Earnings Call: H1 2019

Aug 22, 2019

Ladies and gentlemen, welcome to the CRH Interim Results Call. For the duration of the call, you will be on listen only. However, you may submit your questions at the end of the call by pressing star one on your telephone keypad. I will now hand you over to your host, Albert Manifold. Thank you. Good morning, everyone. Albert Manifold here, CRH Group Chief Executive. You're all very welcome to our conference call and webcast presentation, which accompanies the release of our 2019 interim results this morning. I'm joined on the call by Senan Murphy, our Group Finance Director, and David Dillon, President of Global Strategy and Business Development, and also Frank Heisterkamp, Head of Investor Relations. Over the next 30 minutes or so, we will take you through a brief presentation on the results we've published this morning, highlighting the key drivers of our trading performance for the first six months of 2019, as well as providing you with an indication of our expectations for the second half of the year. We'll also take a few moments to update you on some of the key developments across the group during the first half and the progress we're making against our strategic objectives. Afterwards, we'll be available to take any questions you may have, and all told, we should be done in under an hour or so. At the outset, on slide two, let me take you through some of the key highlights of the year so far. I'm pleased to report a record first half profit performance for CRH, with EBITDA in excess of EUR 1.5 billion, 5% ahead on a like-to-like basis and in line with our previous guidance. Now, despite some significant weather disruption impacting construction activity in parts of Europe and North America during the second quarter, the underlying demand environment in our core markets remains positive and leaves us well-positioned as we enter the second half of the year. As you know, active portfolio management is a key component of how we create value for our shareholders, and 2019 has been no different in that regard. We've announced approximately EUR 2 billion of divestments in the year to date, including an agreement to divest our Europe Distribution business for a net realizable value in excess of EUR 1.6 billion, representing an exit multiple of over 10 times EBITDA. We spent approximately EUR 470 million on 36 small- to medium-sized bolt-on transactions in the year to date. The average multiple on these deals was 8 times EBITDA, that's before we generate the normal savings and synergies we expect when we integrate these businesses into our portfolio. We continue to focus on the efficient and disciplined allocation of our capital to maximize value for our shareholders, this is demonstrated by our ongoing share buyback program, which has returned EUR 550 million to shareholders in the year to date. The board has committed to our share buyback program with a further tranche of up to EUR 350 million to be completed by the end of the year. Senan will have more details on this later on. Of course, all of this is underpinned by our relentless focus on continuous business improvement. Our commitment to excellence is deeply embedded in the CRH DNA, and I'm pleased to report that the implementation of our profit improvement program, targeting a structural improvement in our margins, returns, and cash generation, is progressing very much as planned. If I can turn now to slide three, excuse me. I'm happy to highlight the first six months of the year. Overall, it's had a satisfactory first half performance. Sales, EBITDA, and margin all ahead of the prior year, benefiting from good organic delivery and contributions from acquisitions. We've also corrected headwinds and the transitional impact of the new leasing accounting standards. A good performance in the context of some significant weather disruption across parts of our businesses during the second quarter, and some challenging trading conditions in the U.K. All of this translates into a 51% increase in our earnings per share, reflecting good operational and financial performance for the first half and a better profit on disposals, which were ahead of the prior year. I'm also pleased to report a 2% increase in our interim dividend, reflecting our ongoing commitment to a progressive dividend policy and a sign of the financial strength of the position the company is in. Before I take you through the trading performance of the business, I'd like to give you a brief overview of the market backdrop and the trading environment across our major markets. If we can go to the first slide five. As we continue to experience positive underlying momentum in construction activity across our main markets in North America and continental Europe. While in the U.K., construction activity continues to be impacted by ongoing political and Brexit-related uncertainty. In North America, despite a slower start to the year due to affordability and supply site constraints across the residential construction industry, underlying demand remains solid, and we've seen good growth in our more residentially focused businesses. On the non-residential side, here too, we are seeing good underlying demand, and our order books are strong. Good momentum in U.S. infrastructure activity continues to be underpinned by federal and state-level funding initiatives. Highway and street construction spending is well ahead of the prior year, and strong contract awards gave a closer footprint for the first six months of the year, pointing to a continuation of the positive trends. Outlook is also positive in Europe, with low to mid-single-digit growth expected across residential, non-residential, and infrastructure markets, and even stronger levels of growth in Eastern Europe, led by new build infrastructure activity in particular. While we continue to experience some inflationary pressures in our businesses, the environment in Europe and North America continues to support further progress on pricing across our businesses. Moving on and get that backed up. I will now take you through the financial performance of our businesses for the first six months of the year. First, the performance of our Americas Materials division on slide seven. Our business delivered a good first half with like-to-like sales and EBITDA 2% and 3% ahead, respectively. A reflection of the positive underlying demand environment I mentioned earlier. This was delivered against the backdrop of some significant weather disruption in parts of the U.S. Midwest during the second quarter, primarily impacting our central division. As a result, our like-to-like aggregate and asphalt volumes were slightly behind at the half-year stage. We would expect to recover lost volumes in the second half of the year. Pricing momentum continues to be strong with good price increases achieved across all products during the first half of the year, more than offsetting higher input costs. As a result, our EBITDA margin increased by 20 basis points on a like-to-like basis, a good outcome in the context of the weather-related headwinds we experienced across parts of our footprint during the period. As we look ahead to the second half of the year, we'll see good momentum in our order books, both in terms of volumes and margins, which supports continuation of the positive underlying demand environment across our markets. I'm also pleased to report that the integration of Ash Grove and Suwannee Cement activity deals into our existing portfolio is progressing well, and these businesses are trading very much in line with our expectations. They were important deals for CRH, strengthening our footprint in high-growth markets, providing significant synergy potential through integration with our existing operations and a platform for future bolt-on activity, all of which will deliver significant value for our shareholders going forward. Turning to the performance of our Europe Materials business on slide eight. Our overall like-to-like sales and EBITDA