Ladies and gentlemen, welcome to the CRH Plc 2018 Interim Results Call. Please go ahead, Mr. Manifold.
Good morning, everyone. Albert Manifold here, CRH Group Chief Executive and you're all very welcome to our conference call and webcast presentation, which accompanies the release of our 2018 interim results this morning. I'm joined on our call by our Group Finance Director, Sena Murphy and our Head of Investor Relations, Frank Heistekamp. So over the next 13 minutes or so, Sena and I will take you through a short presentation the results we have published this morning, setting up the key drivers of our trading performance for the 1st 6 months of 2018, as well as providing you with an indication of our expectations for the second half of the year. We'll also take some time to update you on our strategic objectives, targets we have set ourselves and the progress we have made in that regard.
We set out fields how each of these objectives are helping us to deliver structure improvements in our margins, our returns and our cash, all translating into further value creation, for our shareholders. Afterwards, we'd be available to take any questions you may have to walk forward which should be done in about an hour or so. So at the outset on Slide 2, let me take you through some of the key highlights of the year so far. Overall, I'm pleased to report a satisfactory first half performance with like for like sales and EBITDA slightly ahead of last year and in line with previous guidance. Following some significant weather disruption in Europe and North America, the first quarter of the year.
The second quarter showed improved momentum in our volumes and leaves us well positioned as we enter our busiest trading periods. And as you know, the efficient allocation of our capital is a key focus in CRH and the first half of the year was no different. Completed the divestment of our Americas distribution business in January for $2,600,000,000, and we reallocated those proceeds with a $3,500,000,000 acquisition of Ashcroft Synapse, which completed at the end of June to large and important transactions successfully executed during the first half of the year. In addition, we spent over 1,000,000 on 28 Small and medium sized bolt on transactions in the year to date, and the average multiple Mondays deals was 6 times EBITDA, as before any savings or synergies that we would generate. In July, we also announced the divestment of our DIY Benelux business for a total consideration of 1,000,000, representing an exit multiple of 10 times EBITDA.
So it's been a busy year so far, a reflection of our continued focus on the efficient allocations and reallocation of capital to create further value for our shareholders. Of course, a key part of how we create value is the return of excess cash through dividends and share buybacks. In April, we announced a 1,000,000,000 share buyback program, I'm pleased to report we've already completed Phase 1 of that particular program returning 1,000,000 to shareholders. All of this supported by a further increase in our interim dividend to $19.6 per share, reflecting further progress in the strong financial position our group is in. Now turning to Slide 3 and our financial highlights for the 1st 6 months of the year.
Overall, I'm satisfied with our performance with like for like sales and EBITDA ahead of the prior year period. Our EBITDA margin was in line with last year's on a like for like basis, a solid performance in the context of a severely weather disrupted first quarter and an inflationary input cost environment during the seasonally less significant first half of the year. I'm also pleased to report an 11th in increase in our earnings per share a reflection of the positive operational and financial performance during the 1st 6 months of 2018. Now turning to Slide 4. And our regional performance in the first half of twenty eighteen.
We'll start with the Americas. Our largest market representing approximately 60% of group EBITDA in 2017. The economic backlog remains favorable for our businesses, supported by continued GDP growth and a strong labor market. U. S.
Infrastructure funding continues to be underpinned by federal and state governments with increases coming in the form of gas taxes, infrastructure bonds and various other mechanisms. Residential construction sector remains robust with strong underlying demand and first half spending, up 8% year on year. On the non residential side, we think good growth in the and commercial sectors, which have benefited from a positive economic growth and strong labor market. That will be consistent with what we hear from our customers as well as industry data from the U. S.
Census Bureau TCA and indeed the ADI. As you can see on Slide 5, after some severe weather during the early months of the year, our business has recovered strongly in the 2nd quarter, resulting in like for like sales of 3% ahead for the first half of the year for the whole. Our Materials division delivered higher volumes cost volume was also favorable. Per head. In the quarter went together with some increased labor, raw materials and energy costs resulted in our first half margin being slightly behind on a like for like basis.
Our products division also reported well in the second quarter, reporting like for like sales, slightly ahead of the first half of the year. Blue pricing gains and particularly strong performance in our precast business helped to deliver a 40 basis points increase in margin and indeed higher operating leverage. And as most of you are, will be aware, our acquisition of Active for cement closed in late June. The integration of this business is going well and trading has been in line with expectations. Turning now to 5.6 and indeed to Europe, whereas Tier 2 we see an improving backlog.
Economic and construction market activity continues to advance at a modest pace despite some ongoing political uncertainty. The growth outlook for Western European Construction Markets remains positive, but Eastern European markets continue to benefit from strong residential infrastructure activity, particularly within the new build segment. Turning to Slide 7 and similar to what we saw in the Americas, our European business also recovered strongly in quarter 2 after a weather impacted start to the year. Cement volumes were broadly stable in the first half. The oil prices were ahead.
Although the price recovery remains modest, it is encouraging to see prices moving on ahead in 12 out of 15 countries in the first half of the year. As of from 9 out of 15 in 2017. Our light side project businesses had a strong first half performance, driven by good growth in our construction accessories, and meet our architectural product segments. Our distribution business was slightly behind in the first half, primarily due to ongoing challenges in systems. And against the backdrop of inflationary cost environment and given the slow and severely weather impacted start to the year, I'm pleased to report that we've been able to maintain our margins for the year at prior year levels.
I'd also like to mention Fels, the European Line business we acquired in October of last year, the integration of this business is progressing well and trading to be very much in line with our expectations. And finally to Asia on Slide 8, slide 8, where we've been a challenging first time, Now despite improving trends in volumes and prices, particularly in the second quarter, we have experienced a significant decline in profitability as a result of higher fuel and energy costs and a market backdrop that remains competitive. A disappointing result overall, but as I said in April, we expect 2018 to be another difficult year in the Philippines with a recovery and profitability for 2019 onwards. Our equity Marcus. In China, we achieved strong pricing gains helped by a recent supply side of corn across the industry, but volumes were lower.
Now at this point, I'd like to hand over to Kenneth who's going to take you through the financial performance for the 1st 6 months of 2018 in greater detail. Thank you, Albert. Good morning, everybody. So as Albert said in the introduction, we've had a satisfactory start to the year, and this is reflected in our financial performance on Slide 10. As you can see, for the 1st 6 months of the year, our sales were 1,000,000,000 and that's 2% ahead of last year on like for like basis.
