CRH yesterday issued an update for the first half of 2009 in advance of its interim results, which will be announced August 25. The Ireland-based company gave a second-quarter update in May, and this latest update provided additional evidence of the challenging environment that it faces. Demand for the firm's construction products remains soft across the European and American regions. Although the rate of profit decline eased significantly during the second quarter compared with the first quarter, the firm didn't experience as much of a seasonal pickup in May and June as it had anticipated, because of the weak global economy.
The European segments continue to struggle. In the building material segment, a harsh winter hampered demand for cement in the beginning of the year, and cement volume in Ireland, Finland and Ukraine remain about 45%-50% below prior-year levels. Sales of building products also remain weak (down about 20% year over year) because of prolonged weakness in construction activity. That said, the firm's distribution segment has held up relatively well, thanks to its greater exposure to the repair and remodel market, and sales have declined only 10% from the year-ago period.
CRH's American operations haven't fared any better than Europe, and both the product and distribution segments were hit hard by further declines in the residential and nonresidential markets; sales fell around 20% year over year. The material segment also experienced a weaker-than-expected first half because of poor weather--in particular, a rainy June in the Eastern United States slowed the start of the highway season, damping cement sales. That said, the company expects second-half cement demand to improve with infrastructure-related construction activity.
The international building materials group also provided an update on its cost-reduction initiatives. CRH has cut costs throughout the downturn, including measures such as idling and consolidating facilities and workforce reductions and furloughs. Compared with the first half of 2007, it has taken out around 20% of its production capacity and 25% of its head count. The group expects to realise gross savings of EUR 1.45 billion from 2007 through 2010, up from its previous estimate of EUR 895 million in January. According to the release, the company has already benefited from EUR 497 million during 2007 and 2008 and plans to save an additional EUR 848 million in 2009 and EUR 105 million in 2010. The initiatives will cost the firm EUR 188 million during the next two years, leaving net savings of EUR 765 million in 2009 and 2010. The company has also significantly reduced capital expenditures and expects full-year spend to be roughly EUR 600 million, compared with EUR 1 billion in 2008.
We think these initiatives will help CRH to continue to navigate the downturn relatively well, leaving it well positioned for a recovery in its end markets.
Anthony Dayrit is a Morningstar associate stock analyst based in the United States.
