the services provided by them to CRH. TheAudit Committee will consider a full report on the findings and recommendations arising from the review in the first half of 2015.
CRH 101 |
Nomination & Corporate Governance Committee | ||||||||
The Nomination & Corporate Governance Committee consists of four non-executive Directors. The primary responsibilities of the Committee are: – regularly reviewing the size, structure and composition (including skills, knowledge, experience and diversity) of the Board and making recommendations to the Board regarding any changes; – giving consideration to succession planning for Directors and senior executives; – identifying and recommending candidates to fill Board vacancies; – in respect of the appointment of a chairman, preparing a job specification including the time commitment expected; – keeping under review the leadership needs of the organisation; – approving the terms of reference for external board evaluations; – keeping under review corporate governance developments with the aim of ensuring that CRH’s governance policies and practices continue to be in line with best practice; – ensuring that the principles and provisions set out in the 2012 Code (and any other governance code that applies to the Company) are observed; – reviewing the disclosures and statements made in the Corporate Governance Report to shareholders. The responsibilities of theNomination & Corporate Governance Committee are set out in full in its Terms of Reference, which are available on the CRH website, www.crh.com. | Chairman’s overview Board Renewal TheNomination & Corporate Governance Committee regularly reviews the Board’s skill mix, experience and tenure in order that the renewal process is orderly and planned. A skills matrix has been developed to aid this process and is used by the Committee. During 2014, and to date in 2015, the Committee identified and recommended to the Board that the following individuals be appointed as non-executive Directors: – Pat Kennedy, appointed with effect from 1 January 2015; and – Lucinda Riches, appointed with effect from 1 March 2015. The search criteria for these appointments included candidates with a Chief Executive or senior management background who had general industry, emerging markets and, in the context of recent and impending Board retirements, finance, investment banking or private equity experience. Biographies for Pat Kennedy and Lucinda Riches are included on pages 88 and 89. The Committee worked with Korn/Ferry in relation to the appointment of Lucinda. Korn/Ferry has no other connection with the Company. We did not use the services of a recruitment agency in relation to the appointment of Pat; he had been identified as a candidate for a non-executive Director a number of years ago. At that time he was Executive Chairman of SHV Holdings, a large family owned multi-national based in the Netherlands. We remained in contact with him and when he retired from his executive role at SHV he met with all of the current members of theNomination & Corporate Governance Committee and a number of other Board members. He brings to CRH wide experience in a range of industries, emerging markets and the provision of private equity. Lucinda has significant experience in equity and capital markets both in London and New York. While she worked for the majority of her career up to 2007 in UBS, the Company’s broker, the Committee is satisfied that no issues of independence arise. | |||||||
102 CRH
Ernst Bärtschi was appointed to the Board in 2011 and Heather Ann McSharry was appointed in 2012. They completed their first three year terms as non-executive Directors in November 2014 and February 2015 respectively. Following a performance review, on the recommendation of the Committee, the Board has asked Ernst and Heather Ann to each continue on the Board for a further three year term. Following the appointment of Lucinda Riches, female Directors will represent 25% of the Board after the conclusion of the 2015 Annual General Meeting. TheNomination & Corporate Governance Committee will continue to retain gender diversity as a key factor to consider in all Board appointments for the foreseeable future. Board Committees / Senior Independent Director On the recommendation of theNomination & Corporate Governance Committee, the Board has appointed Don McGovern as Chairman of theRemuneration Committee, with effect from March 2015. Don succeeds Dan O’Connor, who will remain on the Committee until his retirement at the conclusion of the 2015 Annual | General Meeting. Don also succeeds Dan as Senior Independent Director. A summary of recent changes to the Board’s Committees are set out in table 10 below. Voting at General Meetings The Committee reviewed the voting outcome at the 2014 Annual General Meeting and concluded that there was no issue or pattern in voting which was unexplained or warranted discussion with individual shareholders. Nicky Hartery Nomination & Corporate Governance Committee Chairman |
Summary of Board Committee Changes | Table 10 | |||||||||||||
Acquisitions | Audit | Finance | Nomination | Remuneration | ||||||||||
Ernst Bärtschi | - | M(Ch) | D | - | - | |||||||||
John Kennedy | D | - | D | o | o | |||||||||
Pat Kennedy | D | D | - | - | - | |||||||||
Albert Manifold | M | - | o | - | - | |||||||||
Don McGovern | - | o | - | D | D (Ch) | |||||||||
Heather Ann McSharry | - | M | D | - | - | |||||||||
Dan O’Connor | - | o | - | M | M(prev. Ch) | |||||||||
Henk Rottinghuis | D | M | - | - | - | |||||||||
Lucinda Riches | - | - | - | D | D |
D = Appointed to committee; o = ceased to be a committee member; (Ch) = committee Chairman; - = not applicable or no change;M = continuing member |
CRH 103 |
Corporate Governance Report| continued
Nomination & Corporate Governance Committee Members
The biographies of the members of theNomination & Corporate Governance Committee are set out on pages 87 to 89.
The tenure of each Committee member is as follows:
W. P. Egan | 7.5 years | |
N. Hartery | 10.5 years | |
D. McGovern | 0.25 years | |
D. O’Connor | 2.5 years |
Ms. L. Riches joined theNomination &Corporate Governance Committee following her appointment to the Board on 1 March 2015.
The factors taken into account by theNomination & Corporate Governance Committee in considering the composition of the Board are set out in the policy for Board renewal which is detailed on page 93.
The Committee reviewed its Terms of Reference in December 2014 and determined that no changes were required. The Terms of Reference, which were last updated in December 2013, are available on the CRH website.
Remuneration Committee
The Directors’ Remuneration Report on pages 108 to 131 contains an overview of the responsibilities and activities of theRemuneration Committee during 2014.
Under its Terms of Reference, theRemuneration Committee must be made up of at least three members, all of whom must be independent non-executive Directors. Members of the Committee can serve for up to a maximum of three terms of three years. The Group Chairman may be a member of the Committee provided he was independent on appointment as Chairman and the Board
continues to consider him to be independent. Only members of the Committee have the right to attend Committee meetings. However, other individuals such as the Chairman, if not a member of the Committee, the Chief Executive, the Group Human Resources and Talent Development Director and external advisers may be invited to attend for all or part of any meeting as and when appropriate. The Chief Executive is fully consulted about remuneration proposals.
Remuneration Committee Members
The biographies of the members of theRemuneration Committee are set out on pages 87 to 89.
The tenure of each Committee member is as follows:
W. P. Egan | 7.5 years | |
N. Hartery | 10.5 years | |
D. McGovern | 0.25 years | |
D. O’Connor | 2.5 years |
Ms. L. Riches joined theRemuneration Committee following her appointment to the Board on 1 March 2015.
The Committee reviewed its Terms of Reference in December 2014 and determined that no changes were required. The Terms of Reference, which were last updated in December 2013, are available on the CRH website.
Acquisitions Committee
Acquisitions Committee Members
The biographies of the members of theAcquisitions Committee are set out on pages 87 to 89.
The tenure of each Committee member is as follows:
N. Hartery | 2.5 years | |
M. Carton | 4.5 years | |
U-H. Felcht | 3.0 years | |
J.W. Kennedy | 0.5 years | |
A. Manifold | 6.0 years |
Mr. P. Kennedy and Mr. H. Rottinghuis were appointed to the Committee on 25 February 2015.
The attendance atAcquisitions Committeemeetings is set out in table 11 below.
Role and Responsibilities
TheAcquisitions Committee has been delegated authority by the Board to approve acquisitions and disposals and large capital expenditure projects up to agreed limits.
Finance Committee
Finance Committee Members
The biographies of the members of theFinance Committeeare set out on pages 87 to 89.
The tenure of each Committee member is as follows:
N. Hartery | 2.5 years | |
M. Carton | 4.5 years | |
U-H. Felcht | 7.5 years | |
J.W. Kennedy | 0.5 years |
Mr. E.J. Bärtschi and Ms. H.A. McSharry were appointed to the Committee on 25 February 2015.
The attendance atFinance Committeemeetings is set out in table 11 below.
Role and Responsibilities
TheFinance Committee is responsible for:
– | advising the Board on the financial requirements of the Group and on |
Attendance at Board and Board Committee meetings during the year ended 31 December 2014
|
|
Table 11
|
| |||||||||||||||||||||||||
Board
| Acquisitions | Audit | Finance | Nomination | Remuneration | |||||||||||||||||||||||
No. of Meetings | No. of Meetings | No. of Meetings | No. of Meetings | No. of Meetings | No. of Meetings | |||||||||||||||||||||||
Total | Attended | Total | Attended | Total | Attended | Total | Attended | Total | Attended | Total | Attended | |||||||||||||||||
E.J. Bärtschi | 8 | 8 | 10 | 10 | ||||||||||||||||||||||||
M. Carton | 8 | 8 | 8 | 8 | 7 | 7 | ||||||||||||||||||||||
W.P. Egan | 8 | 7 | 7 | 7 | 8 | 8 | ||||||||||||||||||||||
U-H. Felcht | 8 | 7 | 8 | 8 | 7 | 7 | ||||||||||||||||||||||
N. Hartery | 8 | 8 | 8 | 8 | 7 | 7 | 7 | 7 | 8 | 8 | ||||||||||||||||||
J.M. de Jong* | 2 | 2 | 1 | 1 | 2 | 2 | ||||||||||||||||||||||
J.W. Kennedy | 8 | 8 | 2 | 2 | 5 | 5 | 7 | 7 | ||||||||||||||||||||
D.A. McGovern, Jr. | 8 | 8 | 10 | 10 | ||||||||||||||||||||||||
H.A. McSharry | 8 | 8 | 10 | 10 | ||||||||||||||||||||||||
A. Manifold | 8 | 8 | 8 | 8 | 7 | 7 | ||||||||||||||||||||||
D.N. O’Connor | 8 | 8 | 5 | 5 | 7 | 7 | 8 | 8 | ||||||||||||||||||||
H. Th. Rottinghuis** | 8 | 8 | 5 | 4 | ||||||||||||||||||||||||
M.S. Towe | 8 | 8 | ||||||||||||||||||||||||||
* Retired May 2014 | ||||||||||||||||||||||||||||
** Appointed to Board February 2014 | ||||||||||||||||||||||||||||
Note: See summary of Board Committee changes in table 10 on page 103.
|
104 CRH |
Corporate Governance Report| continued
appropriate funding arrangements; |
– | considering and making recommendations to the Board in relation to the issue and buy-back of shares and debt instruments and on the Group’s financing arrangements; |
– | considering and making recommendations to the Board in relation to dividend levels on the Ordinary Shares; |
– | keeping the Board advised of the financial implications of Board decisions in relation to acquisitions; |
– | assisting management, at their request, in considering any financial or taxation aspect of the Group’s affairs; and |
– | reviewing the Group’s insurance arrangements. |
Risk Management and Internal Control
The Board has delegated responsibility for the monitoring of the effectiveness of the Group’s risk management and internal control systems to theAudit Committee1. Such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and, in the case of internal control systems, can provide only reasonable and not absolute assurance against material misstatement or loss.
The Consolidated Financial Statements are prepared subject to oversight and control of the Finance Director, ensuring correct data is captured from Group locations and all required information for disclosure in the Consolidated Financial Statements is provided. An appropriate control framework has been put in place around the recording of appropriate eliminating journals and other adjustments. The Consolidated Financial Statements are reviewed by the CRH Financial Reporting and Disclosure Group prior to being reviewed by theAudit Committee and approved by the Board of Directors.
The Directors confirm that the Group’s ongoing process for identifying, evaluating and managing its principal risks and uncertainties (as outlined on pages 52 to 63) is in accordance with the updated Turnbull guidance(Internal Control: Revised Guidance for Directors on the Combined Code) published in October 2005. The process has been in place throughout the accounting period and up to the date of approval of the Annual Report and financial statements.
Group management has responsibility for major strategic development and financing decisions. Responsibility for operational issues is devolved, subject to limits of authority, to product group and operating company management. Management at all levels is responsible for internal control over the business functions that have been delegated. This embedding of the system of internal control throughout the Group’s operations ensures that the organisation is capable of responding quickly to evolving business risks, and that significant internal control issues,
should they arise, are reported promptly to appropriate levels of management.
During the year, the Board andAuditCommitteereceived, on a regular basis, reports from management on the key risks to the business and the steps being taken to manage such risks. They also considered whether the significant risks faced by the Group were being identified, evaluated and appropriately managed, having regard to the balance of risk, cost and opportunity. In addition, theAudit Committee met with internal auditors on a regular basis and satisfied itself as to the adequacy of the Group’s internal control system; met with the Chairman of theRemuneration Committee to ensure that the Group’s remuneration policies and structures were appropriate and in line with the Group’s risk tolerance; and reviewed the principal risks and uncertainties outlined on pages 52 to 63. TheAudit Committee also met with, and received reports from, the external auditors. The Chairman of theAudit Committee reported regularly to the Board on all significant issues considered by the Committee and the minutes of its meetings were circulated to all Directors.
The Directors confirm that, in addition to the monitoring carried out by theAudit Committee under its Terms of Reference, they have reviewed the effectiveness of the Group’s risk management and internal control systems up to and including the date of approval of the financial statements. This had regard to all material controls, including financial, operational and compliance controls that could affect the Group’s business.
Management’s Report on Internal Control over Financial Reporting
In accordance with the requirements of Rule 13a-15 of the US Securities Exchange Act, the following report is provided by management in respect of the Company’s internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
– | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
– | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of Consolidated Financial Statements in accordance with generally accepted accounting principles, |
and that receipts and expenditures of the Company are being made only in accordance with authorisations of management and directors of the Company; and |
– | Provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the Company’s assets that could have a material effect on the Consolidated Financial Statements. |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the US Securities Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our Company’s published Consolidated Financial Statements for external purposes under generally accepted accounting principles.
In connection with the preparation of the Company’s annual Consolidated Financial Statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of 31 December 2014, based on criteria established inInternal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organisations of the Treadway Commission.
As permitted by the Securities and Exchange Commission, the Company has elected to exclude an assessment of the internal controls of acquisitions made during the year 2014. These acquisitions, which are listed in note 30 to the Consolidated Financial Statements, constituted 0.7% of total assets and 1.2% of net assets, as of 31 December 2014 and 0.6% and 0.8% of revenue and Group profit for the financial year, respectively, for the year then ended.
Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this assessment, management has concluded and hereby reports that as of 31 December 2014, the Company’s internal control over financial reporting is effective.
Our auditors, Ernst & Young, a registered public accounting firm, who have audited the Consolidated Financial Statements for the year ended 31 December 2014, have audited the effectiveness of the Company’s internal controls over financial reporting. Their report, on which an unqualified opinion is expressed thereon, is included on page 134.
Changes in Internal Control over Financial Reporting
During 2014, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 that occurred during the period covered by this Annual Report that
1 In accordance with Regulation 91(6)(b) of the European Communities (Statutory Audits) (Directive 2006/43) Regulations 2010.
CRH 105 |
Corporate Governance Report| continued
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Management has evaluated the effectiveness of the design and operation of the disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) as of 31 December 2014. Based on that evaluation, the Chief Executive and the Finance Director have concluded that these disclosure controls and procedures were effective as of such date at the level of providing reasonable assurance.
In designing and evaluating our disclosure controls and procedures, management, including the Chief Executive and the Finance Director, recognised that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The Group Compliance & Ethics (C&E) programme continues to develop in scope and reach. The structure of the C&E organisation was realigned in 2014 to serve the new CRH Europe organisation. A CRH Europe Head of C&E was appointed from the existing Compliance pool. Business Unit Compliance Coordinators (BUCCs) were also appointed for Heavyside East, Heavyside West, Lightside and Distribution and a European Compliance Officer was appointed to assist the European Head of C&E.
CRH’s Code of Business Conduct1 (COBC) and related policies were updated and approved by the Board and the C&E team’s primary focus since then has been to ensure all relevant employees receive appropriate training. In the current training cycle over 32,000 employees have participated in COBC training and a further 11,000 have also undertaken advanced instruction on competition law and anti-bribery, corruption and fraud.
In addition, our development teams and procurement teams have received appropriate instruction on both our C&E Mergers, Acquisitions and Joint Venture Due Diligence Programme and our Ethical Procurement Code. Our Supplier Code of Conduct was developed to communicate our minimum Corporate Social Responsibility requirements to existing and new suppliers to the Group and to outline how we ensure compliance with these requirements. Similar procedures have been developed for any engagements
Investor Relations Activities | Table 12 | |||||
Formal Announcements,including the release of the annual and interim results and the issuance of interim management statements. These announcements are typically accompanied by presentations and webcasts or conference calls. | ||||||
Investor Roadshows,typically held following the release of formal announcements, provide an opportunity for the management team to meet existing and/or potential investors in a concentrated set of meetings. | ||||||
Industry Conferences:Attendance at key sector and investor conferences affords members of the senior management team the opportunity to engage with key investors and analysts. | ||||||
Investor Briefings:In addition to regular contact with investors and analysts during the year, the Company periodically holds capital market days, which include presentations on various aspects of CRH’s operations and strategy and provide an opportunity for investors and analysts to meet with CRH’s wider management team. | ||||||
Media Briefings:Each year, the Company provides media briefings on numerous issues. |
with business partners. Further guidelines developed during the year include a Competition Law Toolbox – which gathers into one place various CRH guidelines, policies and notes to help the businesses comply with Competition Law requirements.
The following existing policies are under review;
The COBC has scored an “A” rating by New York Stock Exchange Governance Services and incorporates some welcome new features, including learning aids, an ethical-decision making guide and a clear focus on the core values of the Group: Integrity, Honesty and Respect for the law. It was translated and distributed during 2014 and related training is being migrated to an on-line module. A robust communication plan is in place to complement the training programme. A multi-lingual “hotline” facility – “Speak Up” is also available to employees as a secure channel to report ethical issues that concern them or suspected violations of our Codes. All hotline reports received are fully reviewed and investigated by appropriately qualified personnel.
The C&E programme has been integrated into our standard Internal Audit procedures and forms part of an annual management certification process. Its effectiveness is also regularly reviewed by the C&E function with appropriate oversight from senior management and theAudit Committee. The collective goal is to ensure the message is clearly understood that at CRH “there is never a good business reason to do the wrong thing”.
Sustainability and Corporate Social Responsibility
Sustainability and Corporate Social Responsibility (CSR) concepts are embedded in all CRH operations and activities.
Excellence in the areas ofhealth & safety, environment & climate change, governance and people & community is a daily priority of line management. The Group’s policies and implementation systems are summarised on pages 47 to 51. During 2014, CRH was again recognised by several leading socially responsible investment (SRI) agencies as being among the leaders in its sector in these important areas.
Communications with Shareholders
Communications with shareholders are given high priority and the Group devotes considerable time and resources each year to shareholder engagement. We recognise the importance of effective dialogue as an integral element of good corporate governance. The Investor Relations team, together with the Chief Executive, Finance Director and other senior executives, meet regularly with institutional shareholders (each year covering over 50% of shareholder base). Detailed reports on the issues covered in those meetings and the views of shareholders are circulated to the Board after each group of meetings. Table 12 above provides a brief outline of the nature of the activities undertaken by our Investor Relations team.
During 2014, the Chairman, Senior Independent Director and Company Secretary participated in a number of conference calls with some of the Group’s major shareholders in advance of the 2014 Annual General Meeting. The meetings were organised to provide those shareholders with an opportunity to discuss the resolutions on the 2014 Annual General Meeting agenda and corporate governance matters generally.
In addition to the above, major acquisitions are notified to the Stock Exchanges in accordance with the requirements of the Listing Rules and development updates, giving details of other acquisitions completed and major capital expenditure projects, are issued periodically (typically in January and July each year).
In addition, we respond throughout the year to
1 | The Code of Business Conduct is applicable to all Group employees including the Chief Executive and senior financial officers. The Code promotes honest and ethical conduct; full, fair, accurate, timely and understandable disclosures and compliance with applicable governmental laws, rules and regulations and complies with the applicable code of ethics regulations of the United States Securities and Exchange Commission arising from the Sarbanes-Oxley Act. |
106 CRH |
Corporate Governance Report| continued |
correspondence from shareholders on a wide range of issues.
The Chief Executive made a presentation to shareholders at the 2014 Annual General Meeting on CRH’s businesses.
General Meetings
The Company’s Annual General Meeting (AGM), which is held in Ireland, affords individual shareholders the opportunity to question the Chairman and the Board. All Directors attended the 2014 AGM. The Notice of the AGM, which specifies the time, date, place and the business to be transacted, is sent to shareholders at least 20 working days before the meeting. At the meeting, resolutions are voted on by way of a poll using an electronic voting system. The votes of shareholders present at the meeting are added to the proxy votes received in advance and the total number of votes for, against and withheld for each resolution are announced. This information is made available on the Company’s website following the meeting.
All other general meetings are called Extraordinary General Meetings (EGMs). An EGM called for the passing of a special resolution requires at least 21 clear days’ notice.
A quorum for a general meeting of the Company is constituted by five or more shareholders present in person and entitled to vote. The passing of resolutions at a meeting of the Company, other than special resolutions, requires a simple majority. To be passed, a special resolution requires a majority of at least 75% of the votes cast.
Shareholders have the right to attend, speak, ask questions and vote at general meetings. In accordance with Irish company law, the Company specifies record dates for general meetings, by which date shareholders must be registered in the Register of Members of the Company to be entitled to attend. Record dates are specified in the notes to the notice of a general meeting. Shareholders may exercise their right to vote by appointing, by electronic means or in writing, a proxy/proxies to vote some or all of their shares. The requirements for the receipt of valid proxy forms are set out in the notes to the notice convening the meeting and in the notes on the proxy form. A shareholder, or a group of shareholders, holding at least 5% of the issued share capital of the Company, has the right to requisition a general meeting. A shareholder, or a group of shareholders, holding at least 3% of the issued share capital of the Company, has the right to put an item on the agenda of an AGM or to table a draft resolution for inclusion in the agenda of a general meeting, subject to any contrary provision in Irish company law.
Going Concern
The Company’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategy Review section on pages 34 to 43. The financial position of the Company, its cash flows, liquidity position
and borrowing facilities are described in the Business Performance Review on pages 66 to 76. In addition, notes 20 to 24 to the Consolidated Financial Statements include the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit, currency and liquidity risks.
The Company has considerable financial resources and a large number of customers and suppliers across different geographic areas and industries. In addition, the local nature of building materials means that the Group’s products are not usually shipped cross-border.
Having assessed the relevant business risks, the Directors believe that the Company is well placed to manage these risks successfully, and they have a reasonable expectation that the Company, and the Group as a whole, have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Consolidated Financial Statements.
Compliance Statement
Non-US companies such as CRH are exempt from most of the corporate governance rules of the NYSE. In common with companies listed on the Irish Stock Exchange and the London Stock Exchange, CRH’s corporate governance practices reflect, inter alia, compliance with (a) domestic company law; (b) the Listing Rules of the UK Listing Authority and the Irish Stock Exchange; and (c) the Code, which is appended to the listing rules of the London and Irish Stock Exchanges.
CRH has adopted a robust set of Board governance principles, which reflect the Code and its principles-based approach
to corporate governance. Accordingly, the way in which CRH makes determinations of Directors’ independence differs from the NYSE rules. The Board has determined that, in its judgement, all of the non-executive Directors are independent. In doing so, however, the Board did not explicitly take into consideration the independence requirements outlined in the NYSE’s listing standards.
Shareholder Approval of Equity Compensation Plans
The NYSE rules require that shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions to those plans. CRH complies with Irish requirements, which are similar to the NYSE rules. The CRH Board, however, does not explicitly take into consideration the NYSE’s detailed definition on what are considered “material revisions”.