Our EBITDA was 1,000,000,000, which is 1% ahead on like for like basis. Now what I'd like to do is mention a few of the key drivers behind this performance. Starting with organic growth, You exclude Asia and focus on the performance of our Europe and Americas businesses. Our organic EBITDA increased by 2% compared to the same period last year. We think this is a good result in the context of the challenging weather conditions during the early months of the year and the inflationary cost environment.
Within which we operate. Our Asia division experienced difficult trading conditions in the first half of the year, resulting in an EBITDA decline from last year. We moved to our development activities. As you can see on this slide, incremental acquisitions contributed EUR 84,000,000 of EBITDA in the 1st 6 months of the year. Including this are the acquisitions of Phelps and Swami completed in 2017, as well as the small contribution from the Ash Grove acquisition, which completed on 20th June.
That's just 10 days before the end of this financial period. It's important to say that the integration of these businesses is progressing well and their trading today is in line with our expectations. And finally, translation, where a weakening in the U. S. Dollar relative to the euro has been the currency cause of that currency headwind.
And that's impacted our EBITDA by $82,000,000 in the first half. However, if you look at where the dollar is trading relative to the euro today, And if we remain or if we remain at this level for the rest of the year, then we would expect this headwind to ease somewhat during the second half. Turning to our cash flow performance. As you can see on Slide 11, we reported a net cash outflow of EUR 311,000,000 in the 1st 6 months of the year. And outflow at this stage of the years to be expected given the seasonal nature of our business.
And this reflects the buildup in our inventory in advance of third quarter trading, which obviously is the seasonally our most significant trading period. Our working capital outflow for the first half of the year have increased over last year. Primarily due to early season weather disruption and the increased levels of trading activities during the second quarter. Our cash tax outflow increased over last year as we paid capital gains tax on the disposal of our American distribution business which closed in January of this year. I think it's important to note that we remain very focused on converting our cash into earnings our earnings into cash And as we look ahead to the second half of the year, we anticipate a significant inflow of operating cash consistent with previous years.
Turning to our net debt movement on Slide 12. And as you can see, our net debt positions closed the first half at 1,000,000,000. In my view, there are a number of features in our debt movements that highlight the strength of our balance sheet. Our portfolio activity in the first half of the year resulted in a net acquisition spend of EUR 850,000,000. And this reflected the reallocation of proceeds from the divestment of our American distribution business.
Into the acquisition of Ash Grove. And the proceeds from the disposal of our DIY business received in July are not yet reflected in these numbers. We are also able to return EUR 584,000,000 of cash to shareholders during the first half of the year. That's a 1,000,000 increase compared to last year, reflecting the commencement
of our
1,000,000,000 share buyback program. As Albert mentioned, the 1st phase of this program for $350,000,000, completely by the end of July, and phase 2 is currently under consideration you can expect further announcements on that in due course. And finally, as we look to the second half of the year, we anticipate a significant cash inflow consistent with previous years. As a result, we expect our year end debt metrics to be at normalized levels, which really highlights the strength of our balance sheet. So at this point, I'll hand back to Albert to provide you with an update on some of the strategic initiatives underway across the group.
Thanks, Anna. A lot of moving parts, but a clear summary, and you can really see the strength of our balance sheet coming through. What I'd like to do now is take a few moments to update you with the strategic direction of the group, reminding you of our strategic objectives, the targets we've set ourselves and the progress we're making in that regard. On Slide 14 of the presentation, we've summarized our 3 main strategic objectives. Firstly, an active approach to portfolio management.
The continuous process, which we are reshaping our business, constantly refining our portfolio, adapting that portfolio for the changing needs of construction. Another high and strategic agenda is the capital area of capital allocation. A relentless focus on the efficient allocation of capital to maximize value for our shareholders, whether that's through capital expenditure investments, value driven M and A or indeed cash returns to our shareholders. And of course, for the core of both of these is our firm belief in the philosophy of continuous business improvement. A deeply embedded practice of making business better through incremental business improvements across the group.
3 strategic objectives, all with the same goal of purpose in mind, the delivery of structurally higher margins, more cash, and improved returns for our shareholders. So I'd like to take a few moments to expand each of these objectives. The technology turns 515. Well, in recent years, we've been working hard to become a simpler and more focused business. Focused on higher growth regions and product areas within our core existing markets.
You can see that in how we reposition our business, building out a broad range of fully integrated related products and services around our more traditional base materials, allowing us to better serve our customers' needs while capturing more value across the supply chain. You will see it as we roll out our simplified reporting structure across 3 divisions, including our new building and product platform, will allow us to better leverage our scale and capabilities in the product space. You can also see it in the divestment of our Americas distribution business. $2,600,000,000, which we've been able to reallocate from
the slow growth northeast of
the United States into the higher growth regions of Florida, Texas, and the Northwest through the acquisition of Ash Grove and Swannie Summit. Through our continuous portfolio review process and the constant refinement of our portfolio, we've become a more unified business with significant opportunities for further growth and value creation through improved horizontal and vertical integration. As well as enhanced network synergies across the group. Our approach to capital allocation is shown on Slide 16, and at centered around our relentless focus on shareholder value. When it comes to the allocation of capital, we take a patient and disciplined approach and our long track record of financial strength in and flexibility is a testament to that.
Whether it's a capital expenditure project or an acquisition or divestment opportunity, R and D, the return of cash to shareholders through dividends or share buybacks, every capital deployment decision is analyzed and assessed to the lens of creating maximum amount of value for our shareholders. Continuous business improvement, as shown on Slide 17, is a DP and better practice in CRH of making businesses better. A continuous process in very much part of the CRH DNA. As we announced in May, we are targeting a 300 basis points EBITDA margin improvement by 2021. As you can see on this slide, we expect approximately half of the increase to come from incremental business improvement initiatives across the globe, internal self help measures actions, which we ourselves are taking to make our businesses better.
