Saint-Gobain H1 results as forecast

Saint-Gobain has released its financial figures for the first half of 2016.

Pierre-André de Chalendar, Chairman and Chief Executive Officer of Saint-Gobain, commented “Saint-Gobain’s sales for first-half 2016 confirm our February forecasts, with France stabilizing and all regions making a strong contribution to growth. Our strategy of investing in emerging markets provides us with a diversified platform for profitable growth. Our first-half results also benefited from efforts to optimize our operations, particularly in Western Europe, and from upbeat trading in the US. The results are in line with our objectives and we expect a like-for-like improvement in operating income for second-half 2016 versus second-half 2015. While the June 23 Brexit vote in the UK has created a climate of uncertainty, it does not affect our objectives.”
Operating performance
First-half sales came in at €19,549 million, including a significant 3.5% negative currency impact resulting namely from the depreciation of Latin American currencies – and to a lesser extent the pound sterling – against the euro.
The negative 1.0% Group structure impact is a result of the disposals carried out in 2015 aimed at optimizing the Building Distribution portfolio.
On a like-for-like basis, sales were up 2.9% on the back of 3.5% volume growth driven partly by the positive impact of a greater number of working days in the second quarter (estimated impact of just over +1% in the first half). All Business Sectors and regions delivered volume growth. In a still deflationary environment in terms of raw material and energy costs, prices remained slightly down, losing 0.6% over the six months to June 30.
The Group’s operating income climbed 7.3% on a reported basis and 10.2% like-for-like. The Group’s operating margin1 rallied to 7.0%, gaining 0.6 percentage points compared to first- half 2015. All Business Sectors reported margin growth, particularly in industry and to a lesser extent Building Distribution, which was hit by the deflationary environment.
Performance of Group Business Sectors
Innovative Materials like-for-like sales moved up 4.4%, powered by Flat Glass. There was a further significant improvement in the Business Sector’s operating margin, which came in at 11.2% versus 10.2% one year earlier.
The second quarter confirmed the upbeat trends seen early in the year in Flat Glass, which 
posted 6.5% organic growth over the first half. Automotive glass continued to enjoy good momentum in all regions except Brazil. Construction markets remained upbeat in Asia and emerging countries and benefited from the upturn in volumes in Western Europe and a rise in float glass prices. The operating margin continued to recover, at 8.8% versus 7.4% in first- half 2015, buoyed by additional volumes and improved operating leverage.
High-Performance Materials (HPM) like-for-like sales rose 2.0% over the first six months of 2016. Plastics and Textile Solutions performed well; Abrasives delivered organic growth led by prices. Ceramics contracted in the three months to June 30 after a first quarter boosted by high levels in refractories. The operating margin widened to 14.0% from 13.5% in first- half 2015. 
Construction Products (CP) like-for-like sales advanced 1.6% over the first half lifted by Interior Solutions, which drove a significant improvement in the Business Sector’s operating margin, up to 9.4% compared to 8.7% for the same period in 2015.
Interior Solutions posted 5.2% organic growth in the first half on the back of strong market positions, which allowed it to benefit from good trading in all regions. In a still deflationary environment, volumes proved upbeat in Western Europe (partly helped by the positive impact of a greater number of working days) and in North America. Asia and emerging countries confirmed their good performance as well as the merits of the growth operations carried out in this region over the past few years. The operating margin climbed to 10.2% from 9.0% in first-half 2015.
Exterior Solutions like-for-like sales retreated 2.0% over the first half, due solely to the expected decline in Pipe, which was hit by contracting markets in its main regions. However, Exterior Solutions stabilized in the second quarter, helped by an acceleration in volumes for Roofing in the US. Mortars reported organic growth led by Asia and emerging countries and by the improvement in Western Europe, which offset tougher conditions in Brazil. Overall, the operating margin steadied at 8.3%.
Building Distribution like-for-like sales rose 3.1%, with the second-quarter performance buoyed by the positive impact of a greater number of working days. Trading in France benefited from the first signs of an upturn in new-builds, while the renovation market remains sluggish. Germany, the UK and especially Nordic countries continued to report good volume trends. Amid a fall in the cost of goods sold in Europe, prices were down – particularly in France and the UK. The sharp economic slowdown in Brazil continued to take its toll on trading.
The operating margin came in at 2.8% versus 2.6% in first-half 2015, benefiting from an upturn in volumes in Europe but affected by a deflationary environment.
Analysis by region
The Group delivered organic growth in all of its regions in the first half, as trends observed earlier in the first quarter continued in the three months to June 30.
France saw confirmation of stabilizing business over the first half, posting organic growth of 
0.6% buoyed by the positive impact of a greater number of working days in the second quarter. New-build activity showed the first signs of improvement, while the renovation market remains sluggish for the time being. The decline in Pipe weighed on first-half results. The operating margin narrowed slightly to 2.4%, hit by the deterioration in Pipe.
Other Western European countries advanced 4.3% over the six months to June 30, with organic growth picking up pace in the second quarter. Besides the positive impact of a greater number of working days, this advance reflects good market conditions in all of the Group’s main countries. The region’s operating margin continued to rally, at 5.9% versus 5.4% in first-half 2015.
North America reported a 3.6% rise in like-for-like sales in the first half, in line with the three months to March 31. Activity in the construction market again proved upbeat, while industrial markets remained uncertain. The operating margin rallied sharply, up to 11.6% versus 9.5% in first-half 2015, powered by the strong advance in Roofing.
