Saint-Gobain 2015 results: Operating Income up 2.2%

“Saint-Gobain delivered improved earnings in 2015 in a sharply contrasted economic climate. The improvement was dampened by continued weak trading in France, hurt in particular by the sharp contraction in Pipe in the second half of the year, despite the first signs of an upturn in construction indicators,” said Pierre-André de Chalendar, Chairman and Chief Executive Officer of Saint-Gobain.

The Group completed a key stage in the reorganization of its business portfolio, with the sale of Verallia on very favorable terms, and continues to pursue its plan to acquire a controlling interest in Sika after obtaining all antitrust approvals prior to closing the deal.
In a still very volatile macroeconomic environment, we will continue to adapt in 2016 and are targeting a further like-for-like improvement in operating income.”
1Recurring net income from continuing operations excluding capital gains and losses on disposals, asset write-downs and material non-recurring provisions.
2Consolidated net income attributable to the Group.
3Free cash flow from continuing operations excluding the tax impact of capital gains and losses on disposals, asset write-downs and material non-recurring provisions.
Operating performance
2015 sales came in at €39,623 million, up 3.3% on a reported basis driven by the positive 3.0% currency impact, and up 0.4% like-for-like. Optimization of the Group’s portfolio in terms of acquisitions and disposals led to a negative 0.1% Group structure impact after reclassification of the Packaging business.
Volumes failed to recover during the year (up 0.1%), due chiefly to the sharp decline in France which continued over the second half. Amid falling raw material and energy costs, prices were stable in the fourth quarter but edged up 0.3% over the year as a whole.
The Group’s operating margin came in at 6.7% (6.6% in 2014) and at 6.9% for the six months to December 31, 2015. Operating income climbed 2.2% on a like-for-like basis, partly helped by favorable weather conditions in Europe towards the end of the year.
In 2015 the Group met its capital expenditure target of €1.35 billion and cost savings target of €360 million compared to 2014. Industrial optimization efforts rolled out over the past few years have notably enabled Flat Glass to continue delivering a strong rally in its performance. The Group also exceeded its operating working capital requirement target, with a reduction of two days’ sales (one day based on constant exchange rates) to 26 days, a record low for the Group and a reflection of its ongoing efforts to maintain cash discipline.
In line with the goal of optimizing its business portfolio, a number of businesses were divested, primarily in Building Distribution, representing around €700 million in full-year sales. The disposal of Verallia in October was carried out on very favorable financial terms and marks a decisive step in the Group’s strategic refocus.
The Group also continued to pursue its acquisition strategy with the aim of growing the share of industrial assets in the US and emerging countries, investing in new technological niches, and strengthening Building Distribution in its key regions. These acquisitions represent around €300 million in full-year sales.
Performance of Group Business Sectors
Innovative Materials sales climbed 2.2% like-for-like over the year as a whole and 1.7% in the second half. The operating margin for the Business Sector widened to 10.5% from 9.4% (10.7% in the second half), driven by the rally in Flat Glass and a resilient performance from HPM.
Like-for-like, Flat Glass sales advanced 5.1% over the year and 4.4% in the second half. In Western Europe, construction markets remained fragile with both prices and volumes beginning to recover towards the end of the year, while the automotive Flat Glass business recorded strong gains and outpaced already good market growth. Healthy trading was confirmed in Asia and emerging countries with the exception of Brazil, hit by a slowdown in automotive and, at the end of the year, in the construction market. 
Additional volumes linked to improved operating leverage over the past few years helped fuel strong gains in the operating margin, up from 5.9% to 7.9%, and to 8.5% in second-half 2015.
High-Performance Materials (HPM) sales slipped 1.0% on a like-for-like basis, with the full- year performance affected by the decline in ceramic proppants. The other HPM businesses continued to deliver organic growth.
Despite the downturn in volumes, the operating margin for the year held firm, at 13.4%.
Construction Products (CP) reported 0.5% organic growth, but slipped 0.1% in the second half due chiefly to the downturn in Pipe, which reduced the Business Sector’s operating margin for the year from 9.0% to 8.5%.
Interior Solutions posted 1.9% organic growth for the year (1.8% in the second half). The downturn in volumes and prices on the French market put the brakes on growth in Western Europe, although this impact eased in the fourth quarter. Trading in North America was dented by a slight dip in prices in the second half and by the decline in the Canadian market. Asia and emerging countries continued to deliver growth. 
The operating margin came in at 8.9% versus 8.8% in 2014.
Exterior Solutions retreated 1.0% like-for-like, with the 2.0% decline in the second half due solely to Pipe. This business was affected by the economic situation in Brazil, a weak infrastructure market in Western Europe and China, and fewer contracts in the Middle East owing to the decline in the oil industry. Exterior Products in the US reported good volume gains buoyed by the strong second-half performance, although prices remained down. Mortars continued to be affected by the economic climate in Western Europe, although the business saw an improvement in the three months to December 31. Mortars delivered further good organic growth in Asia and emerging countries, despite its exposure to the Brazilian market. 
The operating margin fell to 8.0% from 9.1% in 2014, as the rally in Exterior Products in the second half failed to offset the decline in Pipe.
