Compagnie de Saint-Gobain S.A. (SGO) Earnings Call Transcript & Summary

Thank you. Good evening, everybody. I hope that you have received our press release and you have been able to go through the highlights. So together with Sreedhar, our Group CFO, we will present our Q3 2024 performance. As expected, we saw a sequential improvement in organic growth in Q3. The Americas Asia Pacific and High Performance Solutions saw good levels of activity, but sales continued to be affected by weak new construction markets in Europe. With the exception of France, however, most countries in Europe are at or near a low point. On the operational side, we continue to be disciplined in our execution and delivered well on what we can control. Our local teams are proactive taking the right measures at the right time to deliver on their priorities, whatever their local environment. There is no one-size fits all mentality, but we are making the most of our local markets, focusing on cross-selling actions with solutions to outperform tactical decisions on pricing, industrial actions to either adjust cost where we need to or invest for growth where we need additional capacity in order to meet growing demand. On the strategic side, our recent acquisitions in North America, Asia Pacific and Construction Chemicals made a good contribution to our growth in Q3 with a positive structure impact. I'm excited to say that in recent months, we have closed both Bailey, reinforcing our offer for light construction in Canada with now a position of #1 in big materials in this country. And we have also closed CSR establishing a leading position in light and sustainable construction in Australia. We are focused on the integration of all our recent acquisitions and implementing the planned synergies. I'm thus very confident that we have the right action plans and the right teams in place to create value exactly like we have done, for instance, on Continental Building Products or Chryso. We have also announced 2 important acquisitions in Construction Chemicals in recent months, FOSROC, in India, the Middle East and Asia Pacific in particular, and only there, the CEMEX brand, which is their commercial brand in Mexico and Central America. These 2 acquisitions will accelerate our presence in these fast-growing construction chemicals markets. Both acquisitions are expected to close in the first half of 2025 and we are excited to get started on the integrations as soon as we can. As you can see, we continue to allocate capital in a disciplined and decisive manner as part of our growth strategy as worldwide leader in light and sustainable construction. I will now hand over to Sreedhar, who will give you additional information about our third quarter sales. Sreedhar?

Thank you, Benoit, and good evening, everyone. As Benoit said, Saint-Gobain saw a sequential improvement in organic sales in Q3 with good levels of activity in the Americas, Asia Pacific and high-performance solutions, but continuing to be affected by the weak new construction markets in Europe, particularly in France. We had a positive structural impact of 3.4% in Q,3, thanks to our recent acquisitions in our targeted growth markets like North America, Asia Pacific and Construction Chemicals. Volumes were down 1.5% in Q3 and by 3.1% over the 9 months, in line with our expectations for the full year of a low single-digit volume decrease. Prices were stable sequentially, down by 0.5% in the third quarter and by 0.8% over the 9-month period, generating a positive price/cost spread, thanks to the robust pricing discipline and the overall tailwind from the raw material and energy costs. Looking at the Q3 trend, we are confident to deliver a positive spread for the second half, although the magnitude of the spread will be as expected, much smaller in H2 than H1 due to the comparison basis. Now let us look by segment. Overall, in Europe, we saw a noticeable improvement in sales compared to the first half beyond the technical swing in working days which were around plus 2% in Q3. Organic sales were down 4.5% in Q3 compared to down 7.9% in H1. We continue to see contrasted trends by end market. New construction remains significantly down, but renovation continued to remain resilient. Apart from France, most countries are at or near a low point, which is in line with what we told you previously. We have troughed in the U.K. with almost flat sales volume in Q3 which is a solid outperformance. And in the Nordic countries and Germany, we think we are close to a low point. Eastern Europe continued to be -- see the volume growth we have now seen for the several quarters. Elsewhere, Spain and Italy continued to show slight growth with supportive renovation markets and market we clearly outperformed in these countries. And we saw a strong growth in the Middle East and Africa, thanks to the recent investments. In France, we also continued to outperform in the new construction market, which remains significantly down. Thanks to our strong renovation exposure and our comprehensive range of solutions, given to the political uncertainty we expect France to take a few more quarters to reach the low point as we told you at the end of July. Leading indicators for borrowing and market sentiments are encouraging, however, helped by falling interest rates and improve affordability. In the Americas, Sales were up 0.8% like-for-like in Q3. North America remains stable at a good level as we continue to benefit from our comprehensive light solutions offering, bringing high value added for customers and also the price increases that we are successfully implementing. Latin America returned to growth in Q3 with the start of the expected recovery in Brazil, where we also saw share gains in the market with the opening of the third plasterboard line. The Asia Pacific region saw good resilience in sales with a small decrease of 0.9% in Q3. India outperformed once again with continued volume growth driven by our complete solutions and the strength of the Saint-Gobain brand in the country. In China, the new construction market remains difficult, but we achieved market share gains thanks to our renovation exposure. Our move towards inner China and our fully digitally managed sales model is helping us. Southeast Asia saw sales led by Vietnam and Indonesia. And the last but not the least, we began the integration of CSR in Australia during Q3, following completion of the acquisition in July. Now let us look at our global customer markets. High Performance Solutions saw organic sales rise 0.7% in Q3, a clear sequential improvement. We saw a recovery in our sales of our ADFORS reinforcement solutions and further growth in our construction chemicals business with continued good trends in Chryso and GCP up around 4% like-for-like in Q3. Mobility sales stabilized. We outperformed the underlying auto market, thanks to our strong technological positioning and also the innovation that we invest continuously. Our businesses serving industrial markets was slightly up despite some industrial markets remain uncertain. To sum up, Q3 saw a sequential improvement in organic growth. We once again achieved market share gains in many countries, thanks to our complete solutions offering and empowered local organization. We are confident to deliver a price cost spread for the full year and for the H2 alone. I now hand over the floor back to Benoit for his concluding remarks.

