Compagnie de Saint-Gobain's (CODGF) CEO Pierre-Andre de Chalendar on Q2 2016 Results - Earnings Call Transcript

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Compagnie de Saint-Gobain (OTCPK:CODGF) Q2 2016 Earnings Conference Call July 28, 2016 2:30 AM ET

Executives

Pierre-Andre de Chalendar - Chairman and Chief Executive Officer

Guillaume Texier - Chief Financial Officer

Benoit Bazin - Senior Vice President of Construction Products

Laurent Guillot - President, High Performance Materials

Patrick Dupin - President, Flat Glass Activity

Kare Malo - Senior Vice President of Building Distribution

Analysts

Eric Lemarie - Bryan Garnier & Co

Elodie Rall - JPMorgan

Robert Gardiner - Davy

Will Jones - Redburn Partners

Josep Pujal - Kepler Cheuvreux

Mike Betts - Jefferies

Sven Edelfelt - Natixis

Gregor Kuglitsch - UBS

John Fraser-Andrews - HSBC

Arnaud Lehmann - Bank of America Merrill Lynch

Operator

So good morning everybody. Together with Guillaume Texier, our CFO, we'll present you our First Half Results and then the Outlook. And I will start by a few highlights, then Guillaume will go into more details of the results and I will finish up on the outlook on the second half and our action plans.

So in a nutshell, the key figures of this first half. We had a good set of results with sales growth and we see in all our geographies, 2.9% on a like-for-like basis, although in real terms there is a decline of 1.6%, mostly because of a significant exchange difference versus last year. Our operating income growth is 10.2% on a like-for-like basis, which is the way we set our objectives, with an improvement in the margin by 60 basis points, so €1.368 billion.

On a real-term basis, it's an improvement of 7.3%. Our net income increased more I'm talking about the recurring net income, which is the most important for us, €624 million, plus 13%, and given the buybacks that we have done, in fact the recurring net income per share is growing 16.5%. A good generation of free cash flow, €823 million, up plus 13% and a reduction of net debt compared to June 2015 of 17%, which gives us a very solid balance sheet.

In terms of the market environment and the performance in the various regions, we had a better outlook environment in Europe as expected, with stabilization in France as expected. In fact, if we had - and that was also flagged, a downturn in our export by business from France. If I take that out, in fact there is in the first half a little growth in France.

Significant growth in the other regions in Europe. Guillaume will go into detail, but very strong performance, especially in the Nordics and an improved margin in Europe, though slight decline in France. North America, we benefited from a good condition that we were counting on but - and which we continue to materialize in construction markets.

The industrial markets, it varies a lot by segment, but globally they have been more uncertain and we had a very good growth in our margin, powered by and helped also by some very good activity in our roofing business because of - in particular because of some storms in the south of the U.S.

Asia and emerging countries, we have also good growth there in all geographies, whether it is Latin America, despite the difficult situation in Brazil, but all the other countries around in South America have delivered very good growth, which more than compensated the slight decline in Brazil.

Asia was also very good and Africa and the Middle East, which starts to be significant, and Eastern Europe, very good growth in Eastern European countries. And we have - I think we are reaching the bottom and started to grow also in Russia. Driven by this good growth overall and good balance, which has been improved significantly in the last several years, continued improvement in our margin above 10%.

In terms of the highlights globally for the Group, so sharp improvement in volume at 3.5%, helped by around 1% by calendar effect in the second - especially in the second quarter. Price are down in the deflationary environment. We had, as I said, a very significant 3.5% negative currency impact.

Our operating income is up 10% on a like-for-like basis and we have delivered on the first part of this year a cost saving plan with some good operational efficiencies in several divisions, a significant rise in the net income and the net free cash flow and as I said, we have cancelled 11 million of shares after the buyback that we made in the first half.

So these are the highlights, and now I'll give the floor to Guillaume for more details about our results.

Guillaume Texier

Thank you, Pierre-Andre and good morning. I will start with the sales evolution in the first half. Our sales are down 1.6% to €19.549 billion for the first half which means in fact there's solid internal growth of 2.9%. The difference between those two figures comes from exchange rate and Group structure impact.

Organic growth. Starting with organic growth, organic growth is driven by a strong volume figure of 3.5%. It accelerated in the second quarter with 3.8% organic growth figure compared to 1.8% in the first quarter. The figure is helped by a number of days effect compared to last year, which was a little bit more than 1% over the first half.