The following are available on the CRH website, www.crh.com: | Table 13 | |||||
Corporate Governance section: | ||||||
– Terms of Reference ofAcquisitions Committee (amended December 2010) | ||||||
– Terms of Reference ofAudit Committee (amended December 2013) | ||||||
– Terms of Reference ofFinance Committee (amended February 2004) | ||||||
– Terms of Reference ofNomination & Corporate Governance Committee (amended December 2013) | ||||||
– Terms of Reference ofRemuneration Committee (amended December 2013) | ||||||
– The Memorandum and Articles of Association of the Company | ||||||
– Pre-approval policy for non-audit services provided by the auditors | ||||||
– Compliance & Ethics statement, Code of Business Conduct and Hotline contact numbers – The 2014 Remuneration Policy | ||||||
Investors section: | ||||||
– Annual and Interim Reports, the Annual Report on Form 20-F, Interim Management Statements and copies of presentations to analysts and investors | ||||||
– News releases | ||||||
– Webcast recordings of key investor briefings | ||||||
– General Meeting dates, notices, shareholder circulars, presentations and poll results | ||||||
– Answers to Frequently Asked Questions, including questions regarding dividends and shareholder rights in respect of general meetings |
CRH 107 |
108 CRH
Introduction
On behalf of theRemuneration Committee, I am pleased to introduce the Directors’ Remuneration Report for the year ended 31 December 2014. The Remuneration Report (excluding the Remuneration Policy summary on pages 126 to 131), will be included on the agenda of the 2015 Annual General Meeting for shareholder consideration. The purpose of CRH’s Remuneration Policy, which was approved by shareholders at the 2014 Annual General Meeting, is to provide an appropriate framework to support the creation of value for shareholders over the longer term, the attraction and retention of key executives and succession planning, without paying more than is necessary. The full Remuneration Policy is available on the CRH website, www.crh.com. 2014 Performance 2014 was a year of growth and progress in terms of our aim of restoring margins and returns to peak levels in the coming years. | Recent Remuneration Snapshot: • Updated Remuneration Policy approved at 2014 AGM • New performance share plan adopted at 2014 AGM • Incentive payout levels linked to stretching performance criteria • Strong support from shareholders for policy and implementation In addition, there was significant achievement regarding the Group’s multi-year divestment programme of €1.5 billion to €2.0 billion, with proceeds from disposals completed in 2014 of €0.35 billion since the programme was announced in August 2014. Overall, CRH’s strong balance sheet and cash generation capability leave the Company well positioned to take advantage of value-creating acquisition opportunities. In the context of the Group’s performance in 2014, and performance against individual and strategic goals, theRemuneration Committee has determined that the annual bonus levels for 2014 should be set at the maximum level of 150% for each of the executive Directors. In accordance with CRH’s Remuneration Policy, approved by shareholders at the 2014 Annual General Meeting, 25% of the 2014 bonus will be deferred into shares for a period of three years. | The basis for each bonus award is set out in detail on page 112. In line with evolving best practice, we have increased the level of disclosure in relation to payout levels to provide shareholders with a greater level of insight into the approach for determining bonus payments. We have also disclosed the targets for the bonus payments in respect of 2013 as these are no longer considered to be commercially sensitive. Similarly, theRemuneration Committee intends that the targets for the 2014 bonus plan will be disclosed in the 2015 Directors’ Remuneration Report. The 2014 Remuneration Policy also made provision for theRemuneration Committee to introduce clawback provisions, in addition to the malus2 provisions already in place for the annual bonus plan and the long-term performance share plan. The Committee has decided, in accordance with the provisions of the 2014 UK Corporate Governance Code, to introduce clawback provisions for the cash element of the annual bonus plan for 2015 and onwards. The long-term awards made under the 2006 Performance Share Plan and the 2010 Share Option Scheme made in 2012 (each with a three year performance period 2012 - 2014) did not meet the relevant performance criteria required to vest and, consequently, those awards lapse in full. Further details are set out on pages 114 and 115. Executive Director Salaries As reported in the 2013 Directors’ Remuneration Report, following consideration of the scope of the Finance Director’s responsibilities and her performance since being appointed in 2010, the Committee decided that Maeve Carton’s salary should be increased, subject to continued | ||||||||
Sales | + 5% | Return on Net Assets | +150bps | |||||||
EBITDA (as defined)* | +11% | Operating Cash Flow | +23% | |||||||
EPS | +33%1 | Net Debt | -16% |
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of |
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EBITDA (as defined)* to Net Interest Ratio
Management believes that the EBITDA (as defined)* to net interest ratio is useful to investors because it matches the earnings and cash generated by the business to the underlying funding costs. With strong operating cash flows and reducing debt balances, the ratio for 2010 increased to 6.5 times (2009: 6.1 times). The calculation of EBITDA (as defined)* to net interest ratio for the financial year is presented on page 4.
Effective Tax Rate
The effective tax rate in 2010 of 17.8% of pre-tax profit remained broadly consistent with 2009 (18.3%).
Shareholder Returns
The Company’s Ordinary Shares traded in the range€11.51 to€22.00 during 2010. The year-end share price was€15.50, 18% lower than the 2009 closing price (€19.01); with the 2010 dividend unchanged from 2009, the net return for shareholders in 2010 was a negative 16%. The 2010 reduction reflects volatile conditions in the broader market and follows returns of +22% in 2009, -22% in 2008, -23% in 2007 and +29% in 2006. CRH is one of six building materials companies included in the FTSEurofirst 300, a market capitalisation-weighted index of Europe’s largest 300 companies. At year-end 2010, CRH’s market capitalisation of€11.0 billion was 17% lower than 2009 (€13.3 billion). Based on market capitalisation CRH is among the top 5 building materials companies worldwide.
Debt to Equity
Total shareholders’ equity (capital and reserves attributable to CRH’s equity shareholders) increased by€0.7 billion to€10.4 billion during 2010, with the retained profits for the year of€0.4 billion and currency translation effects of€0.5 billion partly offset by dividends of€0.4 billion; movements for the year are fully analysed in the Consolidated Statement of Changes in Equity. Year-end net debt of€3.5 billion† was€0.25 billion lower (7%) than year-end 2009; this reduction in debt, combined with the increase in equity, resulted in a reduction in the percentage of net debt to total equity from 38% at year-end 2009 to 33% at year-end 2010.
The 7% decrease in net debt in 2010 was more than offset by the 17% reduction in market capitalisation resulting in an increase in the debt/market capitalisation percentage from 28% at year-end 2009 to 32% at year-end 2010.
Liquidity and Capital Resources - 2010 compared with 2009
The comments below refer to the major components of the Group’s cash flows for 2010 and 2009 as shown in the Consolidated Statement of Cash Flows on page 103.
Cash flows from operating activities
The€198 million reduction in profit before tax is analysed in Table 1 on page 54. Depreciation and amortisation of€917 million in 2010 includes impairment charges of€102 million relating to subsidiaries and joint ventures (2009:€41 million).
The Group continued to maintain an intense focus on cash generation throughout 2010 and the net working capital (including provisions) decrease (cash inflow) for the year represented a strong performance in a challenging environment. Due to the seasonal nature of CRH’s 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 2010 amounted to€542 million (30 June 2009 outflow:€111 million), compared to an inflow of€142 million at the year end (2009 inflow:€740 million).
1 | Based on adjusted 2013 EPS (excluding impairments and the related tax impact). |
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Tax payments for 2010 at€100 million were slightly less than 2009. Dividend payments increased by€60 million in 2010, reflecting the full year impact of the additional shares in issue following the March 2009 Rights Issue.
Cash flows from investing and financing activities
Capital expenditure of€466 million represented 2.7% of Group revenue (2009: 3.1%) and amounted to 59% of depreciation (including impairment of property, plant and equipment) of€786 million (2009: 67%). Our 2010 capital expenditure included€90 million of investment in major cement plants (2009:€150 million).
Spend on acquisitions and investments in 2010 amounted to€567 million, an increase of€109 million compared with the€458 million spent in 2009. This reflects the pick-up in development activity in the second half of 2010 during which the Group completed a total of 17 transactions, bringing total second-half spend, including deferred consideration from acquisitions in prior years, to€408 million.
Proceeds from disposals increased from€103 million in 2009 to€188 million in 2010, reflecting actions taken by management across all segments to review the portfolio and generate cash from disposal of surplus assets.
The 2009 proceeds from the issue of shares figure of€1.2 billion relate to net proceeds from the issue of 152 million new Ordinary Shares at€8.40 per share under the terms of a 2 for 7 Rights Issue in March 2009.
Exchange rate movements during 2010 increased the euro amount of net foreign currency debt by€221 million principally due to the 7% strengthening in the year-end exchange rate of the US Dollar versus the euro, from 1.4406 at end-2009 to 1.3362 at end-2010. This compares with an exchange gain (reduction in net debt) of€120 million in 2009, when the year end US$/€ exchange rate weakened and went from 1.3917 at end-2008 to 1.4406.
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Europe Materials
2010 overview
Analysis of change | ||||||||||||||||||||||||||||||||||||||
€ million | % of Group | 2010 | 2009 | Change | Organic | Acquisitions | Restructuring | Impairment | Exchange | |||||||||||||||||||||||||||||
Sales revenue | 16% | 2,665 | 2,749 | -84 | -228 | +47 | - | - | +97 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | 26% | 423 | 434 | -11 | -73 | +4 | +37 | - | +21 | |||||||||||||||||||||||||||||
Operating profit | 36% | 251 | 257 | -6 | -70 | +2 | +37 | +9 | +16 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 15.9% | 15.8% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 9.4% | 9.3% |
Like-for-like sales declined by 8% in 2010, with construction activity in our main European markets hampered by very severe weather at both the beginning and end of the year. The impact of cost reductions, together with the benefits from trading of CO2 allowances (€67 million compared with€22 million in 2009) helped contain the EBITDA (as defined)* decline to 3% in a generally more competitive pricing environment.
2010 saw a pick-up in acquisition activity with€123 million spent on a total of 8 transactions, of which the most significant was the expansion of the Division’s aggregates and readymixed concrete business in Switzerland; we continued to invest in our associate Yatai Building Materials as it expanded its presence in northeastern China.
Europe Materials’ operations fall into three main categories: economies in the west and southwest of Europe experiencing severe fiscal imbalances and growing public debt levels; generally stable economies in mainland Europe; and developing economies in Eastern Europe and Asia.
Ireland, Portugal, Spain
In Ireland, activity again fell steeply during 2010 and cement volumes were 23% lower than 2009. Additional cost-reduction programmes were implemented to reduce capacity; after charging lower restructuring and impairment costs, operating losses reduced. In Portugal, the construction sector contracted by almost 8% in 2010 with the residential sector registering the largest decline. Our 49% joint venture was adversely impacted by reduced domestic demand for both cement and downstream products, but maintained its high level of exports at stable prices; although activities outside Portugal benefited from good demand, overall operating profit was down on 2009. In Spain, construction activity declined by a further 16% in 2010. Lower demand from the residential and non-residential sectors was only partly offset by increased public infrastructure spend and the impact of significant cost savings, and operating profit fell sharply.
Switzerland, Finland, Benelux
Construction activity in Switzerland rose by 3% in 2010, and volumes in both our cement and aggregates operations were well ahead of last year. Although cement prices were lower than 2009, higher volumes, and further cost reductions in our downstream business, resulted in higher operating profit. In Finland, construction output grew by over 4%, led by a strong rebound in new residential activity. Infrastructure volumes remained stable at strong levels, while non-residential construction continued to decline. A 19% improvement in cement volumes, combined with the benefit of greater use of alternative fuels and other cost reduction initiatives, led to an increase in operating profit. In the Benelux, despite efficiency improvements at our cement trading, readymixed concrete and aggregates business, lower aggregates volumes resulted in a fall in operating profit compared with 2009.
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Central and Eastern Europe, Eastern Mediterranean, Asia
In Poland, construction activity was impacted by very severe weather in the first quarter and again in December, and grew only modestly. Cement volumes were slightly ahead of 2009 and volumes of other products stabilised or improved. Although some price improvement was achieved in the more buoyant second half, margins were under pressure from stiff competition and operating profit was lower than 2009. In Ukraine, severe winter conditions resulted in sharply lower first-quarter volumes, but a pick-up in demand in later months saw full-year cement volumes only 10% behind 2009 levels. Unrecovered cost increases, particularly fuel, were only partly offset by the impact of further cost savings, and operating profit was lower. In Turkey, domestic cement demand in the Aegean region and export levels remained steady. Selling prices and operating profit for our 50% joint venture were higher than 2009.
In southern India, market conditions weakened across our 50% cement joint venture’s core markets, as newly-commissioned cement capacity put pressure on volumes and prices resulting in lower operating profit than in 2009. In China, further growth in the construction sector, driven primarily by improved residential activity and a continued roll-out of major infrastructure projects, saw cement demand grow by over 10% in the northeastern region, where our wholly-owned and 26% associate operations are located. In this environment volumes, selling prices and profitability increased in line with expectations.
Americas Materials
2010 overview
Analysis of change | ||||||||||||||||||||||||||||||||||||||
€ million | % of Group | 2010 | 2009 | Change | Organic | Acquisitions | Restructuring | Impairment | Exchange | |||||||||||||||||||||||||||||
Sales revenue | 26% | 4,417 | 4,280 | +137 | -302 | +215 | - | - | +224 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | 35% | 566 | 670 | -104 | -183 | +32 | +11 | - | +36 | |||||||||||||||||||||||||||||
Operating profit | 41% | 288 | 407 | -119 | -174 | +22 | +11 | - | +22 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 12.8% | 15.7% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 6.5% | 9.5% |
Americas Materials faced a challenging environment in 2010 with continued volume declines in all product lines, higher energy costs and severe pricing pressure. Market declines were most severe in the Southeast, Mountain West and Northwest, which together contributed over two-thirds of the operating profit shortfall compared with 2009. Aggressive actions to reduce fixed and variable cost helped to mitigate the impact of volume and margin declines; however, overall US Dollar EBITDA (as defined)* was 20% lower than 2009 with operating profit down over 33%.
The Division completed 18 acquisitions in 2010 with a total spend of€249 million, adding 34 quarries (579 million tonnes of reserves), 14 asphalt plants and 25 readymixed concrete plants with annual production of 8 million tonnes of aggregates, 1 million tonnes of asphalt and 0.5 million cubic metres of readymixed concrete. We also broke ground on a new granite quarry in Camak, Georgia, which is expected to be open in early 2012 and will supply our coastal Georgia and Florida asphalt business with stone, leveraging our extensive rail distribution network in the region.
Volumes / Prices
Like-for-like sales for Americas Materials were 7% lower than 2009. Residential construction declined only slightly (1%) from low levels, while non-residential construction declined by 14%. States and municipalities reduced highway spending due to significant budgetary pressures and this more than offset the benefits of the federal stimulus bill (American Recovery and Reinvestment Act, ‘ARRA’). On a like-for-like basis, volumes were down 4% in aggregates, 5% in asphalt and 8% in readymixed concrete, while construction
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revenues fell by 10%. With the benefit of acquisitions, volumes were up 1% in aggregates and asphalt, and up 5% in readymixed concrete, while construction revenues fell by 5%. By continuing to deliver superior quality and service, Americas Materials was able to raise aggregates and asphalt prices by 1%, while limiting price declines for readymixed concrete to 5% in a very competitive environment. Despite lower volumes and higher energy costs, the business continued to improve efficiency and reduce input costs resulting in flat unit production costs for aggregates and readymixed concrete. While asphalt throughput costs also were reduced and we used 7% more recycled asphalt per tonne of mix than in 2009, increases in bitumen prices resulted in higher unit costs and lower margins. Margins on contract paving services dropped sharply due to severe competition for infrastructure projects.
Energy and Other Costs
The price of bitumen, a key component of asphalt mix, increased 14% over 2009. Diesel and gasoline prices, important inputs to aggregates, readymixed concrete and paving operations, increased by 10% and 7% respectively. Our teams leveraged operational best practices to increase efficiency, reduce costs, increase the use of recycled materials, and raise quality and service levels to customers while maintaining price discipline. These actions, combined with the elimination of over€40 million fixed overhead costs through restructuring and other management action during 2010, partially offset the negative impact of lower volumes, higher energy costs and more competitive markets.
Regional Performance
Americas Materials’ operations are geographically organised, segmented into East and West. The East contains four divisions and the West, which given the severe market declines during 2010, has been consolidated from four divisions to three in order to reduce costs and optimise performance.
East
Overall operating profit was lower than 2009 despite a strong performance in our Mid-Atlantic and Central divisions, both of which delivered improved operating profit over a strong 2009. Operating profit in our Northeast division was lower than in 2009 and was down sharply in our Southeast division which continues to be impacted by very weak residential markets.
West
Operating profit in our Central West division was lower than in 2009. Operating profit declines were more marked in the Mountain West division and Northwest division, both of which experienced a steep decline due to less public and private work than in 2009.
Europe Products
2010 overview
Analysis of change | ||||||||||||||||||||||||||||||||||||||
€ million | % of Group | 2010 | 2009 | Change | Organic | Acquisitions | Restructuring | Impairment | Exchange | |||||||||||||||||||||||||||||
Sales revenue | 16% | 2,817 | 3,002 | -185 | -213 | - | - | - | +28 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | 12% | 198 | 283 | -85 | -109 | - | +25 | - | -1 | |||||||||||||||||||||||||||||
Operating profit | 2% | 11 | 116 | -105 | -93 | - | +25 | -35 | -2 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 7.0% | 9.4% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 0.4% | 3.9% |
Trading conditions for our products businesses in Europe remained difficult in 2010. The first quarter was heavily impacted by a prolonged winter which negatively influenced volumes. The rest of the year showed a
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moderation in the rate of decline versus 2009 resulting in overall like-for-like sales down 7% for the year. Significant price pressure in many markets adversely impacted our margins and, despite strong cost control EBITDA (as defined)* declined by 30% compared with 2009.
Concrete Products
Activity was severely affected by the adverse early weather conditions and weaker residential and non-residential construction demand. Our Architectural operations (pavers, tiles and blocks) faced difficult conditions with our Dutch, Danish, German and Slovakian paver businesses suffering from weaker markets and increased price pressure. In contrast, results in our French and Belgian operations improved slightly, driven by targeted commercial initiatives and good cost-control. Further factory closures were made in the Netherlands and France and overall operating costs were reduced significantly. Operating profit in architectural concrete was below 2009.
Our Structural operations (floor and wall elements, beams and vaults) reported operating profit well below 2009. These businesses were severely impacted by difficult conditions in both new residential and new non-residential markets, and experienced increased price pressure due to significant overcapacity in all countries, although our Belgian specialty business which supplies the industrial and farming sector continued to deliver strong results. The ongoing major programme of restructuring initiatives continued in 2010 with production shutdowns and impairment charges.
Clay Products
In the UK, demand improved quickly after poor weather early in the year as house builders reopened sites. However, industry brick volumes levelled out as the year progressed, with overall growth for the year estimated at approximately 7%. With the benefit of recent years’ major reorganisation and cost cutting initiatives, operating profit improved with the uplift in volumes. In the Netherlands, brick markets were very challenging, though paver markets remained more stable. Capacity rationalisation and reduced costs supported an increase in operating profit. In Poland all product markets remained difficult and operating profit declined compared with 2009.
Building Products
Despite declining volumes, our leading market positions and effective cost-reduction action resulted in an increase in operating profit. Our Construction Accessories business, the market leader in Western Europe, was impacted by falling non-residential demand. This was in part offset by the introduction of innovative products, rigorous cost-control, production efficiencies and good commercial practices, resulting in higher operating profit compared with 2009. Our Outdoor Security Products operations, specialising in entrance control solutions, are mainly active in non-residential construction with a focus on the growing RMI and safety and comfort markets. Volumes in Fencing, Security and Access Systems were lower than in 2009, but operating profit was higher. Our Roller Shutters business delivered a good performance with sales and operating profit substantially exceeding 2009.
Following rigorous strategic analysis, we decided at the end of 2009 to exit the Insulation and Climate Control sectors as we no longer saw a route to becoming a pan-European leader in these segments. In November 2010 we reached agreement to sell the majority of our Insulation business.
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Americas Products
2010 overview
Analysis of change | ||||||||||||||||||||||||||||||||||||||
€ million | % of Group | 2010 | 2009 | Change | Organic | Acquisitions | Restructuring | Impairment | Exchange | |||||||||||||||||||||||||||||
Sales revenue | 14% | 2,469 | 2,536 | -67 | -230 | +2 | - | - | +161 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | 10% | 154 | 173 | -19 | -51 | - | +18 | - | +14 | |||||||||||||||||||||||||||||
Operating profit | -3% | -24 | 23 | -47 | -42 | -1 | +18 | -27 | +5 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 6.2% | 6.8% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | -1.0% | 0.9% |
Americas Products experienced significant demand pressures, with further declines in all of our markets, in particular the non-residential sector, as the year progressed. This was most evident in our BuildingEnvelope™ and late-cycle concrete product segments. Like-for-like sales were down 9% compared with 2009. The adverse impact of the volume declines, together with the impairment charge (mainly relating to Ivy Steel), were only partly offset by ongoing cost restructuring initiatives and the non-recurrence of inventory write-downs recorded by MMI in 2009, resulting in an operating loss of€24 million for 2010 (2009: profit of€23 million).
Our Architectural Products business unit completed two bolt-on transactions during 2010. The acquisition of a leading supplier of soils, mulches and decorative stone in September expanded the footprint of our lawn and garden business providing a strong plant network to service retailers in the central and upper Midwest. In the same month, our existing masonry business in Illinois and Wisconsin was strengthened with the purchase of a block manufacturer in the Chicago metropolitan area.
Building Products
With effect from January 2011, the Architectural, Precast, and MMI groups were combined to form a new product group - Building Products. The new organisational alignment will accelerate the capture of market growth opportunities while streamlining common business processes and functions.
Architectural Products (APG) faced difficult trading conditions in 2010 due to continued weakness in the residential construction sector and further declines in non-residential markets. The overall challenging market environment was somewhat offset by solid growth in Canada and relative stability in both the DIY and professional RMI segments. The cost reduction measures implemented since 2008 have sharply reduced the cost structure and rationalised the capacity of APG, resulting in margin stability in 2010 while setting the stage for strong profit improvement once volumes begin to recover. Overall, APG recorded a similar level of US Dollar operating profit to 2009, on a 7% decline in like-for-like sales.
In our Precast group, weak residential activity in 2010 again negatively affected demand for precast products throughout the US. This impact was compounded by further declines in the commercial sector, particularly in the eastern US. Overall, full-year volumes fell by 5% compared with 2009. A generally more competitive pricing environment eroded some of the improvements in contribution margin that had been generated in 2009. Reduced overhead levels somewhat mitigated the impact, but overall operating profit was lower.
MMI continued to be impacted by the deepening decline in non-residential construction activity which led to a further decrease in sales; the favourable impact in 2010 of the absence of 2009’s significant inventory write-down was more than offset by the impairment charge recorded as a result of the divestment in November of the Ivy Steel welded wire reinforcement business.
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BuildingEnvelope™
Sales continued to be weak due to sharp declines in commercial activity. Order and quoting volumes remained slow and building delays and cancellations continued to be a challenge. In this environment we focussed on maintaining market share, tightening cost control, improving our processes and ensuring customer satisfaction, while maintaining our ongoing emphasis on quality. Pricing continued to be intensely competitive and sales and operating profit sharply declined for the year.
South America
Our South American operations benefited from better economic conditions in 2010 in Chile and Argentina. While performance improved in our Argentine ceramic tile and glass businesses, margins declined in an inflationary cost environment in the second half of the year. Our Chilean glass business performed well in a buoyant construction market. The Santiago-based distribution business also recovered from a challenging year in 2009, and operating profit improved. Overall, sales and operating profit in our South American operations advanced strongly for the year.
Europe Distribution
2010 overview
% of | Analysis of change | |||||||||||||||||||||||||||||||||||||
€ million | Group | 2010 | 2009 | Change | Organic | Acquisitions | Restructuring | Impairment | Exchange | |||||||||||||||||||||||||||||
Sales revenue | 21% | 3,566 | 3,633 | -67 | -204 | +37 | - | - | +100 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | 13% | 214 | 204 | +10 | -11 | +4 | +11 | - | +6 | |||||||||||||||||||||||||||||
Operating profit | 19% | 135 | 137 | -2 | -12 | +3 | +11 | -8 | +4 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 6.0% | 5.6% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 3.8% | 3.8% |
Trading conditions for the Distribution businesses continued to be difficult in 2010 with the residential sectors across most of our markets showing varying degrees of decline. Ongoing focus on price management and procurement optimisation resulted in stable gross margins versus 2009. Operating profit was maintained in line with 2009 with the benefit of acquisition contributions, further cost-reduction measures, improved category management and the operational excellence programmes that we have put in place in recent years.