Approximately 30% of the increase is expected to come through higher operating leverage, as a result of improved business mix across our portfolio as well as continued growth in our core markets. And the remaining 20% is expected to come from synergies that we have announced as a result of recent acquisitions in Ashgold, small American cement and indeed in foul. On Slide 16, you can see a further breakdown of our business improvement initiatives into 3 main categories: procurement, process and structural. We are focused on improving our procurement processes, leveraging our global scale and purchasing power such as areas of transport logistics, mobile equipment, and reorganizing realigning our procurement network on a global and regional basis, increasing our use of technology in the areas of advanced analytics e procurement and indeed through supply chain optimization. This is nothing new for CRH, leveraging our global procurement capability is something we do every day This is just a further step in the process as we constantly strive for ways to improve our businesses.
Similarly, the process improvements will come in areas of commercial and operational excellence programs. Fuel and empowerment optimization, increased automation of certain production processes, transport and logistics efficiencies, all part of leveraging our global technical and operational expertise and best practice programs to provide enhanced network synergies for vertical integration from Across the Group. For other structural benefits have also been identified in the hours of back office integration, ERP consolidation, and fixed overhead savings. These targets are a result of several months of in-depth analysis, a possible group wide review culminating in excess of real and measurable initiatives with real responsibilities and accountability behind each and every one. These initiatives are an important part of how we create ID for shareholders.
They're critical in the delivery of the targets we've announced and they are naturally pliers for me and the entire senior team. Turning to Slide 19. You can see the remaining components of our margin improvement target. Including operational improvement of leverage, market growth and previously announced synergies. The reshaping of our business and the reallocation of capital into higher growth markets has resulted in a better business mix, which structurally higher margins and improving operating leverage.
This operating leverage combined with further growth in our core market expected to deliver 30 percent of our margin improvement target. The synergies making the final 20 percent of the margin improvement are a reflection of the real and tangible benefits will come from the integration of our recent acquisitions, particularly the acquisitions of Ashgold And Swamy American Institute in the United States and indeed fell in Europe. And so on Slide 20, we set out for you our 3 strategic objectives, all with the purpose of delivering structural car margins, more cash and improved returns for our shareholders. What does it look like in practice? And then you can see here, this gives you a snapshot of the progress we're making against this strategic agenda.
Through our active approach to portfolio management, we have significantly reshaped our businesses. In the past 3 years alone, we've divested a third of our asset base and approximately half of today's assets were acquired over the same period. That's a significant change in our portfolio and business mix, and it will stop there with a further 1,500,000,000 your divestment program currently underway. In July, we divested our BSNO DIY business, and we are carrying out a strategic review of our wider European distribution business. Going forward, starting in 2019, we will report under a new organization structure a simpler and more focused business across 3 divisions, Americas Materials, Europe Materials And Building Products.
In terms of capital allocation, we remain committed to the return of excess cash to shareholders. We have returned 1,000,000,000 in dividends over the past 4 years and our 1,000,000,000 share buyback program is well underway. We continue to leverage our strong FX book balance sheet to pursue pursue value accretive acquisition opportunities as evidenced by the 28 bolt on acquisitions completed in the year to date. We're also making good progress in the area of continuous business improvements. I relate to focus across the group on making businesses better, a core part of how we value and create value for shareholders.
We've announced a 300 basis point margin improvement targets with benefits coming from business improvement initiatives, improving operating leverage and previously announced synergies. This is a journey and we have by no means arrived. We are moving in the right direction and as a measure of our progress, you can see that over the last 4 years, we have delivered a 400 basis points improvement in margins and a 500 basis points increase in returns and a total share under return on a cargo basis of 16%. Moving to Slide 21, you can see all of these actions on translators into industry leading cash generation. Over the past 4 years, we have converted approximately 80% of our EBITDA into cash, generating an average of 1,000,000,000 of free cash flow each year.
With continued strong cash conversion and subject to a net debt EBITDA of approximately 2 times, we estimate we will have 1,000,000,000 unutilized financial capacity by 2021. And 7,000,000,000 of optionality after CapEx after dividends and after our ongoing share buyback problem, which can be fully used to create value for let's create value as an M and A or cash returns to shareholders, and that's before divestments. Now on Slide 22, and you have seen this slide before, just a reminder of the medium term financial targets we have committed to. As we continue to refine and simplify our businesses, Our improving business mix and the higher margin portfolio of our businesses is expected to translate into improved operating leverage in the region of 20% plus going forward. A combination of this higher operating leverage, business improvement initiatives and previously announced synergies, we are targeting 300 basis points EBITDA margin improvement by 2021.
We remain focused on the client actively managing our portfolio on the allocation and reallocation of our capital for higher growth and more sustainable returns. This is a continuous process, partially refining our portfolio to maximize value for our shareholders, and we're progressing well with our plan to deliver a further 1,000,000,000 of investments over the medium term. And finally, the cash for the allocation of that cash. Over the next 4 years, we expect to generate total financial capacity of EUR 7,000,000,000. EUR 7,000,000,000 for further value creation through M and A or cash returns to shareholders after CapEx.
After dividends and after our ongoing share buyback program and, as I said before, before divestments. This slide represents our commitment to our shareholder with each of these items playing an important role in contributing to our overall objective, the delivery of the structural improvement in margins, cash and returns. And now if I can turn to outlook and our expectation for our businesses for the second half of this year. Turning to Slide 24, Against the backdrop of some severe weather disruption in the first quarter and an inflationary input cost environment, our businesses in the Americas performed well during the 1st 6 months of the year. With like for like EBITDA 3 percent ahead.
The trading environment in the Americas remain supportive. After the second half of the year, we expect EBITDA to make further progress on like for like basis. In Europe, we see continuation of the positive momentum we will experience in the first half of the year and expect an increased rate of like light growth in the second half. And finally to Asia and specifically our business in the Philippines, a disappointing first half performance with a number of factors contributing to a significant decline in profitability. With these challenging conditions continuing in the second half of the year, we expect the second half EBITDA to be similar to what we reported in the first time.
For the group overall, compared to what we saw in the first half, we expect a higher pace of like for like EBITDA growth in the second half of the year and another year of Corpus for the group. So finally on Slide 25, before I turn to Q And A, I'd like to leave you with a few key takeaways from this morning's presentation. We've had a good start to the year with sales and EBITDA ahead and in line with our previous guidance. Our 1,000,000,000 share buyback program is well underway. We've already returned 1,000,000 of cash to our shareholders.