were 6% and 2% ahead respectively. A solid performance and in a number of headwinds which impacted our business in the first half. After a particularly strong start to the year, our volumes were impacted by some adverse weather during May and June. However, overall, our cement volumes were 2% ahead for the first six months of the year. I'm also encouraged to see pricing momentum in Europe continuing to accelerate. Our overall cement pricing was 6% ahead of prior year, with all markets delivering positive pricing movements. However, despite the good progress we made on the volume and pricing front, input cost headwinds and difficult trading conditions in the United Kingdom resulted in a reduction in our underlying margin. We're very much focused on cost recovery and margin improvement in the second half of the year. Finally, Comex in Asia and our cement business in the Philippines, here too, we had a good first half with volumes, prices, and profitability all ahead of the prior year. For Building Products on slide nine, which has delivered a strong first half performance. Good pricing and a strong focus on cost control contributed to an 8% increase in like-to-like EBITDA and a 60 basis points improvement in our margin, reflecting the strong operating leverage in the business. It's also good to see the benefits of our global products platform starting to come through as we run all our products businesses in a more integrated manner. We've often spoken in the past of our focus on active portfolio management and how we are constantly reviewing and refining our portfolio of businesses in an effort to become a more focused and more integrated group. We've made significant progress in that regard, reaching agreements to divest our non-core Shutters & Awnings, Perimeter Protection, and Europe Distribution businesses to enable us to focus on areas where we have core competencies. It's also important to remember that we've been active acquirers in the products space in recent years, spending over EUR 1.5 billion acquiring businesses, where the integration businesses benefits from our existing portfolio are now starting to come through. As we continue to refine and tighten our portfolio of product businesses, we're focused on the parts of our business with higher growth where our skill set is better, and where we can get the benefit of integration both across and within our businesses. This, combined with our focus on strong operational excellence, provides us with a platform to create further value for our shareholders. At this point, I'm going to hand you over to Senan, who's going to take you through our financial performance in further detail. Thank you, Albert. Good morning, everyone. As Albert mentioned earlier, we had a satisfactory start to the year, and this is reflected in our financial performance, which is outlined on slide 11. EBITDA of EUR 1.54 billion is a record first half performance for the group, and it's in line with the guidance that we gave back in April. Let me take you through briefly some of the main drivers of this performance. Starting with organic growth, a 5% like-for-like improvement over last year. A good result in the context of some difficult weather and also the challenging trading conditions we faced in the U.K. Moving on, maybe focusing on our development activity. As you can see on this slide, acquisitions net of divestments contributed EUR 111 million of EBITDA in the first six months of the year. This primarily consists of the half-year contribution from the acquisition of Ash Grove, which completed in June of last year. It also reflects the impact of the divestment of our Benelux DIY business, which was completed in July 2018. Next to currency translation, where a stronger U.S. dollar relative to the euro is the primary contributor to the EUR 50 million currency tailwind in the first half of the year. Finally, our reported results reflect the impact of the group's transition to IFRS 16, the new lease accounting standard, which came into effect on the 1st of January 2019. The impact of this change resulted in a EUR 193 million uplift in our reported EBITDA in the first half. Turning to our cash flow performance on slide 12. As you can see, we reported a net cash inflow of EUR 270 million for the first six months. That's an improvement of almost EUR 600 million compared to prior year. This is a good performance as we would not typically expect to report an inflow at this stage of the year given the seasonal nature of our business. Our seasonal working capital outflow for the first half reduced by over EUR 100 million. This reflects the good working capital control across the business, particularly given our higher sales and higher activity levels. While our interest costs increased by EUR 44 million compared to the prior year, reflecting the higher average debt levels, our tax outflow reduced by over EUR 100 million in the period. That reduction reflects the non-recurrence of property gains tax paid on the divestment of our Americas Distribution business, which was completed in January of last year. Looking ahead, we remain very focused on cash management in our business, and we anticipate a significant inflow of cash in the second half of the year. On slide 13, you can see the consistency of our focus on cash delivery in our business. Everything we do is focused on generating and maximizing the level of cash from the assets that we own. That is what our shareholders want, and indeed expect from us at CRH. We are an extremely cash generative business, consistently generating over EUR 2 billion of free cash each year, representing an industry leading 80% conversion from EBITDA into cash. On a cumulative basis, you can see over the last five years that translates into over EUR 10 billion of free cash generation. It is this strong level of cash generation that provides us with significant optionality for future value creation for our shareholders. Whether this cash is allocated to CapEx investments, value accretive M&A, or returned to shareholders in the form of dividends or share buybacks. Our focus on cash delivery also underpins our strong financial position. You can see on slide 14 the key components that form our year-end net debt expectations. Let me briefly take you through some of those key building blocks. We ended 2018 with a net debt position of just under EUR 7 billion and a net debt to EBITDA of less than 2.1 times. As mentioned earlier, the divestments announced year to date are expected to generate approximately EUR 2 billion of proceeds by year-end. We've also been active on the acquisition front, spending close to EUR 500 million on 36 bolt-on acquisitions in the year to date. We also expect 2019 to be another strong year of cash generation for the group. That will enable us to return approximately €1.5 billion to shareholders in the form of dividends and share buybacks. This includes our intention, as we announced this morning, to continue our share buyback program with a further tranche of up to €350 million to be completed by the end of this year. As you can see on the slide, we expect these combined movements to result in a significant reduction in our year-end net debt position. That's before the impact of the group's transition to IFRS 16. To include this transition impact, we expect our reported net debt position to finish 2019 at approximately €7 billion or below two times net debt to EBITDA. This is consistent with our strong investment-grade credit rating, and as we have seen in recent weeks, the rating agency Fitch has upgraded the group's credit rating to BBB+. Now we have a BBB+ or equivalent rating with each of the three main rating agencies, and that reflects the strong financial position of the group. As shown on slide 15, that strong focus on maintaining our financial discipline has been the hallmark of CRH for many years, and it is something that we as a management team are absolutely focused on. Despite the level of acquisitions and growth that the group has