In August, Europe Distribution acquired 75% of Sax Sanitair, a leading merchant in SHAP materials based in western Belgium. With nine branches across the east and west Flanders region, the acquisition is a further step in our strategy to build a European platform in the growing repair, maintenance and improvement focussed SHAP market. In December, we acquired a further 50% stake in the German-based Bauking distribution business raising our ownership from 48% to 98%. With 128 branches and annual sales of€750 million, the business has grown both organically and through acquisition since our initial investment in 2005 and is a leading player in the German distribution market. This acquisition greatly strengthens our existing distribution position in Europe’s largest construction market. During 2010 we sold our activities in the kitchen business in the German speaking part of Switzerland and our ironmongery distribution activities in the Netherlands.
Professional Builders Merchants
With 501 locations in six countries, Professional Builders Merchants has strong market positions in all its regions. Benelux: Markets remained weak in 2010, resulting in a further sales decline. Operating profit was also lower but declined at a relatively slower pace than sales due to strict cost control and margin management. France: Sales stabilised at last year’s level. Due to the restructuring actions that started in late 2009 we saw an improvement of our profitability. Switzerland: 2010 proved to be another stable year
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for Swiss market sales, with operating profit ahead of 2009 due to strong margin management and a better product mix. Austria: The turnaround in performance of this business which commenced in 2008 continued in 2010 resulting in a further increase in operating profit and margins. Germany: Builders Merchants sales in Germany were comparable to 2009 and particularly strong in the second half of 2010. Operating profit improved significantly, reflecting higher margins and successful cost control. Overall operating profit for Builders Merchants was ahead of 2009.
Sanitary, Heating and Plumbing
Our SHAP business in Germany and Switzerland again proved to be a stable performer in 2010 with robust sales and improved operating profit performance. Our 2010 acquisition in Belgium has performed strongly and has exceeded expectations.
DIY
Our DIY platform in Europe operates a network of 243 stores under four different brands. The Netherlands: Weakening consumer confidence, which became evident in the fourth quarter of 2009, began to impact the DIY businesses more severely in 2010. Despite further focus on efficient store operations and tight cost-control which enabled us to maintain gross margins, we were not able to fully compensate for the lagging sales performance. Belgium: Our network of 19 stores reported lower sales and operating profit due to weaker consumer confidence and demand. Germany: With increasing consumer confidence and continued strong focus on costs, operating profit for Bauking’s 51-store DIY network improved to a more satisfactory level. Portugal: The economic environment continued to be difficult and sales remained under pressure. Due to restructuring measures, operating profit was slightly better than in 2009. Spain: Market circumstances for our Spanish DIY operation in the Alicante/Valencia region remained very challenging throughout 2010 and we decided to exit this business which resulted in rationalisation and impairment charges. Overall DIY operating profit was well below 2009.
Americas Distribution
2010 overview
% of | Analysis of change | |||||||||||||||||||||||||||||||||||||
€ million | Group | 2010 | 2009 | Change | Organic | Acquisitions | Restructuring | Impairment | Exchange | |||||||||||||||||||||||||||||
Sales revenue | 7% | 1,239 | 1,173 | +66 | +2 | +3 | - | - | +61 | |||||||||||||||||||||||||||||
EBITDA (as defined)* | 4% | 60 | 39 | +21 | +16 | - | +3 | - | +2 | |||||||||||||||||||||||||||||
Operating profit | 5% | 37 | 15 | +22 | +18 | - | +3 | - | +1 | |||||||||||||||||||||||||||||
EBITDA (as defined)* margin | 4.8% | 3.3% | ||||||||||||||||||||||||||||||||||||
Operating profit margin | 3.0% | 1.3% |
Americas Distribution, trading as Allied Building Products (Allied), experienced another challenging year in 2010. Activity levels in both segments of our business were impacted, but with the benefit of lower operating costs and stable gross margins, operating profit improved significantly from 2009.
Since 2008, Allied has closed or merged 27 locations, many in smaller markets, and added 3 locations. This process has provided an opportunity to evaluate Allied’s market footprint and to position the business for future opportunities. In addition, the business has concentrated on purchasing and transportation initiatives, rationalisation of administrative and geographic oversight functions, thereby increasing efficiency, control and profitability. This aggressive operating approach has substantially benefited 2010 operating results.
Due to the continued downturn in the macroeconomic environment, Allied curtailed capital spending and kept development activity to a minimum; during 2010 we acquired one Exterior Products distributor in Sacramento, California.
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In order to further penetrate the competitive marketplace, Allied launched a new product initiative in 2010. “TriBuilt Materials” was established to provide a proprietary private label brand of products sold exclusively through Allied’s network of Exterior and Interior branches. This product initiative differentiates Allied in the market while building an exclusive brand identity. TriBuilt® enables Allied to vertically integrate many of its higher-margin items, simultaneously enhancing profit margins and purchasing efficiencies. As brand awareness expands within the contractor community, Allied will add more products to this profitable operating segment.
Exterior Products
Allied is one of the top three distributors in this segment in the United States. Demand is influenced by residential and commercial replacement activity (75% of sales volume is RMI-related) with key products having an average life span of 25 years. Markets continue to be challenged as US shipments of asphalt roofing shingles declined further, down 8.5% on 2009, impacted by the historically low level of new housing starts. Despite this, solid performance from the Northeast, Mid-Atlantic, Upper Midwest and Colorado regions has enabled the Exterior Products division to experience sales growth and a good advance in operating profit for the year.
Interior Products
This business area has low exposure to weather-driven replacement activity and is heavily dependent on the new commercial construction market. Allied is the third largest Interior Products distributor in the US. The new construction market continued to decline as shipments of wallboard, one barometer of market activity, declined 9% in Allied’s market areas. Despite a 12% decline in sales, operating performance stabilised due to a strong presence in Hawaii, the benefit of lower operating costs and the consolidation of smaller and underperforming locations.
CRH 65
CRH 109 |
Directors’ Remuneration Report |continued
individual and business performance, to €675,000 in two steps. Her salary increased to €625,000 (+9.7%) in 2014. TheRemuneration Committee has determined that it is appropriate to make the second increase (to €675,000) in respect of 2015 (+8%).
The Committee has also reviewed the salary levels for Albert Manifold and Mark Towe and determined that increases of 7.5% to €1,290,000 and 3% to US$1,420,000 respectively are appropriate. The increase for Albert Manifold reflects the speed with which he has developed in the Chief Executive role, demonstrated by the progress in the delivery of strategy and the improvement in returns and margins referred to above. TheRemuneration Committee also noted that the salary of Albert Manifold remains below the level of €1,450,000 awarded to the Chief Executive of CRH in 2008. The increase for Mark Towe is in line with increases across the general employee population in the United States.
2015 Awards under the 2014 Performance Share Plan
Awards under the 2014 Performance Share Plan in 2015 will be made at the same level as in 2014 and will continue to be based on TSR and adjusted cash flow. The adjusted cash flow targets have not yet been set by theRemuneration Committee and will be set when the outcome of the proposed acquisition of assets from Lafarge S.A. and Holcim Ltd is known. As in previous years, the targets will be demanding and aligned to value creation for shareholders, with significant stretch ensuring that only exceptional performance will result in maximum payout.
Remuneration Policy
As referred to in the Chairman’s introduction to the Annual Report on page 2, CRH has entered into a binding commitment to acquire certain assets from Lafarge S.A. and Holcim Ltd for a total enterprise value of €6.5 billion. In the context of this proposed acquisition, the Committee will review the remuneration policy during the
course of 2015 to ensure it remains appropriate for the needs of the business.
Conclusion
Shareholders play a crucial role in the design of appropriate, balanced and fair remuneration structures and, as I will retire from the Board of CRH following the 2015 Annual General Meeting, I would like to thank all those who have engaged with CRH during my tenure asRemuneration Committee Chairman, for their constructive approach to dialogue with the Company. I have no doubt that my successor, Don McGovern, will benefit from your continued strong support for CRH.
Dan O’Connor
Remuneration Committee Chairman
110 CRH | ||||
Directors’ Remuneration Report |continued
66 CRH
Directors and Corporate Governance
DIRECTORS AND CORPORATE GOVERNANCE - Board of Directors
CRH 67
Directors and Corporate Governance
DIRECTORS AND CORPORATE GOVERNANCE - Board of Directors
Board of DirectorsAnnual Statement on Remuneration
The Boardfollowing section sets out details of:
– | the remuneration paid to Directors in respect of 2014; |
– | how CRH’s remuneration policy will operate for 2015; and |
– | other areas of disclosure. |
The Directors’ Remuneration Report, excluding the Remuneration Policy summary on pages 126 to 131, will be
put to shareholders for the purposes of Directors managean advisory vote at the businessAnnual General Meeting to be held on 7 May 2015.
The Company is not seeking shareholder approval for a revised Remuneration Policy this year and, therefore, we have not included the full policy in this report. We have, however, included the executive Director and non-executive Director policy tables, as well as details of the Company. The Directors, other than the non-executive Directors, serveChief Executive’s service contract as executive officers of the Company.information for shareholders.
Executive Directors
M. Lee BE, FCAAcquisitions Committee
Chief ExecutiveAcquisitions Committee Members
(Aged 58)
A. Manifold FCPA, MBA, MBS
Chief Operating Officer
(Aged 49)
M. Carton MA, FCA
Finance Director
(Aged 53)
M.S. Towe
Chief Executive Officer
Oldcastle, Inc.
(Aged 62)
BiographiesThe biographies of the Executive Directorsmembers of theAcquisitions Committee are shownset out on pages 14 and 15.
Non-executive Directors
E.J. Bärtschi LIC.OEC.HSG
Ernst Bärtschi became a non-executive Director in October 2011. A Swiss national, he was until 31 December 2011 Chief Executive of Sika AG, a manufacturer of speciality chemicals for construction and general industry. Prior87 to joining Sika, he worked for the Schindler Group and was Chief Finance Officer between 1997 and 2001. Over the course of his career he has gained extensive experience in India, China and the Far East generally. He is a member of the board of Bucher Industries AG, a mechanical and vehicle engineering company based in Switzerland. (Aged 59).
W.P. Egan
Bill Egan became a non-executive Director in January 2007. A United States citizen, he is founder and General Partner of Alta Communications and Marion Equity Partners LLC, Massachusetts-based venture capital firms. He is89.
a directorThe tenure of the Irish venture capital company Delta Partners Limited. He also serves on the boards of several communications, cable and information technology companies. Heeach Committee member is past Chairman of Cephalon Inc., and past President and Chairman of the National Venture Capital Association. (Aged 66).
U-H. Felcht
Utz-Hellmuth Felcht became a non-executive Director in July 2007. A German national, he was, until May 2006, Chief Executive of Degussa AG, Germany’s third largest chemical company. He is a partner in the private equity group One Equity Partners Europe GmbH, Chairman of the German rail company Deutsche Bahn AG, and a member of the Supervisory Board of Jungbunzlauer Holding AG. He was until May 2011 Chairman of the Supervisory Board of Süd-Chemie Aktiengesellschaft. (Aged 64).
N. Hartery BE, CEng, FIEI, MBA
Chairman Designate
Nicky Hartery became a non-executive Director in June 2004 and was appointed Chairman Designate in February 2012. He was Vice President of Manufacturing and Business Operations for Dell Inc.’s Europe, Middle East and Africa (EMEA) operations from 2000 to 2008. 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 Chief Executive of Prodigium, a consulting company which provides business advisory services. He is also a non-executive director of Musgrave Group plc, a privately owned international food retailer, and Eircom Limited, a company which provides telecommunications services in Ireland. (Aged 60).
J.M. de Jong
Jan Maarten de Jong became a non-executive Director in January 2004. A Dutch national, he is a member of the Supervisory Board of Heineken N.V. He is a former member of the Managing
68 CRH
Directors and Corporate Governance
DIRECTORS AND CORPORATE GOVERNANCE - Board of Directorsas follows:
Board of ABN Amro Bank N.V. and continued to be a Special Advisor to the board of that company until April 2006. He is also a director of a number of European banking, insurance and industrial holding companies, including AON Groep Nederland B.V. and KBC Bank N.V. (Aged 66).
J.W. Kennedy MSc, BE, CEng, FIEE
John Kennedy became a non-executive Director in June 2009. He is past Chairman of Wellstream Holdings plc. In a 40 year career, he has served as Executive Vice President of Halliburton Company, President of Dresser Enterprises and Chief Operations Officer of Brown and Root Services. He is a director of Integra Group and is non-executive Chairman of Maxwell Drummond International Limited, Hydrasun Holdings Limited, Welltec A/S and BiFold Group Limited. He is also a past director of the UK Atomic Energy Authority. (Aged 61).
K. McGowan
Chairman
Kieran McGowan became Chairman of CRH in 2007 having been a non-executive Director since 1998. He is a director of Elan Corporation plc and Charles Schwab Worldwide Funds plc and is Chairman of Property Industry Ireland (PII) Limited and Business in the Community Ireland. He was Chief Executive of IDA Ireland (Ireland’s inward investment promotion agency) from 1990 to 1998 and has served as President of the Irish Management Institute and as Chairman of the Governing Authority of University College Dublin. (Aged 68).
H.A. McSharry BComm, MBS
Heather Ann McSharry became a non-executive Director in February 2012. She is Chairman of the Board of Trustees of the Bank of Ireland Pension Fund and is a director of Ergonomics Solutions International, IDA Ireland and the Institute of Directors. She is a former Managing Director of Reckitt Benckiser and Boots Healthcare in Ireland and was previously a director of Bank of Ireland and Enterprise Ireland. (Aged 50).
D.N. O’Connor BComm, FCA
Dan O’Connor became a non-executive Director in June 2006. He is a former President and Chief
Executive Officer of GE Consumer Finance - Europe and a former Senior Vice-President of GE. He was until October 2010 Executive Chairman of Allied Irish Banks, plc. (Aged 52).
Changes in Directors
Ms. J.M.C. O’Connor retired from the Board on 4 May 2011. Mr. W.I. O’Mahony retired from the Board on 31 December 2011.
Mr. E. Bärtschi was appointed to the Board on 26 October 2011. Ms. H.A. McSharry was appointed to the Board on 22 February 2012.
Mr. K. McGowan will retire from the Board at the conclusion of the Annual General Meeting to be held on 9 May 2012.
Under the Company’s Articles of Association, co-opted Directors are required to submit themselves to shareholders for election at the Annual General Meeting following their appointment and all the Directors are required to submit themselves for re-election at intervals of not more than three years. However, in accordance with the provisions contained in the 2010 UK Corporate Governance Code, the Board has decided that all Directors eligible for re-election should retire at each Annual General Meeting and offer themselves for re-election, where applicable.
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Directors and Corporate Governance
DIRECTORS AND CORPORATE GOVERNANCE - Board of Directors
Board Committees
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Mr. P. Kennedy and Mr. H. Rottinghuis were appointed to the Committee on 25 February 2015.
70 CRH
Directors and Corporate Governance
The attendance atAcquisitions Committeemeetings is set out in table 11 below.
DIRECTORS AND CORPORATE GOVERNANCE - Corporate GovernanceRole and Responsibilities
TheAcquisitions Committee has been delegated authority by the Board to approve acquisitions and disposals and large capital expenditure projects up to agreed limits.
Finance Committee
Finance Committee Members
The biographies of the members of theFinance Committeeare set out on pages 87 to 89.
The tenure of each Committee member is as follows:
N. Hartery | 2.5 years | |
M. Carton | 4.5 years | |
U-H. Felcht | 7.5 years | |
J.W. Kennedy | 0.5 years |
CRH, which
Mr. E.J. Bärtschi and Ms. H.A. McSharry were appointed to the Committee on 25 February 2015.
The attendance atFinance Committeemeetings is incorporated in Ireland and subject to Irish Company Law, has a premium listing on the London Stock Exchange, a secondary listing on the Irish Stock Exchange and its American Depositary Shares are listed on the New York Stock Exchange.
Corporate governance is the system by which companies are directed and controlled; it is concerned with the way in which a board operates and sets the values for a company, rather than with the day-to-day operational management of a company by full-time executives. The Directors and management of CRH are committed to maintaining very high standards of corporate governance and ethical business conduct, and this Report describes CRH’s governance principles and practice and the Group’s risk management and internal control systems. The Report also sets out how CRH applies the main and supporting principles of the 2010 UK Corporate Governance Code (the 2010 Code) which, with effect from 1 January 2011 for CRH, replaced the June 2008 Combined Code on Corporate Governance. This Report also takes into account the disclosure requirements set out in the corporate governance annex to the listing rules of the Irish Stock Exchange.table 11 below.
A copy of the 2010 Code can be obtained from the Financial Reporting Council’s website,www.frc.org.uk.
Role of the Boardand Responsibilities
The BoardFinance Committee is collectively responsible for the leadership, control, developmentfor:
– | advising the Board on the financial requirements of the Group and on |
Attendance at Board and Board Committee meetings during the year ended 31 December 2014
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Table 11
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Board
| Acquisitions | Audit | Finance | Nomination | Remuneration | |||||||||||||||||||||||
No. of Meetings | No. of Meetings | No. of Meetings | No. of Meetings | No. of Meetings | No. of Meetings | |||||||||||||||||||||||
Total | Attended | Total | Attended | Total | Attended | Total | Attended | Total | Attended | Total | Attended | |||||||||||||||||
E.J. Bärtschi | 8 | 8 | 10 | 10 | ||||||||||||||||||||||||
M. Carton | 8 | 8 | 8 | 8 | 7 | 7 | ||||||||||||||||||||||
W.P. Egan | 8 | 7 | 7 | 7 | 8 | 8 | ||||||||||||||||||||||
U-H. Felcht | 8 | 7 | 8 | 8 | 7 | 7 | ||||||||||||||||||||||
N. Hartery | 8 | 8 | 8 | 8 | 7 | 7 | 7 | 7 | 8 | 8 | ||||||||||||||||||
J.M. de Jong* | 2 | 2 | 1 | 1 | 2 | 2 | ||||||||||||||||||||||
J.W. Kennedy | 8 | 8 | 2 | 2 | 5 | 5 | 7 | 7 | ||||||||||||||||||||
D.A. McGovern, Jr. | 8 | 8 | 10 | 10 | ||||||||||||||||||||||||
H.A. McSharry | 8 | 8 | 10 | 10 | ||||||||||||||||||||||||
A. Manifold | 8 | 8 | 8 | 8 | 7 | 7 | ||||||||||||||||||||||
D.N. O’Connor | 8 | 8 | 5 | 5 | 7 | 7 | 8 | 8 | ||||||||||||||||||||
H. Th. Rottinghuis** | 8 | 8 | 5 | 4 | ||||||||||||||||||||||||
M.S. Towe | 8 | 8 | ||||||||||||||||||||||||||
* Retired May 2014 | ||||||||||||||||||||||||||||
** Appointed to Board February 2014 | ||||||||||||||||||||||||||||
Note: See summary of Board Committee changes in table 10 on page 103.
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104 CRH |
Corporate Governance Report| continued
appropriate funding arrangements; |
– | considering and making recommendations to the Board in relation to the issue and buy-back of shares and debt instruments and on the Group’s financing arrangements; |
– | considering and making recommendations to the Board in relation to dividend levels on the Ordinary Shares; |
– | keeping the Board advised of the financial implications of Board decisions in relation to acquisitions; |
– | assisting management, at their request, in considering any financial or taxation aspect of the Group’s affairs; and |
– | reviewing the Group’s insurance arrangements. |
Risk Management and long-term success of the Group. We are also responsible for instilling the appropriate culture, values and behaviour throughout the organisation. There is a formal schedule of matters reserved to the Board for consideration and decision. This includes Board appointments, approval of the Annual Report, the Interim Results and the annual budget, major acquisitions, significant capital expenditure and approval of strategic plans for the Group. The Group’s strategy, which is regularly reviewed by the Board, and its business model are summarised on page 10.Internal Control
The Board has delegated responsibility for the managementmonitoring of the Group, through the Chief Executive, to executive management. It has been our practice since the formation of the Group in the 1970s that the roles of Chairman and Chief Executive are not combined. There is a clear division of responsibilities, which is set out in writing and has been approved by the Board, between the two roles. The Chief Executive has full day-to-day operational and profit responsibility for the Group and is accountable to the Board for all authority delegated to executive management. His overall brief is to execute agreed strategy, to co-ordinate and oversee the profitable growth of a diverse group of international businesses and to maximise the contribution of senior management to business planning, operational control and profit performance.
Non-executive Directors are expected to constructively challenge management proposals and to examine and review management performance in meeting agreed objectives and targets. In addition, they are expected to draw on their experience and knowledge in respect of any challenges facing the Group and in relation to the development of proposals on strategy.
The Board has delegated some of its responsibilities to Committees of the Board. The work of each Committee is set out on pages 75 to 80 of this Report. While responsibility for monitoring the effectiveness of the Group’s risk management and internal control systems to theAudit Committee1. Such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and, in the case of internal control systems, can provide only reasonable and not absolute assurance against material misstatement or loss.
The Consolidated Financial Statements are prepared subject to oversight and control of the Finance Director, ensuring correct data is captured from Group locations and all required information for disclosure in the Consolidated Financial Statements is provided. An appropriate control framework has been delegatedput in place around the recording of appropriate eliminating journals and other adjustments. The Consolidated Financial Statements are reviewed by the CRH Financial Reporting and Disclosure Group prior to being reviewed by theAudit Committee and approved by the Board of Directors.
The Directors confirm that the Group’s ongoing process for identifying, evaluating and managing its principal risks and uncertainties (as outlined on pages 52 to 63) is in accordance with the updated Turnbull guidance(Internal Control: Revised Guidance for Directors on the Combined Code) published in October 2005. The process has been in place throughout the accounting period and up to the Audit Committee1,date of approval of the Annual Report and financial statements.
Group management has responsibility for major strategic development and financing decisions. Responsibility for operational issues is devolved, subject to limits of authority, to product group and operating company management. Management at all levels is responsible for internal control over the business functions that have been delegated. This embedding of the system of internal control throughout the Group’s operations ensures that the organisation is capable of responding quickly to evolving business risks, and that significant internal control issues,
should they arise, are reported promptly to appropriate levels of management.
During the year, the Board retains ultimate responsibility for determiningandAuditCommitteereceived, on a regular basis, reports from management on the key risks to the business and the steps being taken to manage such risks. They also considered whether the significant risks faced by the Group were being identified, evaluated and appropriately managed, having regard to the balance of risk, cost and opportunity. In addition, theAudit Committee met with internal auditors on a regular basis and satisfied itself as to the adequacy of the Group’s “risk appetite”internal control system; met with the Chairman of theRemuneration Committee to ensure that the Group’s remuneration policies and annually considers a reportstructures were appropriate and in relationline with the Group’s risk tolerance; and reviewed the principal risks and uncertainties outlined on pages 52 to 63. TheAudit Committee also met with, and received reports from, the external auditors. The Chairman of theAudit Committee reported regularly to the Board on all significant issues considered by the Committee and the minutes of its meetings were circulated to all Directors.
The Directors confirm that, in addition to the monitoring controlling and reportingcarried out by theAudit Committee under its Terms of identified risks and uncertainties. In addition,Reference, they have reviewed the Board receives regular reports from the Chairmaneffectiveness of the Audit Committee in relationGroup’s risk management and internal control systems up to and including the workdate of that Committee in the area of risk management.
Individual Directors may seek independent professional advice, at the expenseapproval of the Company,financial statements. This had regard to all material controls, including financial, operational and compliance controls that could affect the Group’s business.
Management’s Report on Internal Control over Financial Reporting
In accordance with the requirements of Rule 13a-15 of the US Securities Exchange Act, the following report is provided by management in respect of the furtheranceCompany’s internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, their duties as a Director.
The Group has a Directors’the Company’s principal executive and Officers’ liability insurance policyprincipal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements for external purposes in place.accordance with generally accepted accounting principles and includes those policies and procedures that:
– | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of Consolidated Financial Statements in accordance with |
and that receipts and expenditures of the |
– | Provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the Company’s assets that could have a material effect on the Consolidated Financial Statements. |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the US Securities Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our Company’s published Consolidated Financial Statements for external purposes under generally accepted accounting principles.
In connection with the preparation of the Company’s annual Consolidated Financial Statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of 31 December 2014, based on criteria established inInternal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organisations of the Treadway Commission.