Price continues to be slightly negative at 0.6% in an environment which continues to be deflationary overall. In the industry price is in fact flat in Q2, like in Q1, and knowing that on the other hand we benefit from a positive reduction overall in the market price of our raw materials and energy, amounting to approximately €70 million positive effect for us in the first half.

In distribution, which is more of our resale business, we are experiencing a negative pricing environment, stable at 1.3% on both quarters, which is impacting both the purchasing and the resale side of the P&L. Exchange rate is 3.5% negative, slightly accelerated during the first half, since we had a 3% negative effect over the first quarter.

The acceleration between the first and the second quarter comes from the British pound and from the U.S. dollar, which was slightly positive in the first quarter and slightly negative in the second quarter. Overall, if I take the 3.5% over the first half, three quarters of this negative effect comes from basically three regions, Latin America, especially with the Brazilian real, the Nordic countries with the Norwegian krone and the UK.

Group structure impact is negative by 1%, coming mostly from portfolio evolutions in 2015. If you remember well, we did several portfolio adjustments, especially in building distribution in 2015 which have a full-year effect of approximately €700 million and which are giving a negative structure effect in the first half of 2016. This effect is not completely offset by the small and mid-sized acquisitions that we did in all three sectors.

In 2016 we continue this policy of doing small and mid-sized acquisitions with €68 million of financial investments. For example, wood-based insulation acquisition in the first half in construction products or abrasives in Brazil.

If I go now to operating income, operating income is up 7.3% to €1.368 billion for the first half. And on a like-for-like basis, like Andre mentioned, when the adverse effect of exchange rate is removed from the figure, it climbs up to 10.2% evolution between the first half of 2015 and the first half of 2016.

The profitability of the Group is up to 7%, which is our best first half figure since 2011. And as you will see later, the reasons for this evolution are very diverse, both from a business point of view and from a geographical point of view, which is referring on the solidity of the results.

So let us now go into a little bit more details about the results business-by-business. This graph summarizes the main figures for the three business sectors, innovative materials, construction products and building distribution. In innovative materials 4.4% internal growth, with a slight acceleration in the second quarter, driven by flat glass.

In construction products, 1.6%, clearly accelerating in Q2 with interior solutions being the main driver of sales growth. In building distribution, plus 3.1% over the first half, accelerating also in the second quarter, where it was helped by days, as I already mentioned. And I will now get into more details activity-by-activity.

So starting with a flat glass. Flat glass continues to be a very good story for us with a substantial growth rate of 6.5%, accelerating by more than three points between the first quarter and the second quarter and profitability jumping to 8.8%, which is 140 basis points better than last year and even better sequentially than the second half of 2015.

You have to go back to 2011 to find a similar performance in terms of profitability of flat glass. So this good story in flat glass starts with automotive glass, which continues to perform very well, except in Brazil. Here we take advantage of first of all a solid end market, but also from our past efforts which have helped us build strong commercial positions and very efficient manufacturing system.

But the performance of the flat glass sector doesn't stop at automotive; it's not limited to that. We have also seen a good business environment in building-related activities outside of Europe. In Western Europe, volumes were good also and associated with a solid progression of float price during the semester.

Overall again, flat glass shows 6.5% organic growth on the first half with 3.6% contribution of volume and 2.9% contribution of price. In terms of CapEx, flat glass spent €102 million with in particular capacity expansion projects in emerging countries for Sekurit, our new glass quarters in South Korea or in India.

Now moving on to high-performance materials. High-performance materials posted a 2% internal growth rate overall on the first half, 0.8% coming from volume and 1.2% coming from price. After a strong first quarter, the second quarter marked a slowdown, but this breakdown between the first and the second quarter also has a lot to do with the timing of large orders in ceramics.

HPM experienced overall good demand in Asia and emerging countries. In Western Europe, volumes were positive over both quarters, whereas North America remains more contrasted with different industrial sectors, contributing very unevenly to the total growth and outlook for the industry in general in North America remaining a little bit difficult to read.

Thanks to operational efforts and helped by a particularly good mix in the first quarter of 2016, HPM is able to increase its margin by 50 basis points compared to the first half of last year and even a little bit more compared to the full-year. Margin overall is at 14%, the best semester figure in four years.