Thank you, Sreedhar. Now I would like to make a few comments. To conclude, we confirm that we expect some of our markets to remain difficult over 2024 overall with weakness in new construction and resilience in renovation in Europe and good levels of activity in the Americas, Asia Pacific and High Performance Solutions. Despite this mixed context, our teams are delivering country by country, enabling us to deliver a strong operating performance. As a result, we expect a further increase in our operating margin in 2024. Even in challenging markets, we therefore continue to demonstrate again our resilience, reflecting the quality of our businesses and the strength of our organization. We have a clear and focused strategy as leader in light and sustainable construction that has been paying off strongly over the last years, supported by structural needs to construct in a more sustainable manner to improve the energy efficiency of existing buildings to deal with population growth, urbanization and more and more to adapt to climate change. We are continuing to execute in a decisive manner to reinforce the group's profitable growth profile. As you saw in our July H1 presentation, 2/3 of our operating profit now comes from North America, Asia Pacific and emerging countries, markets with strong structural growth. And with our recent acquisitions, we have created on a pro forma basis, a EUR 6.5 billion platform in Construction Chemicals. So in conclusion, 2024 will be another year of success and strong execution for Saint-Gobain. And I'm very confident that our strategic plan has set us up for many successful years to come. Thank you for your attention, and Sreedhar and I are now happy to answer any questions.

[Operator Instructions] The first question is from Ebrahim Homani of CIC.

Benoit and Sreedhar, I have 3, if I may. The first 1 is about the France and Europe low point. In France, should we expect to reach the low point in Q4 2025? And then the other European country, when do you see the low point. My second question is about Chryso. Is Chryso still outperforming its sector in terms of top line and margin. And maybe my last question on the CSR and Bailey, could you give us an update on the integration of these 2 companies? Is everything on track as you expected?

Yes. Thank you for your questions. I would say overall, in Europe, we see and we expect to continue to see moving forward a gradual sequential improvement. Clearly, as you know, in Eastern Europe, we have turned to positive volumes, and now it's 4 consecutive quarters. As we said, in the U.K., we had flattish volumes in Q3. We were actually slightly positive in Germany in Q3 and also positive in South Europe. So truly, I think the low point has been reached or we have passed it in most of the countries, and we are very close to that in the Nordic countries. In France, it will be more gradual. As you can imagine, the political situation has created a bit of a wait-and-see attitude recently. As Sreedhar mentioned, we start to see some green shoots in terms of market sentiment, in terms of financing on the credit side. So it will take a while. Renovation is resilient. I think we will continue to see a good level of activity in terms of renovation, and we see that also in the statistics of the craftsmen in France, which is above 70 days of order book. It has not changed. It has not deteriorated. The new construction will take a bit longer. So it's a bit too early to say. But yes, it will take several quarters for France to turn up on new construction. On your question regarding Chryso. Yes, we continue to outperform. We mentioned 4.1% in terms of like-for-like growth in Q3. So I think it's a nice performance or outperformance, you may say that. And margin is extremely solid. You remember that we started with Chryso as a stellar margin when we bought it, and it has even continued to improve. So yes, Credo is holding well on the margin. We are very disciplined on innovation on bringing new innovation, new products, notably around sustainability to our customers and continuing to outperform in terms of like-for-like growth. CSR and Bailey, well, I was in Australia in late -- in early July for the close and Sreedhar was there for a full week end of August. All the organization is in place. It's crystal clear for them. We have connected the dots on multiple topics, notably world-class manufacturing on all the, I would say, the traditional corporate integration, be it IT, finance, EHS purchasing. We have sent a few people there. For instance, our deputy purchasing guy has been sent over there to oversee not only Australia, but also Asia Pacific purchasing. So a lot of good actions are in place. We had several managers of CSR in our annual meeting gathering for the top 140 managers of Saint-Gobain mid-September. So the spirit is very positive. The link with the teams of Saint-Gobain is there. And the attitude is exactly what we expect. So I'm very happy with what we have as a team and very strong team in Australia. Bailey is also a very strong company in Canada. I was there 2 weeks ago. So it's well on track connecting. It's more on the sell side in terms of cross-selling. When you sell steel frame, you can sell plasterboard. We share some common distributors. So it's more on the selling side. But yes, we connect the dots also in Canada quite nicely. And again, the spirit in Canada is positive. So yes, we are confident about those 2 and confident that we will create value on all the acquisitions exactly like we have done strongly even on year 2. Remember Chryso was year 2, Continental Building Products was year 2. So I'm very confident that we are on track for good momentum, notably in Canada, Australia. And we are also preparing, but it's more the background because we cannot talk more on CEMEX in Mexico and Central America. And FOSROC, on the other side, we are preparing also with multiple visits, multiple discussions with the teams. But of course, we cannot go too much too far because we are still in the antitrust filing. But I'm very confident that, again, the teams are well connected on all this front of integration.