delivered in recent years, we have consistently maintained a strong and flexible balance sheet. Over the last 10 years, our average net debt to EBITDA ratio stands at around two times, and we remain committed to maintaining our strong financial position and our investment-grade credit rating going forward. Irrespective of where we are in the cycle, the one constant in CRH is our unerring focus on cash in our business and the discipline on our balance sheet. You can also see that discipline in the way we allocate capital. Over the last five years, we've generated approximately EUR 7 billion from divestments at an average exit multiple of 11x EBITDA, and we have reinvested those proceeds into higher growth and higher returning opportunities at an average multiple of 8x. We have focused on the efficient allocation of capital and reallocation of capital for superior returns and cash generation in our business, and in doing so, have created significant value for our shareholders. At this point, David's going to provide you with an update on some of the key developments from across our business. Thanks, Albert. Turning to slide 17, where we summarize some of the key initiatives that are underway across the group, all fully aligned with our objective of building a better business. First is our active approach to portfolio management, a continuous process by which we are reshaping our business, constantly refining our portfolio to deliver superior returns, growth, and cash generation. Second is the area of synergy delivery, creating value by integrating businesses into our existing portfolio and leveraging our global scale and best practice programs to extract operational and commercial improvements. Of course, core to both of these is our focus on continuous business improvement, a deeply embedded practice of making our business better, both existing and acquired businesses, through incremental improvements across the group. Three areas of focus, all with the same goal or purpose in mind: to deliver structurally higher margins, returns, and cash. I'll begin with portfolio management on slide 18. We've made significant progress on our divestment program in the year to date, reaching agreements on approximately EUR 2 billion of divestments. This includes three businesses in our Building Products division, Europe Distribution, Shutters & Awnings, and Perimeter Protection. All good businesses which have delivered well for us over the years, by divesting now at attractive valuations, we're able to crystallize a significant amount of value for our shareholders. Our largest divestment in the year to date was Europe Distribution. In July, we announced that following a comprehensive strategic review, we've reached an agreement to divest of the business for an enterprise value of over EUR 1.6 billion, representing an exit multiple of over 10x EBITDA. This significant level of divestment activity demonstrates the clear execution of our strategy to deliver value by active management of portfolio and becoming a narrower, deeper, and more focused group. We have made significant progress repositioning our portfolio in recent years. We will continue to refine and reshape our business all across the group to generate superior returns and cash. Next to integration on slide 19, and our recent acquisitions of Ash Grove and Suwannee, which represented a major expansion in US Cement. Combined, this is the second largest acquisition we've ever done at over $4 billion. It provided a significant overlap with our existing business and value creation opportunities for decades to come. The success of these acquisitions was predicated on our ability to deliver value through the quick and efficient integration of the businesses into our existing network and our ability to leverage our global expertise and best practice from across the group. The integration of these businesses is progressing well and synergies are coming through ahead of expectations. At the time of acquisition, we had initially identified a combined $100 million of synergies over a three-year period. As we started to integrate them into our existing business, we were able to identify further operational and commercial improvements. This has enabled us to increase our current synergy target to $145 million, $45 million of additional value over and above our original expectations. To slide 20 on continuous business improvement, a deeply embedded practice of making our businesses better through incremental improvement initiatives across the group, a core part of what we do at CRH. We set out in our 2018 results presentation in February that we manage the performance of our individual business units on a margin basis. We also showed how our comparable business units were best-in-class operators. However, we also set out that we manage the overall group to maximize returns and cash, which we believe is the true measurement of overall business performance. We have ambitious goals to further improve the margins, returns, and cash in our business. As we look ahead to the next phase of growth and performance for the group, I'm pleased to report that our business improvement programs are progressing as planned. This has been enabled by the significant repositioning of our business in recent years, focusing on improving efficiency and productivity through procurement, process, and structural initiatives, and driving greater integration across our businesses. We talked about Ash Grove and Suwannee and how we buy these businesses and integrate them. It is only when we fully immerse them into our group programs that we get the full benefit over time. We've always said that the current business improvements programs will deliver some small benefits towards the back end of this year, and that will build through 2020 and beyond. We are pleased with the progress we've seen to date and are confident we are on track to deliver against our targets. The continued refinement and pruning of the portfolio will allow us to increase our focus in this area, extracting the maximum amount of value from our businesses and resulting in higher margins, better returns, and better cash for our shareholders. Thanks, David. Some really good progress there, and good to see that delivery coming through. Now to outlook and our expectations for our businesses during the second half of the year. If I can ask you to turn to slide 22. Here we can see the underlying trading environment in our Americas Materials business remains positive. For the second half of the year, we expect an increased rate of EBITDA growth on a like-to-like basis. In Europe Materials, while we expect continued positive momentum across most of our major markets, we do expect the U.K. to remain challenged for the remainder of the year. Overall, we expect second half like-to-like EBITDA to advance at a similar pace to that what we've seen in the first half of the year. In Building Products, we expect the strong and positive momentum in the first half of the year to continue into H2. For group overall, we expect further growth in like-to-like EBITDA in the second half of the year and another year of progress for CRH. Before I turn over to Q&A, just looking at slide 23, I just want to leave you with a few key takeaways from this morning's presentation. We've had a record start to the year with EBITDA of EUR 1.54 billion, and we expect further progress in the second half. Our profit improvement program is progressing well, focusing on improving efficiency and productivity through greater integration across our businesses, delivering higher margins, returns, and cash for all of our shareholders. As I said earlier, we will continue to allocate and reallocate capital to deliver superior value and cash generation for all our shareholders. We have continued to refine and reshape our business through active portfolio management, reaching agreement on approximately EUR 2 billion divestments and signing over EUR 470 million on 36 bolt-on acquisitions in the year to date. We are focused on the efficient allocation of capital to maximize value for our shareholders. We returned EUR 1.35 billion since the inception of our buyback program in May of last year, and we intend to return a further $350 million to shareholders by the end of 2019. As you will have seen through the generations of CRH management, we are resolutely focused on maintaining a strong, flexible balance sheet and benefiting from the optionality this provides in the years ahead. That concludes this part of the presentation this morning, and we're now happy to take your questions. May I ask you please to state your name and the institution that you represent before posing your questions. I'm now going to hand you back to the moderator to coordinate the Q&A session of our call. Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad, and you will be advised when to ask your question. This question comes in from the line of Gregor Kuglicz, calling from UBS. Please go ahead. Hi, good morning. I've got three questions, please. Two are a bit more short-term and one a little bit longer term. On the shorter-term one, can you just give us a sense on energy costs, how they trended, if you blend it all in in the first half and how that evolves into the second half? I guess particularly bitumen would be interesting, but not only. Secondly, on the U.K., obviously it's been a big drag in the first half. I think if you do the math, maybe it was a 20% down or something like that in EBITDA terms. Can you just give us a sense of what's really happening? Obviously, we've heard some delays in general, but it does seem like a big drop. Perhaps there was some energy hedging, I think, last year from memory. If you could just elaborate. Finally, if I can come back to your midterm margin targets, which I think were set for 2021 of a 300 basis point improvement. I think last year was kind of zero. This year looks like it's going to be up a little bit. I guess I want to kind of gauge your confidence in how that starts feeding into next year in particular and how confident you are you're pacing at that rate. Then just for the avoidance of doubt, that margin target doesn't include any of the sort of accretive benefit from asset rotations. So for instance, the sale of the distribution business. Thank you. Thanks, Gregor. Three questions there. First one on energy costs, second on the U.K., the third one on margin targets. I'll take the first two myself, then I'll ask David Dillon, who's with us here this morning to talk about the margin target at the end. Excuse me. With regard to the energy costs, as you rightly say, there are some headwinds with regard to energy in the first half of this year, primarily in the areas of bitumen and electricity. Now, one has to say, look, energy has always been there for us. The costs are volatile, we have to manage those costs, those costs have been up in the first half of the year, primarily as a result of some forward contracts that we had in place as they unwind. Overall, I expect if you view the oil prices, you would expect energy prices to be starting to decline. Of course, our selling prices are moving up as well. We're used to managing our cost base. Of course, the answer to all of that is the costs are going up, so are our selling prices. If you look at our margins, you can see the response of the two. We're seeing net margin increases across our businesses. In the bitumen area, which you specifically asked about, with regard to the United States in particular, which is our big user of bitumen, we're already seeing net margin increases at this time of the year. We're starting to unwind and starting to see the benefits of higher throughput and our lower bitumen costs coming through. Again, overall for the full year, we expect the second half energy costs to be lesser than the first half of the year. Overall in CRH, they tend to be about 9% of revenues on an annualized basis. That's what they were in 2018, and I expect energy costs to be about 9% of revenues in 2019 as well. Secondly, with regard to your question with regard to the U.K. and you called it, I think a sort of drag on the results. The U.K. is an important part of our business, don't get me wrong, but it is only 7% of EBITDA. Volumes are back a bit, and profitability is down a bit. For me, it's more the lost opportunity rather than the actual pain of taking a reduction in the EBITDA number. Primarily, the slowdown, as we've seen since the vote of 2016, has been in the pullback in the area of infrastructure. Actually, residential has been quite resilient, as indeed has non-residential, but that has been pulling back over the last 18 months or so. Our business is about 50% exposed to infrastructure. While the volumes have been relatively resilient on the basis of good residential and non-residential market, particularly out there in the U.K., sorry, London, I should say, in the U.K., the mix of business has been less favorable. That has impacted upon our ability to keep our costs down because we are having to reprocess materials a second time rather than when we break stone in a quarry, you break them into many different sizes. If you don't have the big stones, which infrastructure work use, you got to process it again for smaller stones for concrete, et cetera. The mix of business has caused higher cost base and also lower selling prices, and that has impacted upon our businesses. Hard to say where it's going forward. We've come back off quite a peak in 2015. I think we're at a level now whereby it's continuing on at this level, and until we get some certainty regarding what's happening after the end of October, I think it'll stay at those kind of levels. With regard to your third question on the profit improvement program we have in place, and just to remind everybody before I pass it to David. The program really, we announced this last year. This really was as a result of a number of things. We have been changing the shape of CRH over the past number of years, where we've been selling down certain businesses and reinvesting back within our core areas of competency and capability. Really, as a result of that and as a result of really running our business in a more centralized manner, we were and are looking to improve the overall internal efficiencies within our businesses and the targets and improvement in doing so. The actual program itself runs over three years. I'm going to pass it over to David just to take you through in terms of where we are in that program and what we should expect over the next couple of years. David? Yeah, just on this, I think Albert said a few minutes ago, very pleased with the progress overall. Great engagement right across our businesses. Important to note that it's centrally managed but delivered locally, and CRH is a business of over 3,000 locations. With all those things, your smaller items just build up to a larger, big number. 