Active Portfolio Management And Efficient allocation and reallocation capital is a core part of our strategy rate value for our shareholders. We remain firmly committed to our 1,000,000,000 to 1,000,000,000 divestment program and have already made significant progress following the divestment of our Benelux CLI business in July for a total consideration of 1,000,000. And as I've outlined earlier, remain focused on improving our businesses day in, day out, all with the view to delivering higher margins, more cash and improved returns. This is why you get the CRH and this is what we as a manager team should be chosen upon. So look, that concludes the presentation part of this morning's event, and we're now happy to take your questions.
May I ask you please state your name and the institution you represent before posing your questions? I'm now going to hand you back to the operator to coordinate the Q and A session. Thank you. Our
first question comes in from the line of Gregorovich from calling from UBS. Please go ahead.
I've
got a couple of questions. So the first one is on the $7,000,000,000 number that you're putting out there. I guess the question is, how do you think about deploying that capital? So what criteria will you look for it's going to be more M and A skewed or do you think that there's a possibility that if the opportunities aren't there, that you could return that at least part of that cash, to shareholders. And then can you dig a little bit more into the 300 basis point margin improvement just perhaps for the avoidance of doubt, how would, for instance, the sale of margin dilutive businesses play into that.
It's gonna be clear that you've just sold the DIY business in the Benelux, for example, which clearly is below Google average. So I wanna understand is that 300 basis points? Will that effectively continuously get the adjusted to the extent of the mix changes? And then perhaps if you could help us on the pace, of that margin improvement, because the guidance kind of implies this year is not going to move much. Next year, as positive, obviously, 3 years from 2019 onwards, the pace of that step up would be helpful.
Thanks, Gregor. I'll take the question in terms of the capital allocation in terms of how we look at the deployment of that EUR 7,000,000,000 we anticipate generating over the next 3 to 4 years. And also in terms of the how that business improvement, how the change in shape of our business affects that, I'll talk to Sam, we'll come in at the end and just talk about the pace of habit just to we see it drift into our margin. And specifically going back to the capital allocation question, And we take a very simple clear view on how we allocate capital in CRH. And we're very transparent on this.
Is all about value and creating value for our shareholders. So when we're faced with a number of options at any one time, we can deploy capital in a number of different ways. Obviously, there's internal capital expenditure to support our businesses. Actually, historically, I think the best returning investments we can make within CRH is something we need to do. This is something we should continue to do.
I I think you know the runway in terms of capital expenditure by business. There's not gonna change going forward. Also, there are M and A opportunities. And I have to say that the M and A pipeline is quite strong at this moment in time. Of course, one has to look us shape of the business and how you're creating that.
And also in terms of the pace of change, and also the outlook is time to be to be to push ahead with emanates and then time to perhaps put in your own somewhat. But we'll make that decision based on what we see in front of us. And then, of course, the issue of how we return capital to shareholders, we've got a very strong record in terms of dividends. And this year, you've seen the return where we've finished returning 1,000,000,000 of it to a share buyback program. So to make those decisions based on what we see in our funds, but the opportunities we see in front the key issue for us is, is the creation of the option to use that capital.
And that capital will be deployed in a way that maximizes value per share I suspect it will be across all four of those particular categories rather than focused on one particular one at this moment in time. I should say at this moment in time, with regard to our deployment of our capital, very much focused on integrating the business we have acquired over the course of the last 12 months and delivering upon those objectives and indeed the internal self help measures that were focused I wouldn't expect to see very significant M and A during the remainder of this year. I'd expect to see business as usual M and A, which we kind of indicated to you earlier this year, I don't see any change in that, and I would expect to see us to continue with our share buyback programs. I'm sure we'll disclose later. And if I can move on to the second question, which is in terms of the impact of the changing business mix on our basis point improvements in our margins specific to your question with regards to the sale of our DIY business, which was below our with our group margin as such, I should say that the that was an idea of statements in other words of it.
At the end of 2017, the business shape that was there and the business that was there in 2017 are that's the base upon which we improve going forward. So in terms of deploying capital and redeploying capital reports, sometimes that will have an impact. That's the way things look a bit for our businesses. I should say that you talked about in terms of margin availability, some of the business we've bought and sold over the course of the last 24 months, specifically taking our Americas Distribution business. We sold that at a very high multiple.
It was a good business. It performed well. But by being able to deploy that back into another part of the United States into the gas flow cement business, which is exposed to the higher growth Southern and Western regions of the United States, and indeed, with the opportunities to integrate that business with our existing network of business. That gives us value creation opportunities above and beyond or we could have been able to achieve with the existing business, the U. S.
Distribution business that we had. And therefore, that will create market enhancement opportunities for us. That does feed through into that area. And as we've highlighted it this morning, if you go to the leverage section of our business, it comes through in that particular, gradual leverage, better margins, greater opportunities for pull through demand. With regards to the timing of the benefits, maybe timing?
Yes, Gregor, just in terms of your question on pace, I think as you rightly pointed out, 300 basis points is set out as a target that we will achieve over 3 years running out to 2021. And as you would expect, that will be back end loaded. So you would expect to see more of those basis points coming through in 2020 and in 2021. You will see modest improvement in 2019, but it is expected to be more back end loaded. Thank you very much.
Thank you.
The next question comes in from the line of Robert Gardiner calling from Davy. Please go ahead.
Good morning, Halal. Thanks for the the presentation. 2 for me, please. So one, And just on your, in the slide that you've mentioned, you've improved your return on net assets by 500 basis points over the last couple of years. So with your new target, say, to 2021, I'm just wondering, do you have a kind of a target run-in mind, and, and how sustainable do you think those returns are over time.
And 2, just to come back out of the US. So obviously, an impressive pickup in the United States in the second quarter, I think you mentioned your margins had improved in Q2 on a year on year basis there. So I'm just wondering about the strength of trading through the summer months in terms of like for like sales and EBITDA. And just in terms of your confidence in your end markets in the United States, if you could give us some sort of sense ahead, that's progressed.
Thanks, Bob, and good morning to you. Yes, we have made good progress with regard to improvements in margins and returns and be cash over the last number of years. And, I do think what we've done is a, that has been delivered by and improved business performance in terms of our business themselves, helped largely by a recovering U. S. Market.
