Austerity alone is not the solution for Ireland
Published 29/11/2012 | 05:00
Ireland's biggest company chief says the challenge for Europe over the next five years is to get a bit of growth going with some stimulus. By John Mulligan
Myles Lee jokingly apologises in advance in case he falls asleep from jetlag. He's fresh off the plane from New York where he and other members of the executive team, as well as a team of senior managers, have held a capital markets day for investors.
But even in the subdued surrounds of Belgard Castle – the now somewhat incongruously situated country pile that rubs shoulders with a mix of a massive CRH quarry, golf course, agricultural fields and housing estates – it's unlikely he'll nod off. There's just too much to do.
From these CRH headquarters, Lee oversees what is Ireland's biggest company since the banks went into freefall. It has a €10bn market capitalisation, about 76,000 employees, annual revenues in 2011 of just over €18bn and pre-tax profits that year of €711m. Its activities in 34 countries stretch from the US to Europe and Asia.
But anyone looking for startling facts need look no further than Myles Lee's own presentation to those investors in New York.
In the US, the volumes of aggregates and asphalt (used in making roads, CRH is the biggest supplier of asphalt there) are at 1995 levels – even though the population there has grown by nearly 20pc since then.
The volumes of plasterboard being used (typically in housing) in the United States has fallen to levels not seen since 1983 or 1984. In Ireland, the volume of cement being used in the market has plunged to pre-1980s levels.
The wider geographical impact on CRH from economic uncertainty is felt across a broad spectrum of operations – from those heavy aggregates and cement production, to DIY stores in countries such as the Netherlands. But in an age where austerity has become a defining characteristic of countries across Europe, Lee thinks it's clear it's not the only solution to fiscal woes.
So, let's pretend for a moment that the native of Schull, Co Cork, is crowned European president for a day. What's the first thing he'd do? "That's a tough one. I think I'd have to go and lie down for a week before I had my day," he laughs.
"I'm not an economist, but the message seems to be dropping that austerity alone is not the solution," he adds more seriously. "It has to be combined with some mix of stimulus. That's become evident. In Greece, it was all about cut, cut, cut and there's a realisation that what was mandated for them was just too tough.
"How to get a bit of growth going – that's really the challenge for Europe over the next five years," he says.
CRH has no exposure to either Greece or Italy, very little to Ireland, and had a lucky escape from Portugal when a Paris arbitration court ruled last year that CRH's joint venture partner there had to buy the Irish firm's stake in their cement business (it still has a small presence there). That resulted in net proceeds of €564m for CRH.
During the summer, CRH conceded that it was keeping hardly any cash on deposit in euro over the weekend just in case there was a catastrophic event (think Greece being turfed out of the euro or any other reasonable doomsday financial scenario you can concoct) that could have made it difficult to access those funds in a timely fashion.
In Ireland, Lee thinks it's difficult to see how the government – constrained by the IMF, EU and ECB – could be doing much other than what it is doing.
"It's been difficult and I suppose it's hard to see what other path we could be following just at this particular point in time," he says. "But we've garnered a very good reputation internationally in terms of how we've been approaching our problems and dealing with them.
"Particularly when I travel around to our own investor base in Europe or in the US, there's a very positive perception of Ireland.
"It's been very important that the reputation that was at a pretty low level two to three years ago internationally has been restored and that it is maintained.
"The levels we were at, in hindsight, were unsustainable," he says of the construction sector. "You look back and say that should have been more widely recognised at the time and we would have avoided a lot of the legacy of that period."
And as a well-paid chief executive of a global firm (Lee received a total remuneration package last year of nearly €2.7m), what does he think of the banker salaries at home that continue to outrage the public?
Lee recoils like he's been asked to take part in a Bushtucker Trial.
"I'm not going to get into that," he says, somewhat uncomfortably.
Lee, though genuinely affable, is certainly all business. There's a sense – rightly or wrongly – that he's not given over to navel gazing or pondering his route to CRH's hot seat.