Now switching to construction products, I will start with interior solutions, which delivered 5.2% internal growth and an operating margin improved by more than 100 basis points to 10.2%, benefiting from strong market positions and operational excellence. This level of operating margin had not been reached since 2008.

Volume was strong in all regions but South America. Strong growth in the U.S. driven by a dynamic construction and renovation market, both in insulation and in gypsum. Growth to two digits in Asia, where we benefit from past strategic developments and more than 5% growth in Western Europe, with all major countries solidly contributing - Scandinavia, the UK, Germany, and France.

From a pricing perspective, interior solutions operated in a more challenging environment due to the competitive nature of the business as well as to the fact that it is also one of those businesses which is benefiting the most on the other side from the reduction in raw materials and energy bill, which is true for us as well as for competitors.

On the first half we spent €111 million in CapEx within particular new lines in India or in Vietnam. Like in past quarters, exterior solutions includes both businesses doing very well, like exterior products in North America and businesses facing a much more challenging environment, like pipes. Overall, the 2% negative growth figure, which is however very strongly impacted by pipes.

Pipes continue to be difficult in all geographic areas, Western Europe and in particular France, China and Latin America, even though the mid-term underlying demand for pipes products continues to be there, the strong contraction in public spending in those countries where we operate has created the conditions for a cyclical trough in which we are. It is too early to point to recovery. However, we will benefit in the second half from a slightly improved comparison basis in 2015.

On the other side of the spectrum, exterior products in the U.S. saw a strong acceleration of volumes in the second quarter with roofing benefiting from increased activity, triggered in particular by hailstones in several regions of the U.S. Demand in roofing continues to be strong and we have announced price increases in June and August to offset the beginning of the rebound of the price of last fall.

Mortars reported organic growth led by Asia and emerging countries and by the improvement in Western Europe, which offsets tougher conditions in Brazil. Profitability in exterior solutions remained stable in the first half at 8.3%. Total CapEx amounts to €53 million for the semester, including the end of the construction of our new roofing plant in Missouri, which started up successfully in the second quarter, as well as several new capacities in emerging countries, in mortars, including China, India or Vietnam.

Building distribution now. Distribution grew by 3.8% on the first half of 2016 with days contributing a little bit more than 1% to this figure. Western Europe grew steadily. The Nordics were quite strong with substantial growth netted from the day’s effect, particularly in the second quarter. Germany also displayed strong and accelerating performance, and UK grew on both quarters.

France was also positive on the first half with trading benefiting from first signs of upturn in newbuilds while the renovation market continues to lack consumer and contractors' confidence. Pricing in distribution was negative 1.3% and stable between the first and the second quarter.

As we continue to be in a deflationary environment with France and the UK posting negative pricing figures. Even if this situation allows us to gain on the purchasing side also, it weighs on profitability as trade margins is slightly under pressure and fixed costs like salaries and rents continue to increase. Despite that, however, building distribution improved its margin overall, moving from 2.6% to 2.8%.

Now by region, all main regions grew during the first half of the year. France posted 0.6%, in line with the stabilization guidance that we gave at the beginning of the year. This figure would have been north of 2% without pipes despite negative pricing figures both in distribution and construction products.

Other Western Europe countries were up 4.3%, an acceleration compared to the 2% figure that we were showing during our Q1 sales results. Part of this was helped by the number of days, but part of this also is the reflection of a real positive evolution of market volumes in most countries, while price continues to be under slight pressure.

Scandinavia continued to be very solid. Germany showed strong growth, led by innovative materials, while the UK showed positive evolutions in all three sectors. North America was up 3.6% in the first half of 2016 with an acceleration between Q1 and Q2.

Price in the U.S. is negative because of the impact of roofing products price, which follows the evolution of asphalt raw material. Volume, on the other hand, is strongly positive, thanks to construction products, whereas industrial markets, as I mentioned, remain more flattish overall.

Finally, Asia and the emerging countries were up 4.9% over the first half, a very strong performance, followed by the diversity of our geographical base and our strong position built over the years, which allow us to offset the few negative countries in which we are. For example, in Latin America, we were able to totally offset the Brazilian negative figures to finish the first half with a strong 7.6% internal growth figure, which means double-digit in countries like for example in Mexico.