As permitted by the Securities and Exchange Commission, the Company has elected to exclude an assessment of the internal controls of acquisitions made during the year 2014. These acquisitions, which are listed in note 30 to the Consolidated Financial Statements, constituted 0.7% of total assets and 1.2% of net assets, as of 31 December 2014 and 0.6% and 0.8% of revenue and Group profit for the financial year, respectively, for the year then ended.
Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this assessment, management has concluded and hereby reports that as of 31 December 2014, the Company’s internal control over financial reporting is effective.
Our auditors, Ernst & Young, a registered public accounting firm, who have audited the Consolidated Financial Statements for the year ended 31 December 2014, have audited the effectiveness of the Company’s internal controls over financial reporting. Their report, on which an unqualified opinion is expressed thereon, is included on page 134.
Changes in Internal Control over Financial Reporting
During 2014, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 that occurred during the period covered by this Annual Report that
1 In accordance with Regulation 91(6)(b) of the European Communities (Statutory Audits) (Directive 2006/43) Regulations 2010.
CRH 105 |
Corporate Governance Report| continued
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Management has evaluated the effectiveness of the design and operation of the disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) as of 31 December 2014. Based on that evaluation, the Chief Executive and the Finance Director have concluded that these disclosure controls and procedures were effective as of such date at the level of providing reasonable assurance.
In designing and evaluating our disclosure controls and procedures, management, including the Chief Executive and the Finance Director, recognised that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The Group Compliance & Ethics (C&E) programme continues to develop in scope and reach. The structure of the C&E organisation was realigned in 2014 to serve the new CRH Europe organisation. A CRH Europe Head of C&E was appointed from the existing Compliance pool. Business Unit Compliance Coordinators (BUCCs) were also appointed for Heavyside East, Heavyside West, Lightside and Distribution and a European Compliance Officer was appointed to assist the European Head of C&E.
CRH’s Code of Business Conduct1 (COBC) and related policies were updated and approved by the Board and the C&E team’s primary focus since then has been to ensure all relevant employees receive appropriate training. In the current training cycle over 32,000 employees have participated in COBC training and a further 11,000 have also undertaken advanced instruction on competition law and anti-bribery, corruption and fraud.
In addition, our development teams and procurement teams have received appropriate instruction on both our C&E Mergers, Acquisitions and Joint Venture Due Diligence Programme and our Ethical Procurement Code. Our Supplier Code of Conduct was developed to communicate our minimum Corporate Social Responsibility requirements to existing and new suppliers to the Group and to outline how we ensure compliance with these requirements. Similar procedures have been developed for any engagements
Investor Relations Activities | Table 12 | |||||
Formal Announcements,including the release of the annual and interim results and the issuance of interim management statements. These announcements are typically accompanied by presentations and webcasts or conference calls. | ||||||
Investor Roadshows,typically held following the release of formal announcements, provide an opportunity for the management team to meet existing and/or potential investors in a concentrated set of meetings. | ||||||
Industry Conferences:Attendance at key sector and investor conferences affords members of the senior management team the opportunity to engage with key investors and analysts. | ||||||
Investor Briefings:In addition to regular contact with investors and analysts during the year, the Company periodically holds capital market days, which include presentations on various aspects of CRH’s operations and strategy and provide an opportunity for investors and analysts to meet with CRH’s wider management team. | ||||||
Media Briefings:Each year, the Company provides media briefings on numerous issues. |
with business partners. Further guidelines developed during the year include a Competition Law Toolbox – which gathers into one place various CRH 71guidelines, policies and notes to help the businesses comply with Competition Law requirements.
The COBC has scored an “A” rating by New York Stock Exchange Governance Services and incorporates some welcome new features, including learning aids, an ethical-decision making guide and a clear focus on the core values of the Group: Integrity, Honesty and Respect for the law. It was translated and distributed during 2014 and related training is being migrated to an on-line module. A robust communication plan is in place to complement the training programme. A multi-lingual “hotline” facility – “Speak Up” is also available to employees as a secure channel to report ethical issues that concern them or suspected violations of our Codes. All hotline reports received are fully reviewed and investigated by appropriately qualified personnel.
The C&E programme has been integrated into our standard Internal Audit procedures and forms part of an annual management certification process. Its effectiveness is also regularly reviewed by the C&E function with appropriate oversight from senior management and theAudit Committee. The collective goal is to ensure the message is clearly understood that at CRH “there is never a good business reason to do the wrong thing”.
DirectorsSustainability and Corporate GovernanceSocial Responsibility
Sustainability and Corporate Social Responsibility (CSR) concepts are embedded in all CRH operations and activities.
Excellence in the areas ofhealth & safety, environment & climate change, governance and people & community is a daily priority of line management. The Group’s policies and implementation systems are summarised on pages 47 to 51. During 2014, CRH was again recognised by several leading socially responsible investment (SRI) agencies as being among the leaders in its sector in these important areas.
DIRECTORS AND CORPORATE GOVERNANCE - Corporate GovernanceCommunications with Shareholders
MembershipCommunications with shareholders are given high priority and the Group devotes considerable time and resources each year to shareholder engagement. We recognise the importance of effective dialogue as an integral element of good corporate governance. The Investor Relations team, together with the Chief Executive, Finance Director and other senior executives, meet regularly with institutional shareholders (each year covering over 50% of shareholder base). Detailed reports on the issues covered in those meetings and the views of shareholders are circulated to the Board after each group of meetings. Table 12 above provides a brief outline of the Board
It is our practice that a majoritynature of the Board comprises non-executive Directors, consideredactivities undertaken by the Board to be independent, and thatour Investor Relations team.
During 2014, the Chairman, is non-executive. At present, there are four executiveSenior Independent Director and nine non-executive Directors. Biographical details are set out on pages 14, 15, 68 and 69. While there is an ongoing processCompany Secretary participated in a number of planned refreshment and renewal, we consider the current size and compositionconference calls with some of the Board to be within a range which is appropriate. We also believe that the current sizeGroup’s major shareholders in advance of the Board is sufficiently large2014 Annual General Meeting. The meetings were organised to enable its Committeesprovide those shareholders with an opportunity to operate without undue reliancediscuss the resolutions on individual non-executive Directors, while being dynamicthe 2014 Annual General Meeting agenda and responsivecorporate governance matters generally.
In addition to the needsabove, major acquisitions are notified to the Stock Exchanges in accordance with the requirements of the Company. The spreadListing Rules and development updates, giving details of nationalities ofother acquisitions completed and major capital expenditure projects, are issued periodically (typically in January and July each year).
In addition, we respond throughout the Directors reflects the geographical reach of the Group and we consider that the Board as a whole has the appropriate blend of skills, knowledge and experience,year to
1 | The Code of Business Conduct is applicable to all Group employees including the Chief Executive and senior financial officers. The Code promotes honest and ethical conduct; full, fair, accurate, timely and understandable disclosures and compliance with applicable governmental laws, rules and regulations and complies with the applicable code of ethics regulations of the United States Securities and Exchange Commission arising from the Sarbanes-Oxley Act. |
106 CRH |
Corporate Governance Report| continued |
correspondence from shareholders on a wide range of industries, regions and backgrounds, necessaryissues.
The Chief Executive made a presentation to leadshareholders at the Company. Directors are appointed for specified terms and are subject to annual re-election at the2014 Annual General Meeting and to the Memorandum and Articles of Association of the Company.
None of the executive Directors is a non-executive director of a listed company.
As outlined below, the Nomination & Corporate Governance Committee is responsible for keeping the “bench-strength” of the Board, and the need for refreshment and renewal, under review.on CRH’s businesses.
Board succession policy and diversityGeneral Meetings
The Board plans for its own succession with the assistance of the Nomination & Corporate Governance Committee. Independent consultants are engaged to search for suitable candidates to serve as non-executive Directors.
We are committed to ensuring that the Board is sufficiently diverse and appropriately balanced. In its work in the area of Board renewal, the Nomination & Corporate Governance Committee looks at four criteria when considering candidates: (i) international business experience, particularly in the regions in which the Group operates or in which it intends to expand; (ii) skills, knowledge and expertise in areas relevant to the operation of the Board; (iii) diversity, including nationality and gender; and (iv) the need for an appropriately sized Board. During the ongoing process of Board renewal, each, or a combination, of these factors can take priority. Consequently, to date the Board has not set specific objectives in relation to diversity.
Independence of Directors
The independence of Board members is considered annually. The Board is assisted in this by the annual review carried out by the Senior Independent Director which addresses the independence of the individual members of the Board (see Performance appraisal and Board evaluation section below), and by the work of the Nomination & Corporate Governance Committee, which annually reviews each Board member’s directorships and considers any relevant business relationships between Board members. We have concluded that all of the Directors bring independent judgement to bear on issues of strategy, performance, resources, key appointments and standards, and have determined that each of the non-executive Directors is independent. In reaching that conclusion, we considered the principles relating to independence contained in the 2010 Code, together with the guidance provided by a number of shareholder voting agencies, and have taken the view that independence is determined by a Director’s character, objectivity and integrity. Those principles and guidance highlight 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, while making it clear that a Director may be considered independent notwithstanding the presence of one or more of these factors.
Chairman
Kieran McGowan, who has been Chairman of the Group since May 2007, will retire as Chairman and from the Board at the conclusion of the 2012Company’s Annual General Meeting. On his appointment asMeeting (AGM), which is held in Ireland, affords individual shareholders the opportunity to question the Chairman Mr. McGowan met the independence criteria set out in the June 2006 Combined Code. The Board has
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appointed Nicky Hartery as Chairman Designate. Mr. Hartery, who was appointed to the Board in June 2004 meets the independence criteria set out in the 2010 Code. The process used for the appointment of the new Chairman is set out on page 79.
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 management’s plans for the Group and that Directors receive accurate, timely, clear and relevant information. He oversees the search for new Board members and is available to meet with, and hear the views of, institutional investors. While Mr. McGowan holds a number of other directorships (see details on page 69), the Board considers that these do not interfere with the discharge of his duties to CRH.
Senior Independent Director
Nicky Hartery has been the Senior Independent Director since May 2008. The Board has decided that Dan O’Connor will take on the role of Senior Independent Director when Mr. Hartery assumes the role of Chairman in May 2012.
Company Secretary
The appointment and removal of the Company Secretary is a matter for the Board. All Directors have accessattended the 2014 AGM. The Notice of the AGM, which specifies the time, date, place and the business to be transacted, is sent to shareholders at least 20 working days before the meeting. At the meeting, resolutions are voted on by way of a poll using an electronic voting system. The votes of shareholders present at the meeting are added to the adviceproxy votes received in advance and servicesthe total number of votes for, against and withheld for each resolution are announced. This information is made available on the Company’s website following the meeting.
All other general meetings are called Extraordinary General Meetings (EGMs). An EGM called for the passing of a special resolution requires at least 21 clear days’ notice.
A quorum for a general meeting of the Company Secretary, who is responsibleconstituted by five or more shareholders present in person and entitled to vote. The passing of resolutions at a meeting of the Company, other than special resolutions, requires a simple majority. To be passed, a special resolution requires a majority of at least 75% of the votes cast.
Shareholders have the right to attend, speak, ask questions and vote at general meetings. In accordance with Irish company law, the Company specifies record dates for general meetings, by which date shareholders must be registered in the Register of Members of the Company to be entitled to attend. Record dates are specified in the notes to the Board for ensuring that Board procedures are complied with.
Terms of appointment of non-executive Directors
The standard terms of the letter of appointment of non-executive Directors are available for inspection at the Company’s registered office and at the Annual General Meeting.
Induction, training and development of Directors
New Directors are provided with extensive briefing materials on the Group and its operations, the procedures relating to the Board and its Committees and their duties and responsibilities as Directors under company law. The Chairman agrees a tailored and comprehensive induction programme with each new Director. The aim of the programme, which generally covers the first yearnotice of a new Director’s appointment, isgeneral meeting. Shareholders may exercise their right to provide them withvote by appointing, by electronic means or in writing, a detailed insight into the Group. The programme involves meeting with the Chief Executive, Chief Operating Officer, Finance Director, Company Secretary and key senior executives at Head Office and Divisional level. It covers areas such as strategy, development priorities, acquisition evaluation, organisation structure, succession planning, financing, corporate social responsibility, compliance and ethics, investor relations and risk management. New Directors also meet with the Senior Independent Directorproxy/proxies to discuss the most recent Board evaluation exercise and, after approximately six months, a session is organised with the Chairman to review progress. All Directors can also avail of opportunities to hear the views of and meet with the Group’s investors and analysts. Directors regularly receive copies of research and analysis conducted on CRH and the building materials sector. The Board receives regular updates from the external auditors in relation to regulatory and accounting developments. Updates in relation to other relevant matters, for example, changes in company law, are provided from time to time.
Throughout the year, 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.
For newly-appointed members of the Audit Committee, training arrangements include meeting with the key members of the external audit, internal audit and finance (Head Office and Divisional) teams and where required, relevant financial courses are provided. Committee members also receive details of relevant conferences organised by external parties. New members of the Remuneration Committee meet with the Committee’s remuneration consultants in the yearvote some or all of their appointment toshares. The requirements for the Committee.
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Remunerationreceipt of Directors
Details of remuneration paid to the Directorsvalid proxy forms are set out in the notes to the notice convening the meeting and in the notes on the proxy form. A shareholder, or a group of shareholders, holding at least 5% of the issued share capital of the Company, has the right to requisition a general meeting. A shareholder, or a group of shareholders, holding at least 3% of the issued share capital of the Company, has the right to put an item on the agenda of an AGM or to table a draft resolution for inclusion in the agenda of a general meeting, subject to any contrary provision in Irish company law.
Going Concern
The Company’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategy Review section on pages 34 to 43. The financial position of the Company, its cash flows, liquidity position
and borrowing facilities are described in the Business Performance Review on pages 66 to 76. In addition, notes 20 to 24 to the Consolidated Financial Statements include the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit, currency and liquidity risks.
The Company has considerable financial resources and a large number of customers and suppliers across different geographic areas and industries. In addition, the local nature of building materials means that the Group’s products are not usually shipped cross-border.
Having assessed the relevant business risks, the Directors believe that the Company is well placed to manage these risks successfully, and they have a reasonable expectation that the Company, and the Group as a whole, have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Consolidated Financial Statements.
Compliance Statement
Non-US companies such as CRH are exempt from most of the corporate governance rules of the NYSE. In common with companies listed on the Irish Stock Exchange and the London Stock Exchange, CRH’s corporate governance practices reflect, inter alia, compliance with (a) domestic company law; (b) the Listing Rules of the UK Listing Authority and the Irish Stock Exchange; and (c) the Code, which is appended to the listing rules of the London and Irish Stock Exchanges.
CRH has adopted a robust set of Board governance principles, which reflect the Code and its principles-based approach
to corporate governance. Accordingly, the way in which CRH makes determinations of Directors’ independence differs from the NYSE rules. The Board has determined that, in its judgement, all of the non-executive Directors are independent. In doing so, however, the Board did not explicitly take into consideration the independence requirements outlined in the NYSE’s listing standards.
Shareholder Approval of Equity Compensation Plans
The NYSE rules require that shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions to those plans. CRH complies with Irish requirements, which are similar to the NYSE rules. The CRH Board, however, does not explicitly take into consideration the NYSE’s detailed definition on what are considered “material revisions”.
The following are available on the CRH website, www.crh.com: | Table 13 | |||||
Corporate Governance section: | ||||||
– Terms of Reference ofAcquisitions Committee (amended December 2010) | ||||||
– Terms of Reference ofAudit Committee (amended December 2013) | ||||||
– Terms of Reference ofFinance Committee (amended February 2004) | ||||||
– Terms of Reference ofNomination & Corporate Governance Committee (amended December 2013) | ||||||
– Terms of Reference ofRemuneration Committee (amended December 2013) | ||||||
– The Memorandum and Articles of Association of the Company | ||||||
– Pre-approval policy for non-audit services provided by the auditors | ||||||
– Compliance & Ethics statement, Code of Business Conduct and Hotline contact numbers – The 2014 Remuneration Policy | ||||||
Investors section: | ||||||
– Annual and Interim Reports, the Annual Report on Form 20-F, Interim Management Statements and copies of presentations to analysts and investors | ||||||
– News releases | ||||||
– Webcast recordings of key investor briefings | ||||||
– General Meeting dates, notices, shareholder circulars, presentations and poll results | ||||||
– Answers to Frequently Asked Questions, including questions regarding dividends and shareholder rights in respect of general meetings |
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Introduction
On behalf of theRemuneration Committee, I am pleased to introduce the Directors’ Remuneration Report for the year ended 31 December 2014. The Remuneration Report (excluding the Remuneration Policy summary on pages 126 to 131), will be included on the agenda of the 2015 Annual General Meeting for shareholder consideration. The purpose of CRH’s Remuneration Policy, which was approved by shareholders at the 2014 Annual General Meeting, is to provide an appropriate framework to support the creation of value for shareholders over the longer term, the attraction and retention of key executives and succession planning, without paying more than is necessary. The full Remuneration Policy is available on the CRH website, www.crh.com. 2014 Performance 2014 was a year of growth and progress in terms of our aim of restoring margins and returns to peak levels in the coming years. | Recent Remuneration Snapshot: • Updated Remuneration Policy approved at 2014 AGM • New performance share plan adopted at 2014 AGM • Incentive payout levels linked to stretching performance criteria • Strong support from shareholders for policy and implementation In addition, there was significant achievement regarding the Group’s multi-year divestment programme of €1.5 billion to €2.0 billion, with proceeds from disposals completed in 2014 of €0.35 billion since the programme was announced in August 2014. Overall, CRH’s strong balance sheet and cash generation capability leave the Company well positioned to take advantage of value-creating acquisition opportunities. In the context of the Group’s performance in 2014, and performance against individual and strategic goals, theRemuneration Committee has determined that the annual bonus levels for 2014 should be set at the maximum level of 150% for each of the executive Directors. In accordance with CRH’s Remuneration Policy, approved by shareholders at the 2014 Annual General Meeting, 25% of the 2014 bonus will be deferred into shares for a period of three years. | The basis for each bonus award is set out in detail on page 112. In line with evolving best practice, we have increased the level of disclosure in relation to payout levels to provide shareholders with a greater level of insight into the approach for determining bonus payments. We have also disclosed the targets for the bonus payments in respect of 2013 as these are no longer considered to be commercially sensitive. Similarly, theRemuneration Committee intends that the targets for the 2014 bonus plan will be disclosed in the 2015 Directors’ Remuneration Report. The 2014 Remuneration Policy also made provision for theRemuneration Committee to introduce clawback provisions, in addition to the malus2 provisions already in place for the annual bonus plan and the long-term performance share plan. The Committee has decided, in accordance with the provisions of the 2014 UK Corporate Governance Code, to introduce clawback provisions for the cash element of the annual bonus plan for 2015 and onwards. The long-term awards made under the 2006 Performance Share Plan and the 2010 Share Option Scheme made in 2012 (each with a three year performance period 2012 - 2014) did not meet the relevant performance criteria required to vest and, consequently, those awards lapse in full. Further details are set out on pages 114 and 115. Executive Director Salaries As reported in the 2013 Directors’ Remuneration Report, following consideration of the scope of the Finance Director’s responsibilities and her performance since being appointed in 2010, the Committee decided that Maeve Carton’s salary should be increased, subject to continued | ||||||||
Sales | + 5% | Return on Net Assets | +150bps | |||||||
EBITDA (as defined)* | +11% | Operating Cash Flow | +23% | |||||||
EPS | +33%1 | Net Debt | -16% |
* | Defined as earnings before interest, taxes, depreciation, amortisation, asset impairment charges, profit on disposals and the Group’s share of equity accounted investments’ result after tax. |
1 | Based on adjusted 2013 EPS (excluding impairments and the related tax impact). |
2 | Malus is a mechanism whereby the Remuneration Committee may decide not to release deferred share or performance share plan awards if an unusual event such as a material financial misstatement occurred, significant losses were incurred or the Company suffered significant reputational damage. |
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Directors’ Remuneration Report |continued
individual and business performance, to €675,000 in two steps. Her salary increased to €625,000 (+9.7%) in 2014. TheRemuneration Committee has determined that it is appropriate to make the second increase (to €675,000) in respect of 2015 (+8%).
The Committee has also reviewed the salary levels for Albert Manifold and Mark Towe and determined that increases of 7.5% to €1,290,000 and 3% to US$1,420,000 respectively are appropriate. The increase for Albert Manifold reflects the speed with which he has developed in the Chief Executive role, demonstrated by the progress in the delivery of strategy and the improvement in returns and margins referred to above. TheRemuneration Committee also noted that the salary of Albert Manifold remains below the level of €1,450,000 awarded to the Chief Executive of CRH in 2008. The increase for Mark Towe is in line with increases across the general employee population in the United States.
2015 Awards under the 2014 Performance Share Plan
Awards under the 2014 Performance Share Plan in 2015 will be made at the same level as in 2014 and will continue to be based on TSR and adjusted cash flow. The adjusted cash flow targets have not yet been set by theRemuneration Committee and will be set when the outcome of the proposed acquisition of assets from Lafarge S.A. and Holcim Ltd is known. As in previous years, the targets will be demanding and aligned to value creation for shareholders, with significant stretch ensuring that only exceptional performance will result in maximum payout.
Remuneration Policy
As referred to in the Chairman’s introduction to the Annual Report on page 2, CRH has entered into a binding commitment to acquire certain assets from Lafarge S.A. and Holcim Ltd for a total enterprise value of €6.5 billion. In the context of this proposed acquisition, the Committee will review the remuneration policy during the
course of 2015 to ensure it remains appropriate for the needs of the business.
Conclusion
Shareholders play a crucial role in the design of appropriate, balanced and fair remuneration structures and, as I will retire from the Board of CRH following the 2015 Annual General Meeting, I would like to thank all those who have engaged with CRH during my tenure asRemuneration Committee Chairman, for their constructive approach to dialogue with the Company. I have no doubt that my successor, Don McGovern, will benefit from your continued strong support for CRH.
Dan O’Connor
Remuneration Committee Chairman
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Directors’ Remuneration Report |continued
Annual Statement on Remuneration
The following section sets out details of:
– | the remuneration paid to Directors in respect of 2014; |
– | how CRH’s remuneration policy will operate for 2015; and |
– | other areas of disclosure. |
The Directors’ Remuneration Report, excluding the Remuneration Policy summary on pages 85126 to 96. The 2011 Report on Directors’ Remuneration131, will be presented
put to shareholders for the purposes of an advisory non-binding vote at the Annual General Meeting to be held on 97 May 2012.2015.
OwnershipThe Company is not seeking shareholder approval for a revised Remuneration Policy this year and, dealing by Directorstherefore, we have not included the full policy in CRH securities
Detailsthis report. We have, however, included the executive Director and non-executive Director policy tables, as well as details of the shares held by Directors are set out on page 90. CRH has a policy on dealings in securities that applies to all Directors and senior management. Under the policy, Directors are required to obtain clearance from the Chairman and Chief Executive before dealing in CRH securities. Directors and senior management are prohibited from dealing in CRH securities during designated prohibited periods and at any time at which the individual is in possession of insideExecutive’s service contract as information (as defined in the Market Abuse (Directive 2003/6/EC) Regulations 2005). The policy adopts the terms of the Model Code, as set out in the Listing Rules published by the UK Listing Authority (which has been amended in relation to Irish company law and taxation references).
Performance appraisal and Board evaluation
The Senior Independent Director conducts an annual review of corporate governance, the independence of Board members, the operation and performance of the Board, and its Committees, the effectiveness of Board communications and the performance of the Chairman. This is achieved through discussion in one-to-one sessions with each Director. The meetings, which cover specific topics and allow for free-ranging discussion, provide a forum for an open and frank discourse. The Senior Independent Director circulates a written report to the Board each year, which summarises the outcome of the review and sets out any recommendations from Board members in relation to areas where improvements can be made. Consideration of the Senior Independent Director’s report is a formal agenda item at a scheduled Board meeting each year. This evaluation process will be facilitated in 2012 by a third party expert in this area. This is dealt with further in the Nomination & Corporate Governance Committee section on pages 78 and 79.