Asia and emerging countries reported further good organic growth, at 4.9% for the first half, led by Eastern Europe and Latin America, despite the slowdown in Brazil. Asia was up, with trading bullish in India, despite a downturn in China. The operating margin continued to improve, at 10.6% of sales versus 10.0% one year earlier.
Consolidated sales advanced 2.9% like-for-like, buoyed by volume growth and despite a negative 0.6% price effect in a deflationary environment. On a reported basis, sales were down 1.6%, with a negative 3.5% currency impact chiefly resulting from the depreciation of Latin America currencies – and to a lesser extent the pound sterling – against the euro. The negative 1.0% Group structure impact essentially reflected disposals carried out in the Building Distribution business in 2015.
Operating income climbed 7.3% based on reported figures, despite a negative currency impact. The operating margin improved to 7.0% of sales versus 6.4% in first-half 2015, buoyed by margin gains in all Business Sectors.
EBITDA (operating income + operating depreciation and amortization) was up 3.8% to €1,957 million, and the EBITDA margin came in at 10.0% of sales versus 9.5% in first-half 2015.
Non-operating costs totaled €180 million, with a rise in restructuring costs compared to the same period in 2015 owing to the roll-out of certain projects earlier than planned. The Group maintains its forecast of a slight decrease in restructuring costs for the year as a whole. The €45 million accrual to the provision for asbestos-related litigation involving CertainTeed in the US is unchanged from the last few half-year periods.
The net balance of capital gains and losses on disposals, asset write-downs and corporate acquisition fees was an expense of just €32 million versus an expense of €41 million in first-half 2015. In line with the increase in operating income, business income climbed 7.0% to €1,156 million.
Net financial expense improved significantly, down 12.5% to €287 million from €328 million, mainly reflecting the decrease in net debt; the cost of gross debt remained at 3.9% at June 30, 2016, in line with end-2015.
The income tax rate on recurring net income remained stable at 30%. Income tax expense totaled €261 million (€236 million in first-half 2015).
Recurring net income (excluding capital gains and losses on disposals, asset write-downs and material non-recurring provisions) jumped 13.0% to €624 million.
Net attributable income was up 6.8% to €596 million but jumped 20.9% excluding net income relating to Verallia in 2015.
Capital expenditure fell to €428 million including a negative currency impact (€457 million for the same period in 2015). Capex represented 2.2% of sales compared to 2.3% in the same period one year earlier.
Cash flow from operations rose 5.4% to €1,260 million; before the tax impact of capital gains and losses on disposals, asset write-downs and material non-recurring provisions, cash flow from operations advanced 5.6% to €1,251 million and free cash flow rose 13.0% to €823 million (4.2% of sales versus 3.7% in first-half 2015).
The difference between EBITDA and capital expenditure improved, up 7.0% to €1,529 million (€1,429 million in first-half 2015), representing 7.8% of sales (7.2% in first-half 2015).
Operating working capital requirements (operating WCR) totaled €4,244 million (€4,448 million at June 30, 2015) and represented 39.1 days’ sales, an improvement of 1.7 days year-on-year, owing chiefly to the decrease in inventories.
Investments in securities were limited, at €68 million (€92 million in first-half 2015) and correspond to small-scale acquisitions in the three business sectors.
Net debt fell 17.1% from €8.0 billion at June 30, 2015 to €6.6 billion at June 30, 2016, reflecting the favorable impact of the Verallia disposal in second-half 2015, partly offset by the dividend paid out in June 2016 compared to the payment in July 2015, and by the €857 million in share buybacks over the last two half-year periods. Net debt represents 36% of consolidated equity, compared to 40% at end-June 2015.
The net debt to EBITDA ratio on a rolling 12-month basis came in at 1.7, compared to 2.1 one year earlier.
Update on asbestos claims in the US
Some 1,700 claims were filed against CertainTeed in the first half of 2016 (versus 2,000 claims in first-half 2015).
At the same time, around 2,100 claims were settled (versus 2,000 in first-half 2015), bringing the total number of outstanding claims at June 30, 2016 to around 35,200, down slightly on December 31, 2015 (35,600 claims).
A total of USD 89 million in indemnity payments were made in the US in the 12 months to June 30, 2016, versus USD 65 million in the year to December 31, 2015, reflecting the catch-up in payments in respect of settlements still to be documented.
2016 outlook and action priorities
After a first half in line with our forecasts, our outlook for the second half is as follows:
–  France should gradually benefit from the recovery in new-builds after stabilizing over the six 
months to June 30.
–  Other Western European countries should continue to deliver growth, even though the UK 
could be hit by uncertainties following the June 23 Brexit vote.
–  North America should advance despite uncertainty in industrial markets.
–  Asia and emerging countries should continue to see good organic growth for our 
businesses, despite the contraction in Brazil. 
The Group confirms its action priorities for the year as a whole:
–  keep its priority focus on sales prices in a deflationary environment;
–  unlock additional savings of around €250 million (calculated on the 2015 cost base), 
including €150 million in the first half;
–  pursue a capital expenditure program of around €1,400 million;
–  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;
– pursue its plan to acquire a controlling interest in Sika. 
In line with its long-term objectives, the Group bought back 10.9 million shares and canceled 11 million shares in the first six months of 2016. 
The Group confirms its objectives for 2016 and expects a like-for-like improvement in operating income in the second half versus second-half 2015.
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