We've had particular no help from the European market to this point in time. And I think it's been achieved by running our business better, lower call space, tighter, sharper. It's been achieved by reshaping the portfolio. And it's been achieved by recovering U. S.
Markets. And as we go forward in terms of improving the margins and looking at the efficiency of our business, Of course, that will and should decrease the returns of our business going forward. And the actual amount of those returns will be determined over time because, of course, the pace of acquisitions, the pace of investment will determine that. And I think for us, the key issue for us is, of course, we're focused on that, that returns bigger, I think it's the most sustainable way of measuring the what a business can achieve, but we don't put a specific target out there for that. For us, the targets are the ones we we are the ones we can control, such as cash, such as margins, and that's the ones we're very much focused on.
And we do believe we are building a higher margin business that does have higher returns that will generate more cash debt. And that is stable going forward. And with regards to the market you referred to the United States in terms of end use out there, I have to say I've been pleasantly apprised by the robustness of the market that we're seeing during quarter 2 and the rolling into quarter 3. And as you know, U. S.
Construction is divided by 50% spending in about fiftyfifty into residential and non residential. If I look at those 3 segments, I think that's the funding and indeed the demand levels for U. S. Infrastructure continues to be robust this year. Overall funding is going to be up about 8% on last year.
And I think that we're seeing that coming through in terms of overall spend and I think that will remain for the rest of the year. Absent any massive weather impacting in our very busy season. We've had a reasonably good July and reason with August weather wise. And the residential sector remains solid, good growth this year again, off a low base, still way too low. It's 1,200,000 homes, demand is at least 2 to 300,000 above that.
We're up about 6% year to date. So I expect that robustness to continue. It is noticeable that, you know, it's very tight on the supply side over there. An active inventory levels in terms of housing, as you grow out in the U. S, are probably at historical lows.
And I think that's combined with the strong demand there is going to sustain that sector quite some time going forward. And lastly, I've been pleasantly surprised by if the robust incentive continued growth non residential. The ABI, as you all know, has been ahead now for sort of 10 over the last 11 months ahead last month, the revision was released again early this week. We're seeing that in our numbers coming forward pretty much across the commercial office and warehousing sector with a head sort of 3%, 4%, which is at a higher pace of growth that we wouldn't see in the tail end of last year or start of this year. And with the ABI, showing the figures that it does, it should continue to continue at most levels.
So I I as we look at the remainder of this year and looking at our backlogs, our backlogs are probably stronger now than they have been assigned anytime over the last 3 years, not only the activity levels. But also in terms of margins within that, it gives me confidence that there is a solid demand fundamentals in our U. S. Market going forward. For remainder of this year and indeed into next year.
And I think we would see our age having such a large business in North America and particularly in the United States think we are are a canary in the cold and that we could really smell the change on the wind if it's coming well in advance. And after saying this morning, we don't see anything at all other continued growth profile that we're seeing in front of us. So we feel quite good about that. It's for us now. It's about going to work, working in our business, ensuring we deliver maturing we try and recover as best we can.
The cost inflation, which has spiked up during the early season and I'll call it as much of that as we can in the second half of this year because we have a little or no opportunities to do in the first half of the year. And that's why I still think despite all of that, it's quite a good performance by our businesses across Europe and United States, but this market is in good shape. Yeah. Excellent. Thank you very much.
Question comes in from
3 from me as well. And so the first one is on operating leverage. You're talking about a 20% drop through margin medium term. If we look at what consensus is implied, it seems to imply that already for 2018. Obviously, you did lower than that in the first half So do you think that's realistic?
I think it would imply some like 25% in the second half? The second question is really on Switzerland. Can you explain a bit more about what's driving that pricing pressure, and whether any signs of stabilization or improvement in that country? And then thirdly on American Materials, obviously, you've just given a very optimistic outlook that you've talked about the desire to recover more cost inflation in the second half. But overall, when we look at that second half, would you expect margins to improve compared to last year, or is it just a case of less margin pressure compared to the 1st half?
Thank you.
So I'll start with the with the leverage question on that one, Paul. In terms of the operating leverage, I think as you pointed out, you mentioned a number of terms in the first half of the year. Obviously, it's important to look at operating leverage on an annual basis I think it gets the storages when you look at half of your performance, particularly looking at our first half, which is obviously a small half in the year. Think you've asked the question about the second half in terms of do we see stronger second half performance? And the answer to that is yes, I think in terms of our like for like earning growth in the first half of the year, you've seen from us a 1% like for like improvement.
Think in the second half of the year, we would expect to see mid single digit like for like improvement in terms of our earnings performance. And that obviously will filter through into operating leverage I think your comment around the operating leverage in terms of being above 20% as you go forward, I think that fits into the conversation we have around the 300 basis points. And as you look forward, we would expect that our businesses will generate at the higher end of that operating and effort. As you look out over the 3 to 4 year period that we talked So that's operating leverage. Absolutely.
I'll take the switch and as far as my question, Paul. You can see a very significant increase in volume from us last year and last 4, 6 months of this year, well up on last year. And really that's a matter of 2 things. First and foremost, there's a bit of mix in that. And we have, it's just the type of product we're selling in the marketplace demand of our customers.
And it's also, as a result of certain particular contracts in the region, where we are. And also, it's a bit of a copy of market share that we've lost over the last couple of years. And those three things have reflected themselves in, although it's the lower level of activity for the full year is reflected itself in a same price decline, but there's no significance in that. And we expect that's bigger to equalize out by the remainder of this year.
Yeah. See, I mean, I guess sorry, Albert. I guess it's just a little bit surprising when you've got 3 players in the market, to have a 7% price decline. I mean, is this due to imports or is there something more competitive going on in the underlying market itself?
No, it's more to do with the nature of some of the very large contracts where we've got very large volumes going into very large contracts and those contracts are committed at a particular price to get those volumes and those contracts will be for some of the very large tunnel and jobs might require specific types of products that will be at a lower price because it will be lower grade types of cement or rather than any specific competitive activity. And just I might take the margins question about Americas Materials. As you pointed out in the first half of the year, we would have had a 20 basis points like for like decline in our marking our American Materials business, if I ignore the contribution from acquisitions. And I think that's really driven the wetter disruption in the first quarter of the year, but also the energy cost headwinds that we would face in that business. I think in terms of energy costs in the first half of the year, they're up 10%.