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 fulfil the role and to listen to and respect the views of other Directors and the management team. As part of that review process the Chairman discusses with each individual their training and development needs and, where appropriate, agrees for suitable arrangements to be put in place to address those needs.
Directors’ retirement and re-election
All Directors retire at each Annual General Meeting and, unless they are stepping down from the Board, submit themselves to shareholders for re-election. Re-appointment is not automatic. Directors who are seeking re-election are subject to a performance appraisal, which is overseen by the Nomination & Corporate Governance Committee.
Board meetings and time commitment
There were eight full meetings of the Board during 2011. Details of Directors’ attendance at those meetings are set out in the table on page 75. Each year, additional meetings, to consider specific matters, are held when and if required.
The Chairman sets the agenda for each meeting, in consultation with the Chief Executive and Company Secretary. In addition to the Group budget, trading results, large acquisitions, financial results and reports and regular Board matters, during the course of the year the Board receives updates on health and safety,shareholders.
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with a particular focus on the Group’s fatality elimination programme, environmental issues, human resources and the Company’s investor relations programme. A report on the performance of acquisitions against the original Board proposal following three years of Group ownership is also considered by the Board. In July, the Board meeting is held over two days, with the main focus being on Group strategy. The Chief Executive regularly updates the non-executive Directors, in sessions at which other executive Directors are not present, regarding succession planning for senior management in each Division. Board papers are circulated to Directors in advance of meetings. Directors can, if they wish, obtain their papers electronically by way of a secure application for portable electronic devices.
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 2011, these visits were to The Netherlands in Europe and to the Michigan area in the United States.
The non-executive Directors met twice during 2011 without executives being present.
Prior to their appointment, potential non-executive Directors are made aware of the calendar of meetings and are asked to confirm that they are able to allocate sufficient time to meet the expectations of their role. The agreement of the Chairman is required before accepting additional commitments that might impact adversely on the time they are able to devote as a non-executive Director of the Company.
Attendance at Board and Board Committee meetings during the year ended 31 December 2011
Board | Acquisitions | Audit | Finance | Nomination | Remuneration | |||||||||||||||||||||||||||||||||||||||||||
A | B | A | B | A | B | A | B | A | B | A | B | |||||||||||||||||||||||||||||||||||||
E.J. Bärtschi (appointed 26 October 2011) | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||
M. Carton | 8 | 8 | 3 | 3 | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||
W.P. Egan | 8 | 8 | 4 | 4 | 7 | 7 | ||||||||||||||||||||||||||||||||||||||||||
U-H. Felcht | 8 | 6 | 9 | 7 | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||
N. Hartery | 8 | 8 | 4 | 4 | 7 | 7 | ||||||||||||||||||||||||||||||||||||||||||
J.M. de Jong | 8 | 8 | 9 | 9 | ||||||||||||||||||||||||||||||||||||||||||||
J.W. Kennedy | 8 | 8 | 4 | 2 | 7 | 6 | ||||||||||||||||||||||||||||||||||||||||||
M. Lee | 8 | 8 | 3 | 3 | 4 | 4 | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||
K. McGowan | 8 | 8 | 3 | 3 | 4 | 4 | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||
A. Manifold | 8 | 8 | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||
D.N. O’Connor | 8 | 8 | 3 | 3 | 9 | 9 | ||||||||||||||||||||||||||||||||||||||||||
J.M.C. O’Connor (retired 4 May 2011) | 2 | 2 | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||
W.I. O’Mahony (retired 31 December 2011) | 8 | 8 | 3 | 2 | 4 | 3 | ||||||||||||||||||||||||||||||||||||||||||
M.S. Towe | 8 | 8 |
Column A - indicates the number of meetings held during the period the Director was a member of the Board and/or Committee.
Column B - indicates the number of meetings attended during the period the Director was a member of the Board and/or Committee.
Mr. Felcht was unable to attend some meetings during the course of 2011 due to diary conflicts and personal circumstances.
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 & Corporate Governance 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 Group’s 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.
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The current membership of each Committee, and each member’s length of service, is set out on page 70. Attendance at meetings held in 2011 is set out in the table on page 75.
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.
Acquisitions Committee
The role of thisAcquisitions Committee is to approve acquisitions, divestments and capital expenditure projects within limits agreed by the Board.
Audit CommitteeMembers
This Committee consistsThe biographies of four non-executive Directors, considered by the Board to be independent1. As at the date of this Report, the Board has determined that Mr. Jan Maarten de Jong and Mr. Dan O’Connor are the Committee’s financial experts. It will be seen from the Directors’ biographical details, appearing on pages 68 and 69, that the members of theAcquisitions Committee bring are set out on pages 87 to it experience and expertise from a wide range89.
The tenure of industries, including the financial services sector.
Theeach Committee2 met nine times during 2011. While its terms of reference, which were last updated in 2010, remained unchanged, the Committee reorganised its calendar of meetings in 2011 resulting in a reduction in meetings (from 14 in 2009 and 2010). 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 the majority of Committee meetings and report on any issues they believe should be brought to the attention of the Committee; in addition, they 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.
In 2011, the Committee reviewed, and discussed with management the content of, the Company’s interim management statements, the 2010 preliminary results announcement/Annual Report and financial statements, the 2010 Annual Report on Form 20-F, which was filed with the United States Securities and Exchange Commission, and the interim report for the period ended 30 June 2011. In February 2011, the Committee approved the annual internal audit plan and, in July, the external auditors presented their audit plans for the 2011 audit. In February 2012, at the meeting at which the 2011 year-end financial statements were considered, the Committee received a report from the external auditors in relation to the audit process. Each year, the Committee also considers a report from the external auditors containing their observations and comments on issues that arose during the audit.
Throughout the year, the Committee received reports and updates from the Head of Internal Audit in relation to internal audit reviews, Section 404 of the Sarbanes-Oxley Act 20023 and the arrangements in place to enable employees to raise concerns, in confidence, in relation to possible wrongdoing in financial reporting or other matters.
Assessments of the Internal Audit function are carried out periodically by management and validated by an independent third party assessor. The most recent assessment was conducted in late 2009, during which no major weaknesses were identified; the assessment did result in a number of recommendations, most of which have been implemented, and the Committee receives updates on the status of the implementation of the remaining recommendations. The Committee approves Internal Audit’s charter and any amendments thereto.
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In 2011, the Committee met with senior finance personnel from the Group’s operations to discuss inter-alia, internal audit review findings, the implementation of resulting changes to control structures, work in relation to improving the control environment and culture in each Division, co-ordination with the work of the external auditors, actions being taken to prevent fraud and the harmonisation of IT platforms, where appropriate, across the Group.
As part of its response to the difficult trading conditions in recent years, the Group has implemented a programme of cost savings and has periodically announced updates on the annualised savings under that programme. The Head of Internal Audit reviews these savings, and the related implementation costs, and reports his findings to the Committee.
During the year, the Committee reviewed the workings in relation to goodwill impairment testing and the sensitivity analysis referred to in note 15 to the Consolidated Financial Statements and discussed the outcome of the process with management and the external auditors in the context of developments in the wider industry.
The Board has delegated responsibility for monitoring the effectiveness of the Group’s risk management and internal control systems to the Audit Committee. Further details in relation to the Committee’s work in this area are set out in the section onRisk Management and Internal Controls on page 82.
The Committee regularly reviews the position in relation to the implementation of plans to mitigate the Group’s pension scheme liabilities. The Committee also regularly reviews the structures in place to ensure the Group complies with its obligations, particularly under competition and anti-corruption legislation throughout the world.
Under its terms of reference, the Audit Committee makes 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 or to seek other competitive bids for the audit. These include the quality of reports provided to the Audit Committee and the Board and the quality of advice given; the level of understanding demonstrated of the Group’s business and industry; the objectivity of the auditors’ views on the financial controls around the Group and their ability to co-ordinate a global audit, and the results of formal evaluations of the auditors.
Ernst & Young have been the Group’s auditors since 1988. Following an evaluation carried out in 2009, the Committee recommended to the Board that Ernst & Young be retained as the Group’s external auditors. There are no contractual obligations which act to restrict the Audit Committee’s choice of external auditor. The Committee has decided that such evaluations should be carried out at least every five years, with periodic interim reviews, and it monitors the implementation of the recommendations made as part of the evaluation process. The Committee considers the risk of withdrawal by Ernst & Young from the market and the potential impact on the Group, were that eventuality to materialise.
The Committee has put in place safeguards to ensure that the independence of the audit is not compromised. Such safeguards include: seeking confirmation from the external auditors that they are, in their professional judgement, independent from the Group; obtaining from the external auditors an account of all relationships between the auditors and the Group; monitoring the Group’s policy prohibiting the employment of former staff of the external auditors, who were part of the CRH audit team, in senior management positions until two years have elapsed since the completion of the audit, monitoring the number of former employees of the external auditors currently employed in senior positions in the Group and assessing whether those appointments impair, or appear to impair, the auditors’ judgement or independence; considering whether, taken as a whole, the various relationships between the Group and the external auditors impair, or appear to impair, the auditors’ judgement or independence; and reviewing the economic importance of the Group to the external auditors and assessing whether that importance impairs, or appears to impair, the external auditors’ judgement or independence.
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N. Hartery | 2.5 years | |
M. Carton | 4.5 years | |
U-H. Felcht | 3.0 years | |
J.W. Kennedy | 0.5 years | |
A. Manifold | 6.0 years |
The Group has a policy governing the conduct of non-audit work by the auditors1. The policy, which was updated in 2011, is available on the CRH website,www.crh.com. Under the policy, the external auditors are prohibited from performing services where they may be required to audit their own work, participate in activities that would normally be undertaken by management; are remunerated through a ‘success fee’ structure, where success is dependent on the audit; or act in an advocacy role for the Group. Other than the above, the Group does not impose an automatic ban on the external auditors undertaking non-audit work. The external auditors are permitted to provide non-audit services that are not, or are not perceived to be, in conflict with auditor independence, providing they have the skill, competenceMr. P. Kennedy and integrity to carry out the work and are considered by the Committee to be the most appropriate to undertake such work in the best interests of the Group. The engagement of the external auditors to provide any non-audit a services must be pre-approved by the Audit Committee or entered into pursuant to pre-approval policies and procedures established by the Committee. The pre-approval policy specifies the services that are prohibited and the services which have general pre-approval. The Committee has delegated to the Finance Director responsibility for confirming whether a service, which has general pre-approval, can be provided by Ernst & Young. The Finance Director reports regularlyMr. H. Rottinghuis were appointed to the Committee on services which have been approved.25 February 2015.
In 2011, the external auditors provided a number of audit-related and non-audit services, including Sarbanes-Oxley Section 404/regulatory reporting; services in relation to Securities and Exchange Commission registrations in the United States; work associated with bond and treasury issues; and due diligence services associated with proposed acquisitions. They were also engaged during 2011 in a number of jurisdictions in which the Group operates to provide help with local tax compliance, advice on taxation laws and other related matters; assignments which typically involve relatively small fees. The Auditattendance atAcquisitions Committeemeetings is satisfied that the external auditors’ knowledge of the Group was an important factor in choosing them to provide these services. The Committee is also satisfied that the fees paid to Ernst & Young for non-audit work, which amounted to circa 20% of the consolidated audit fee, did not compromise their independence or integrity. Details of the amounts paid to the external auditors during the year for audit and other services are set out in note 4table 11 below.
Role and Responsibilities
TheAcquisitions Committee has been delegated authority by the Board to the Consolidated Financial Statements on page 124.approve acquisitions and disposals and large capital expenditure projects up to agreed limits.
The Group external audit engagement partner is replaced every five years.
Finance Committee
ThisFinance Committee which advises the Board on the financial requirements of the Group and on appropriate funding arrangements, considers and makes recommendations to the Board in relation to the issue and buy-back of shares and debt instruments and to the Group’s financing arrangements; considers and makes recommendations to the Board in relation to dividend levels on the Ordinary shares; keeps the Board advised of the financial implications of Board decisions in relation to acquisitions; assists management, at their request, in considering any financial or taxation aspect of the Group’s affairs.
During 2011, the Committee considered a review of the Group’s listing arrangements, which resulted, in December 2011, in the re-classification of CRH’s listing of Ordinary shares on the Irish Stock Exchange from a primary listing to a secondary listing (the “Listing Re-classification”). CRH retained the premium listing of its Ordinary shares on the London Stock Exchange and there was no change to its listing of American Depositary Shares on the New York Stock Exchange. The Listing Re-classification facilitated the Group’s inclusion in the FTSE 100 and FTSE All Share indices.
Nomination & Corporate Governance Committee
This Committee consists of four independent non-executive Directors. The Committee has recommended to the Board that, in accordance with evolving governance norms in some regions, the Nomination & Corporate Governance Committee should be made up entirely of non-executive Directors. Accordingly, the Chief Executive stepped down from the Committee in February 2012. Mr. Lee continues to be consulted on
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issues related to Board, senior management succession and corporate governance developments and is invited to attend meetings of the Committee when appropriate. The Committee is responsible for assisting the Board in ensuring that the composition of the Board and its Committees is appropriate to the needs of the Group; for keeping corporate governance developments under review and recommending changes, where appropriate, to the Board; for monitoring compliance with governance codes; and for reviewing the content of the Corporate Governance Report to shareholders.
In 2010, the Committee recommended to the Board that the Company appoint an external service provider to facilitate the evaluation of the performance of the Board at least once every three years. The first evaluation will take place in 2012 and will supplement existing processes and reviews carried out by the Chairman and the Senior Independent Director (as outlined in the Performance appraisal and Board evaluation section of this Report on page 74). A number of potential providers based in Ireland and the UK were considered. The provider which the Committee recommended to the Board, and which was subsequently engaged, is based in the UK and has an extensive record in facilitating Board evaluations in large listed companies both in Ireland and the UK. While the provider is part of an organisation which also supplies software solutions to the Group, the Committee is satisfied that the annual value of the relevant contracts is not material to either party. The Committee has agreed the terms of reference for the evaluation and will review the results.
The factors taken into account by the Committee in considering the compositionbiographies of the Board are set out in the policy for Board renewal which is detailed on page 72. The Committee establishes processes for the identification of suitable candidates for appointment to the Board and oversees succession planning for the Board and senior management. Non-executive Directors are typically expected to serve two three-year terms, although they may be invited to serve for a further period. The Committee keeps the tenure of Board members under review, with the aim of ensuring phased renewal and refreshment, particularly when a number of non-executive Directors are appointed in any one year.
During 2011 and in the year to date, the Committee identified, and recommended to the Board, two suitable candidates for appointment as non-executive Directors, Ernst Bärtschi and Heather Ann McSharry.
To facilitate the search for suitable candidates to serve as non-executive Directors, the Committee uses the services of independent consultants. When prospective candidates have been identified, each member of the Committee meets with them.
The Committee led the succession process for the appointment of Mr. McGowan’s successor as Chairman and, having sought the views of each Director in relation to the filling of this position, recommended to the Board that Mr. Hartery be appointed as Chairman Designate. The Committee was, in the absence of Mr. McGowan and Mr. Hartery, chaired by Mr. Egan when considering its recommendation. The Committee set out the duties, responsibilities and time commitment required by Mr. McGowan’s successor and determined that, due to the calibre of internal candidates, there was no requirement to seek external candidates. Consequently, the position of Chairman was not advertised and external consultants were not engaged. Mr. Hartery is a non-executive Director of Musgrave Group plc (an unlisted public limited company), Eircom Limited and is a business consultant.
As referred to above in the section on Independence of Directors, each year the Committee reviews details of the non-CRH directorships of each Director, including any relationship between those companies and the Group. The Committee also reviews any business relationships between individual Board members.
Remuneration Committee
This Committee consists of three non-executive Directors considered by the Board to be independent and is chaired by the Senior Independent Director. The Directors’ biographical details, on pages 68 and 69, demonstrate that the members of theFinance Committee bring to it a wide range of experience in large organisations and public companies, including experience in the area of senior executive remuneration. The Committee receives advice from Mercer, a leading compensation and benefit consultant. The Chief Executive is fully consulted about remuneration proposals. A statement regarding other services provided by Mercer to the Group is available on the CRH website,www.crh.com.
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In 2011, the Committee determined the salaries of the executive Directors and the level of awards made under the performance-related incentive plans, which were based on measured targets. The Committee set the remuneration of the Chairman and reviewed the remuneration of senior management. It also approved an award of share options to the executive Directors and key management under the 2010 Share Option Scheme, which was approved by shareholders in May 2010 (the 2010 Scheme), and the conditional allocation of shares under the 2006 Performance Share Plan. In addition, the Committee approved the partial release of awards made under the 2006 Performance Share Plan in 2008 and released deferred shares awarded in 2008.
The Committee oversees the preparation of the Report on Directors’ Remuneration, which contains details on pages 85 to 96 of the Group’s remuneration policy, the structure of executive Directors’ remuneration, awards made under the Group’s share incentive plans, the factors taken into account when assessing the level of vesting under the Performance Share Plan and executive Directors’ pension arrangements.
Following the Listing Re-classification referred to on page 78, the Committee determined that it remained appropriate for CRH, as an Irish incorporated company, to continue to have regard to the guidelines and recommendations of the Irish Association of Investment Managers (IAIM) in relation to share incentive plans. In early 2012, the IAIM approved amendments to the performance criteria in respect of the grant of options under the 2010 Scheme in 2012. Subsequently, the Chairman of the Remuneration Committee wrote to the Group’s major shareholders in relation to the changes. Further details in relation to the performance criteria for the 2010 Scheme are set out on pages 87 to 8989.
The tenure of each Committee member is as follows:
N. Hartery | 2.5 years | |
M. Carton | 4.5 years | |
U-H. Felcht | 7.5 years | |
J.W. Kennedy | 0.5 years |
Mr. E.J. Bärtschi and Ms. H.A. McSharry were appointed to the Committee on 25 February 2015.
The attendance atFinance Committeemeetings is set out in table 11 below.
Role and Responsibilities
TheFinance Committee is responsible for:
– | advising the Board on the financial requirements of the Group and on |
Attendance at Board and Board Committee meetings during the year ended 31 December 2014
|
|
Table 11
|
| |||||||||||||||||||||||||
Board
| Acquisitions | Audit | Finance | Nomination | Remuneration | |||||||||||||||||||||||
No. of Meetings | No. of Meetings | No. of Meetings | No. of Meetings | No. of Meetings | No. of Meetings | |||||||||||||||||||||||
Total | Attended | Total | Attended | Total | Attended | Total | Attended | Total | Attended | Total | Attended | |||||||||||||||||
E.J. Bärtschi | 8 | 8 | 10 | 10 | ||||||||||||||||||||||||
M. Carton | 8 | 8 | 8 | 8 | 7 | 7 | ||||||||||||||||||||||
W.P. Egan | 8 | 7 | 7 | 7 | 8 | 8 | ||||||||||||||||||||||
U-H. Felcht | 8 | 7 | 8 | 8 | 7 | 7 | ||||||||||||||||||||||
N. Hartery | 8 | 8 | 8 | 8 | 7 | 7 | 7 | 7 | 8 | 8 | ||||||||||||||||||
J.M. de Jong* | 2 | 2 | 1 | 1 | 2 | 2 | ||||||||||||||||||||||
J.W. Kennedy | 8 | 8 | 2 | 2 | 5 | 5 | 7 | 7 | ||||||||||||||||||||
D.A. McGovern, Jr. | 8 | 8 | 10 | 10 | ||||||||||||||||||||||||
H.A. McSharry | 8 | 8 | 10 | 10 | ||||||||||||||||||||||||
A. Manifold | 8 | 8 | 8 | 8 | 7 | 7 | ||||||||||||||||||||||
D.N. O’Connor | 8 | 8 | 5 | 5 | 7 | 7 | 8 | 8 | ||||||||||||||||||||
H. Th. Rottinghuis** | 8 | 8 | 5 | 4 | ||||||||||||||||||||||||
M.S. Towe | 8 | 8 | ||||||||||||||||||||||||||
* Retired May 2014 | ||||||||||||||||||||||||||||
** Appointed to Board February 2014 | ||||||||||||||||||||||||||||
Note: See summary of Board Committee changes in table 10 on page 103.
|
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appropriate funding arrangements; |
– | considering and making recommendations to the Board in relation to the issue and buy-back of shares and debt instruments and on the Group’s financing arrangements; |
– | considering and making recommendations to the Board in relation to dividend levels on the Ordinary Shares; |
– | keeping the Board advised of the financial implications of Board decisions in relation to acquisitions; |
– | assisting management, at their request, in considering any financial or taxation aspect of the Group’s affairs; and |
– | reviewing the Group’s insurance arrangements. |
Risk Management and Internal Control
The Board has delegated responsibility for the monitoring of the effectiveness of the Group’s risk management and internal control systems to theAudit Committee1. Such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and, in the case of internal control systems, can provide only reasonable and not absolute assurance against material misstatement or loss.
The Consolidated Financial Statements are prepared subject to oversight and control of the Finance Director, ensuring correct data is captured from Group locations and all required information for disclosure in the Consolidated Financial Statements is provided. An appropriate control framework has been put in place around the recording of appropriate eliminating journals and other adjustments. The Consolidated Financial Statements are reviewed by the CRH Financial Reporting and Disclosure Group prior to being reviewed by theAudit Committee and approved by the Board of Directors.
The Directors confirm that the Group’s ongoing process for identifying, evaluating and managing its principal risks and uncertainties (as outlined on pages 52 to 63) is in accordance with the updated Turnbull guidance(Internal Control: Revised Guidance for Directors on the Combined Code) published in October 2005. The process has been in place throughout the accounting period and up to the date of approval of the Annual Report and financial statements.
Group management has responsibility for major strategic development and financing decisions. Responsibility for operational issues is devolved, subject to limits of authority, to product group and operating company management. Management at all levels is responsible for internal control over the business functions that have been delegated. This embedding of the system of internal control throughout the Group’s operations ensures that the organisation is capable of responding quickly to evolving business risks, and that significant internal control issues,
should they arise, are reported promptly to appropriate levels of management.
During the year, the Board andAuditCommitteereceived, on Directors’ Remuneration.a regular basis, reports from management on the key risks to the business and the steps being taken to manage such risks. They also considered whether the significant risks faced by the Group were being identified, evaluated and appropriately managed, having regard to the balance of risk, cost and opportunity. In addition, theAudit Committee met with internal auditors on a regular basis and satisfied itself as to the adequacy of the Group’s internal control system; met with the Chairman of theRemuneration Committee to ensure that the Group’s remuneration policies and structures were appropriate and in line with the Group’s risk tolerance; and reviewed the principal risks and uncertainties outlined on pages 52 to 63. TheAudit Committee also met with, and received reports from, the external auditors. The Chairman of theAudit Committee reported regularly to the Board on all significant issues considered by the Committee and the minutes of its meetings were circulated to all Directors.
The Directors confirm that, in addition to the guidelinesmonitoring carried out by theAudit Committee under its Terms of Reference, they have reviewed the effectiveness of the IAIM,Group’s risk management and internal control systems up to and including the Group takes cognisancedate of remuneration guidelines issued by institutional shareholders and the provisions of Schedule A to the 2010 Code will be followed in relation to the design of performance-related incentive schemes.
A Committeeapproval of the Chairmanfinancial statements. This had regard to all material controls, including financial, operational and the executive Directors makes recommendations to the Board in relation to the remuneration of the non-executive Directors. In accordance with the Articles of Association, shareholders set the maximum aggregate amount of the fees payable to non-executive Directors. The current limit was set by shareholders at the Annual General Meeting held in 2005.
On the recommendation of the Nomination & Corporate Governance Committee, the Committee’s terms of reference were updated in 2010 to the effectcompliance controls that could affect the Group’s Chairman may be a member of the Committee provided his/her tenurebusiness.
Management’s Report on the Board does not exceed 12 years. Accordingly, Mr. McGowan ceased to be a member of the Committee in 2010. He is consulted on Remuneration matters and is invited to attend meetings of the Committee when appropriate. Mr. Hartery, who was appointed to the Board in 2004 will remain a member of the Committee when he becomes Chairman in May 2012.