Building Distribution sales slipped 0.6% (down 0.1% over the second half) in a construction market that declined sharply in France but showed the first signs of stabilizing towards the end of the year. After disappointing first-half trading, Germany returned to growth in the six months to December 31. The UK saw small gains in the year, with less traction in the second half. Led by Sweden and Norway, Scandinavia confirmed its robust momentum over the full year, as did Spain and the Netherlands. Brazil delivered good growth as a whole, despite the more pronounced economic slowdown in the fourth quarter. Trading in Switzerland was hit by the impact of an exchange rate boosting imports.
The operating margin was affected by slack volumes in France, coming in at 3.2% for the full year (3.8% in the second half), versus 3.5% in 2014.
Analysis by region
Over the year as a whole, the Group’s organic growth and profitability gains were dented mainly by France.
Construction volumes in France remained sharply down throughout the year, although there
were signs that activity was stabilizing towards the end of the year. The second half was affected by the downturn in Pipe. With negative 4.1% organic growth for the year (negative 3.9% organic growth in the second half), the operating margin narrowed sharply to 2.9% from 4.3% one year earlier.
Other Western European countries saw 2.1% like-for-like sales growth, led by a stronger second half at 2.4%. Nordic countries and to a lesser extent the UK continued to advance in the year. After posting a 1.3% decline for the full year, Germany returned to growth in the second half. Trading in Southern Europe and Benelux countries rebounded, particularly in Spain and the Netherlands. The operating margin saw strong gains, coming in at 5.7% in 2015 compared to 4.9% in 2014.
North America retreated 2.0%, hit mainly by the contraction in proppants and also by sluggish industrial markets. Organic growth in construction was dampened by Roofing prices and by the downturn in the Canadian market. The operating margin was 9.1% versus 10.1% in 2014.
Asia and emerging countries delivered solid 4.1% organic growth over the year and 3.1% in the second half, with declines in Brazil and China and advances in all other regions. The operating margin continued to strengthen, up to 10.3% in 2015 versus 9.4% in the year- earlier period.
The 2015 consolidated financial statements were approved and adopted by Saint-Gobain’s Board of Directors at its meeting of February 25, 2016. The consolidated financial statements were audited and certified by the statutory auditors.
Share buyback and dividend
In line with its objectives, the Group bought back 13,863,858 shares for €545 million during the year. This exceeds the number of shares created in connection with the Group Savings Plan, stock option plans, bonus share plans and the stock dividend payment.
At today’s meeting, Compagnie de Saint-Gobain’s Board of Directors decided to recommend to the June 2, 2016 Shareholders’ Meeting a return to a full cash dividend policy, with the dividend stable at €1.24 per share. This represents 59% of recurring net income, and a dividend yield of 3.1% based on the closing share price at December 31, 2015 (€39.85). The ex- date has been set at June 6 and the dividend will be paid on June 8, 2016.
2016 strategic priorities
The Group will pursue its internal optimization efforts and its acquisitions and divestments strategy. This will allow it to improve the Group’s growth potential by focusing on high value- added and less capital-intensive businesses and on activities outside Western Europe.
Saint-Gobain is pursuing its plan to acquire a controlling interest in Sika. During 2015 it obtained the antitrust authorities’ unconditional approval for the transaction and various legal decisions were handed down in favor of the deal’s completion. The last obstacle remains the limitation of the voting rights of the SWH holding company, on which a decision in first instance is expected from the Zug court in summer 2016.
A new €800 million cost-cutting program for 2016-2018 will be launched as part of ongoing cost savings initiatives. This program will focus more extensively on operational excellence and purchasing, and will include new initiatives in terms of logistics optimization, sales excellence and the digital transformation of industrial plants.
The digital shift remains an important focus. Thanks to its presence at several levels of the value chain (production and distribution), Saint-Gobain is particularly well placed to leverage the opportunities resulting from the digital transformation of its markets.
Saint-Gobain has reaffirmed its commitment to fighting climate change by introducing an internal carbon price which will be factored into all assessments of future investments. Climate change represents both a major challenge for society and a growth opportunity for Saint-Gobain’s products.
2016 outlook
In 2016 the Group should benefit from more vibrant trading in Western Europe, with France stabilizing. North America should continue to see slight growth on construction markets but is expected to face a more uncertain outlook in industry. Our operations in Asia and emerging countries should deliver satisfactory growth overall, albeit affected by the slowdown in Brazil.
Saint-Gobain will continue to keep a close watch on cash management and financial strength. In particular, it will:
– keep its priority focus on sales prices in a still deflationary environment;
– unlock additional savings of around €250 million (calculated on the 2015 cost base)
thanks to its ongoing cost-cutting program;
– pursue a capital expenditure program (around €1,400 million) focused primarily on
growth capex outside Western Europe;
– renew its commitment to invest in R&D in order to support its strategy of
differentiated, high value-added solutions;
– keep its priority focus on high free cash flow generation.
In line with its strategy, Saint-Gobain is confidently pursuing its plan to acquire a controlling interest in Sika.
In a still very volatile macroeconomic environment, we will continue to adapt in 2016 and are targeting a further like-for-like improvement in operating income. A complete report is available on the investors page of the company website.