As you know, we have the ability and we do, you know, pass that on in terms of our escalation activities and pricing. But there is a lag between, you know, significant spike in costs and our ability to be able to recover that. I think we're very confident that over time we will recover that. And as you look out to the second half of the year for that business, we would obviously expect to see progress in margins in the second half of the year. So I think it is primarily down to the significant spike in energy costs that you see in the first half of the year, which we have increased, obviously, headline prices in all of our key products, as you can see, but obviously not sufficiently to offset the significant spike in the first half, but we anticipate obviously catching that up in the second half.
One thing I should add there as well, as I said, as well, but everyone focused on asphalt and bitumen. Of course, the energy cost impacts upon electricity and diesel and gasoline and natural gas all of which we use on inbound and outbound and internal logistics. And all of these are used across all our products, it's not just an asphalt issue, a significant aggregate increase in cost production would be good as a result of those. And it just takes a while for us to price them back in because we have a big fixed complex that we have to work through before we can re back in. It just takes time more than because particularly when there's a spike in energy costs that's been made this year.
The next question comes in from the line of Alodi Roll calling from JP Morgan. Please go ahead.
Oh, hi. Good morning, everyone. I have three questions as well if I may. The first one is on FX headwinds. They were 82,000,000 in H1, and you expect for the headwind in H2.
However, we've seen an improvement in the euro dollar rate. So what kind of a headwinds would you actually expect for the rest of the year? What currencies are driving that? Second, if I can, on net debt, you end up, 1,700,000,000 higher in H1, but you expect that to normalize, through H2 through much stronger cash inflow in H2. But overall, can you give us a little bit more granularity about your expectation for year end in terms of net debt?
And 3, if I can ask about, the buyback program, you've done 300,000,000 so far. You have 1,000,000,000 planned for this what, for 'eighteen, 'nineteen, any views on when you will launch the next phase? Thank you.
Okay, Elodie, I may take those questions. Starting with currency, as you pointed out, obviously, we had a headwind in the first half on the translation primarily up dollar earnings into euros and the order of magnitude as you saw was approximately 1,000,000. If you look at spot exchange rates today, and then let's call them 115. And if you were to assume that that 115 rate carries through from now through to the end of the year, then the calculation we would have on the full year currency headwind is probably somewhere in the region of 100 to maybe 120,000,000 max in terms of currency headwind. So a significant easing of the headwinds in the second half of the year Bear in mind, the average last year in terms of exchange rate on the dollar was $1.13.
The average we closed out the first half at was $1.21 And obviously, we're sitting at 1.15 ish today. So if we ended the year as total average of 1.18, then obviously that leads to size of an improvement in the strength of the headwinds in the second half of the year. Your net debt question, $8,100,000,000 at the half year, the first thing to bear in mind is that the proceeds of the DIY sales are not included in that, debt number. So that transaction closed in July. So there's another 500,000,000 to come off that in the early weeks of July.
As we look out to the second half of the year then, which is where we have a significant trading period. As in previous years, we would expect a significant inflow of cash And as we look out to the end of the year, I think we're very comfortable that our net debt position will be at or below $7,000,000,000, And our net debt EBITDA would be at we would describe as normalized levels. So I think we're very comfortable that we have a very strong balance sheet We already have a strong balance sheet, but we'll have an even stronger balance sheet as we get to the end of the year. And then I think to your buyback question, Obviously, included in those debt forecast is buyback, $350,000,000 completed at the end of July, obviously, we remain committed to the $1,000,000,000 program. We've active dialogue and discussion and consideration going on at the moment in terms of phase 2 on that program.
And obviously, we'll update you in due course once there's further enhancements to be made on that buyback, but it's certainly under active consideration at the moment.
Great. Thank you very much.
The next question comes in from the line of Will Jones calling from Redburn. Please go ahead.
Good morning.
A couple for me as well please. The first maybe perhaps you could explore the performance in America's products a
little bit more. That seems to have been a
standout. Performer in the first half. I think plus 1 of like for like sales converted to plus 5 like for like EBITDA. Was there any mix issues there between the the business lines that helped or is that just a good price cost or savings performance? And I think back at the IMS you talked about building envelope being slightly slow in the first quarter as that's to come back?
And then just a couple of sub questions. I guess going back to the targets. The first really is why now in terms of giving a target for 2021. It's not really been your style in the past to make medium term predictions. So just, I guess, why that change in TAC would be great to stand?
And then again, within that, when you look at the regional contribution, to improvements, be it Europe or the Americas, is would you say one area is due to contribute more of that 300 bps than the other? And I guess within that europe heavy side probably is the business when we look back long term that's that's most below its prior average? Is that a particular focus for improvement or does that one really need
the market to come back? I will add, and good morning to answer the questions there. And let me take, as you get into me, with regard to the amounts of productivity, actually really is almost a microcosm of CRH. And the margin improvement is a result of the reshaping and reallocation of the upper quartile portfolio over the last 3 or 4 years. It's quite a different business than it was 3 or 4 years ago.
And the addition of the Sierra Lawrence business, which we talked about in 2015, if you recall, we talked that being a business, which is a higher margin and would integrate well in liver synergies, but of course, that's starting to deliver and that's improving the margin of our business going forward. And of course, we've had very tight control of our costs as we do within CRH looking at how we reshape that business and support that business. And we've done some structural realignment that has lowered our cost base there that has helped our bottom So it's down to the portfolio management. It's down to how we run a business better. It's down to reallocating capital at a higher margin businesses, and that's mapping through I think that's all contributed to an improved performance and she'll see a continued improved performance across our Memphis products business, of course, underpinned by strong commercial excellence, strong operational excellence, and good knowledge.
And with regard to OBE, you're right. It saw the 1st, 1st quarter deal was quite tougher. Things have improved soft in the second half of the year. I would expect its main exposure to the second quarter of the year, excuse me, I would expect it to see that their exposure to the nonresidential markets should see that the momentum within the business for the remainder of this year. And again, that's a fine business.
It delivers good profits and returns for us. That should be a good performance for us. And with regard to the targets in Hawaii now and why we second that, I think it was in the context of trying to be transparent and communicate shareholders basically the work we are doing within CRH. And our business has gone through a lot of reorganization and a lot of reshaping. And I think in terms of looking at how shareholders can make a decision in terms of looking at investing within search.