Communications with ShareholdersInternal Control over Financial Reporting
Communications with shareholders are given high priority and we communicate with shareholders in a number of ways. There is regular dialogue with institutional shareholders and proxy voting agencies, as well as presentations and webcasts at the time of the release of the annual and interim results. Conference calls are held following the issuance of interim management statements and major announcements by the Group, which afford Directors the opportunity to hear investors’ reactions to the announcements and their views on other issues. Interim management statements are issued in May and November. Major acquisitions are notified to the Stock Exchanges inIn accordance with the requirements of the Listing Rules. In addition, development updates, giving details of other acquisitions completed and major capital expenditure projects, are usually issued in January and July each year.
During 2011, the Board received and considered reports on the issues raised by investors in the courseRule 13a-15 of the presentations and meetings.
The Group’s website,www.crh.com, providesUS Securities Exchange Act, the full textfollowing report is provided by management in respect of the AnnualCompany’s internal control over financial reporting. As defined by the Securities and Interim Reports,Exchange Commission, internal control over financial reporting is a process designed by, or under the Annual Report on Form 20-F, whichsupervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
– | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
– | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of Consolidated Financial Statements in accordance with generally accepted accounting principles, |
and that receipts and expenditures of the Company are being made only in accordance with authorisations of management and directors of the Company; and |
– | Provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the Company’s assets that could have a material effect on the Consolidated Financial Statements. |
Our management is filed annuallyresponsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the US Securities Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our Company’s published Consolidated Financial Statements for external purposes under generally accepted accounting principles.
In connection with the United Statespreparation of the Company’s annual Consolidated Financial Statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of 31 December 2014, based on criteria established inInternal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organisations of the Treadway Commission.
As permitted by the Securities and Exchange Commission, the CSR Report, interim management statements and copies of presentationsCompany has elected to analysts and investors. News releases are made available in the Media sectionexclude an assessment of the website immediately after releaseinternal controls of acquisitions made during the year 2014. These acquisitions, which are listed in note 30 to the Consolidated Financial Statements, constituted 0.7% of total assets and 1.2% of net assets, as of 31 December 2014 and 0.6% and 0.8% of revenue and Group profit for the financial year, respectively, for the year then ended.
Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this assessment, management has concluded and hereby reports that as of 31 December 2014, the Company’s internal control over financial reporting is effective.
Our auditors, Ernst & Young, a registered public accounting firm, who have audited the Consolidated Financial Statements for the year ended 31 December 2014, have audited the effectiveness of the Company’s internal controls over financial reporting. Their report, on which an unqualified opinion is expressed thereon, is included on page 134.
Changes in Internal Control over Financial Reporting
During 2014, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 that occurred during the period covered by this Annual Report that
1 In accordance with Regulation 91(6)(b) of the European Communities (Statutory Audits) (Directive 2006/43) Regulations 2010.
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Stock Exchanges. Webcasts
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of key investor briefings are broadcast liveDisclosure Controls and are made availableProcedures
Management has evaluated the effectiveness of the design and operation of the disclosure controls and procedures as recordingsdefined in Exchange Act Rules 13a-15(e) as of 31 December 2014. Based on that evaluation, the Media section.Chief Executive and the Finance Director have concluded that these disclosure controls and procedures were effective as of such date at the level of providing reasonable assurance.
In designing and evaluating our disclosure controls and procedures, management, including the Chief Executive and the Finance Director, recognised that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The Group Compliance & Ethics (C&E) programme continues to develop in scope and reach. The structure of the C&E organisation was realigned in 2014 to serve the new CRH Europe organisation. A CRH Europe Head of C&E was appointed from the existing Compliance pool. Business Unit Compliance Coordinators (BUCCs) were also appointed for Heavyside East, Heavyside West, Lightside and Distribution and a European Compliance Officer was appointed to assist the European Head of C&E.
CRH’s Code of Business Conduct1 (COBC) and related policies were updated and approved by the Board and the C&E team’s primary focus since then has been to ensure all relevant employees receive appropriate training. In the current training cycle over 32,000 employees have participated in COBC training and a further 11,000 have also undertaken advanced instruction on competition law and anti-bribery, corruption and fraud.
In addition, our development teams and procurement teams have received appropriate instruction on both our C&E Mergers, Acquisitions and Joint Venture Due Diligence Programme and our Ethical Procurement Code. Our Supplier Code of Conduct was developed to communicate our minimum Corporate Social Responsibility requirements to existing and new suppliers to the Group and to outline how we respond throughoutensure compliance with these requirements. Similar procedures have been developed for any engagements
Investor Relations Activities | Table 12 | |||||
Formal Announcements,including the release of the annual and interim results and the issuance of interim management statements. These announcements are typically accompanied by presentations and webcasts or conference calls. | ||||||
Investor Roadshows,typically held following the release of formal announcements, provide an opportunity for the management team to meet existing and/or potential investors in a concentrated set of meetings. | ||||||
Industry Conferences:Attendance at key sector and investor conferences affords members of the senior management team the opportunity to engage with key investors and analysts. | ||||||
Investor Briefings:In addition to regular contact with investors and analysts during the year, the Company periodically holds capital market days, which include presentations on various aspects of CRH’s operations and strategy and provide an opportunity for investors and analysts to meet with CRH’s wider management team. | ||||||
Media Briefings:Each year, the Company provides media briefings on numerous issues. |
with business partners. Further guidelines developed during the year include a Competition Law Toolbox – which gathers into one place various CRH guidelines, policies and notes to numerous letters from shareholders on a wide range of issues.help the businesses comply with Competition Law requirements.
The Chief Executive presentedfollowing existing policies are under review;
The COBC has scored an overview of CRH strategy to shareholders at the 2011 Annual General Meeting. The presentation, which also set out management’s response to the market challenges of recent years, is available“A” rating by New York Stock Exchange Governance Services and incorporates some welcome new features, including learning aids, an ethical-decision making guide and a clear focus on the core values of the Group: Integrity, Honesty and Respect for the law. It was translated and distributed during 2014 and related training is being migrated to an on-line module. A robust communication plan is in place to complement the training programme. A multi-lingual “hotline” facility – “Speak Up” is also available to employees as a secure channel to report ethical issues that concern them or suspected violations of our Codes. All hotline reports received are fully reviewed and investigated by appropriately qualified personnel.
The C&E programme has been integrated into our standard Internal Audit procedures and forms part of an annual management certification process. Its effectiveness is also regularly reviewed by the C&E function with appropriate oversight from senior management and theAudit Committee. The collective goal is to ensure the message is clearly understood that at CRH website.“there is never a good business reason to do the wrong thing”.
Sustainability and Corporate Social Responsibility
Sustainability and Corporate Social Responsibility (CSR) isconcepts are embedded in all CRH operations and activities.
Excellence in the areas ofhealth & safety, environment & climate change, governance environmental (including climate change), health and safety and social performancepeople & community is a daily key priority of line management. GroupThe Group’s policies and implementation systems are described in detail in the CSR Reportsummarised on the Group’s website,www.crh.com.pages 47 to 51. During 2011,2014, CRH was again recognised by several leading socially responsible investment (SRI) agencies as being among the leaders in its sector in this area.these important areas.
Communications with Shareholders
CodeCommunications with shareholders are given high priority and the Group devotes considerable time and resources each year to shareholder engagement. We recognise the importance of Business Conducteffective dialogue as an integral element of good corporate governance. The Investor Relations team, together with the Chief Executive, Finance Director and other senior executives, meet regularly with institutional shareholders (each year covering over 50% of shareholder base). Detailed reports on the issues covered in those meetings and the views of shareholders are circulated to the Board after each group of meetings. Table 12 above provides a brief outline of the nature of the activities undertaken by our Investor Relations team.
During 2014, the Chairman, Senior Independent Director and Company Secretary participated in a number of conference calls with some of the Group’s major shareholders in advance of the 2014 Annual General Meeting. The CRH Codemeetings were organised to provide those shareholders with an opportunity to discuss the resolutions on the 2014 Annual General Meeting agenda and corporate governance matters generally.
In addition to the above, major acquisitions are notified to the Stock Exchanges in accordance with the requirements of Business Conduct, which was updated recentlythe Listing Rules and development updates, giving details of other acquisitions completed and major capital expenditure projects, are issued periodically (typically in January and July each year).
In addition, we respond throughout the year to ensure it continues
1 | The Code of Business Conduct is applicable to all Group employees including the Chief Executive and senior financial officers. The Code promotes honest and ethical conduct; full, fair, accurate, timely and understandable disclosures and compliance with applicable governmental laws, rules and regulations and complies with the applicable code of ethics regulations of the United States Securities and Exchange Commission arising from the Sarbanes-Oxley Act. |
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correspondence from shareholders on a wide range of issues.
The Chief Executive made a presentation to beshareholders at the forefront of best practice in this area, is applicable to all Group employees1. The updated Code is available2014 Annual General Meeting on the Group’s website,www.crh.com, where it will be available in 20 languages during the course of 2012. Regional hotline facilities are in place, to enable employees to report suspected breaches of the Code.CRH’s businesses.
The Company’s Annual General Meeting (AGM), which is held in Ireland, affords individual shareholders the opportunity to question the Chairman and the Board. All Directors attended the 20112014 AGM. The Notice of the AGM, which specifies the time, date, place and the business to be transacted, is sent to shareholders at least 20 working days before the meeting. At the meeting, resolutions are voted on by meansway of a poll using an electronic voting system. The votes of shareholders present at the meeting are added to the proxy votes received in advance and the total number of votes for, against and withheld for each resolution are announced. This information is made available on the Company’s website following the meeting.
All other general meetings are called Extraordinary General Meetings (EGMs). An EGM called for the passing of a special resolution must be called byrequires at least 21 clear days’ notice.
A quorum for a general meeting of the Company is constituted by five or more shareholders present in person and entitled to vote. The passing of resolutions at a meeting of the Company, other than special resolutions, requires a simple majority. To be passed, a special resolution requires a majority of at least 75% of the votes cast.
Shareholders have the right to attend, speak, ask questions and vote at general meetings. In accordance with Irish company law, the Company specifies record dates for general meetings, by which date shareholders must be registered in the Register of Members of the Company to be entitled to attend. Record dates are specified in the notes to the Noticenotice of a general meeting. Shareholders may exercise their right to vote by appointing, a proxy/proxies, by electronic means or in writing, a proxy/proxies to vote some or all of their shares. The requirements for the receipt of valid proxy forms are set out in the notes to the Noticenotice convening the meeting and in the notes on the proxy form. A shareholder, or a group of shareholders, holding at least 5% of the issued share capital of the Company, has the right to requisition a general meeting. A shareholder, or a group of shareholders, holding at least 3% of the issued share capital of the
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Company, has the right to put an item on the agenda of an AGM or to table a draft resolution for inclusion in the agenda of a general meeting, subject to any contrary provision in Irish company law.
The Group’s website,www.crh.com, contains answers to questions frequently asked by shareholders (FAQs), including questions regarding shareholder rights in respect of general meetings. The FAQs can be accessed in the Investors section of the website under “Equity Investors”.
Risk Management and Internal Control
The Board has delegated responsibility for the monitoring of the effectiveness of the Group’s risk management and internal control systems to the Audit Committee1. Such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and, in the case of internal control systems, can provide only reasonable and not absolute assurance against material misstatement or loss.
The Consolidated Financial Statements are prepared subject to oversight and control of the Finance Director, ensuring correct data is captured from Group locations and all required information for disclosure in the Consolidated Financial Statements is provided. An appropriate control framework has been put in place around the recording of appropriate eliminations and other adjustments. The Consolidated Financial Statements are reviewed by the CRH Financial Review and Disclosure Group prior to being reviewed by the Audit Committee and approved by the Board of Directors.
The Directors confirm that the Group’s ongoing process for identifying, evaluating and managing its principal risks and uncertainties (as outlined on pages 31 to 36) is in accordance with the updated Turnbull guidance (Internal Control: Revised Guidance for Directors on the Combined Code) published in October 2005. The process has been in place throughout the accounting period and up to the date of approval of the Annual Report and financial statements.
Group management has responsibility for major strategic development and financing decisions. Responsibility for operational issues is devolved, subject to limits of authority, to product group and operating company management. Management at all levels is responsible for internal control over the business functions that have been delegated. This embedding of the system of internal control throughout the Group’s operations ensures that the organisation is capable of responding quickly to evolving business risks and that significant internal control issues, should they arise, are reported promptly to appropriate levels of management.
During the year, the Board and Audit Committee received, on a regular basis, reports from management on the key risks to the business and the steps being taken to manage such risks and considered whether the significant risks faced by the Group were being identified, evaluated and appropriately managed, having regard to the balance of risk, cost and opportunity. In addition, the Audit Committee met with internal auditors on a regular basis and satisfied itself as to the adequacy of the Group’s internal control system, met with the Chairman of the Remuneration Committee to ensure that the Group’s remuneration policies and structures were in line with the Group’s “risk appetite” (which the Board has determined to be low) and reviewed the principal risks and uncertainties outlined on pages 31 to 36. The Audit Committee also met with, and received reports from, the external auditors. The Chairman of the Audit Committee reported regularly to the Board on all significant issues considered by the Committee and the minutes of its meetings were circulated to all Directors.
The Directors confirm that, in addition to the monitoring carried out by the Audit Committee under its terms of reference, they have reviewed the effectiveness of the Group’s risk management and internal control systems up to and including the date of approval of the financial statements. This had regard to all material controls, including financial, operational and compliance controls, that could affect the Group’s business.
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The Company’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive’sStrategy Review section on pages 3834 to 40.43. The financial position of the Company, its cash flows, liquidity position
and borrowing facilities are described in the FinanceBusiness Performance Review on pages 4166 to 44.76. In addition, notes 2120 to 2524 to the financial statementsConsolidated Financial Statements include the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit, currency and liquidity risks.
The Company has considerable financial resources and a large number of customers and suppliers across different geographic areas and industries. In addition, the local nature of building materials means that the Group’s products are not usually shipped cross-border.
Having assessed the relevant business risks, the Directors believe that the Company is well placed to manage these risks successfully, and they have a reasonable expectation that the Company, and the Group as a whole, have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.Consolidated Financial Statements.
In the period under review, CRH complied with the provisions of the 2010 UK Corporate Governance Code (the “2010 Code”). The Company also complied with the rules issued by the United States Securities and Exchange Commission to implement the Sarbanes-Oxley Act 2002, in so far as they apply to the Group.
Although non-USNon-US companies such as CRH are exempt from most of the corporate governance rules of the NYSE, inNYSE. In common with companies listed on the Irish Stock Exchange and the London Stock Exchange, CRH’s corporate governance practices reflect, inter alia, compliance with (a) domestic company law; (b) the Listing Rules of the UK Listing Authority and the Irish Stock Exchange; and (c) the 2010 Code, which is appended to the listing rules of the London and Irish Stock Exchanges.
CRH has adopted a robust set of boardBoard governance principles, which reflect the 2010 Code and its principles-based approach
to corporate governance. As such,Accordingly, the way in which CRH makes determinations of directors’Directors’ independence differs from the NYSE rules. The Board has determined that, in its judgement, all of the Non-executivenon-executive Directors are independent. In doing so, however, the boardBoard did not explicitly take into consideration the independence requirements outlined in the NYSE’s listing standards.
Shareholder Approval of Equity Compensation Plans
The NYSE rules require that shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions to those plans. CRH complies with Irish requirements, which are similar to the NYSE rules. The CRH Board, however, does not explicitly take into consideration the NYSE’s detailed definition ofon what are considered “material revisions”.
Evaluation of Disclosure Controls and Procedures
Management has evaluated the effectiveness of the design and operation of the disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) as of 31 December 2011. Based on that evaluation, the Chief Executive Officer and the Finance Director have concluded that these disclosure controls and procedures were effective as of such date at the level of providing reasonable assurance.
In designing and evaluating our disclosure controls and procedures, management, including the Chief Executive Officer and the Finance Director, recognised that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The following are available on the CRH website, www.crh.com: | Table 13 | |||||
Corporate Governance section: | ||||||
– Terms of Reference ofAcquisitions Committee (amended December 2010) | ||||||
– Terms of Reference ofAudit Committee (amended December 2013) | ||||||
– Terms of Reference ofFinance Committee (amended February 2004) | ||||||
– Terms of Reference ofNomination & Corporate Governance Committee (amended December 2013) | ||||||
– Terms of Reference ofRemuneration Committee (amended December 2013) | ||||||
– The Memorandum and Articles of Association of the Company | ||||||
– Pre-approval policy for non-audit services provided by the auditors | ||||||
– Compliance & Ethics statement, Code of Business Conduct and Hotline contact numbers – The 2014 Remuneration Policy | ||||||
Investors section: | ||||||
– Annual and Interim Reports, the Annual Report on Form 20-F, Interim Management Statements and copies of presentations to analysts and investors | ||||||
– News releases | ||||||
– Webcast recordings of key investor briefings | ||||||
– General Meeting dates, notices, shareholder circulars, presentations and poll results | ||||||
– Answers to Frequently Asked Questions, including questions regarding dividends and shareholder rights in respect of general meetings |
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Management’s Report on Internal Control over Financial Reporting
In accordance with the requirements of section 404 of the Sarbanes-Oxley Act 2002, the following report is provided by management in respect of the Company’s internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
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108 CRH
Introduction
On behalf of the The purpose of CRH’s Remuneration Policy, which was approved by shareholders at the 2014 Annual General Meeting, is to provide an appropriate framework to support the creation of value for shareholders over the longer term, the attraction and retention of key executives and succession planning, without paying more than is necessary. The full Remuneration Policy is available on the CRH website, www.crh.com. 2014 Performance 2014 was a year of growth and progress in terms of our aim of restoring margins and returns to peak levels in the coming years. | Recent Remuneration Snapshot: • Updated Remuneration Policy approved at 2014 AGM • New performance share plan adopted at 2014 AGM • Incentive payout levels linked to stretching performance criteria • Strong support from shareholders for policy and implementation In addition, there was significant achievement regarding the Group’s multi-year divestment programme of €1.5 billion to €2.0 billion, with proceeds from disposals completed in 2014 of €0.35 billion since the programme was announced in August 2014. Overall, CRH’s strong balance sheet and cash generation capability leave the Company well positioned to take advantage of value-creating acquisition opportunities. In the context of the Group’s performance in 2014, and performance against individual and strategic goals, theRemuneration Committee has determined that the annual bonus levels for 2014 should be set at the maximum level of 150% for each of the executive Directors. In accordance with CRH’s Remuneration Policy, approved by shareholders at the 2014 Annual General Meeting, 25% of the 2014 bonus will be deferred into shares for a period of three years. | The basis for each bonus award is set out in detail on page 112. In line with evolving best practice, we have increased the level of disclosure in relation to payout levels to provide shareholders with a greater level of insight into the approach for determining bonus payments. We have also disclosed the targets for the bonus payments in respect of 2013 as these are no longer considered to be commercially sensitive. Similarly, theRemuneration Committee intends that the targets for the 2014 bonus plan will be disclosed in the 2015 Directors’ Remuneration Report. The 2014 Remuneration Policy also made provision for theRemuneration Committee to introduce clawback provisions, in addition to the malus2 provisions already in place for the annual bonus plan and the long-term performance share plan. The Committee has decided, in accordance with the provisions of the 2014 UK Corporate Governance Code, to introduce clawback provisions for the cash element of the annual bonus plan for 2015 and onwards. The long-term awards made under the 2006 Performance Share Plan and the 2010 Share Option Scheme made in 2012 (each with a three year performance period 2012 - 2014) did not meet the relevant performance criteria required to vest and, consequently, those awards lapse in full. Further details are set out on pages 114 and 115. Executive Director Salaries As reported in the 2013 Directors’ Remuneration Report, following consideration of the scope of the Finance Director’s responsibilities and her performance since being appointed in 2010, the Committee decided that Maeve Carton’s salary should be increased, subject to continued | ||||||||
Sales | + 5% | Return on Net Assets | +150bps | |||||||
EBITDA (as defined)* | +11% | Operating Cash Flow | +23% | |||||||
EPS | +33%1 | Net Debt | -16% |
2 | Malus is a mechanism whereby the Remuneration Committee may decide not to release deferred share or |
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Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Because of its inherent limitations however, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, the effectiveness of an internal control system may change over time.
In connection with the preparation of the Company’s annual Consolidated Financial Statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of 31 December 2011, based on criteria established inInternal Control - Integrated Framework, issued by the Committee of Sponsoring Organisations of the Treadway Commission.
As permitted by the Securities and Exchange Commission, the Company has elected to exclude an assessment of the internal controls of acquisitions made during the year 2011. These acquisitions, which are listed in note 31 to the Consolidated Financial Statements, constituted 3.1% of total assets and 5.5% of net assets, as of 31 December 2011 and 0.9% and 1.3% of revenue and profit for the financial year, respectively, for the year then ended.
Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this assessment, management has concluded and hereby reports that as of 31 December 2011, the Company’s internal control over financial reporting is effective.
Our auditors, Ernst & Young, a registered public accounting firm, who have audited the Consolidated Financial Statements for the year ended 31 December 2011, have audited the effectiveness of the Company’s internal controls over financial reporting. Their report, on which an unqualified opinion is expressed thereon, is included on page 99.
Changes in Internal Control over Financial Reporting
During 2011, there have not been any changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 that occurred during the period covered by this AnnualDirectors’ Remuneration Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.|continued
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Report on Directors’ Remuneration
business performance, to €675,000 in two steps. Her salary increased to €625,000 (+9.7%) in 2014. TheRemuneration Committee has determined that it is appropriate to make the second increase (to €675,000) in respect of 2015 (+8%).
The Remuneration Committee has also reviewed the salary levels for Albert Manifold and Mark Towe and determined that increases of 7.5% to €1,290,000 and 3% to US$1,420,000 respectively are appropriate. The increase for Albert Manifold reflects the Board consists of independent non-executive Directors of the Company. Under its terms of reference,speed with which are available on the CRH websitewww.crh.com, the Remuneration Committee is responsible for determining the Group’s policy on executive remuneration and considering and approving salaries and other terms of the remuneration packages for the executive Directors. The Remuneration Committee also recommends and monitors the level and structure of remuneration for senior management. It receives advice from leading independent firms of compensation and benefit consultants, when necessary, and the Chairman andhe has developed in the Chief Executive attend meetings exceptrole, demonstrated by the progress in the delivery of strategy and the improvement in returns and margins referred to above. TheRemuneration Committee also noted that the salary of Albert Manifold remains below the level of €1,450,000 awarded to the Chief Executive of CRH in 2008. The increase for Mark Towe is in line with increases across the general employee population in the United States.
2015 Awards under the 2014 Performance Share Plan
Awards under the 2014 Performance Share Plan in 2015 will be made at the same level as in 2014 and will continue to be based on TSR and adjusted cash flow. The adjusted cash flow targets have not yet been set by theRemuneration Committee and will be set when their own remuneration is being discussed. Further details regarding the membersoutcome of the Remuneration Committee, including their lengthproposed acquisition of serviceassets from Lafarge S.A. and biographies are set out on pages 68Holcim Ltd is known. As in previous years, the targets will be demanding and aligned to 70.value creation for shareholders, with significant stretch ensuring that only exceptional performance will result in maximum payout.
Remuneration Policy
As referred to in the Chairman’s introduction to the Annual Report on page 2, CRH is an international grouphas entered into a binding commitment to acquire certain assets from Lafarge S.A. and Holcim Ltd for a total enterprise value of companies, with activities in 36 countries. CRH’s€6.5 billion. In the context of this proposed acquisition, the Committee will review the remuneration policy on Directors’ remuneration is designedduring the
course of 2015 to attract and retain Directorsensure it remains appropriate for the needs of the highest calibre who can bring their experience and independent views to the policy, strategic decisions and governance of CRH.business.
Executive Directors must be properly rewarded and motivated to performConclusion
Shareholders play a crucial role in the long-term interestdesign of appropriate, balanced and fair remuneration structures and, as I will retire from the shareholders. Board of CRH following the 2015 Annual General Meeting, I would like to thank all those who have engaged with CRH during my tenure asRemuneration Committee Chairman, for their constructive approach to dialogue with the Company. I have no doubt that my successor, Don McGovern, will benefit from your continued strong support for CRH.