The next question is from Elodie Rall of JPMorgan.

I have 2 on margins, if I may. So the first 1 is on the near-term outlook. So you've tweaked your guidance a little bit to look for further improvement in margins versus last year at 11%. Is there any reason why H2 shouldn't see the same kind of year-on-year improvement, which was 40 bps in H1. I mean I know the price cost is a bit lower, but still positive than H1. Volume should be better in H2 than H1. And you have the positive impact from acquisitions. So net-net, would it be fair to look for a similar improvement. My second question is on the midterm outlook for margin. You achieved margin improvement so far despite a weak volume environment. So where do you think margins could go with the volume recovery? And maybe if I can throw in actually a third one on the performance in Construction Chemicals, which was quite impressive, up 4%. If you could provide some color there on volumes and pricing and across regions.

I will let Sreedhar take the first one, and I will take the second and the third.

Yes. So Elodie, H2 you need to compare with last year H2, and we have to keep in mind that the volumes are going to -- we expect the volumes to remain negative in the second half. So that would certainly be one of the factors. The second thing is price cost spread, yes, it will be lower. We said we are very confident that we will deliver a positive price/cost spread. But in terms of euro terms, it will be very limited. And so for us, I think when you look at it, best way to look at it is that the full year, we are going to -- we are confident that we are going to make progression as compared to what we delivered last year. So I think at this point of time, we will not be more precise than this, but just keep these 2 factors, which is an important factor, which will have an impact on the second half versus last year's first second half.

And being close to the end of the year, it makes sense to give you a picture for the full year margin, which again will be another new record. On your second question for the midterm outlook. So first, we will talk about our expectations in February for 2025. And as you know, and as you expect, we will have a Capital Market Day in the second half of 2025 to reset the guideline and the road map for the next 5 years. So it will be a good opportunity to talk about that. What I can tell you is that we have established a very strong rock-solid organization in order to deliver tactically on the ground, be it on initial topics, be it on pricing, be it on cross-selling solutions, et cetera. So that's, I think, a very strong pillar on which we'll continue to capitalize and to build. When there will be some volume recovery in Europe, there will be some operating leverage. And the third point I would mention is that as you have seen over the years, we have made very attractive acquisitions, which are running at an attractive margin. And therefore, we should expect the ongoing impact from our M&A activity from recent years or recent months to continue to have a positive impact on the margin. So I hope I gave you enough, not too much, but that gives you a bit of color of how we are thinking of we shape the way we shape the group in terms of quality of the business, quality of execution and very strong growth and profitable profile. Now on Construction Chemicals, yes, we have good performance in Q3. It's a lot related notably to some countries in Northern Europe, some countries also in Asia and also a good performance in some countries of Western Europe, like France. So it's overall quite spread. I would say, the good support behind this growth is a very focused organization on cement additives and mixtures for concrete with dedicated teams with also a good innovation pipeline, notably on sustainability. So I think it's across multiple countries. It's not just one, and with, again, a very good streamlined quality of business. When I was in the U.S. in early October, I did review our North American Chryso, GCP business, the teams on the ground are very good, and we have won some customers based on the quality of service, based on the depth of the knowledge of our teams and plus the innovation behind it. And we continue, if I take the U.S. as one example, we continue to add labs where we were not present in some part of the country, so being closer to the customers in terms of both lab and mixing units. So it's a combination of multiple factors and all this with the leadership of Thierry Bernard, who is a very strong expert in that field.