70% of the improvement is internal self-help and kind of classic CRH in many ways, detailed focus of what we know and what we do. It's this, as Albert said, through the refinement of the portfolio, which allows us to run the business in a more unified way. When you get into the detail, there's lots and lots of things. I mean, I'm just going to pick out a couple. If you look at operational excellence, if you take one of our business lines where we have hundreds of locations, which is aggregates, where you're looking at improving throughput, shooting and blasting, rock yield, cost per ton. Maintenance costs, logistics. I mean, the list goes on. I suppose there's been a very good start. We're starting to see it come through towards the back end of this year, that will accelerate as we go through 2020 and 2021. I think we were always clear that we said this was primarily 2020, 2021 before you start to see it. We do expect to see it come through in the back end of this year when you see full level. Remember, our business is quite seasonal, one-third, two-thirds, first half, second half. At the back end of the year, when the full year results come out, I expect you'll see some demonstrable achievements with regard to margin improvement. Thank you. Thank you. The next question comes in from the line of Robert Gardiner, calling from Davy. Please go ahead. Good morning. Two for me, please. One, just wanted to ask upon capital allocation, how should we think about as the debt falls in the business? Should we be thinking about more buybacks, more bolt-ons, or a mix of both? I'm just wondering how you're thinking about that looking into 2020. Secondly, just wondering then, in terms of your guidance for an increased rate of growth in Americas Materials in the second half of the year. Just wondering what's behind that. Does that speak to your backlogs, your pipeline, or the strength of trading in July, August? Thanks. Thanks, Rob. Two questions there. One on the general capital allocation question in terms of how we can use the cash we're generating, and secondly, just maybe an update on the U.S. trading at this moment in time. We gave a further indication this year that we focus very much on value creation across a range of initiatives. An increase again in dividends. Again, further buybacks, which will bring the total buybacks this year to over $900 million if we complete the full program, which I expect we will. And of course, we've done $470 million of bolt-ons, which just come through the door every day, 36 deals done in the first half of the year. I don't see that pace changing for the remainder of the year. Our primary focus, I have to say, going forward, actually at this moment in time, is actually on the internals of the business. We have a lot of work to do, as David has outlined, on the profit improvement program. We have some really good businesses, and they have made changes to our business, building a better business by selling down peripheral areas and focusing in areas where we've got core capability overlap and competence. For us, that's where our primary focus is going to be. That will leave the business with higher profitability, higher returns, and higher cash. It's a first-world problem to have to deal with excess cash within the business. You can't answer that question unless you can see the opportunities open in front of you. One thing we are determined to do in CRH is we are very much focused on being a growth-orientated company. At the moment, that growth is through organic growth within our businesses and through bolt-on acquisitions. If and when the time is right to go back to organic growth in our large way or if opportunities present to us, we will return to that. Of course, it's a focus of the cycle, the opportunities we see, and the cash we have in front of us. We can't answer your question of what we see, but our focus is very much on the inside of our business. We continue to do buybacks and use that cash because we think that's the appropriate thing to do at this moment in time with the cash that's available to us, and focusing on the bolt-ons. That's what we'll do for the next 12 to 24 months. With regard to your question with regard to where the U.S. and our guidance of an increased pace of growth, we had a somewhat okay first half of the year. The demand levels are there in our U.S. business. In fact, U.S. construction markets are actually fundamentally in a good place. We had some difficult weather in the second quarter, particularly in the central divisions and in Texas, which is a big area for us. What we have seen through July and indeed into August, we've seen good volume pickup across our businesses. Really our businesses started seeing during this period. Remember, our Americas Materials business makes two-thirds of its profitability in the months of July over to September because we get high volume throughput. We're working 24/7 at good low-cost base. The work is there. It's living well. Prices are good. The U.S. construction market is fundamentally in a good place at this moment in time. Looking at our business itself, the backlogs within our businesses are strong. They're ahead of last year. The margin of those backlogs are ahead of last year. It's not only a comment looking at this quarter for the remainder of the year, I have to say, as I look into the first half of next year, the issue we have with our backlogs for construction is we have got reasonably good visibility pretty much into Q1 and Q2 of next year. For the U.S., it looks to be continuing at the same pace of growth that we're seeing, which is encouraging. I mean, U.S. infrastructure spend is due to increase by 12% over the next two years. The funding is there for infrastructure, which is 50% of the demand. U.S. housing is at well below peak levels, 1.2 million homes. It's just wallowing at that level there, but it's continuing on a slow pace of growth. U.S. non-res on the back of, at the end of the day, there's a lot of naysayers about the U.S. economy, but if you just look at the fundamentals here, there are 2 million net new jobs to be created in the United States this year. That puts bums on seats, working in truck fleets, working in office spaces, and those things have to be built. U.S. economy is growing at 2.4%, unemployment 3.7%, inflation's 2.2%. You've got a supportive Fed ready to react if need be, as anyone who read the statements that were published last night from last Friday's meeting. Fundamentally, we think the U.S. construction markets are in a good place. Our order books look fairly robust, and the question for us now is just making sure we get the weather to go to work, and so far this quarter it's been doing well. That's very clear. Thank you very much. The next question comes in from the line of Yves Bromehead calling from Exane BNP Paribas. Please go ahead. Good morning. Thank you for taking my questions. I'll have two, if I may. My first one is, looking ahead with your outlook on the H2 bridge, could you maybe help us in understanding the profit drivers and what you're expecting for scope effects at current spots? My second question is on the Building Products side. You've had quite an impressive margin performance in Q1, and you're guiding for Cement making is going to continue in H2. Could you maybe help us in understanding what are the products which are driving this margin and these growth improvements? If we can expect a similar trend in terms of margin expansion in H2 versus last year? Thank you very much. Thank you, Yves. Two questions there. One on the H2 bridge in terms of performance in the second half of the year. I'll ask Andrew to deal with that question in a moment. The second question was on the Building Products side. Maybe I'll take that one first in terms of what's driving that performance. The Building Products group now is fairly young, and it's interspersed within CRH. It's a global products business. I might remind you that in the products that it sells, 75%-80% of the profitability in our products businesses are generated by products that are made from concrete. This is a core capability of CRH. You should remember with CRH, 80% of the profits of CRH are generated by its cements, aggregates, asphalts, and concrete or concrete products. A very focused profile of business. Our Building Products business was formed so that we could really roll out the global initiatives across businesses like that in Europe. We're doing very well to roll them back into the U.S. and in the U.S. back into Europe. We're seeing the benefits of that coming through. There's no one item driving the success of Building Products. It's a reasonable volume build across our two major markets. It's good commercial management. It's good cost management, the structural reforms that David referred to earlier on, the operational improvements. It's all down through the P&L account that's showing a very strong growth at the bottom line, and we expect that to continue. We're very encouraged by the take-off in that business. Of course, we can build upon the capability of that, integrating that