Displaying items by tag: CRH

HeidelbergCement released their sustainability report for 2019 this week. Every large cement producer publishes one but this one is worth checking out because of the company’s ambition to become CO₂ neutral. Other companies are heading the same way but few of them have such developed and public plans.

Sustainability reports are often a hodgepodge of non-financial reporting bringing together environment, health and safety, community and other topics. Multinational companies cover a wide range of jurisdictions and combining reporting in these kinds of fields can be beneficial. Typically they are members of various bodies like the Global Reporting Initiative (GRI) or the Global Cement & Concrete Association (GCCA) that give various levels of conformity between reports. Yet, the wider focus of sustainability reports gives companies a chance to promote what they are doing well, away from balance sheets.

One highlight of HeidelbergCement’s report is its progress towards reducing its specific CO₂ emissions per tonne of cement and its recognition by the Science Based Targets (SBT) initiative towards this goal. So far it has achieved a reduction of around 22% from 1990 levels to 599kg CO₂/t (net) with a target of a 30% reduction or 520kg CO₂/t by 2030. There is a lot more going on in the report but it’s led by the vision, ‘to offer CO₂-neutral concrete by 2050 at the latest.’ It plans to achieve this by increasing the proportion of alternative CO2-neutral raw materials and fuels, developing lower clinker cement types and capturing and utilising CO₂ emissions. A focus on concrete is worth noting given the pivot by building materials manufactures towards concrete in recent years.

Back in the present, HeidelbergCement is roughly in the middle of the pack of major European multinational cement producers with its specific CO₂ emissions for cement in 2019. LafargeHolcim reported 561kg CO₂/t and Cemex reported 622kg CO₂/t. This is a bit of a moving target since corporate acquisitions and divestments can change both the starting point and the apparent current progress. HeidelbergCement’s acquisition of Italcementi in 2017 or CRH’s purchase of Ash Grove did exactly that. The other thing to consider is that these companies manufacture a lot of cement. The actual gross CO₂ emissions from a multinational cement producer are immense. LafargeHolcim, one of the world’s largest multinational producers, emitted 113Mt of CO₂ in 2019 from process and fuel sources whilst making cement. To put that into context, estimates for total global CO₂ emissions range from 33 – 36Gt for 2019. The cement industry’s entire share was estimated by the International Energy Agency (IEA) to be 4.1Gt in 2018.

Where this sustainability report starts to become really interesting is where it talks about CO₂ capture and utilisation. Its plans in this department are more mature than many of its competitors with various initiatives at different levels of development, mostly in Europe. Norcem, its Norwegian subsidiary, recently signed an agreement with Aker Solutions to order a CO₂ capture, liquification and intermediate storage plant at its integrated Brevik cement plant. The deal is dependent on government support but it’s a serious proposal. As reported previously from the Innovation in Industrial Carbon Capture Conference 2020, HeidelbergCement is actively preparing to hook up with CO₂ transport and storage infrastructure. The driver is CO₂ pricing from initiatives like the European Union (EU) Emissions Trading Scheme (ETS). With the EU preparing for the next phase of the ETS and talk of the European Green Deal gathering pace, before the coronavirus outbreak at least, CO₂ prices in Europe look set to rise. HeidelbergCement is positioning itself to benefit from being the first major cement producer to head into CO₂ capture and storage/utilisation with a variety of methods intended for different CO₂ prices and regional requirements.

HeidelbergCement doesn’t mention the coronavirus pandemic in its latest sustainability report. The report covers 2019 after all, before all of this happened. These reports do include health and safety information of employees, so this may be something to look out for next year. However, Cemex did mention the coronavirus in relation to its climate action plans this week. Essentially it wants to maintain its plans as a ‘fundamental component’ of its efforts to recover from the health crisis. This chimes with media talk around so-called ‘green-led’ government-backed relief programmes. Governments are the ones who are likely to be handing out the money, probably in the form of infrastructure projects. So it’s the perfect opportunity for them to encourage change from the companies bidding for this funding. Sustainability reports and the information behind them will be a useful tool in accessing this cash.

France: CRH subsidiary EQIOM has announced a 9000t/yr reduction in its transport-related CO₂ emissions, down by 5% to 171,000t/yr for the past three years from 180,000t in 2017. It achieved the reduction through its commitment to the FRET21 initiative, a sustainable development strategy of the Agence de l’Environnement et de la Maîtrise de l’Énergie (ADEME) and Association des Utilisateurs de Transport de Fret (AFAT).

The initiative is based on CO₂ reduction around four key activities: loading rate; distance travelled; means of transport; and responsible purchasing. EQIOM launched five initiatives, including increasing laden returns of trucks to reduce empty transport to 28%, commissioning four new natural gas and bioethanol-powered vehicles and increasing rail freight to 89%.

EQIOM logistics manager Jérôme Becamel said, "As in the rest of the country, our transport activity has been impacted by the social situation, particularly strikes on the roads and in the railways. However, we are delighted with the results obtained for this first challenge even if we were unable to reach our ambitions 100%. We are only more motivated and we will be stepping up our efforts over the next three years.”