The next question is from Paul Roger of BNP Paribas Exane.

Benoit, Sreedhar and team. So just 2 for me then if we can talk a bit about pricing. I think you mentioned stable sequentially in the quarter. But I do think previously you talked about some increases in Q3. I think notably in the Americas, so I was just wondering, did they not stick or were there some declines elsewhere, which basically offset that? And then secondly, are you expecting any boost in U.S. roofing sales or indeed other U.S. sales after the storms in the country recently?

Okay. So maybe I take the second and Sreedhar will take the first. No, we have a good activity in North America, notably on roofing. I think we gained share. When I look at the statistics in Q3 for the [indiscernible] in North America, so a good performance, both in terms of pricing and volume for roofing. When you look at the recent storms, well, first, we have been fortunate that we didn't get any damage for our teams, their families and of course, for also our assets. We think that it could indeed provide some additional volume in some parts of the country for next year. This year, overall, 2024 was not a very exceptional year in terms of storm. It was actually slightly below 2023. We had a bit of carryover effect from the storms of 2023 into 2024. But the activity in terms of weather and storm was not particularly strong, but indeed in the Southeast, some of the recent storms and hurricanes should bring some additional volume in this part of the country for next year. And I would say it's unfortunate, but it fits well with the new capacities we have announced because we have a new capacity for roofing in Georgia to serve the Southeast that will come on stream in the second quarter of next year. And as you may also remember, we have a second line in our large plasterboard plant in Palatka in Florida and also this flood and hurricane it will trigger quite a lot of activity for gypsum, we think, going forward. So overall, yes, a good solid third quarter in the U.S., both for roofing and gypsum. Keep in mind that also gypsum, it's a lot related to single-family homes and the housing starts and single-family has been up recently. So it's solid and even up if I take the last -- the latest statistics. Maybe Sreedhar for the first one?

Yes. So Paul, when you look at the numbers, it is basically minus 1.1% in the first quarter and then it's 0.8%. And then the third quarter has been minus 0.5%. So when you look at it optically, clearly, we are making -- the impact is lesser and lesser quarter-on-quarter. We did see a push on prices particularly in the U.S. market. If you recall, we have been trying to push the prices each time we had the opportunity, more so in the roofing business and gypsum businesses, and they have been quite successful in doing that. And then in all other countries, it's again, by country, we do make certain trade-offs. There are places where we have to -- we need to make some adjustments. If you recall, we had talked about the glass. But then again, at the end of the day, this is all in line with the deflation that we saw in their input cost. So this is, again, intelligent trade-off that each country manager is doing, depending on the tailwind that he's seeing in the input cost in this country. So this is a very permanent ongoing monitoring happening. I think what is most important is that we remain very confident to deliver price/cost spread positive, and that's what I said in the beginning itself that when I look at the trend, what we saw in Q3, H2, I remain, again, confident to deliver a price cost spread, which is positive.

And I should have mentioned it because you asked about the U.S., but we announced also some price increase for gypsum in the U.S., which should happen in the first quarter of 2025. So we are ongoing practically, as Sreedhar said on some pricing actions.

Next question is from Ephrem Ravi of Citi Group.

So 2 questions. One, again, on pricing. You've had sort of pricing pressure in the glass businesses, as well in pretty much every other business. My understanding was that you are having a pricing increase. Is that still the trend going forward, i.e., all the decline is essentially coming from the glass-related businesses where there has been kind of cost pass-through impact rather than the core kind of construction-driven businesses. And secondly, in terms of automotive or mobility, it's down 1.5%. Are you seeing any impact of the further declines that you're seeing in the outlook for European automotive in terms of your outlook for Q4 and into 2025?

Only one comment, general comment, Sreedhar will give you some color by country. We manage our business, remember by country for the last 6 years. So the way you look at it, and indeed, the pricing situation varies by country. Sreedhar?

Yes. Now as far as glass is concerned, I think it's more or less stabilized. It's being very managed very closely. Whatever corrections we had to do, we had done it in the beginning of the year, depending on what the tailwind we had seen. And again, this is a business that we saw also the biggest tailwind. So it's being monitored and we see that in a, now much more stable situation, as far as the glass prices are concerned.