We don't feel we've fully communicated to them that story of what the plan we were working on. That is also, I think, is incumbent upon management of business to actually share what they are doing within their businesses, try and with self help managers improve what they're doing In SeaH, we look, I literally know it was being staged in the market and rising and falling with what's going on out there. Of course, the macro trends will accuse the impact about what we do. But I think it's also important to communicate to shareholders so they can make an assessment, in terms of whether you have to invest or not to invest. In terms of what we do in our businesses to improve the businesses.
And I think setting that out in terms of, in terms of, in terms of how we want to improve the efficiency within our business. And I think that's the key task of all businesses now is to move beyond what the market is doing to them and to structurally improve their businesses by becoming more efficient at what they do. And we do that every day in terms of allocating capital into higher growth and higher returning areas via products or different regions. We do that terms of going to work every day in terms of continuous business improvement. Initially, the thousands of initiatives that can bottom up off to all of our business that we're working on a day to day basis to improve what we do that will contribute to that 300 basis points improvement.
And then the whole current reason why we're in M and A, it's not just a buy business to become bigger. Is to buy businesses become better, and better returns means better businesses invested leverage through synergies and to stretch strategically stronger and a more sustainable profitability going forward. And all of that converts into very significant cash optionality. And I think that really was a crucial trigger point for us is that We had become a business now over the last number of years. We create over, and we generate over $2,000,000,000 of free cash flow every year, I think what we wanted to communicate to shareholders with us, we are not an M and A machine.
We are people who are focused on creating value for our shareholders, and we will advocate that cash to whatever is the most appropriate way to create value pressures. M and A will be part of that as indeed will be increased dividends, as indeed will be share buybacks. In communicating all of that information, internal business improvements, reshaping the portfolio, the absolute, relentless focus on capital allocation and the size and scale of the cash we're generating. I mean, if you stop for a moment, I think that at 4 years' times, we believe we will have 1,000,000,000 financial capacity there to generate value for our showers in whatever way we feel is appropriate. But the enormous advantage to have And we thought it was appropriate for investors to have that information so they could make the proper decision, and that's why we did it at that particular time.
Your last question talks about the regional contributions we see across our businesses. I prefer to think about rather than regional contributions, think about individual contributions, the 2 big business that we currently have on materials businesses, they are 2 big super tankers that drive our business forward. Year in, year out. We have we have the largest building materials business in North America, where the largest head to side business in Europe, given where those markets are at this moment in time, we need to go to work every day and be excellent, but we think our mark to markets are going to help us for the next few years. Clients are moving ahead.
U. S. Is in a good place, prices are moving ahead Europe is recovering, we believe volumes and prices will continue to recover and a slow pace of growth we will continue to recover. And therefore, in those areas, we expect to see the improvements in margins, the improvements in cash and the improvements in returns that we set out, Eric, to this morning. And in particular, I think I liked the idea of the whole motor products business, which for us, represents greater options for the future for growth in CRH.
This products division have been put together to really address the changing phase of construction needs as we go around the world. We talk about supply side constraints, particularly on the labor side. This is a real fact in our markets that we're in. And construction is changing to address these supply side constraints because it's not only with regard to environmental inter, in terms of speed of construction, These are real constraints that I could continue to move forward. And people like ourselves are looking at developing new products options for people to construct materials and buildings to address these particular changes.
And our products business allows us to, to facilitate that, and it will give us a further spur for growth as we go forward. And we have tremendous ambition for that division over the next coming years. So I think that the 300 basis points will be delivered across all three divisions. But for the foreseeable future, I think it will be largely across our materials businesses, the longer term top line growth and bottom line growth will also be aided by an improving product business.
The next question comes in from the line of David O'Brien calling from Goodbody. Please go ahead.
Good morning, fellows. Thanks for taking the question. A couple on Europe first, please. You've highlighted that there's been progress to 12 countries now looking at at stable or positive pricing. Can you give us or help us understand where are we in terms of the journey of price cost in Europe?
And when can we expect it to significantly contribute towards either profit or margin growth for the business. And can you give us some commentary on individual countries and how they're managing the pricecost across Europe. And more generally, could you just get some color on how the UK should be expected before for the remainder of this year. And one final one, if I can. Look, you've talked about very encouraging backlogs and you mentioned labor constraints.
Is there any change in pattern of how you're converting those backlogs into actual business on the ground? Are you hitting any constraints in terms of or bottlenecks and trying to converting into actual activity.
Hi, there, there are three questions there and 3 good and diverse questions. And let me talk to you about the cement pricing across Europe, our cement concrete pricing, which displays a lot of the markers and certainly our business across Europe. And I'll go back to say that the philosophy in our industry is really driven by the fact that volumes have to come back first. And I think we always feel that it's kind of a 2 year volume recovery before we start to see pricing coming through. And it really was at the tail end of 2016 that we start to see pricing started to emerge it builds momentum during 2017 and we're seeing that momentum continue to build during 2018.
I think we're very much at the early stages of where that pricing recovery is going to be. I've said before, I feel that we're kind of like 2012, 2013 in the United States, in Europe in terms of recovery of pricing. Think there's a long road for us to recover back pricing because the margins that we're making in all cement players across Europe, the margins that have been made in the business are not sustainable to meet the level of ongoing investment and future investment in the industry going forward. And there has been a long history in our industry of being able to recover costs, over time and then bring margins back to, to levels the levels we are at now at the moment have not been seen historically at this level for quite some time. And I believe that we have quite a journey ahead of us.
And I believe the momentum is building, and I would expect over the next 2 to 3 years as volumes continue to grow, even at the pace they're growing with, that pricing will build momentum because it's owed. And the last thing I would say David on pricing in Europe the, the, the silver lining to the cloud cost inflation this year, it just really hammers home the point for all players that actually we need to get that cost inflation would affect us in the price that we charge for our product because we can't absorb that. I think that would give added stimulation and spur to that we go into the pricing season of the back end of this year of foreign exchange. So I would be quite optimistic about pricing, of course, our European markets, for the next few years. And specifically with regards to the UK, we have been looking at our business over the last year or so in the context of the Brexit, but it's been quite stable.