Germany: The Nature and Biodiversity Conservation Union (NABU) has awarded a placard to Opterra’s 2.3Mt/yr integrated Karsdorf plant, declaring that a multi-purpose facility at the plant in Saxony-Anhalt is a “martin-friendly house.” The company says that the building is the first industrial facility to receive the accreditation, after becoming the home to 60 breeding pairs of house martins. Opterra Karsdorf head of mining Axel Horn said, “For us, active environmental and biodiversity protection means protecting and respecting nature, even during limestone extraction. Animals and plants established here will find ideal living conditions.”

UK: Tarmac says that it is the first cement company to have signed up to the EV100, a scheme that targets net-zero carbon emissions in transportation. Under the initiative, Tarmac will replace its fleet of 2000 corporate cars and vans with electric models by 2030.

Tarmac procurement director Jonathan Harry said, “We are fully committed to supporting the UK’s ambition of net-zero carbon emissions by 2050 and have been proactive in making significant changes to our business and product portfolio for many years. The road to a reduction in carbon requires collective action and sustainable procurement strategies have an important role to play in supporting these ambitions. By taking progressive actions such as adopting electric vehicle (EV) technology and switching to clean electricity, we can lead by example and begin to effect real change.”

Ireland: CRH has said that it had a ‘positive start to the year’ in the first three months of 2020. Total sales over the period rose by 3% year-on-year. In the Americas region, cement volumes rose by 4% and prices by 6%. European cement sales were ‘broadly in line with the same period of 2019’ due to general volume and price increases offset by a fall in volumes in Western Europe.

Government-implemented covid-19 restrictions on construction towards the end of the period impacted sales in Canada, the UK and France. The likely effects on 2020 profit ‘cannot be reasonably estimated at this time.’ CRH chief executive officer (CEO) Albert Manifold said, “With the financial strength of CRH and the experience of our leadership teams, we will endure through these unprecedented and uncertain times.”

Yesterday, on 14 April 2020, the International Monetary Fund (IMF) forecast a 3% gross domestic product (GDP) growth contraction in 2020 due to negative economic effects from the coronavirus outbreak and its containment. Most regions around the world may experience negative growth in 2020 with exceptions only in so-called Emerging and Developing Asia and Low-income Developing Countries. This is just one projection among many coming out at the moment but the prognosis is downward. This begs the questions: how will cement companies cope?

Markets for building materials are not going to disappear in these conditions but demand looks likely to be reduced. Added to this, an industry that’s been facing increasing production overcapacity over the years may be challenged by additional competition effects. Here we will look at the debt profile of some of the major multinational cement producers outside of China. Please note that this is a cursory examination of corporate debt that only looks at simple financial indicators. Company financial officers want to present themselves in best possible light and will have alternatives that point to their strengths. For a detailed view we refer readers to the credit rating agencies and the companies’ published financial information directly.

Graph 1: Net debt and EBITDA for selected multinational cement companies in 2019. Source: Company financial reports and investor presentations. Note, Conversion for reporting currencies to US$, HeidelbergCement uses Result from Current Operations Before Depreciation and Amortisation (RCOBD) and UltraTech Cement results from 2018 – 2019 financial year.

Graph 1 presents a comparison between net debt and earnings before interest, taxation, depreciation and amortisation (EBITDA) in real terms. The bigger the gap between debt and earnings then the more one starts to wonder how it can be repaid. One feature to note in this graph is the size of the debt of the three largest producers – LafargeHolcim, HeidelbergCement and Cemex – despite the fact that the companies are of different sizes. Cemex’s high debt to earnings ratio has been much commented on previously following its acquisition of Rinker just before the financial crash in 2007 and 2008. Unfortunately though, despite strenuous mitigation efforts, it remains prominent. Other positions to note are those of Buzzi Unicem and Dangote Cement, which have higher earnings than debts. These are envious positions to be in.

Graph 2: Net debt/EBITDA and EBITDA Margin for selected multinational cement companies in 2019. Source and notes as in Graph 1.

Graph 2 shows the ratio of net debt and EBITDA and the EBITDA Margin, a company’s earnings divided by its revenue. This graph better shows the relationship between debt and earnings. This can be seen well in a comparison between LafargeHolcim and HeidelbergCement. The latter has higher debts with respect to its earnings. Its debt jumped in 2016 following its acquisition of Italcementi. LafargeHolcim’s debts ballooned followed its formation by merger in 2015 but this was in line with the jump in its equity. Where it struggled was with slow earnings in the years afterwards. However, bold divestments in South-East Asia in 2018 and 2019 appear to have fixed this.

Other companies to watch in the higher Net debt/EBITDA category include India’s UltraTech Cement and both of the large Brazilian multinationals, Votorantim and InterCement. In recent years UltraTech Cement has been busy buying up other cement producers in India. The difference between the Brazilian companies may reflect the fallout from their fight to buy Cimpor back in 2012. InterCement and its parent company Camargo Corrêa won the battle to acquire the Portuguese company but Votorantim was given selected international assets outside of Brazil. Unfortunately, the Brazilian market then collapsed and Camargo Corrêa has reportedly been trying to sell some or all of its cement assets ever since.