And indeed, we look at it by country, for instance, recently, in Central America, Mexico, Brazil, we were slightly up in pricing in glass. So again, it's based on all the different market dynamics. On mobility, I think what we see in Q3 is clearly a strong outperformance because we are with a unique technology on most of the models for high-end models also for, I would say, classic EV or hybrid vehicles. So it has been a deliberate strategy over the years to go after value higher margin on that business, and we benefit from that because we are positioned on the successful model. So I'm not particularly worried about what we read or what has been announced by others. I would say when you are on the commodity side and only in Europe, remember that our business is only 30% Western Europe. All the rest is outside of the world in terms of mobility. And we have this unique ability to service customers, be it in North America, be it in India, but in China, Thailand, Korea, Brazil, notably on their new models and EV. So no particular worry, but the current trend that we may see elsewhere on Europe.

The next question is from Brijesh Siya of HSBC.

I have 2 questions as well. So the first one is on North America, that performance is flattish in Q3. If you could just split that into volume and price and provide some color around what you look at as the demand going forward at least into Q4 and into 2025, and what's the kind of capacity you talked about expanding capacity. So I was wondering what's the underlying capacity to deliver growth into 2025 in North America? And the second one is on raw material side. So you talked about price cost being spread getting squeezed out into H2. So looking into 2025, if Sreedhar can help us kind of understand how the raw material dynamics looking like? Are you seeing some inflation there coming in or if so? And what's the magnitude of it?

So Sreedhar will take the second, and I will come back to the first one.

Yes. So when you look at the raw material inflation situation, as of now, it continues to be a deflationary environment. But I would say for 2025, I would expect there will be an inflation. That's my assumption. It's too early. We will anyway talk in the end of February. But whatever trend I see, I think we should see. And in a way, I feel also it's good for us because when you have some news of inflation, then you have enough of reasons to go back to the customers and try and start trying to push the prices. And actually, we have started preparing for it. And typically, that what Saint-Gobain has done it systematically in the last 4, 5 years. You've seen that we anticipate and take proactive steps so the teams are looking at making -- depending on, again, country by country, some price increase in the beginning of the year, next year.

Thank you. And coming back to your question on North America. Well, first, keep in mind that we had quite a strong price increase in Q3 last year in roofing. So the comparison basis is a bit higher. Overall, U.S. is up, volume and price in Canada is slightly soft. So it's better to read it that way. And within the U.S., we are stronger in roofing, insulation, if I take it in the right order, gypsum and slightly soft in siding, but against a very strong comp from Q3 last year. So that's overall a combination of price and volume for U.S., slightly negative in Canada and roofing being the strongest line in Q3. Insulation is quite strong as well. Gypsum also and siding a bit softer. And going into next year, I'm confident that we'll have a good activity, again, housing starts on single family, which is what matters the most for us are moving in the right direction. The sentiment from homebuilders is positive. There is, as you know, a large shortage of supply. Mortgages have been up and down flattish around 6% in the last months and quarters, if there is any additional interest rate cuts, it would help. We discussed already what could be the impact of renovation, notably for roofing coming from extreme weather impact. So altogether, we think '25 will stay at a good level of activity in the U.S., could be also bouncing back in Canada because we expect also the Bank of Canada to cut -- they have done already some of that, but to cut interest rates going forward. So altogether, 2025, I'm confident for a solid activity in North America, U.S. and Canada.

And just can I supplementary on the U.S. elections? If my Republicans win, does that change any of the dynamics you think on the underlying demand trends?

Frankly, our managers on the ground don't see and don't expect any impact from the election one way or the other. What they expect like anyone is to have a clear cut in terms of results of the election. But in terms of program, one way or the other, we don't expect any significant shift or move. And again, the demand is there, the affordability gets better. The sentiment from the homebuilders is there. So we are confident to have a solid activity going forward in the U.S. Keep in mind, it's a local business. So I was in early October in the U.S. visiting Georgia, Florida, Texas, Arkansas, what matters is how strong you are in terms of market share, local team solutions in those parts of the country and there is a demand. So that is why we have put our additional capacities in that part of the country. And also to your question, they are limited in scope. We are talking that if I take roofing, it's a 5% additional capacity, 5% to 7% additional capacity for our business at Saint-Gobain. And hopefully, as we speak, we are on allocation, we are on the allocation for roofing U.S. We benefit from our acquisition of roofing in Canada because our plant in the West in Edmonton is not fully loaded, we have put the quality and the standards of this plant of Canada to the standards of the U.S. in terms of quality. And now we have the ability to ship from Edmonton to the north of Canada, and our plants in Minnesota to ship South, and we are benefiting from that. So it will be a nice addition to have something else in the southeast of the U.S. to service the U.S. next year.