It's quite as hell of quite well. Residential has looked well. We did see a little bit of softening in the area of non residential in the Southeast of England, that was really offset by sort of good growth on the area of infrastructure spend. I have to say during the month of May, June, July, we have seen some uncertainty leak into the market and perhaps a little bit of softness come into the demand levels there. Nothing significant, just a little bit of a softness.
And I think that until there is clarity with regard to how the exit of Britain from the European Union is going to take place, I think that uncertainty is going to drift back into our market of softness coming across all mainly in the infrastructure markets. Nothing significant that this year, just perhaps a little flat with them, maybe flat to slightly down rather than just flat. I think it would be decided and determined to 2019 by how the negotiations go, but a little bit softer than we would have anticipated earlier this year, but not a big issue, at this moment in time. And with regard to the labor constraints comment that you're making, I would say that the labor constraints impacts us in 2 or 3 ways, actually primarily the problem for our customers rather than that problem for us. It is a problem for us, but it's a bigger problem for our customers because they're much more labor intensive than us in terms of contracting And it's probably more acute in the United States than it is in Europe.
It's not really a big issue. It's regionally in Europe, it can be a bit of niche, but it's mainly in the United States. And and what it's doing is you, you've kind of caught an EBITDA of a perfect storm this year because with a a a longer winter, construction season has become compressed. So we would normally have a kind of 8.5% to 9.5% of construction season in North America, the lumber we're looking but now actually with the longer window, everything's been compressed really from April onwards. So it's really only make, it's starting to go into work.
And with that, It highlights the bottlenecks in the system, and the bottlenecks in the system is the supply of labor. And that really is, for me, is probably one of the stories of this year in addition to the cost inflation is the fact that the demand level is significantly ahead of supply side. And in our major customers, you can see the inventories that are there for construction, residential construction and nonresident construction are running down to record level record low levels. Actually, that's quite good for the long term needs for the industry. A good comment with regard to long term health of the industry, the demand is there, but it is coming through.
And we are seeing a little bit of labor inflation coming into nothing significant. It primarily comes through in our direct operators. And with regards to logistics and transportation, that's really a pass through cost and adjustment of the impact upon us. So the the call the call center comes through at direct operators. It's more to do with the constraints and the ability to get work done by our customers more than anything else.
And that's just putting a check and sew in a piece of growth. If we had a longer season, it would have been a little bit, a little bit easier because you have a shorter season, it compresses the season that makes that bottleneck a little bit a little bit more acute. But it's something that we're going to have to manage to when it goes back to my comments earlier about the reshaping of our business and the importance of building up our building products business, which looks at the whole area of more higher value add and less labor intensive and more quicker construction type process and products, which will why really this is a trend that's going to continue going forward for the short to medium term and why we need to focus on that and developing business in sector.
Great, Abbot. If I can have one follow-up maybe. In terms of U. S. Backlogs, can you give us any color or quantify the level of year and year growth you're seeing in them?
Yes, I'll take that 1, Davis. I mean, look, a half year when you go across our major product lines, you're talking about some nice double digit increases over prior year in terms of backlog, right? So if you look at it, and that's both in volume terms, but also in terms of margin. So You know, we see that across our asphalt, backlogs, across our construction activities in terms of that coming through. And you're sort of talking about backlog percentage increases over somewhere in the range of 12% to 15%.
So that looks very healthy and it ties into what Albert mentioned earlier in terms of our view in terms of the strength of the demand in that market. I think we've got time for one more question here.
Okay. The final question comes in from the line of Andy Murphy calling from BAML. Please go ahead.
Good morning guys. I've got 3. Just thinking about the DIY business, first of all, can you give us a figure for the full year EBITDA contribution and just gives a little bit of flavor around the extent of the seasonal contribution H1 versus H2. At disposal? And secondly, following on from that, you've obviously raised 1,000,000,000 from the disposal of this, but you're still pointing to 1,000,000,000 to 1,000,000,000 of cash being raised as a target, obviously having raised half a 1,000,000,000.
The target is still the same. So I was wondering whether there's whether you're effectively indicating that you're going to overachieve on that, initial range I'm just sorry, just to push you on the share buyback, given what you said about the cash generation of the business being extremely high at 1,000,000,000 a year, having already completed the GBP 350,000,000 of the share buyback. I was wondering why you seem to be a little bit coy on, on the just pushing ahead with with the share buyback program? Are you thinking about perhaps extending it or is there something else
we should do with missing?
Hi, Andy. Good
morning. Just three questions. There. I'll deal with the issue in terms, and it's gonna deal with the DIY and the share buyback, in terms of the the extent of the program, the divestment program we we set out and may Look, we highlighted there's no precision, as we said, with $1,500,000,000 to $2,000,000,000. We don't have a list of business.
We're saying we're going to dispose of A, B, and C. We have a number of businesses that we're looking at in terms of whether we feel we can improve them and or whether we should divest them. And there are a number of factors that impact upon that, not just financial performance. And our program was $1,520,000,000, and that's the thing that is our program. Of course, we've divested, as you rightly say, for $510,000,000 or 10 times EBITDA, our deal life business has been we feel it's a good price.
The fellow is the right thing to do first. And that is part of that particular number, part of that particular program, and we'll continue to work through that. Through the next few years. It's no change to the overall headline figures with regards to the contribution in terms of DIY, in terms of its annual contribution runs 55,000,000 Euros of EBITDA in the split. It's not quite even, but it's close to.
So second half impact of not owning DIY in terms of asking that question, somewhere in the range of 1000000 to 1000000. That would come out of the business. In terms of the share buyback, I certainly don't see any concern in terms of your comments in question. We're fully committed to the $1,000,000,000 buyback program over the 12 month period. And I think if you misinterpret my comments earlier, I think we're actively considering phase 2 at this point in time.
So certainly wouldn't, wouldn't read what due date into the comments earlier. Okay. All
right. Thanks very much. It's clear.
Okay. Ladies and gentlemen, thank you very much. I'm just being counted down here. I'm afraid that's all we have time for this morning. I want to thank you for your attention this morning.
I hope we plan to answer all of your questions, but Frank has to cancel as our IR team and his team are available to answer any follow-up questions you might have throughout the day, and we look forward to talking to you again in November and provide a trading update for the 9 month period to September 30th this year. Thank you very much.
Thank you for joining today's call.