The other financial indicator in Graph 2 is EBITDA margin or earnings/operating profit as a percentage of revenue. Higher is generally seen as better here in comparison to other companies in the same sector. Note how LafargeHolcim is ahead of HeidelbergCement and Cemex, possibly due to its cost cutting and synergies since the merger. InterCement also has a relatively high EBITDA margin, boosted by a pickup by the Brazilian economy in 2019. Again, Buzzi Unicem and Dangote Cement stand out. Both of these are public companies but are associated with family or individual ownership, although in very different markets. Neither has really indulged in any large-scale acquisitions in recent years. Dangote Cement has been steadily expanding but through building its own plants and distribution networks.

We’ve not mentioned CRH as its figures seem ‘average’ compared to the other cement producers discussed here. Average is of course relative for one of the world’s biggest building materials manufacturers with a net of debt of US$7.4bn in 2019! Yet, despite battles with activist investors over board member pay aside, CRH might be the rare producer that knows when to stop expanding. Notably in 2018 after an expansion phase, including acquisitions of Ash Grove Cement and LafargeHolcim assets previously, it publicly decided in 2018 to take a pause. There may be weaknesses in the company’s balance sheets yet to be revealed but they are not apparent using these metrics.

In summary, we’ve focused on corporate acquisitions here as the main source of debt in cement producers. This is simplistic but timing is everything when taking on a large amount of debt. Cemex is still carrying the scars from buying Rinker over a decade ago and InterCement and HeidelbergCement, to a lesser extent, are ones to watch through the next bad patch. Other things to consider are a general move to a more regional model for these producers away from a global one. UltraTech Cement’s focus on the Indian sub-continent or Dangote Cement’s work in Africa are examples of this. This approach could go wrong if the sole regions they operate in suffer disproportionately from the economic fallout from coronavirus. Or, if any producer, even one with high debts, has the good fortune to be present in a territory that suffers less from the downturn it may benefit. On a final note, it is worth mentioning that government data reports that China’s domestic cement production capacity utilisation in the two-week period ending on 10 April 2020 bounced back to 95% following the relaxation of the lockdown.

Ireland: The Irish Times newspaper has reported examples of shareholder advisory companies expressing concern about the scale of CRH chief executive officer (CEO) Alfred Manifold’s pay package in the face of mounting financial pressure due to the coronavirus pandemic. Glass Lewis has said in a report that it remains ‘particularly concerned’ about the size of Manifold’s pension benefits, while Institutional Shareholder Services has expressed similar reservations about his remuneration. Manifold had a total reported pay, performance and long term incentive package totalling Euro9.3m in 2019.

Institutional Shareholder Services previously recommended that investors vote against an executive pay rise at CRH in 2018. The multinational building materials company plans to hold its annual general meeting on 23 April 2020.

Building materials companies around the world are expected to face financial pressure as construction markets suffer due to national and regional lockdown measures in response to the coronavirus epidemic.

US: Oldcastle APG, a subsidiary of CRH, has acquired dry mix manufacturer US MIX. The purchase adds to APG's dry mix manufacturing footprint and expands its network of facilities to the Denver, Colorado market. In addition, the acquisition provides APG with materials science expertise and adds another brand, US SPEC, to its existing dry mix product portfolio of Sakrete and Amerimix. No value for the acquisition has been disclosed.

US MIX primarily operates out of a manufacturing facility in Denver, with a secondary specialty bagging location in Fontana, California. Founded in 1968, US MIX has been privately owned by the Peterson family for over 50 years. Its products include bagged concretes, mortars and specialty cement mixes, in addition to liquid repair products.

US MIX currently operates as a Sakrete and Amerimix licensee and offers a variety of specialty products under the well-known US SPEC brand. US SPEC products are professionally engineered concrete and masonry repair products used in a variety of applications, formulated and tested in laboratory conditions under ASTM testing methods and specifications.

Ireland: CRH recorded sales of Euro28.3bn in 2019, up by 6% year-on-year from Euro26.7bn in 2018. Earnings before interest, taxation, depreciation and amortisation (EBITDA) rose by 25% year-on-year to Euro4.20bn from Euro3.36bn. The company said that the results were supported by a positive demand backdrop in the Americas and in key regions in Europe. It also set out a new CO₂ emissions roadmap with target of 520kg/t of cement by 2030, a 33% reduction compared to 1990 levels.

Australia: National press in Australia has reported that the Irish building materials giant CRH has approached Boral regarding a possible takeover. CRH snapped up US$6.5bn of assets from Lafarge and Holcim in 2015 following their merger to become LafargeHolcim, and it consequently became the third-largest building materials supplier by market value internationally.

The speculation comes amid market expectations that Boral could be broken up if a takeover does not unfold soon. Suitors have looked at Boral before but a deal has never eventuated. The company’s market value is US$3.9bn, so it could be within the grasp of a cash-rich strategic player or private equity firm from overseas. Three years ago Boral was worth more than US$4.8bn.

Meanwhile, Australia's devastating recent bushfires have affected Boral’s Berrima plant in New South Wales, likely leading to lower production and margins. This was due to extended leave for staff and road closures.