In Asia, China is negative as it is impacted by pipes, but here again, we have double-digit figures of growth in Southeast Asia or in India, and in the end, we are able to post a negative evolution of plus 2% in Asia, a positive evolution of plus 2% in Asia. The same is true with Eastern Europe and Russia, which is very small. Overall, in this region, growth was solid, and it was fueled both by volume and by price, which allowed us to post another improvement in profitability, as you will see in the next slide.

So switching now to operating income by region. Operating income by region progresses everywhere, both in absolute terms and profitability, except in France. France is impacted in particular by pipes and the continued softness in volume despite the recent positive trends.

Although Western Europe countries are on a very good roll with more than €50 million additional contribution to operating profit in the first half of 2015, and 0.5 points of percentage operating profit improvements. Similarly, North America progresses by more than two full points of operating profit percentage, thanks to operational improvements, better volumes in construction-related activity and also improved profitability in innovative materials businesses.

Asia and emerging countries also show a substantial improvement in profitability, going from 10% to 10.6%, but the absolute operating profit is not progressing as much because of adverse exchange rate. So all this translates into a strong EBITDA generation, which you can see on this graph as well as this graph mentions also the CapEx by geographical area.

Maybe a few additional comments on CapEx figures. First to say, that the overall amount of CapEx is €428 million overall, 6% down compared to last year, because of the timing of the projects first of all, and also a currency impact. The second remark is to mention the fact that around 40% of those CapEx overall are growth-related. And the third remark to highlight our effort in Asia and emerging countries where we invest double proportionally to the rest of the Group and mostly in capacity CapEx in line with our growth expectations in this region.

Now further comments now on the financials, and especially on the lines between operating profit and net results. Non-operating costs are slightly up from €154 million to €180 million. This is mostly due to the timing of restructuring charges, which we advanced in the first part of the year in full consistency with our new cost savings plan. Charges to the asbestos provision are flat, at $50 million or €45 million, and we will see the details in the next slide.

Overall, we expect the year-end figure for non-operating costs to be slightly better than in 2015. Other operating expenses improved by €9 million compared to last year; they don't include any particular meaningful operation. As I mentioned, the asbestos provision charge is constant at $50 million or €45 million. When it comes to the number of new asbestos claim, which is a good direction of indication, they were completely in line with last year's average.

Payments are up though, on a 12-month running basis from $65 million to $89 million. This is mostly a timing issue as we knew already last year that the backlog of claims settled, but still waiting for paperwork before being paid was increasing. So this is not unexpected, and overall, the situation on the asbestos side is very stable.

If I continue down the P&L, the net financial expense is down as expected compared to last year from €328 million to €287 million. A large part of this effect is due to the fact that we have reimbursed two bonds since June 2015, €1 billion in September 2015 and €700 million in May 2016. The tax rate on recurring net income remains stable at 30%, with a total tax charge of €261 million, increasing compared to last year obviously, owing to better results.

Finally, net income for the first half amounts to €596 million, which is an increase of 6.8%, remembering that last year's figure included €69 million of Verallia net results. On a recurring basis, this figure becomes 13% improvement and it goes up to 16.5% when divided by the number of shares, as a reminder we brought back as much as €857 million worth of shares in the last 12 months and reduced the number of outstanding shares by almost 70 million shares or 3% since last year at the same date.

As a result of the good first half, cash flow increased by 5.6% and free cash flow by 13%, given the reduction in CapEx that I was mentioning a little bit before. Free cash flow went from €728 million to €823 million. A very good performance on the working capital evolution since we improved the working capital requirements by 1.7 days over the last 12 months, going from 40.8 days to 39.1 days. Part of this positive evolution is due to a positive favorable exchange rate effect, but still without exchange rate at constant rates, the working capital requirement in number of days would still improve by 0.5 days, which is a very good performance.

Now finishing with net debt and shareholders’ equity. Compared to last year, net debt is improving by €1.4 billion compared to last year, end of June. So €1.4 billion improvement, €2.5 billion are the proceeds of the Verallia sale. €1.4 billion are generated by operations, either on the free cash flow side or by working capital, and on the minus side to that, we paid €1.1 billion of dividend over the last 12 months.

You have to remember that on top of the €0.7 billion that we paid this year, we also paid in the second half of last year the cash part of the dividend in July last year for €0.4 billion. Lastly, as I mentioned, we spent almost €0.9 billion in share buybacks.

