THE FRIDAY INTERVIEW: Myles Lee, chief executive of CRH
CRH’s HQ on the western edge of Dublin city looks a far cry from the gritty business of cement and asphalt. Belgard Castle, a 19th-century estate on the site of one of a series of Norman fortifications along the Pale, protected the medieval city’s largely English residents from the rampaging Irish.
Its gardens and a nearby golf course disguise the fact that the grounds contain a fairly extensive quarry, which probably supplied some of the materials soaked up by the building boom in and around the capital earlier in the decade.
Building booms in its main markets in the US and Europe helped propel CRH’s revenues to €20 billion a year during the last decade, making it the biggest company in Ireland by turnover. It still occupies that position today and the annihilation of the banks means that it accounts for 30 per cent of the Iseq index of Irish shares. The boom is long gone, though, and unlikely to return for some time, leaving the group facing into a much leaner period.
Its chief executive Myles Lee took over the job at the beginning of 2009, just when things were looking very lean indeed.
CRH’s business is spread across basic building materials, such as stone and cement, and a whole range of finished products, such as paving, bricks and glass. Its subsidiaries have supply components used in everything from housing and office blocks to big structures such as highway bridges in the US and road and rail tunnels under the Alps.
Depending on how you measure these things, it is the fifth or sixth largest player in its industry in the world.
When he’s talking about the company’s plans or progress, Lee frequently uses the word “cautious”. It reached its position in its industry slowly, over more than three decades, through a combination of acquisition and organic growth.
Given its reputation for doing nothing too radically, Lee signals that there is a reasonably significant shift in its overall profile on the way. About 50 per cent of its business is in the US, 35 per cent in Europe and the balance in developing markets. Lee says this is likely to change, with developing markets taking up a greater share of its business, which means expanding on its existing footholds in India and China.
CRH has 26 per cent of cement maker, Jilin Yatai, a Chinese cement manufacturer based in the northeast of the country. In India, it holds 50 per cent of another cement maker, Home Products. “We’re keen to push out and build on what we’ve established in Asia,” he says. “We’ve been a bit more cautious than others since we stepped in there.”
Lee adds that there were specific reasons for this caution. The group was focused on getting returns and, while it acknowledged that there was huge potential for growth, initial returns were low. It also wanted to find the right partners, a process that took time.
It is likely to increase its stakes in its existing partners. The group normally takes a holding in another business with a view to getting control. It will not be able to go down this route with Yatai, as the Chinese government has decreed that it is a strategic industry and thus wants to hold on to 51 per cent.
Given that the last few years have not been the best in the building materials business, CRH has held up well. While profits halved last year to €730 million, cash flow actually doubled to €1.1 billion. This is partly because it began taking remedial action before its peers.
In 2007, the group did sense that something was up and began cutting costs. Running the group is now €1.65 billion a year cheaper than it was back then, something in which Lee, as chief financial officer and chief executive, was directly involved.
At the end of 2007, it walked away from what could have been the biggest deal in its history, the purchase of a large part of its rival, Cemex, whose takeover of Australian player Rinker meant that it had to dispose of significant chunks of its US business to satisfy competition law.
CRH had announced that it was in due diligence, but by late 2007, the world was looking a lot more uncertain. “Our perception of the valuation of those businesses changed, and that proved unacceptable to Cemex,” Lee says.
Midway through 2008, it reined in its normally aggressive pursuit of acquisitions. Lee says it saw the pressures building in the banking system and the way that trade was going. It turned out to be a wise move. In September of that year, Lehmann Brothers collapsed, virtually freezing finance around the world.
Lee took over CRH’s helm the following January. Two months later he announced a €1.2 billion fundraising, the biggest in Irish corporate history, the proceeds of which were to be used to fund . . . acquisitions.
The about-turn, six months after a crash variously described as the “worst ever”, “worst since 1929” or “worst since 1945”, was surprising, but Lee and CRH argued that it was the right time to get back in the hunt to buy rivals.
The logic was simple. There was value to be had. During the boom, many of the bigger and smaller players in its industry had borrowed heavily or gone on acquisition splurges and overpaid. They now had to get out.
That was the theory, but it didn’t quite pan out like that in practice. A revival in bond markets allowed businesses to refinance their debts and ease some of the immediate pressure, making them less keen to sell. This did not mean that CRH did nothing; the group spent €480 million on acquisitions, mainly in the second half.
There was activity too in the background. After CRH raised the cash, a number of people approached it, including, Lee says, private equity players who a few years earlier were inflating asset values by borrowing heavily at cheap rates to fund deals. However the value for which it had been hoping failed to materialise in many cases, so it did not do as many deals as expected.
As a result, it can still afford to spend well over €1 billion on purchases, so are we likely to see more news on this front? Lee is cautious.
“We’ve a very rigorous approach to deals,” he says. “We’re working on quite a good number of opportunities at the moment, but we’re focused on getting good value and if it means being a bit more patient until we see that value, and are prepared to conclude deals, well then we’re prepared to do that.”
In terms of the likely scale of any acquisitions, Lee said earlier this year that the group was capable of completing a substantial purchase, if the right opportunity at the right price were to materialise. Its biggest to date was US asphalt producer Apac in late 2006, which topped $1 billion, but more traditionally, CRH has gone for medium-sized and smaller, often family-owned businesses, that it can easily absorb into its overall structure.
It is this type of owner to which the company is now talking. These vendors’ hopes were inflated along with the prices at which companies sold during the boom. Subsequent events brought them back down to earth, but whether or not they can deliver the value that CRH is seeking, remains to be seen.
In its ongoing businesses, Lee says the Greek- triggered deficit crisis means Europe is hard to call. He is optimistic that the US residential market is improving and believes there will be more definite signs of a recovery there in the second half. That period of the year should also see a pick-up in federal spending on infrastructure, which will involve highway construction and maintenance. This is a key market for the Irish group – Apac is a leading supplier of asphalt in the US. On the commercial side, he says: “It’s very tough in the US and it’s going to be right through to 2011.”
However, he laughs at the suggestion that he should be annoyed by the fact that he got the top job just when things had gone really pear-shaped. “I’ve been here since 1982, you have your good times and your bad times. It’s what you are dealt and you have to get on and deal with it, there’s no point in looking back and saying, what if it had been five years earlier or five years later?”
On the record
Name:Myles Lee.
From:Schull, Co Cork.
Family:Married with two daughters.
Why is he in the news?He is chief executive of building materials group CRH, which is rarely out of the news by virtue of the fact that it is Ireland's biggest company and accounts for about one third of the Iseq index of Irish shares.
Something you might expect:He has had a long career with the company, joining in 1982. Served as chief finance officer before his current job.
Something you might not expect:Although he is an accountant and has worked in that discipline through his career, he originally qualified as a civil engineer.