Dan O’Connor
Remuneration Committee Chairman
110 CRH |
Directors’ Remuneration Report |continued
Annual Statement on Remuneration
The spread of the Group’s operations requires that the remuneration packages in place in each geographical area are appropriate and competitive for that area. In setting remuneration levels,following section sets out details of:
– | the remuneration paid to Directors in respect of 2014; |
– | how CRH’s remuneration policy will operate for 2015; and |
– | other areas of disclosure. |
The Directors’ Remuneration Report, excluding the Remuneration Committee takes into consideration the remuneration practices of other international companies of similar size and scope, trends in executive remuneration generally, in each of the regions in which the Company operates, and the EU Commission’s recommendationsPolicy summary on remuneration in listed companies. Extensive reviews of the structure of executive remuneration were carried out in 2005 and in 2009.
The EU Commission’s recommendations were published in December 2004 in a document entitled “fostering an appropriate regime for the remuneration of the directors of listed companies” and those recommendations were supplemented by additional recommendations issued in 2009. The Remuneration Committee supports the general objectives of the EU’s recommendations and the broad issues they aimpages 126 to address. This is reflected in the detailed disclosures in this Report and in the Corporate Governance Report in relation131, will be
put to the composition of the Remuneration Committee, the Group’s remuneration policy, the elements of executive Directors’ remuneration (including bonus structure, deferred bonus arrangements and share incentive plans), the collective and individual remuneration of Directors and pension entitlements. The Company believes that shareholders are entitled to have a “say on pay” and, accordingly, the Report on Directors’ Remuneration is presented to shareholders each year for the purposes of an advisory vote. In 2011, 96.4%vote at the Annual General Meeting to be held on 7 May 2015.
The Company is not seeking shareholder approval for a revised Remuneration Policy this year and, therefore, we have not included the full policy in this report. We have, however, included the executive Director and non-executive Director policy tables, as well as details of the votes on this resolution were castChief Executive’s service contract as information for shareholders.
Executive Directors
Remuneration received by executive Directors in favour. A numberrespect of the EU Commission’s recommendations, some2014
Details of which are the subject of ongoing consideration at government level and in investment associations, have not been implemented by the Remuneration Committee. Those areas will continue to receive the Remuneration Committee’s active consideration and their relevance and practicality in the business context in which CRH operates will be assessed on an ongoing basis.
Performance-related rewards, based on measured targets, are a key component of remuneration. CRH’s strategy of fostering entrepreneurship in its regional companies requires well-designed incentive plans that reward the creation of shareholder value through organic and acquisitive growth. The typical elements of theindividual remuneration package for executive Directors are basic salary and benefits, a performance-related incentive plan, pension arrangements and participation in the performance share and share option plans. It is policy to grant participation in these plans to key management to encourage identification with shareholders’ interests and to create a community of interest among different regions and nationalities. The Chairman of the Remuneration Committee meets with the Audit Committee annually to review the Group’s remuneration structures and ensure they are in line with its risk policies and systems.
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The Group also operates share participation plans and savings-related share option schemes for eligible employees in all regions where the regulations permit the operation of such plans. In total there are approximately 6,750 employees of all categories who are shareholders in the Group.
Executive Directors’ Remuneration
Basic salary and benefits
The basic salaries of executive Directors are reviewed annually having regard to personal performance, company performance, step changes in responsibilities and competitive market practice in the area of operation. Employment-related benefits relate principally to relocation costs, the use of company cars and medical/life assurance. No fees are payable to executive Directors.
Performance-related incentive plan
The performance-related incentive plan is totally based on achieving clearly defined and stretch annual profit targets and strategic goals with an approximate weighting of 80% for profits and cash flow generation and 20% for personal and strategic goals. At target performance, payout is 80% of basic salary for Europe-based participants and 90% of basic salary for US-based participants. A maximum payout of 1.5 times these levels is payable for a level of performance well in excess of target.
The four components of the plan are:
Up to one-third of the bonus in each year is payable in CRH shares and the entitlement to beneficial ownership of the shares is deferred for a period of three years (the Deferred Shares), with the individual not becoming beneficially entitled to the Deferred Shares in the event of departure from the Group in certain circumstances during that time period. Deferred Shares are awarded in respect of the portion of any bonus payout that exceeds target performance. The principal objective of the deferral element is to tie a portion of the annual award to the longer-term performance of the CRH share price. In 2011, the Remuneration Committee authorised the release of the Deferred Shares awarded to Mr. Lee in 2008.
In addition to the annual performance incentive plan, the Chief Executive, Mr. Lee, has a special long-term incentive plan (LTIP) incorporating targets set for the five-year period 2009-2013. The plan, the structure of which is the same as for LTIPs putyear ended 31 December 2014, including explanatory notes, are given in place for previous CRH chief executives, incorporates challenging goals in respect of Total Shareholder Return by comparison with a peer group, growth in earnings per share and the strategic development of the Group, with a total maximum earnings potential of 40% of aggregate basic salary. While accruals are made on an annual basis, there is no commitment to any payment until the end of the period. Any payments under the plan will not be pensionable. Details of the manner in which the earnings are provided for under the plan are set out in note 2 to the table of Directors’ remuneration on page 91.
Performance Share Plan/Share Option Scheme
Long-term incentive plans involving conditional awards of shares are a common part of executive remuneration packages, motivating high performance and aligning the interests of executives and shareholders. The Performance Share Plan approved by shareholders in May 2006 is tied to Total Shareholder Return (TSR). Half of the award is assessed against TSR for a group of global building materials companies and the other half against TSR for the constituents of the Eurofirst 300 Index.
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The maximum award under the Performance Share Plan is 150% of basic salary per annum in the form of conditional shares and the vesting period is three years. The awards lapse, if over the three-year period, CRH’s TSR is below the median of the peer group/index; 30% of the award vests if CRH’s performance is equal to the median while 100% vests if CRH’s performance is equal to or greater than the 75th percentile; for TSR performance between the 50th and the 75th percentiles, between 30% and 100% of the award vests on a straight-line basis.
When approved by shareholders in 2006, the Performance Share Plan incorporated an earnings per share (EPS) growth underpin of the Irish Consumer Price Index plus 5% per annum, a requirement of the Irish Association of Investment Managers (IAIM) at the time. The circular issued in 2006 in connection with the proposed adoption of the Performance Share Plan advised shareholders that the “Committee may modify the EPS performance condition if, following agreement with the Irish Association of Investment Managers, it is satisfied that there are valid reasons to do so or where such requirement has ceased to be a requirement of the Irish Association of Investment Managers”. In 2009, the IAIM advised that it did not regard this financial test as an additional hurdle but rather as a mechanism to assist the Remuneration Committee in determining whether TSR reflected performance. Following discussion with the IAIM, the rules of the PSP were amended to delete the underpin requirement, substituting in its place the condition that no award, or portion of an award, which had satisfied the TSR performance criteria would be released unless the Remuneration Committee had confirmed the validity of the TSR performance and reviewed EPS performance to assess its consistency with the objectives of the assessment.
During 2011, the Remuneration Committee determined that 46.21% of the award made under the Performance Share Plan in 2008 had vested. The Company’s TSR performance, which was verified by the Remuneration Committee’s remuneration consultants, was between the 50th and the 75th percentiles referred to above when assessed against the building materials sector, while TSR performance was below the median in relation to the Eurofirst 300 Index. Prior to making its vesting determination in each case, the Remuneration Committee satisfied itself that the TSR outcome was valid and had not been significantly affected by unusual events or extraneous factors.
The peer group against which the Performance Share Plan was measured for the 2008 award was:
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Participants in the Plan are not entitled to any dividends (or other distributions made) and have no right to vote in respect of the shares subject to the award, until such time as the shares vest. Details of awards to Directors under the Plan are provided on page 94.
2010 Share Option Scheme
At the 2010 Annual General Meeting, shareholders approved the introduction of the current share option scheme (the 2010 Scheme) by a vote of 97.5% to 2.5%. Options are granted annually, ensuring a smooth progression over the life of the scheme, at the market price of the Company’s shares at the time of grant. To ensure transparency, grants are made after the final results announcement. The Scheme currently has approximately 650 active participants, over 50% of whom are US employees.
It was indicated in the circular to shareholders in connection with the introduction of the 2010 Scheme that, for the most senior executives in the Group, the combination of awards under CRH’s share incentive plans would be biased towards the TSR-based Performance Share Plan. Awards in 2010 and 2011 were made
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on this basis and it is intended to maintain this approach. The maximum allocation to any executive under the 2010 Scheme was 150% of basic salary; the maximum allowable under the rules is 200% of salary (including bonus and benefits-in-kind).
The 2010 Scheme is based on one tier of options with a single vesting test. The performance criteria for the scheme are EPS-based. Vesting only occurs once an initial performance target has been reached and, thereafter, is dependant on performance. In considering the level of vesting based on EPS performance, the Remuneration Committee also considers the overall results of the Group. Performance targets for the initial grant of options were agreed with the IAIM, which also approved the Scheme, and were as follows:
the option award lapses if EPS growth over the three year target period is less than 12.5% compounded over the period;
20% of the option grant shall be exercisable if compound EPS growth is equal to 12.5%, while 100% shall be exercisable if compound EPS growth is equal to 27.5%;
subject to any reduction which the Remuneration Committee deems appropriate, options vest between 20% and 40% on a straight line basis if compound growth is between 12.5% and 17.5%; and vest between 40% and 100% on a straight line basis if compound growth is between 17.5% and 27.5%, which provides for proportionately more vesting for higher levels of EPS growth.
The above criteria were also applied for the second grant of options under the scheme in 2011. In setting the criteria in March 2010, the Remuneration Committee took into account the steep fall in CRH EPS arising from the global financial crisis and also an expected rebound in economic growth in CRH’s primary markets. Events over the past two years have led to a much weaker economic recovery and in retrospect these targets have proved much too demanding. As a result, the incentive element in the Scheme has been severely eroded.
Accordingly, the Committee has reviewed the performance criteria in the light of the current economic circumstances and trading backdrop and, with the approval of the IAIM, has adjusted the targets to apply for the option grant in April 2012, as follows:
the option lapses if EPS growth over the three year target period is less than 10% compounded over the period;
20% of the option grant shall be exercisable if compound EPS growth is equal to 10% while 100% shall be exercisable if compound EPS growth is equal to 20%;
subject to any reduction which the Remuneration Committee deems appropriate, options vest between 20% and 40% on a straight line basis if compound growth is between 10% and 13%; and vest between 40% and 100% on a straight line basis if compound growth is between 13% and 20%, which provides for proportionately more vesting for higher levels of EPS growth.
The targets that applied to the 2010 and 2011 option grants remain in place.
The Chairman of the Remuneration Committee has written to major shareholders regarding the change, the rationale therefor and the consultation process with the IAIM.
The Remuneration Committee will review the targets for future grants in 2013 and subsequent years in the light of economic and industry developments.
The Remuneration Committee has discretionary powers regarding the implementation of the rules of the 2010 Scheme. These powers have not been exercised since the adoption of the Scheme. A summary of the principal features of the 2010 Scheme was included in the circular sent to all shareholders, with the Notice of the 2010 Annual General Meeting. The circular is available on the CRH website,www.crh.com. Under the rules of the 2010 Scheme, the Committee has discretion to introduce “clawback” provisions on a retrospective basis for options granted, if such provisions are required by law or any applicable code of corporate governance.
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The percentage of share capital which can be issued under CRH share schemes, and individual share participation limits, comply with institutional guidelines.
Non-executive Directors’ Remuneration
The remuneration of non-executive Directors, including that of the Chairman, is determined by the Board of Directors as a whole. In determining the remuneration, the Board receives recommendations from the Remuneration Committee in respect of the Chairman and in respect of the non-executive Directors from a committee of the Chairman and the executive Directors. Remuneration is set at a level which will attract individuals with the necessary experience and ability to make a substantial contribution to the Company’s affairs and reflect the time and travel demands of their Board duties. They do not participate in any of the Company’s performance-related incentive plans or share schemes.
Pensions
Ms. Carton, Mr. Lee and Mr. Manifold are participants in a contributory defined benefit plan which is based on an accrual rate of 1/60th of pensionable salary for each year of pensionable service and is designed to provide two-thirds of salary at retirement for full service. There is provision for Ms. Carton, Mr. Lee and Mr. Manifold to retire at 60 years of age.
The Finance Act 2006 established a cap on pension provision by introducing a penalty tax charge on pension assets in excess of the higher of€5 million (in the Finance Act 2011, this threshold was reduced to€2.3 million) or the value of individual accrued pension entitlements as at 7 December 2005. As a result of these legislative changes, the Remuneration Committee decided that Ms. Carton, Mr. Lee and Mr. Manifold should have the option of continuing to accrue pension benefits as previously, or of choosing an alternative arrangement - by accepting pension benefits limited by the cap - with a similar overall cost to Group. They have chosen to opt for the alternative arrangement which involves capping their pensions in line with the provisions of the Finance Act 2006 and receiving a supplementary taxable non-pensionable cash allowance in lieu of pension benefits foregone. These allowances are similar in value to the reduction in the Company’s liability represented by the pension benefits foregone. They are calculated based on actuarial advice as the equivalent of the reduction in the Company’s liability to each individual and spread over the term to retirement as annual compensation allowances. The allowances for 2011 are detailed in note (iii) on page 92.
Mr. Towe participates in a defined contribution retirement plan in respect of basic salary; and in addition participates in an unfunded defined contribution Supplemental Executive Retirement Plan (SERP) also in respect of basic salary, to which contributions are made at an agreed rate, offset by contributions made to the other retirement plan.
Since 1991, it has been the Board’s policy that non-executive Directors do not receive pensions.
Directors’ Service Contracts
No executive Director has a service contract, has a notice period in excess of 12 months, or is entitled to any benefits on termination of employment.
Directors’ Remuneration and Interests in Share Capital
18 below. Details of Directors’ remuneration charged against profit in the year are given in the table 49 on page 91. Details of individual remuneration and pension benefits for125 in the year ended 31 December 2011 are given on page 92. Directors’ share options are shown on pages 94 and 95; Directors’ shareholdings are shown on page 90.Other Disclosuressection.
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Directors’ interests in share capital
The interests of the Directors and Secretary in the shares of the Company, which are beneficial unless otherwise indicated, are shown below. The Directors and Secretary have no beneficial interests in any of the Group’s subsidiary, joint venture or associated undertakings. The Company’s Register of Directors’ Interests contains full details of Directors’ shareholdings and options to subscribe for shares.
Ordinary Shares | 23 March 2012 | 31 December 2011 | 31 December 2010 | |||||||||
Directors | ||||||||||||
E.J. Bärtschi | 2,000 | 2,000 | - | * | ||||||||
M. Carton | 45,471 | 42,343 | 38,521 | |||||||||
W.P. Egan | 16,112 | 16,112 | 16,427 | |||||||||
- Non-beneficial | 12,000 | 12,000 | 12,000 | |||||||||
U-H. Felcht | 1,285 | 1,285 | 1,285 | |||||||||
N. Hartery | 1,302 | 1,302 | 1,285 | |||||||||
J.M. de Jong | 14,672 | 14,672 | 14,036 | |||||||||
J.W. Kennedy | 1,009 | 1,009 | 1,009 | |||||||||
M. Lee | 384,828 | 372,401 | 348,340 | |||||||||
K. McGowan | 22,744 | 22,744 | 22,001 | |||||||||
A. Manifold | 33,706 | 29,215 | 21,525 | |||||||||
D.N. O’Connor | 15,883 | 15,883 | 15,328 | |||||||||
M.S. Towe | 68,028 | 55,405 | 44,644 | |||||||||
Secretary | ||||||||||||
N. Colgan | 10,723 | 9,174 | 11,348 | |||||||||
629,763 | 595,545 | 547,749 |
Individual remuneration for the year ended 31 December 2014 (Audited)
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and Fees | Benefits | Element | Shares | Incentives | Expense | Total | Total | Total | ||||||||||||||||||||||||||||||||||
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€ 000 | € 000 | € 000 | € 000 | € 000 | € 000 | € 000 | € 000 | € 000 | ||||||||||||||||||||||||||||||||||
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|
|
| 2013
|
|
| 2012
|
| ||||||||||||||||
| Executive Directors | |||||||||||||||||||||||||||||||||||||||||
Maeve Carton | 625 | 16 | 703 | 234 | - | 260 | 1,838 | 1,412 | 921 | |||||||||||||||||||||||||||||||||
Albert Manifold | 1,200 | 39 | 1,350 | 450 | - | 559 | 3,598 | 2,088 | 1,385 | |||||||||||||||||||||||||||||||||
Mark Towe | 1,036 | 59 | 1,166 | 389 | - | 207 | 2,857 | 2,965 | 1,983 | |||||||||||||||||||||||||||||||||
| 2,861
|
|
| 114
|
|
| 3,219
|
|
| 1,073
|
|
| -
|
|
| 1,026
|
|
| 8,293
|
|
| 6,465
|
|
| 4,289
|
|
Of the above holdings, the following are held in the form of American Depositary Receipts:
23 March 2012 | 31 December 2011 | 31 December 2010 | ||||||||||
W.P. Egan | 15,000 | 15,000 | 10,000 | |||||||||
- Non-beneficial | 12,000 | 12,000 | 12,000 | |||||||||
M.S. Towe | 3,397 | 3,397 | 3,397 |
Ms. H.A. McSharry became a Director on 22 February 2012 and her holdings at that date and at 23 March 2012 are set out below.
23 March 2012 | 22 February 2012 | |||||||
H.A. McSharry | 3,556 | 3,556 |
90 CRH
Directors and Corporate Governance
DIRECTORS AND CORPORATE GOVERNANCE - Directors’ Remuneration
2011 €000 | 2010 €000 | 2009 €000 | ||||||||||||
Notes | Executive Directors | |||||||||||||
Basic salary | 3,398 | 3,443 | 3,384 | |||||||||||
Performance-related incentive plan | ||||||||||||||
- cash element | 1,559 | 952 | 964 | |||||||||||
- deferred shares element | - | - | - | |||||||||||
Retirement benefits expense | 1,727 | 1,602 | 1,462 | |||||||||||
Benefits | 135 | 164 | 397 | |||||||||||
1 | 6,819 | 6,161 | 6,207 | |||||||||||
2 | Provision for Chief Executive long-term incentive plan | 460 | 460 | 460 | ||||||||||
Total executive Directors’ remuneration | 7,279 | 6,621 | 6,667 | |||||||||||
Average number of executive Directors | 4.00 | 4.00 | 4.00 | |||||||||||
Non-executive Directors | ||||||||||||||
Fees | 578 | 635 | 646 | |||||||||||
Other remuneration | 659 | 667 | 672 | |||||||||||
Total non-executive Directors’ remuneration | 1,237 | 1,302 | 1,318 | |||||||||||
Average number of non-executive Directors | 8.52 | 9.34 | 9.50 | |||||||||||
3 | Payments to former Directors | 47 | 56 | 59 | ||||||||||
Total Directors’ remuneration | 8,563 | 7,979 | 8,044 |
Notes to Directors’ remuneration
(a) Basic Salary and Fees: The background to the increase in Maeve Carton’s salary in 2014 is set out on |
CRH 91
Directors and Corporate Governance
DIRECTORS AND CORPORATE GOVERNANCE - Directors’ Remuneration
Individual remuneration for the year ended 31 December 2011
Incentive Plan | ||||||||||||||||||||||||||||||||||||
Basic €000 | Cash element (ii) €000 | Deferred (ii) €000 | Retirement €000 | Other €000 | Benefits €000 | Total 2011 €000 | Total 2010 €000 | Total 2009 €000 | ||||||||||||||||||||||||||||
Executive Directors | ||||||||||||||||||||||||||||||||||||
M. Carton (vi) | 550 | 255 | - | 232 | - | 13 | 1,050 | 489 | - | |||||||||||||||||||||||||||
G.A. Culpepper (vi) | - | - | - | - | - | - | - | 381 | 1,087 | |||||||||||||||||||||||||||
M. Lee | 1,150 | 534 | - | 980 | - | 25 | 2,689 | 2,443 | 2,455 | |||||||||||||||||||||||||||
A. Manifold | 800 | 371 | - | 335 | - | 31 | 1,537 | 1,385 | 1,236 | |||||||||||||||||||||||||||
M.S. Towe | 898 | 399 | - | 180 | - | 66 | 1,543 | 1,463 | 1,429 | |||||||||||||||||||||||||||
3,398 | 1,559 | - | 1,727 | - | 135 | 6,819 | 6,161 | 6,207 | ||||||||||||||||||||||||||||
Non-executive Directors | ||||||||||||||||||||||||||||||||||||
E. Bärtschi (vii) | 11 | - | - | - | 4 | - | 15 | - | - | |||||||||||||||||||||||||||
W.P. Egan | 68 | - | - | - | 52 | - | 120 | 120 | 120 | |||||||||||||||||||||||||||
U-H. Felcht | 68 | - | - | - | 37 | - | 105 | 105 | 105 | |||||||||||||||||||||||||||
N. Hartery | 68 | - | - | - | 56 | - | 124 | 121 | 115 | |||||||||||||||||||||||||||
J.M. de Jong | 68 | - | - | - | 71 | - | 139 | 139 | 139 | |||||||||||||||||||||||||||
J. W. Kennedy | 68 | - | - | - | 37 | - | 105 | 90 | 45 | |||||||||||||||||||||||||||
K. McGowan | 68 | - | - | - | 337 | - | 405 | 405 | 405 | |||||||||||||||||||||||||||
T.V. Neill (viii) | - | - | - | - | - | - | - | 36 | 105 | |||||||||||||||||||||||||||
D.N. O’Connor | 68 | - | - | - | 22 | - | 90 | 90 | 90 | |||||||||||||||||||||||||||
J.M.C. O’Connor (ix) | 23 | - | - | - | 8 | - | 31 | 90 | 90 | |||||||||||||||||||||||||||
W.I. O’Mahony | 68 | - | - | - | 35 | - | 103 | 106 | 104 | |||||||||||||||||||||||||||
578 | - | - | - | 659 | - | 1,237 | 1,302 | 1,318 |
(b) Benefits: For executive Directors these relate principally to the use of company cars, medical insurance and life assurance and, where relevant, the value of the discount on the grant of options under the Group’s 2010 Savings-related Share Option Scheme (see table 38 on page 119) for more details) and the reimbursement of legal fees in relation to the putting in place of service contracts (see page 129 for |
more details). (c) (d) Long-Term Incentives: In February 2015, the Remuneration Committee determined that the award made in 2012 under the 2006 Performance Share Plan would lapse as, over the three-year period 2012-2014, CRH’s TSR performance was below the median of both the peer group and |
table 31 on page 116. The performance criteria for the 2010 Share Option Scheme are set out in table 32 on page 116. (e) Retirement |
CRH 111 |
Directors’ Remuneration Report| continued
2015 Salaries - Executive Directors
| Table 19 | |||||||||
Director |
2014 |
2015 |
% Change | |||||||
Albert Manifold (Chief Executive) | €1,200,000 | €1,290.000 | +7.5% | |||||||
Maeve Carton (Finance Director) | €625,000 | €675,000 | +8% | |||||||
Mark Towe (Chief Executive, Oldcastle, Inc.) | US$1,377,000 | US$1,420,000 | +3% | |||||||
Basic Salary and Benefits
Details of executive Directors’ salaries for 2015 compared with 2014 are set out in table 19 above.
The background to the increases in respect of 2015 are set out in theRemuneration Committee Chairman’s introduction on pages 109 and 110.
Salary level increases for executive Directors since 2009 are shown in table 14 on page 108.
Details in relation to employment-related benefits are set out in note (b) in table 18 on page 111.
Annual Bonus Plan
A summary of the structure of CRH’s Annual Bonus Plan is set out in table 20 below.
2014 Annual Bonus Outcomes
CRH’s Annual Bonus Plan for 2014 was based on a combination of financial targets and personal/strategic goals. The specific weightings for each executive Director are shown in table 21 on page 113. In terms of the relative weighting of the components of the plan, the Committee has increased the focus on returns on net
assets, with a corresponding reduction in the percentage of the plan based on earnings per share to ensure that there is sufficient focus on delivering sustainable growth. Indicative performance for each measure is given in tables 22 and 23 on page 113. Specific targets for the 2014 Annual Bonus Plan have not been disclosed in this report as they are considered by the Board to be commercially sensitive. However, it is intended that Group-related targets for 2014 will be disclosed in the 2015 Directors’ Remuneration Report.
