Weaker-than-expected H1 as Flat Glass profits collapse; cost savings programme announced
27 July 2012
FACTS: Saint-Gobain (SGO) announced interim results after the close of European markets on July 26th. Headline figures included: sales up 3.4% year-on-year (yoy) to €21.6bn; operating profit of €1.5bn (-12% yoy); and net debt of €9.8bn, up from €9.1bn at end-H1 2011. There were two other key take-outs from the statement. The first is that the group has embarked on a cost savings programme and is scaling back capital spending as well as putting acquisitions on hold. Cost savings measures were €170m in H1; €500m in savings will be achieved by year-end; and the full year impact will be €750m in 2013. The second key message relates to guidance. SGO is now flagging that second-half operating profits will be "moderately down" on the H1 result.
ANALYSIS: The guidance on second-half operating profits implies that current year expectations are too high. We are below consensus yet the H1 result was 4% below our forecast and we had expected H2 EBIT to match the first-half performance. It looks as if SGO is now pointing to full year EBIT of €2.90-2.95bn; we are at €3.13bn and consensus at €3.17bn.
In relation to the H1 result, there was a marked slowdown in Q2. Like-for-like (lfl) sales in the first half fell 0.8% but, having risen 0.9% in Q1, declined 2.3% in the second quarter. The lfl decline was in spite of prices rising 2.2% (1.9% in Q2) as volumes fell 3.0%. Q2 volumes actually fell 4.2%, the steepest decline since Q4 2009.
By division, by far the most significant reversal was in Flat Glass. We had forecast a 30% decline in operating profits. In the event, operating income fell almost 80%, from €261m to just €54m. This €207m fall in itself accounts for effectively the entire €208m decline in H1 group operating profits. The extremely sharp contraction in the division's profits was due to a number of factors: lower volumes and falling prices (lfl sales down 6.5%); rising input prices; and the collapse of the solar market.
Elsewhere, SGO generally did much better. Building Distribution, for instance, surprised on the upside as H1 margins rose 30 basis points (bps) to 3.9% and operating profits rose 13%, even though lfl sales fell 60 bps. In SGO's other core division, Construction Products, there was a contrasting result. In interior solutions (insulation and gypsum), H1 EBIT rose 14% yoy while exterior solutions operating profits fell 19%, with weakness in pipes specifically cited. High Performance Materials operating profits rose 4% in H1 (a robust result) while Verallia's fell 8%.
DAVY VIEW: SGO is a bellwether for construction activity, especially in Western Europe, and its H1 result captures (i) the extent to which a sharp downturn kicked in during Q2; and (ii) the gloomy prospects for the remainder of the year. With this backdrop, SGO's efforts to cut costs are welcome. Full achievement of €750m in savings would represent a reduction in total costs of 2%, and it is believed that the intended mix is €150m purchasing; €120m general; and €480m operational. We will review forecasts post the management briefing, but our initial sense is that revised 2012 EPS will be 270-280c (we are currently at 300c). This would leave SGO trading on a P/E multiple of 9.8-10.2x. This is not demanding. Another significant support is the dividend. If we assume SGO holds its dividend at the 2011 level – and with net debt/EBITDA at end-year likely to be under 2x, this is feasible – the yield is 4.5%.