Tuesday 16 January 2018

New man in CRH chair

Despite his experience with multinationals, turning the building-supplies giant around will be a tall order

THIS week former Dell executive Nicky Hartery took over as chairman of CRH. With the global recession having hit demand for building materials, Ireland's largest industrial company is struggling to maintain growth.

Ever since the company was first formed in 1971 from the merger of Roadstone and Irish Cement, CRH has worked hard at ensuring orderly transfers of power in the boardroom.

After a few tumultuous years following the merger, CRH has engineered one seamless transition after another, with successive chairmen and chief executives coming and going virtually unnoticed.

So it was with Nicky Hartery, who this week succeeded Kieran McGowan as chairman. Mr Hartery has been a non-executive director of CRH since 2004, which gave the company plenty of time to see if it liked the cut of his jib.

His career path at CRH was uncannily similar to that of his predecessor Mr McGowan, who was appointed chairman in 2007 after nine years as a director. The board clearly doesn't like to be rushed into making these decisions.

Like all building-materials companies, CRH has been hit hard by the recession. The economic downturn has punctured housing bubbles on both sides of the Atlantic, while concerns about mounting sovereign debt in most developed economies have meant that the hoped-for fiscal stimulus -- ie state-funded construction projects -- has failed to live up to expectations.

Peak

The company's operating (pre-interest) profits peaked at €2.14bn in 2007. They then fell by almost two-thirds to just €753m in 2010, before recovering slightly to €926m in 2011.

This week CRH issued an interim management statement, which revealed that while sales at its US operations had increased by 11pc in the first four months of 2012, sales at its European businesses had fallen by 4pc.

Guiding on likely EBITDA (earnings before interest, taxation, depreciation and amortisation) for the first half of 2012, CRH was extremely cautious stating that it would be "close to" the €574m recorded in the first six months of 2011. In the arcane language of such documents, "close to" can usually be taken to mean "less than".

This disappointing performance has been reflected in the CRH share price. It peaked at over €37 in 2007.

By last November, just before the company announced plans to transfer its main listing to London, the CRH share price had fallen to just over €12.

After initially making strong gains following the move to the London market, peaking at over €16.50 in March, the CRH share price has since faltered and closed yesterday at under €14.20.

The fact that the share prices of other international building materials, such as Lafarge or Cemex, have performed even worse will come as little consolation to CRH shareholders, who have seen their investment lose more than 60pc of its value over the past five years.

They will need no reminding that in March 2009 the company launched a €1.24bn rights issue that diluted the holdings of existing shareholders by 22pc.

Analysts predicted then that the proceeds would give CRH the financial firepower to make an acquisition of up to €3bn -- but more than three years later the money remains largely unspent.

Riches

Indeed, CRH's embarrassment of riches became even more pronounced last month when it received €574m in cash after being forced to sell its 49pc stake in Portuguese cement manufacturer Secil.

Mr Hartery is not a major CRH shareholder, owning just 1,302 shares which are worth €18,400 at the current share price.

CRH pays its directors a basic salary of €68,000. This is topped up with other payments, with Mr Hartery receiving a total of €124,000 from CRH in 2011.

He is likely to be paid considerably more in 2012 as his predecessor Mr McGowan was paid a whopping €405,000 in 2011. Maybe Mr Hartery will use some of the money to buy more CRH shares.

The company now does less than 2pc of its business in Ireland. It is a true Irish multinational, with operations in the UK, mainland Europe, North America and elsewhere. This is almost certainly one of the key reasons why Mr Hartery was chosen as the new chairman.

A native of Limerick, Mr Hartery graduated from UCC with a degree in electrical engineering in 1972 and later went on to receive an MBA from NUI Galway, before working for several American multinationals.

He served as president and chief executive of US data-storage company Verbatim and as vice-president of photography company Eastman Kodak.

In 2000, he returned to Ireland when he was appointed executive vice-president of computer manufacturer Dell's European, Middle Eastern and African operations.

In the early noughties Dell was one of the shining stars of the Celtic Tiger, with its Limerick manufacturing plant employing 1,900 workers.

However, Dell's core business of assembling PCs and laptops to order is an inherently low-margin one. Last year was Dell's best-ever, but it still earned operating profits of just $4.4bn on sales of $62bn (€48bn), an operating margin of just 7pc.

As the Celtic Tiger pushed Irish labour costs up, the Limerick plant became vulnerable.

Indeed, such was the labour shortage that Ireland experienced in the middle of the last decade that many of the workers in the Limerick plant came from overseas, particularly from Poland and other central European countries.

This, of course, begged the obvious question: why employ Polish workers in Ireland at Irish wage rates when the company could employ them in Poland instead at (much lower) Polish pay rates?

This is exactly what happened when Dell opened a manufacturing plant in the Polish city of Lodz in 2007. From that point on, the Limerick plant was doomed.

The axe duly fell in January 2009 when Dell announced that it was transferring production from Limerick to Lodz, with the loss of all 1,900 jobs.

It has since transferred ownership of the Lodz plant to the Taiwanese electronics manufacturer Foxconn, to which other branded electronics companies -- most notably Apple -- have also outsourced most of their manufacturing.

Mr Hartery was no longer with Dell by the time the Limerick closure was announced. He had left the company in October 2008.

While his departure was never fully explained, it is generally believed that as a resident of the Co Limerick village of Croom, he had no wish to preside over shutting the Limerick plant and the resulting huge job losses.

HE WAS one of a consortium of local businessmen who tried unsuccessfully to persuade the Dell boss Michael Dell to sell them the Limerick plant.

The consortium hoped to turn the Limerick plant into a contract manufacturer to which electronics companies, including Dell, would outsource their manufacturing, thus saving some of the jobs.

Since leaving Dell, Mr Hartery has been chief executive of his own consulting firm, Prodigium. He is also a non-executive director of Eircom and the food retailer Musgrave.

While Musgrave remains highly successful -- despite the downturn in the retail sector -- with pre-tax profits of €72m, Eircom is now in examinership as it seeks to restructure its €4bn debt mountain.

As someone who made his reputation as a senior executive with multinational corporations, Mr Hartery is now seeking to apply the lessons that he has learnt over the past four decades to CRH and other leading Irish companies.

Irish Independent

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