Overall, strong performance against the 2014 Annual Bonus Plan metrics resulted in bonus payments of 150% of salary for Albert Manifold, Maeve Carton and Mark Towe. In accordance with the Group’s remuneration policy, 25% of the bonus amount will be deferred into shares for a period of three years. Deferred Shares are not subject to any additional performance conditions during the deferral period.
Similar to 2014, CRH’s Annual Bonus Plan for 2013 was based on a combination of financial targets and
Structure of CRH’s Annual Bonus Plan | Table 20 | |||||||||
Operation: | – | 80% of awards based on financial measures, such as profits, cash flow and returns | ||||||||
– | 20% of awards based on personal and strategic goals | |||||||||
Performance: | – | 50% of maximum bonus awarded for delivering target performance | ||||||||
– | Maximum award size of 150% of salary for all executive Directors | |||||||||
Deferral: | – | 25% of all bonus awards deferred into shares for three years | ||||||||
Malus/Clawback: | – | Malus provisions for deferred share awards to provide the ability to scale back awards prior to vesting in the event of material misstatement, serious reputational damage or the Company suffering serious losses | ||||||||
– | In line with the requirements of the 2014 UK Corporate Governance Code, clawback provisions will apply to the cash element of the Annual Bonus Plan for 2015 awards onwards, for the same events as apply in respect of malus, for a period of three years | |||||||||
personal/strategic goals. Due to commercial sensitivity, specific targets were not disclosed in the 2013 Directors’ Remuneration Report. TheRemuneration Committee considers that Group-related targets for 2013 have ceased to be commercially sensitive and, accordingly, these are set out in table 24 on page 114. Indicative performance against Oldcastle targets for 2013 is shown in table 25 on page 114; the actual targets have not been disclosed as it is considered that the information remains commercially sensitive. Please see table 11 on page 93 of the 2013 Annual Report on Form 20-F for performance in 2013 against personal/strategic measures.
The 2015 Annual Bonus Plan will be operated broadly in line with the 2014 Annual Bonus Plan. However, in line with the requirements of the 2014 UK Corporate Governance Code, theRemuneration Committee has decided that, in addition to the malus provisions already in place, clawback provisions for the cash element of the Annual Bonus Plan will apply for 2015 onwards (see pages 116 and 117 for more details).
Share Scheme Awards
A summary of share scheme awards made to executive Directors in 2014 is set out in table 27 on page 115. Details of outstanding performance share awards and share options held by executive Directors are shown in tables 36, 37 and 38 on pages 118 and 119.
In addition to the awards set out in table 27 on page 115, Maeve Carton was granted an option under the Group’s 2010 Savings-related Share Option Scheme. Further details in relation to that award are set out in table 38 on page 119.
Long-Term Incentives
2014 Performance Share Plan
A summary of the structure of CRH’s 2014 Performance Share Plan is set out in table 26 on page 115.
In 2014, shareholders approved the introduction of the 2014 Performance Share Plan (the “2014 PSP”). Following approval by shareholders, awards were made to the executive Directors, details of which are summarised in table 37 on page 118. It is anticipated that awards in 2015 under the 2014 PSP will be on broadly the same basis as those made in 2014.
112 CRH |
Directors’ Remuneration Report | continued
2014 Annual Bonus - Measures and Weightings
| Table 21 | |||||||||||||||||||
Albert Manifold | Maeve Carton | Mark Towe | ||||||||||||||||||
% of salary | % of salary | % of salary | ||||||||||||||||||
Measure | Target | Maximum | Target | Maximum | Target | Maximum | ||||||||||||||
CRH EPS | 18.75% | 37.5% | 18.75% | 37.5% | 15.0% | 30.0% | ||||||||||||||
CRH Cash Flow | ||||||||||||||||||||
(i) Operating Cash Flow | 11.25% | 22.5% | 11.25% | 22.5% | - | - | ||||||||||||||
(ii) Divestments | 11.25% | 22.5% | 11.25% | 22.5% | - | - | ||||||||||||||
CRH Return on Net Assets | 18.75% | 37.5% | 18.75% | 37.5% | 7.5% | 15.0% | ||||||||||||||
Oldcastle* Group PBIT** | - | - | - | - | 15.0% | 30.0% | ||||||||||||||
Oldcastle Cash Flow
| ||||||||||||||||||||
(i) Operating Cash Flow | - | - | - | - | 15.0% | 30.0% | ||||||||||||||
(ii) Divestments | - | - | - | - | 7.5% | 15.0% | ||||||||||||||
Personal/Strategic | 15.00% | 30.0% | 15.00% | 30.0% | 15.0% | 30.0% | ||||||||||||||
Total | 75.0% | 150.0% | 75.0% | 150.0% | 75.0% | 150.0% | ||||||||||||||
* Oldcastle is the holding company for the Group’s operations in the Americas ** PBIT is defined as earnings before interest and taxes
|
2014 Annual Bonus - Achievement against targets*
| Table 22 | |||||||||||||||||||||||||||||||||||||||||
Performance achieved relative to targets | ||||||||||||||||||||||||||||||||||||||||||
Measure |
Threshold** |
Target |
Maximum | Performance achieved*** | Payout % of max | |||||||||||||||||||||||||||||||||||||
CRH EPS | ![]() | 78.9c | 100% | |||||||||||||||||||||||||||||||||||||||
CRH Cash Flow | ||||||||||||||||||||||||||||||||||||||||||
(i) Operating Cash Flow**** | ![]() | €1,477m | 100% | |||||||||||||||||||||||||||||||||||||||
(ii) Divestments | ![]() | €345m | 100% | |||||||||||||||||||||||||||||||||||||||
CRH Return on Net Assets | ![]() | 7.4% | 100% | |||||||||||||||||||||||||||||||||||||||
Oldcastle Group PBIT | ![]() | N/D | 100% | |||||||||||||||||||||||||||||||||||||||
Oldcastle Cash Flow | ||||||||||||||||||||||||||||||||||||||||||
(i) Operating Cash Flow | ![]() | N/D | 100% | |||||||||||||||||||||||||||||||||||||||
(ii) Divestments | ![]() | N/D | 100% | |||||||||||||||||||||||||||||||||||||||
* Specific targets have not been disclosed as these are deemed commercially sensitive at this time. Target will be disclosed retrospectively when no longer sensitive. ** 0% of each element is earned at threshold. *** Oldcastle cash flow targets have not been disclosed as it would result in the disclosure of information which is not generally available and is commercially sensitive. **** For this purpose, operating cash flow has been defined as reported internally.
|
2014 Annual Bonus - Achievement against Personal/Strategic targets | Table 23 | |||||||||
Payout | ||||||||||
% of | ||||||||||
Directors | Strong delivery in relation to: | Maximum | ||||||||
Albert Manifold | Effective leadership of the Group’s portfolio review; continued progress in relation to organisational change in particular in Europe; supporting and mentoring the senior executive team; effective and clear managemnt of investor communications and building up the Group’s general communication capability. | 100% | ||||||||
| Continued build up of finance organisation and expansion of finance roles to support performance management; achievements in relation to succession to ensure a strong pipeline of finance executives; completion of two bond issues in 2014 (including a debut Swiss bond issuance) at the lowest coupons achieved by the Group; continued build up of Group IT security and project management roles. | 100% | ||||||||
Mark Towe | Continued input in to the Group’s talent management process and supporting newly appointed Group Human Resources and Talent Development Director; working closely with the Chief Executive to refine succession planning in the Americas; leading the portfolio review process in the Americas. | 100% |
CRH 113 |
Directors’ Remuneration Report| continued
2013 Annual Bonus - Achievement against Group targets (Albert Manifold, Maeve Carton and Mark Towe) | Table 24 |
Performance needed for payout at | ||||||||||
Measure
| Threshold
| Target
| Maximum
| Performance Achieved
| Payout % of max
| |||||
CRH EPS | 74c | 80c | 84c | 59.5c* | 0.0% | |||||
Operating Cash Flow** | €1,075m | €1,240m | €1,340m | €1,204m | 52.0% | |||||
CRH Return on Net Assets | 6.0% | 6.5% | 7.0% | 5.9% | 0.0% | |||||
* Adjusted EPS, excluding the impact of non cash impairment recorded in 2013. | ||||||||||
**For this purpose, operating cash flow has been defined as reported internally.
|
2013 Annual Bonus - Achievement against Oldcastle targets (Mark Towe) | Table 25 |
Performance achieved relative to targets | ||||||||||||||||||||
Measure | Threshold** | Target | Maximum |
| ||||||||||||||||
Oldcastle Group PBIT* | ![]() | 93.3% | ||||||||||||||||||
Oldcastle Cash Flow | ![]() | 92.6% | ||||||||||||||||||
Oldcastle Return on Net Assets | ![]() | 93.3% | ||||||||||||||||||
* PBIT is defined as earnings before interest and | ||||||||||||||||||||
**0% of |
9275% of each award made in 2014 is subject to a Total Shareholder Return (TSR) performance measure, with performance being measured against sector peers (see table 30 on page 116). The vesting schedule is shown in table 28 on page 116. The Committee believes that, for a cyclical business such as CRH, TSR is the most appropriate performance measure at present and is a key measure of the value generated for shareholders.
The remaining 25% of each award is subject to a cumulative cash flow metric. This Group financial measure supports dividend delivery, development activity and, in the context of the Group’s €1.5 - €2.0 billion multi-year divestment programme, provides an emphasis on asset/business disposals. The cash flow
target is based on a cumulative adjusted cash flow figure over three financial years. The definition of cash flow is adjusted to exclude:
– | dividends to shareholders; |
– | acquisition/investment expenditure; |
– | share issues (scrip dividend, share options, other); |
– | financing cash flows (new loans/ repayments); |
– | back funding pension payments; and |
– | foreign exchange translation. |
TheRemuneration Committee considers that it is appropriate to make these adjustments in order to remove items that do not reflect the quality of management’s operational performance, or are largely outside of management control. This is to ensure that management remains incentivised to make decisions which are in the best long-term interests of the business and shareholders.
The cumulative adjusted cash flow target for the award made in 2014 under the 2014 PSP are set out in table 29 on page 116.
The adjusted cash flow target for awards in 2015 under the 2014 PSP have not yet been set by theRemuneration Committee. The target will be set once
the outcome of the proposed acquisition of assets from Lafarge S.A. and Holcim Ltd is known. The targets will be demanding with significant stretch ensuring that only exceptional performance will result in a maximum payout.
Vested awards will be required to be held for a further two years post-vesting.
Directors2006 Performance Share Plan
The 2006 Performance Share Plan (the “2006 PSP”), which was approved by shareholders in May 2006, is tied to TSR over a three year performance period. It has been replaced by the 2014 PSP (see page 112), which was approved by shareholders at the 2014 Annual General Meeting. Consequently, the last award under the 2006 PSP was made in 2013. Half of each award is assessed against TSR for a group of global building materials companies (see table 30 on page 116) and Corporate Governancethe other half against TSR for the constituents of the Eurofirst 300 Index.
The performance criteria for the 2006 PSP are set out in table 31 on page 116. Participants are not entitled to any dividends (or other distributions made) and have no right to vote in respect of the shares subject to the award, until the shares vest.
The rules of the 2006 PSP provide that no award, or portion of an award, which
114 CRH |
Directors’ Remuneration Report
| continued
DIRECTORS AND CORPORATE GOVERNANCE -
Structure of the 2014 Performance Share Plan | Table 26 | |||
Operation: | – Conditional share award which vests, subject to performance, over a three year period – Awards subject to a two year holding period post vesting | |||
Performance: | – 75% of awards based on relative TSR performance compared to key peers (see table 30 on page 116) – 25% of awards based on cumulative cash flow performance (see table 29 on page 116) – Maximum award size of 250% of salary for Chief Executive and 200% of salary for other executive Directors | |||
Malus/Clawback: | – Malus provisions provide theRemuneration Committee with the ability to scale back awards up to five years from grant in the event of material misstatement, serious reputational damage or the Company suffering serious losses | |||
has satisfied the TSR performance criteria should be released unless theRemuneration Committee has confirmed the validity of the TSR performance and reviewed EPS performance to assess its consistency with the objectives of the assessment.
In respect of the award made in 2012 (with a performance period 2012-2014), in February 2015, theRemuneration Committee determined that the award would lapse as, over the three-year period 2012 -2014, CRH’s TSR performance was below the median of both the peer group and the Eurofirst Index. The Company’s TSR performance was reviewed by theRemuneration Committee’s remuneration consultants.
During 2014, theRemuneration Committee determined that 49% of the award made under the 2006 PSP in 2011 (with a performance period 2011-2013) had vested. Details of the value of that award are set out in table 18 on page 111. Further details are provided in the 2013 Directors’ Remuneration Report.
Details of outstanding awards to Directors under the 2006 PSP are provided in table 36 on page 118. Outstanding awards are subject to the performance conditions outlined above.
2010 Share Option Scheme
At the 2010 Annual General Meeting, shareholders approved the introduction of the Earnings Per Share (EPS) based share option scheme (the “2010 Scheme”). Following the approval by
shareholders for the introduction of the 2014 PSP, no further awards will be made under the 2010 Scheme. Consequently, the last award under the 2010 Scheme was made in 2013.
Options were granted at the market price of the Company’s shares at the time of grant. The vesting period for options is three years, with vesting only occurring once an initial EPS performance target has been reached. Awards under the 2010 Scheme were limited to 150% of salary.
The performance criteria for the 2010 Scheme were agreed with the Irish Association of Investment Managers (the “IAIM”) and are set out in table 32 on page 116. The performance targets were designed to provide for proportionately more vesting for higher levels of EPS growth.
Vesting levels are subject to any reduction which theRemuneration Committee deems appropriate in the context of the overall results of the Group.
The grant of options under the 2010 Scheme made in 2010 and 2011 did not meet the EPS performance criteria set out above and, accordingly, the options lapsed on the third anniversary of the date of grant. Similarly, the grant of options made in 2012, having failed to meet the appropriate EPS criteria, will lapse in full in April 2015.
Pension entitlements - defined benefit
Summary of Scheme Interests Granted in 2014
| Table 27
| |||||||||||||||||
Directors
| Scheme
| Basis of award
| Number of
| Face value*
| Exercise
|
Percentage vesting at threshold performance (% of maximum)
|
Performance end date
| Expected date of
| ||||||||||
2014 PSP | ||||||||||||||||||
Albert Manifold | (conditional shares)
| 250%
| 142,900
| € 2,928,021
| n/a
| 25%
| 31-Dec-16
| Feb-2019
| ||||||||||
2014 PSP | ||||||||||||||||||
Maeve Carton | (conditional shares)
| 200%
| 59,500
| € 1,219,155
| n/a
| 25%
| 31-Dec-16
| Feb-2019
| ||||||||||
2013 Annual Bonus** | 5%
| 2,561
| € 54,000
| n/a
| n/a
| n/a
| Mar-2017
| |||||||||||
Mark Towe | (deferred shares)
| |||||||||||||||||
2014 PSP (conditional | 200% | 97,100 | €1,989,579 | n/a | 25% | 31-Dec-16 | Feb-2019
| |||||||||||
shares) | ||||||||||||||||||
* Face value has been calculated using the share price at the date of grant for 2014 PSP awards (€20.49). | ||||||||||||||||||
** See table 9 on page 93 of the 2013 Annual Report on Form 20-F for the structure of the 2013 Annual Bonus Plan.
|
Increase in (i) €000 | Transfer value (i) €000 | Total accrued (ii) €000 | ||||||||||
Executive Directors | ||||||||||||
M. Carton | - | 5 | 266 | |||||||||
M. Lee | - | - | 287 | |||||||||
A. Manifold | - | 28 | 273 |
CRH 115 |
Directors’ Remuneration Report| continued
Details of outstanding awards to Directors under the 2010 Scheme are provided in tables 38 and 39 on page 119.
TheRemuneration Committee has discretionary powers regarding the implementation of the rules of the 2010 Scheme. These powers have not been exercised since the adoption of the 2010 Scheme.
2000 Share Option Scheme
At the Annual General Meeting held in 2000, shareholders approved the introduction of a share option scheme (the “2000 Scheme”). This scheme was superseded by the 2010 Scheme referred to above. No awards have been made under the 2000 Scheme since 2009. Details of outstanding awards and the performance criteria for the 2000 Scheme are set out in tables 38 and 39 on page 119.
Other employee share plans
Maeve Carton and Albert Manifold also participate in the 2010 Savings-related Option Scheme (Republic of Ireland) (the “2010 SAYE”) and in the Group’s Irish Revenue approved Share Participation Scheme (the “Participation Scheme”).
The 2010 SAYE is an Irish Revenue approved plan open to all Irish employees. Participants may save up to €500 a month from their net salaries for a fixed term of three or five years and at the end of the savings period they have the option to buy CRH shares at a discount of up to 15% of the market price on the date of invitation of each savings contract. Details of the outstanding awards of Maeve Carton and Albert Manifold under the 2010 SAYE are set out in tables 38 and 39 on page 119.
The Participation Scheme is open to all employees in Ireland, and grants can be made to participants up to a maximum of €12,700 annually in CRH shares.
Malus and Clawback
From 2015 all incentive awards to executive Directors are subject to recovery provisions. Annual bonus awards will be subject to recovery provisions for three years from the date of payment (cash awards) or grant (deferred awards). Performance Share
2014 Performance Share Plan (2014 PSP) Metrics | ||||||||||
3-year TSR* performance compared to peer group | Vesting Level | Table 28 | ||||||||
Equal to or greater than 75thpercentile | 100% | |||||||||
Between 50thand 75thpercentile | Straight line between 25% and 100% | |||||||||
Equal to 50thpercentile | 25% | |||||||||
Below 50thpercentile | 0% | |||||||||
* The methodology for calculating TSR assumes all dividends are reinvested on the ex-dividend date at the closing share price on that day; the open and close price is based on the three month average closing price on the last day before the start of the performance period and the final day of the performance period respectively. | ||||||||||
Cumulative Cash Flow 2014 - 2016(25% of award) | Vesting Level | Table 29 | ||||||||
Equal to or greater than€3.5bn | 100% | |||||||||
Between€2.9bn -€3.5bn | Straight line between 25% - 100% | |||||||||
Equal to€2.9bn | 25% | |||||||||
Below€2.9bn | 0% | |||||||||
Peer Group for TSR Performance Metric for awards under the 2014 PSP and 2006 PSP | Table 30 |
Boral | Italcementi | Titan Cement | Additional company included in the 2006 PSP Peer Group: | |||||||||
Buzzi Unicem | Kingspan Group | Travis Perkins | Home Depot | |||||||||
Cemex | Lafarge | Vulcan Materials | ||||||||||
Grafton Group | Martin Marietta Materials | Weinerberger | ||||||||||
Heidelberg Cement | Saint Gobain | Wolseley | ||||||||||
Holcim | ||||||||||||
2006 Performance Share Plan (2006 PSP) Metrics | Table 31 | |||||||||
3-year TSR* performance compared to peer group/Eurofirst 300 Index | Vesting Level | |||||||||
Equal to or greater than 75thpercentile | 100% | |||||||||
Between 50thand 75thpercentile | Straight line between 30% and 100% | |||||||||
Equal to 50thpercentile | 30% | |||||||||
Below 50thpercentile | 0% | |||||||||
* The methodology for calculating TSR assumes all dividends are reinvested on the ex-dividend date at the closing share price on that day; the open and close price is based on the closing price on the last day before the start of the performance period and the final day of the performance period respectively. |
Share Option Scheme Metrics | Table 32 | |||||||||||
Compound EPS* Growth Performance over three years | ||||||||||||
Awarded in 2010 & 2011 | Awarded in 2012 & 2013 | Vesting Level | ||||||||||
Equal to or greater than 27.5% p.a. | Equal to or greater than 20% p.a. | 100% | ||||||||||
Between 17.5% and 27.5% p.a. | Between 13% and 20% p.a. | Straight line between 40% and 100% | ||||||||||
Between 12.5% and 17.5% p.a. | Between 10% and 13% p.a. | Straight line between 20% and 40% | ||||||||||
Equal to 12.5% p.a. | Equal to 10% p.a. | 20% | ||||||||||
Less than 12.5% p.a. | Less than 10% p.a. | 0% | ||||||||||
* The EPS figure used for the purposes of the 2010 Scheme is the basic consolidated earnings per share of the Company for the accounting period concerned as shown in the Annual Report issued by the Company for that accounting period. |
116 CRH |
Directors’ Remuneration Report| continued |
Plan awards will be subject to malus for the three years prior to performance assessment and the two further years of the holding period.
Malus or clawback provisions may be triggered in the event of:
– | material misstatement; |
– | serious reputational damage; or |
– | the Company suffering serious losses. |
Retirement Benefit Expense
Maeve Carton and Albert Manifold are participants in a contributory defined benefit plan which is based on an accrual rate of 1/60th of salary* for each year of pensionable service and is designed to provide two-thirds of career average salary at retirement for full service. If either Maeve Carton or Albert Manifold leave service prior to Normal Retirement Age (60) they will become entitled to a deferred pension, payable from Normal Retirement Age, based on the pension they have accrued to their date of leaving.
The Finance Act 2006 effectively established a cap on pension provisions by introducing a penalty tax charge on pension assets in excess of the higher of €5 million (in the Finance Act 2011, this threshold was reduced to €2.3 million and reduced further to €2 million by the Finance Act (No. 2) Act 2013) or the value of individual accrued pension entitlements as at 7 December 2005. As a result of these legislative changes, theRemuneration Committee decided that executive Directors should have the option of continuing to accrue pension benefits as previously, or of choosing an alternative arrangement - by accepting pension benefits limited by the cap - with a similar overall cost to the Group. Maeve Carton and Albert Manifold have opted for an arrangement whereby their pensions are capped in line with the provisions of the Finance Acts and receive a supplementary taxable non-pensionable cash supplement in lieu of pension benefits forgone. There was, therefore, no additional accrual in 2014. The cash pension supplements for 2014 are detailed in table 18 on page 111. These supplements are similar in value to the reduction in the Company’s
Pension Entitlements - Defined Benefit (Audited)
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Table 33
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Increase in accrued personal pension during 2014 (i) € 000
| Transfer value of increase in dependents’ pension (i) € 000
| Total accrued personal pension at year-end (ii) € 000
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Executive Directors | ||||||||||||||||||||
Albert Manifold | - | 208 | 273 | |||||||||||||||||
Maeve Carton | - | 29 | 266 |
(i) As noted on page |
(ii) | The accrued pensions shown are those which would be payable annually from normal retirement date. |
Pension entitlements - defined contribution
The accumulated liabilities related to the unfunded Supplemental Executive Retirement Plans for Mark Towe are as follows:
Pension Entitlements - Defined Contribution (Audited)
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Pension Entitlements - Defined Contribution (Audited)
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Table 34
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The accumulated liablilities related to the unfunded Supplemental Executive Retirement Plans for Mark Towe are as follows: |
The accumulated liablilities related to the unfunded Supplemental Executive Retirement Plans for Mark Towe are as follows: |
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As at 31 December €000 | 2011 contribution €000 | 2011 €000 | Translation adjustment €000 | As at €000 | As at 31 December 2013 € 000
| 2014 contribution € 000
| 2014 Notional interest (iii) € 000
| Translation adjustment € 000
| As at 31 December 2014 € 000
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Executive Director | ||||||||||||||||||||||||||||||||||||||||||||||||
M.S. Towe | 1,217 | 173 | 63 | 58 | 1,511 | |||||||||||||||||||||||||||||||||||||||||||
Mark Towe | 1,923 | 194 | 97 | 288 | 2,502 |
liability represented by the pension benefits foregone. They are calculated based on actuarial advice as the equivalent of the reduction in the Company’s liability to each individual and spread over the term to retirement as annual compensation allowances. The contributory defined benefit plan in which Albert Manifold and Maeve Carton participate is closed to new entrants. Mark Towe participates in a defined contribution retirement plan in respect of basic salary; and in addition he participates in an unfunded defined contribution Supplemental Executive Retirement Plan (SERP) also in respect of basic salary, to which contributions are made at an agreed rate (20%), offset by contributions made to the other retirement plan.
Details regarding pension entitlements for the executive Directors are set out in tables 33 and 34 above. There is no change to the pension arrangements for 2015.
Directors’ Remuneration Report| continued Directors’ Interests in Shares and Share Scheme Awards
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