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Saint-Gobain Announces Sluggish First Half 2009 Results (posted 7/29/09)

July 29, 2009
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Against the backdrop of an unprecedented economic and financial crisis affecting virtually all sectors and countries across the globe, trading for the Saint-Gobain Group remained sluggish in the second quarter of 2009. Both construction and industrial markets continued to decline in the U.S. and Western Europe, as well as in most Asian and emerging countries. Only household consumption remained relatively less affected by the downturn.

The Group posted negative organic growth of 15.5% for the first half of the year. This decline is due to a sharp 17.2% drop in sales volumes in the first six months of the year. It was partially offset by the continued positive momentum in sales prices, which gained 1.7% over the period.

All of the Group’s business sectors, with the exception of Packaging, were affected by the deterioration in the global economic environment and reported a sharp decline in sales volumes over the half-year, broadly in line with the first quarter. In contrast, sales prices remained well-oriented across all sectors, except Flat Glass, allowing the Group to benefit from a positive spread compared with the cost of raw materials and energy.

Innovative Materials was the worst hit by the economic crisis, due to the sharp decline in the sector’s main markets in both construction and industry. Sales for the sector shed 22.1% on a like-for-like basis, and its operating margin fell to 2.7% of sales vs. 14.1% of sales in the first half of 2008.

Flat Glass posted a 20.4% drop in sales, mirroring its first quarter performance. Despite rebounding in June, prices of commodity products (float glass) remained sharply down on the same period in 2008. This put pressure on prices for construction glass and for the Flat Glass Sector as a whole, despite more favorable trends in automotive glass. Operating margin, also hit by the steep slide in sales volumes, and, to a lesser extent, by the rise in the cost of raw materials, is just about positive at 0.6% of sales (vs. 14.2% of sales in the first half of 2008).

High-Performance Materials (HPM) also experienced a strong 24.7% decline in like-for-like sales, owing to the slump in industrial output and capital spending across the globe. Operating margin retreated to 5.5% (vs. 13.9% in the 2008 first half), despite a rise of 2.3% in sales prices. Sales for the Construction Products (CP) sector were down 15.3% on a like-for-like basis. The sharp 4.1% rise in prices failed to fully offset the continuing fall in sales volumes, particularly in Interior Solutions. The sector’s operating margin narrowed to 9.1% vs. 10.1% in the same year-ago period.

Interior Solutions sales retreated 19.5% on a like-for-like basis, as the business continued to feel the pinch of weakening construction markets in North America and Europe. This took its toll on the operating margin, which stood at 6.7% compared with 12.0% in the first half of 2008, despite the rise in sales prices in the Gypsum division.

Exterior Solutions saw a similar drop in sales volumes over the first half of the year but benefited from restructuring measures and a favorable price impact at the level of operating income. Operating margin for the sector therefore continued to climb, up to 11.2% from 7.9%.

Building Distribution like-for like sales contracted 14.5%, at a slower pace than in the Construction Products sector. While the UK and Spanish construction markets remained the worst affected by the economic crisis, most other European countries also began to flag (except Switzerland), posting a double-digit decline in sales volumes over the six months to June 30. Although sales prices held firm, the lackluster performance weighed on the sector’s operating margin, which came in at 1.4% of sales (vs. 4.7% of sales in the first half of 2008).

Packaging stood out from the Group’s other business sectors, delivering sales and operating income on a par with the 2008 first half, despite the crisis. Like-for-like, sales for the sector edged down 3.5% as robust sales prices failed to fully offset the 6.7% decline in sales volumes. Operating margin held firm year-on-year, at 13.4% of sales.

All of the geographic areas where the Group operates were hard hit by the crisis in the first half of 2009, in line with the trends observed in the first quarter. In France, like-for-like sales retreated 13.5% due to the downturn in construction and industrial (particularly automotive) markets over the period. Operating margin narrowed to 5.4% of sales, even though gross margins in the Building Distribution sector held up well.

The downturn in other Western European countries was even greater, with like-for-like sales falling 19.5% and operating margin sliding to 3.2% of sales from 8.7% previously. Most European countries saw weak trading conditions in their markets over the period.

Sales for North America dropped 15.1% like-for-like, reflecting the continued decline in construction coupled with the contraction in industrial markets since the beginning of the year. In contrast, operating margin continued on the strong upward trend observed in the second half of 2008, coming in at 8.8% of sales (4.6% in the 2008 first half) on the back of a significant 7.6% price effect and the impact of restructuring measures.

Emerging countries and Asia were also affected by the economic crisis, reporting a 13.5% drop in like-for-like sales. The region experienced a significant decline in profitability, with operating margin falling to 4.5% of sales, compared with 11.7% one year earlier. Eastern Europe and Asia (except India) were the most affected by the challenging conditions, while Latin America (especially Brazil) proved resilient.

Global markets remained in the doldrums during the first half of the year, though the dismal trading environment appeared to stabilize somewhat between the first and second quarters. The Group expects the economic climate to remain extremely challenging in the six months to December 31. However, despite persistent uncertainty going forward and severe volatility in energy/raw material prices and exchange rates, Saint-Gobain does not expect any overall further deterioration compared with the first half of 2009.

Moreover, the Group should benefit from a lower basis for comparison than in the first six months of the year (especially in the fourth quarter), and from the acceleration and extension of the action plan rolled out at the beginning of the year, with, in particular:
  • a positive price/cost spread (energy/raw material costs), thanks to the priority given to sales prices and a deeper fall in the cost of raw materials and energy than in the first half; and
  • cost savings in the six months to December 31, 2009, set to exceed first half cost savings by €400 million (about $569 million), owing to the extension of the cost cutting program.
Barring a further decline in the economic environment, operating income and recurring net income for the second half of 2009 should therefore outperform first half figures. In addition, the Group will continue to optimize cash generation on the back of strong free cash flow and an ongoing tight rein on operating working capital requirements (WCR). The Group has taken advantage of the crisis to reinforce its core assets, with the aim of preparing its future and further developing its various strategic priorities over the longer term.

Industrial and commercial facilities have been overhauled by restructuring a number of industrial plants and selectively closing Building Distribution branches experiencing structural difficulties, while maintaining the core commercial network. Expansion in Asia and emerging countries has continued, with one-third of the Group’s total capital expenditure focused on these countries (double their weight in the Group’s total sales). In particular, capital spending for the period remained upbeat in Latin America, Asia and the Middle East. The Group carved out new strategic footholds during the period in this latter Middle East region.

R&D initiatives have been maintained, with an increasingly sharp focus on energy efficiency and solar technologies, which account for more than 50% of R&D projects in 2009. The Group has considerably strengthened its balance sheet and optimized its free cash flow generation after operating WCR in order to leverage any growth opportunities going forward.

For additional details, visit www.saint-gobain.com.

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