On the shareholders' equity, we decreased the shareholders' equity by €0.9 billion. If I compare the figure at the end of June to the figure at the end of December, this is due to dividends for - the main evolutions are dividends for €0.7 billion, share buybacks for €0.4 billion, and conversion effect for €0.4 billion negative, offset partially by the results from operations which are adding a positive €0.6 billion.

Pierre-Andre de Chalendar

So a few words now about the outlook and our action plan. In terms of the economic climate, we are seeing stabilizing trends in France. They should progressively improve, as we see more and more evidence about the increase in new build activity.

We have started to see that in the summer, our distribution activities in the products linked to foundations, the bulk of what Saint Gobain has is later in the cycle, but we are - so we're going to see I think - you know, I have been cautious on that, I think we will have progressive impact of the increasing new build activity materializing in the second half, and from that standpoint, July indication in France are positive after the months of June where there was - I'm sure we didn't mention that, that there was a negative impact from very bad weather, the flooding and strikes.

So I think we are more online with what we have seen at the beginning of the year in July. We should see a gradual improvement in France. For the renovation market, which is a most important one, I am still cautious. We are not yet seeing an increase, even though the early indicators are still positive in terms of the numbers of transactions, but I will talk about the recovery in renovation when I really see it.

We expect to see further good growth in other Western European countries, even though but I don't think it will be material. There are some uncertainties following the Brexit vote in the UK. We are going to have continued good growth in our construction markets in the U.S. where the new activity is still very positive and the renovation market is good as well and we will continue to see the impacts in our roofing but to a lesser extent, but we will see an impact of the weather incidents in the spring in the delivery of our roofing products in the second half.

We also are going to have a good growth level in Asia and emerging countries. We have - the latest trends we have seen in Brazil, I think the rate of decline has been slowing and we may be close to the bottom and Russia has started also to stop bottoming in the second quarter and most of the other countries, we see good dynamics. So I think overall the economic climate in the second half should continue the trends that we have seen in the first half.

What does that mean for our businesses? Innovative materials, we expect further profitability gains for flat glass and continued good margins for our high performance materials business.

In terms of construction products, we will have an improved profitability despite the downturn in fiber. This downturn should - as a comparison basis is going to ease because we had already in the second half of last year - the situation has already deteriorated. We should continue to see the margin growth in our building distribution activities.

In terms of our priorities, they remain the same. We continue to give the focus on sales price, which is taking place in a deflationary environment. I think this deflationary pressure may ease progressively during the second half, but on the other hand there are some raw materials also which have stopped to decline.

We will deliver our cost saving program over the year, which calculated on the 2015 cost base is around €250 million. We also will deliver our capital expenditure program of around €1.4 billion. We are going to increase - continue to increase progressively our investment in R&D to support our differentiated high value added strategy.

We keep focus on our free cash flow generation and even though there has not been a lot of news recently, we continue our plan to acquire controlling interest in Sika, waiting for the holding of the Burkard family to reconvert their property rights.

The Group in all this framework confirmed its objective for 2016 and you remember in terms of operating income, our objective was to increase the operating income. We have generated more than 10% in the first half. We keep our objective for the full year, but we will also have an improvement during the second half of the year compared to the second half of 2015. So this is a summary of our results and outlook and now we are at your disposal for the questions.

Question-and-Answer Session

Q - Unidentified Analyst

Bonjour. I have a question regarding the interior solutions, so plasterboard and also insulation. Price effect was slightly negative over the first half. Could we have more flavor on that in Western Europe and also in U.S.? In U.S., did you have a price increase in plasterboard? Thank you.

Pierre-Andre de Chalendar

Well as you have seen we have had good dynamics in interior solution in the first half in all regions, like Guillaume mentioned, including Europe where as you know - and that was the rationale a long time ago for the acquisition of BPB.

Our interior solution businesses, whether it is insulation and plasterboard, they are growing at a higher rate than the market and we are seeing that when it declines, it declines less and now it is going to grow more. We have also good dynamics in terms of volume in the U.S.

Pricing in the U.S. has been so far more disappointing. In gypsum, we hope to see a significant increase in the second quarter which didn't materialize a lot. We had a small increase sequentially and in insulation we have not been able to have a price increase. In emerging countries globally, I think we have had good growth everywhere. Maybe Benoit you want to…

So I - and I should also mention on interior solution that we are seeing a good impact in our profitability level from all the operational excellence plans and the cost savings in this business driven by operational improvement is quite - going really quite well.