further. Our products business, particularly in the U.S. and in Europe with our new cement footprints over the last three or four years, is a big plus to us as well and helps that division. I expect that to continue. I think it's a good story. It's a good story of growth for CRH. With regard to the H2 bridge, do you want to? Yeah, maybe the best way to explain that one, Yves, is if you look at slide 11 that we presented this morning, which shows the half one bridge and it's used the same headings. As you work maybe right to left on that bridge, the IFRS 16 translation impact in the first half, I would take that number and double it for the full-year impact, so half two should be the same number. In terms of the currency translation, as you see, with EUR 50 million of headwinds in the first half, and again, using kind of spot rates today, you'd expect that number to double for the full year in terms of its impact. Acquisition investments in the first half, you saw we had EUR 111 million of contribution. In summary, that's the half one contribution of Ash Grove from last year, which we didn't own until mid-year 2018. The bolt-on deals and the divestment activity are a net zero really in the first half, and we'd expect them to be a net zero in the second half as well. Obviously, Ash Grove now moves into the organic in the second half of the year in the sense that we owned it for all of the second half of last year. You'll see the performance this year in the second half where we would be comparing that to full year ownership last year. The only thing on the horizon that will have a small impact on the acquisition investment side would be the timing of the closing of the Europe Distribution sale. Obviously, at the moment, it is scheduled to close in the fourth quarter. If that closes on 31st December, we'll see a full 12 months earnings impact this year. If it closes a few months earlier, then obviously that would be reduced accordingly. Obviously, as I said, the last bridge really is read around the organic growth gap we talked about. We've given guidance in terms of expectations as to where you'd expect to see that in the second half. Thank you. The next question comes in from the line of David O'Brien calling from Jefferies. Please go ahead. Hey, guys. Two areas for me, please. First, just on Europe. I guess the rhetoric around performance in continental Europe seems reasonably upbeat. I'm just trying to contextualize. Margins are down 40 basis points on a like for like. If we were to strip out the U.K. from this, what would the margin progression in continental Europe look like? Indeed, when we think about price costs, it's pretty upbeat rhetoric around cement pricing. You've pointed to lower costs in terms of energy headwinds in the second half. Should we see a material step up in terms of underlying leverage on the continent in H2? Finally, just in terms of maybe following up on capitalization and surplus capital, you're saying that metrics will be below normalized levels at year-end. If we use your guidance of EUR 7 billion debt, a consensus north of EUR 4.3 billion, EBITDA, we get to a kind of 1.7 times-ish net debt to EBITDA level, giving you scope for maybe EUR 1 billion of surplus capital by year-end. Is that the kind of right framework to think about it? Thanks, David. It's a nice juicy question. I'm going to leave the last question on debt to expect to Patrick. I'll just take the first two questions with regard to Europe, your specific question about the U.K. and also the pricing of cement across Europe. Generally speaking, I think the activity levels in our key markets across Europe have been quite good. There's been a few short-term headwinds, a few pockets where it's been a bit slow. They tend to be project related more than actual indications of slowdowns or anything else. The U.K. is the one area where we have seen a kind of a flat lining or a slight decline in overall performance. Our performance in Europe Materials for me is down 40 basis points. If I strip out the U.K., which is a good question, actually, the overall performance for the rest of Europe combined is actually up 40 basis points, which is encouraging in terms of how we're managing our costs and our margins and indeed our selling prices. Specifically with regards to the selling prices across Europe, you've heard me say for quite some time, volumes have to come first across Europe in terms of volume uplift that's come, and then prices would follow. Here we've been seeing that coming through the last couple of years, and we're seeing it coming through strongly this year. It's my contention and my belief that there are seven years of catch-up in cement prices across Europe. There's been a fundamental disconnect, and the evidence is there. The empirical evidence is there. If you compare cement pricing across Europe with cement pricing in the U.S., which didn't have this dislocation, and you can see the level of catch-up that's been raised. I believe, given the demand environment we're seeing across our European markets and the activity levels that we're seeing there, particularly in Eastern Europe, we're in for a run of good years of cement pricing as we catch up on the cost increases that we as an industry had to absorb for several years without the ability to pass those on. With regard to the net metrics in terms of looking for year-end and cash-. Yeah, I think, David, actually, your commentary is certainly accurate. I wouldn't contradict this. I think as we've highlighted on the slide there, year-end outlook at this point in time based on acquisitions to date and the investments announced to date, with trading and with dividend buyback and the IFRS 16 impact, we're predicting that to be in the region of about EUR 7 billion. As you've rightly pointed out, that would result in a net debt EBITDA metric of below 2 times. Would create, as we've mentioned a few times, capacity in terms of optionality as to what we do and how we invest our capital. I think in terms of capital allocation and what we do with that capital, I go back to the answer Albert gave earlier in terms of the options we have available in terms of buybacks, dividends, book tons, and continuing to invest in our business. Brilliant. Thank you. Thanks very much. The next question comes in from the line of Arnaud Lehmann calling from Bank of America. Please go ahead. Thank you very much. Good morning, gentlemen. Arnaud Lehmann from Bank of America. Firstly, maybe a strategic question. You've ended up, or you're in the process of selling your distribution, and obviously you sold a few months ago the U.S. distribution. Why did you feel that these two distribution business didn't fit into CRH? Do you see any kind of strategic challenges for distribution going forward, or was it just a question of capital allocation and an opportunity to sell them at a decent valuation? That's my first question. My second question is on the U.K., not on the short-term performance, but more around Brexit. Are you doing any specific preparations? Obviously, who knows what's going to happen, but considering the risk of a no-deal Brexit, how do you prepare your U.K. business for what's potentially coming in the coming months? Are there any friction? Do you import anything, or is there a risk that you're going to have to do a bit more paperwork to get your business going after Brexit? That's my second question. The last one, hopefully fairly brief. On emerging markets, they're almost a footnote now when you look at where your Asia operation or your Brazilian operation, they're relatively small. My understanding is that you're not that keen anymore to have a big exposure outside of Europe and North America, but please let me know if I'm wrong. Thanks, Arnaud. Three broad questions there. One on distribution, one on Brexit, and another on sort of emerging markets and capital allocation. With regard to distribution, first and foremost, I have to say, we sold what are essentially good businesses. From our point of