He started at the company in 1982 as a 28-year-old armed with a degree in civil engineering from University College Cork, and having also qualified as an accountant. He had stints with Esso and KPMG before joining CRH and was appointed chief executive in 2009 after six years as finance director.
He says the time has flown by and tries to remember precisely what age he was when he first walked through the company door. He says he didn't have any designs on the top spot when he joined.
"No, I was involved very much on the finance side and also to an extent on the development side and I saw my whole career progression as being very linked into the finance side," he says.
"As things developed I had a shot at putting my hat in the ring for the CEO role, and so threw it in and here I am.
"Every day is different."
Engineering was in the family so it seemed only natural that Lee would keep up the tradition.
"There was a strong civil engineering streak in my background," he says. "My father was a civil engineer for Cork County Council and I had cousins and uncles who were engineers as well. So that was the initial route I took.
"As I completed that, I decided I'd like to try to get into business and that led to the accounting route.
"I wouldn't particularly have had any contact per se with business people as a teenager and maybe people didn't think about careers as deeply then as they do now," he adds. "But the civil engineering training is excellent in terms of thinking and approaching problems."
And among those problems, if it can be considered such, is how to expand the group without overpaying for assets. CRH recently retreated from making a fresh investment in India, while so far this year it has spent about €400m on acquisitions.
But he's glad now that CRH shied away from many bigger potential deals that were presented to it in the past few years, despite criticism from some investors that he and predecessor Liam O'Mahony had to deflect that the company wasn't expanding aggressively enough.
"Between 2005 and 2007, in our sector, it was a very busy time for large-scale mergers and acquisitions," he recalls. "That was funded by easy availability of debt from the banks.
"When we looked at many of the large scale transactions that our peers were completing, we just couldn't make sense of the valuations in terms of how you could earn a return in any sensible timescale.
"The world was awash with cheap debt at the time. In our sector there's quite a legacy in terms of the debt overhang which is going to take many years for companies to move down," he says.
"We're in a situation now where in terms of leverage, we're at very comfortable levels that give us the capacity to continue to be acquisitive when most of our peers are looking to shed assets in order to reduce their leverage."
CRH could easily spend between €1bn and €1.5bn over the next 18 months or so on acquisitions, says Lee.
"We have significant capacity going into 2013 and 2014 and we'd like to deploy it, but only where we continue to see sensible opportunities." CRH is also likely to increase its stake in Chinese cement manufacturer Jilin Yatai closer to 49pc from the current 26pc within the next two to three years.
Sensible opportunities are also likely to keep cropping up in the US, which accounts for about half CRH's business, even though the economy there is shuddering along.
And with those aggregates, asphalt and volumes of other materials at relative lows, Lee reckons the only way is up.
"In the US those low aggregates and asphalt levels aren't sustainable in an economy that's so dependent on road transport for the functioning of trade," he says.
"The body politic over there really has to face up to putting more significant funding into infrastructure and having a long-term programme."
Federal funding of US road infrastructure is a major political football. The current $105bn (€81bn) funding programme approved this year is due to expire in 2014.
But economic growth is what CRH really needs in the US. An impending fiscal cliff that would see automatic tax increases and spending cuts kicks in unless the issue is addressed by the year end.
That's another major political hurdle too. Federal Reserve chairman Ben Bernanke recently said he foresees decent growth in the US next year if the fiscal cliff can be resolved.
"The last time we had this sort of brinkmanship was in relation to the debt ceiling in 2011 and that went to the brink before they finally reached an accommodation," says Lee.
"I would hope that it doesn't go that far this time and something sensible is done. We're hoping good sense will prevail."
Outside on a crisp winter's day, you'd nearly forget you're in the company HQ. Lee wonders if the weather at the weekend will be good enough to do some gardening.
You wonder if he'll have time. He breezes back up the stairs to his office. You can bet he didn't go for a snooze, even if the jetlag was kicking in.