view is we have a range of assets open to us to invest with and through. We have to consider what the opportunities are to generate income from those assets. When we look at the capability we have within our business, and we felt and we still believe we have capability to run distribution businesses, but we have better capability and we have more overlap, more confidence in other types of businesses. It made sense to us to crystallize the value that was available to us at that particular time and reinvest those proceeds back in businesses where it's easier for us to make money, and we have a better chance of making higher returns and cash for our shareholders. It truly purely was a capital allocation decision, a discretion decision which we should make across our businesses. We keep all of our businesses currently under review because at the end of the day, no business in CRH subsidizes any other business. They all stand on their own two feet. Distribution was a good business, is a good business. It's just that we have more capability and more optionality by investing in perhaps areas where we have greater capability and overlap. With regard to Brexit, look, we have been preparing for Brexit now for three years, and the level of activities in the United Kingdom, our business has been slipping down for the last three years. I personally think we're at a level now that it's just waiting to see what happens post-October. We have a number of contingency plans in place because it's anybody's guess as to how this game could play out. You could take a bull view of it and say that post-Brexit, there will be a significant investment program, of course, in the United Kingdom for infrastructure. Certainly, it has those great needs. You can take a bear view that it's going to lead to the collapse of the U.K. economy. I think it's going to be somewhere in between the two. All I can tell you is working in this industry for the past 30 years, I, and CRH for the past 50 years, are well used to adapting our cost base to deal with the changing environments, be it a positive or a negative situation. We have preparations in place and possibilities to do so as well. At the end of the day, with regard to the issue about whether we're impacted by imports or not, as the case may be, all of our business, whether in the U.K., Europe, or the United States, all the local businesses selling generating products that they manufacture locally and are sold locally. We don't really have big exposure to issues of imports or exports at all. With regard to the last question for emerging markets, emerging markets are a small focus of our business, only about 2% of EBITDA. The focus of our business is very much on developed markets at this moment in time. It's there because, like everybody else, we had a good look at emerging markets 10 or 15 years ago, we all remember the world of Jim O'Neill and BRIC and how this is going to change the world. Of course, we see enormous growth in the BRIC countries and in the developing world. The challenge for people in our industry, and in any industry, but particularly our industry, is the difficulty of making consistent profitability and good returns in those areas. We just can't figure out how to do that. There's too much disruption, too much dislocation, too much uncertainty. Particularly when, again, you're faced with a capital allocation decision of investing in Europe or North America, where you've got stability, certainty, overlap, capability versus going for something a bit more exotic. The returns you need to generate to just have a high level risk are extraordinary. We just don't see it. Our focus, you're absolutely right, is on the developed market businesses and managing what we have in the developing world in an appropriate manner there, as you see it going forward. That's great. Thank you very much. Thank you. The next question comes in from the line of Elodie Rall, calling from J.P. Morgan. Please go ahead. Hi, good morning. Thanks for taking my question. A lot has been asked already, maybe I can ask a little bit of a tricky one on the overall guidance. You have stronger views on Americas Materials, or you at least sound very confident, and you expect similar trends in Europe. Does it mean that for the full year, we could expect like-for-like EBITDA growth, or at least in H2, to be at least as much as H1, typically at least 5% like-for-like? A question on your margin improvement, the 300 basis points that you have. How much do you think we could see this year? You started to mention that we could see some impact in H2. Overall, how much would you expect there? Maybe a last one on potential divestments from here. I mean, everything seems quite lean and clear. Are there any candidates within your portfolio for potential divestments? Thank you very much. Thanks, Elodie. Three questions there. One in terms of just giving things a bit more specific on guidance for the second half of the year, given our comments about the U.S. and the markets there, which seem to be in a good place. The second thing, a question was about just to get a bit more commentary with regard to the 300 basis points and what we should expect next year. The third question is just to get some directional view in terms of divestments going forward. Well, look, Elodie, we are in the middle of our busy period. All we can do with all honesty and certainty is to give you and communicate to you the activity levels we're seeing in our markets as of today, August 22nd, and what we see rolling in in front of us. What that will translate into, ultimately, I won't be able to give you an informed view of that, at least until November, because at the end of the day, July, August, September are a very busy period. October is a very busy period. I want to get those results in, we'll see how it all pans out. Honestly, I don't want to be guessing other than that. I just know that I think we're going to have a stronger second half of the year than the first half of the year. The extent of that, we'll see what that is. We're aware of our competitors as well. The second point with regard to the 300 basis points, again, a lot of talk, a lot of commentary with regard to this. CRH is a company that is quite conservative, cautious company. We don't say things without having some belief that we can deliver upon these things. We were very clear. We've been pushed all around. "Can you deliver sooner? Can you deliver a bigger number?" We've been very clear about this. This is a program that looks at the reshaping and repositioning of our business. As David mentioned, the level of detail that goes down to the hundreds of initiatives we're running across all of our businesses, are what's going to deliver this over the course of the next three years. You will see some delivery on this at the back end of this year. I think that delivery at the back end of this year will give you confidence that ultimately, over the three-year program, we will deliver what we said we would deliver. The extent that we'll have to wait until the end of this year because it's dependent upon a number of factors coming our way or things kicking in. If they don't kick in by December, they're kicking in by March or by June, but they will kick in. We're confident that the work we're doing will deliver on the program. Ultimately, as David said, I can't give you a view now as to what they'll be at the end, other than I would expect you to see ultimately where you'll say, "Okay, that shows me progress." Thirdly, with regard to divestments, most of our divestments have tended to be in the area of products and distributions. Not all, by the way. Don't mistake that for one second that the whole program of constant review of our portfolio is over. In fact, it's only just begun. The easy work has been done. As we prune the peripheral businesses out, it's really because we're not the best owners of those businesses to reinvest back in the businesses, doesn't mean that our work is finished. For me, the work goes into the materials business and further deeper inside the products business now, because not all of our businesses are as good as they should be. We're not the best owners of all of those businesses. We will continue to refine and reshape the portfolio because we need to and we have to. Our industry and our world is changing, and we have to change with that, and we have to reposition ourselves and constantly reposition ourselves for the next 10 years, not the past 10 years. I don't have any dogs of business within CRH, but there's businesses that I think we can reposition and reshape through a pure portfolio management. I think we will do so and continue to do so. Better portfolio management is just an intrinsic part of good business management. If you go in terms of how you manage assets and how we manage assets, and it's an essential part of how we manage CRH going forward. It's a big part of our improvement and our margin improvement and our strategic approach to our business, and I would expect it to continue going forward. Thanks very much. I just am waving at the moderator. I think we have time for one more question, if you don't mind, please. Okay, sure. The final question comes in from the line of Will Jones calling from Redburn. Please go ahead. Morning. Thank you. 3, if I could please. The first, exploring, I guess, Europe and maybe staying outside the U.K. and thinking about the confidence. Clearly quite a bit of debate around the macro picture there as well. Are there any countries where you're thinking differently about the growth picture, I guess, in H2 compared to H1, trying to strip out obviously any weather benefits you came back in that first quarter period? The second was just on synergies. I think it was 50 basis points of the 300 that were attributed to synergies previously. Maybe that's a shade higher today with the higher Ash Grove guidance. Could you just help us on that one? Hopefully it's mechanical in terms of how that 50 or 60 basis points eventually flows into the P&L. Is that still majority beyond 2019 or is that a bit more delivery up front there? The last one, I guess, was just more strategically, a few references to Building Products division today. Do you think on a maybe three, five-year view that's going to become a bigger part of the group, a smaller part of the group? I guess a sub-question within that, the 65% or so that's concrete linked, do you want to keep that kind of ratio or are there other products that are outside of the concrete arena where you think actually you might want to shift over time? Thanks. Thanks, Will. We have three questions there. First one in terms of the big macro picture for Europe and any concerns about any particular markets. Second one upon the issue of the synergies and how it fits into the 300 basis points. I'll ask Annette to come to that if they may. The third question with regard to Building Products and maybe our focus on our business going forward. Where the business actually focus on that. Across Europe, actually, generally speaking, other than the U.K., actually, markets are pretty resilient actually, despite some of the crap out of the country. We do know some of the countries in recent times, Germany, it's generally quite a small market for us. Our problems in Germany were caused by production shutdown. Our bonding levels are pretty much okay, but other than that, I just think other than the U.K., actually Europe seems to be pretty okay, actually. It's a residential led, non-residential coming onto a lot of infrastructure needs in Europe. They're actually pretty good shape, actually. The comment on Building Products business. The shape of Building Products business has been designed and positioned to cater for the changing face of construction demand going forward. As construction demand goes forward, we will adapt and shape our portfolio to serve that market. This is a third of the profitability of CRH now. As we're continuing to grow and be a bigger part of CRH because construction markets are beginning to grow in this particular area. We generate two-thirds of our profits when we dig stuff out of the ground and sell it by the ton. This area here is an area whereby we've a core capability where we use a lot of those products and form them into higher value-added products, which gives higher margin, better returns, and good cash. This is an area where we should continue to invest, and we will follow those trends as we see them in front of us. We don't have a back of 1,000. We don't get 10 out of 10 right, but we may invest in other areas. As long as we get eight out of 10 of those areas are right, then we'll continue to grow in those particular areas. My own sense is that it will continue to be strongly be a concrete-based business over the next five, 10, 15 years. Other products will align to and associated with concrete will become part of that. I take an example. We've got two defined businesses, Construction Accessories and Network Access. Neither of them are used concrete, but they are closely aligned to and sold with the actual product. They are serving the same customer, and we can make very good returns and very good capability there to our engineering skills and our knowledge. That's the area where we should build out. It's a very resilient platform because it's not only just new build, it's RMI as well. I see this being a broader footprint, servicing higher growth markets with better returns on cash and building then a bigger and better division as part of a newer CRH going forward in the years ahead. I think it's a very attractive part of our business going forward, and we have a core capability to do that. With regard to synergies? Yeah, just on synergies, a couple of comments, Will. First of all, you're absolutely correct. I mean, the synergies are a part of the performance improvement program of the business. They are a part of the 300 basis points, as you rightly called out. David updated earlier on the synergy delivery, specifically in Ash Grove and Suwannee, in terms of where we're at and how those programs are going really well. If you remember those businesses when we were acquiring them back in 2017, on a combined basis, those businesses made about $400 million of EBITDA. In 2019, we'll be way ahead of that in terms of EBITDA delivery. That's really down to the strong performance on the synergy side, but also the good organic growth we're getting out of those businesses. Albert mentioned earlier on, you would see margin improvements by the end of 2019. Obviously some of that margin improvement that's coming through is coming through as a result of the strong delivery of synergies that you're seeing in those businesses. Specifically on that point, the last point I'm making at them is that we spoke before about our capability within our cement business in Europe and how we dedicated some very significant resources of manpower, people in North America on the cement area. They have made a tremendous impact upon that business in terms of lowering our unit costs and improving our throughput. That work will carry on for the next two years and really demonstrates the advantage of doing business and doing deals in areas where you've got a core competency and a core capability, which is cement for us. Being able to bring that talent and capability from Europe to U.S. has been a big plus to us. As you said, big driver of the performance of that business in the last couple of years. Ladies and gentlemen, thank you. Thanks very much. Ladies and gentlemen, that's all we have time for, I'm afraid. It's just winding me up here at the moment. I want to thank you for your attention this morning. Hope we've managed to answer some or all of your questions, but the fine guys back in the team are available to answer any follow-up questions you might have through the day. We look forward to talking to you again in November when we provide you a trading update for the 9-month period, which is December 30th, 2019. Thank you very much.