Benoit Bazin

Yes?

Eric Lemarie

Yes, good morning, Eric Lemarie, Bryan Garnier. I've got three quick questions. First on the roofing, I didn't catch what you said on H2 your view because I understand [indiscernible] was a bit cautious on H2 volumes, what's your view on that regarding roofing in the U.S.?

Second question on calendar effect, you mentioned this 1% effect in H1 from calendar effect. Do you have the split between Q1 and Q2 in terms of calendar effect? The last question, on the Brexit, you don't seem very worried on the Brexit. Could you explain as to why you are not worried about the possible impact of the Brexit on your business please? Thank you.

Pierre-Andre de Chalendar

Well I'll start with the third question maybe because you know I am not in the financial world, so maybe that's why I'm less worried than the financial community and maybe the impact on our share price is more driven by what's going on in the financial community. No, I think that what are the impacts of the Brexit? First there is an impact which is the one which happened immediately on the translation of our results into euros. From that standpoint - and maybe that's not intuitive, there is no impact, because in fact at the same time that the - for the time being, yes, it may change.

But for the time being, the devaluation of the sterling versus the euro has been nearly completely compensated by a minor but on a bigger scale devaluation or reduction of the value of the euro versus most other currencies. So in fact, this impact is really very, very minimal. So that's the immediate impact of the Brexit.

Then what is the impact in terms of the activity of our businesses? First we have a small part of our business in the UK which are mostly in high performance materials, are going to be a beneficiary of the Brexit because - it is mostly the export and their competitive position is improved and generally they sell in dollars, so they are going to benefit from this improvement. But this is a small part of what we have in the UK.

Then the big part is linked with the construction activity in the UK and from that standpoint, I don't know what's going to happen. I don't see any significant change for the next few months. Later on I will - as always I'm not going to talk about 2017 today, I will update you in February. I think it's too early to know what's going to happen.

I just have in mind that the construction level of activity in the UK at the moment is not extremely high. People are focusing on probably the real estate prices in London and these are high, but the overall activity in the UK in construction has not at all recovered from where it was before the 2008 crisis. We are in fact on this subject of the construction market in the UK; we have put in place an action, a group to monitor the situation.

We monitor the situation very closely and we will take actions as necessary, as necessity comes. For the time being, I am not able and I don't see any significant impact based even on - July is not bad in the UK and we don't see a significant impact on 2016.

That was the second question, you may answer…

Guillaume Texier

Yes I can answer the other questions. You had one question about the days effect in the first half. As I mentioned, the days effect is a positive days effect on growth in the first half of a little bit more than 1% and the breakdown between the first quarter and the second quarter, so first quarter was very slightly negative and the second quarter is close to 3% approximately.

Pierre-Andre de Chalendar

No.

Guillaume Texier

The second quarter?

Pierre-Andre de Chalendar

In France

Guillaume Texier

[Indiscernible]

Pierre-Andre de Chalendar

So that means that minus two…

Guillaume Texier

No, it's slightly negative in the first quarter.

Pierre-Andre de Chalendar

Slightly negative.

Guillaume Texier

Slightly negative in the first quarter.

Pierre-Andre de Chalendar

Yes.

Guillaume Texier

And close to 3% in the second quarter. You were asking about the roofing…

Pierre-Andre de Chalendar

Sorry, I was talking about the days.

Guillaume Texier

No, so you were asking about roofing evolution, roofing evolution in the U.S. So in terms of volume, as I mentioned, we saw a big acceleration of volumes in the second quarter fueled by underlying demand. I think the construction and renovation markets are good in the U.S., but also helped by hailstorms especially in the south of the U.S. For the moment, we continue to see I think a good demand for the next few months in terms of volume.

In terms of pricing, we announced a price increase in the beginning of June and part of it was realized and we announced the second price increase for beginning of August, knowing that on the other side, talking about the main raw material, which is asphalt. Asphalt experienced a sharp decline in the first half of the year and in the last few weeks stabilized and even saw a very slight increase. So overall, if I look at the future, I think in terms of volume, we continue to see good trends for the short term future and pricing I commented.

Pierre-Andre de Chalendar

So maybe I will go to…

Guillaume Texier

To the internet.

Pierre-Andre de Chalendar

No. No. I go to the conference - I don't have the question on the internet yet, so we'll go on the telephone. So we have Elodie Rall from JPMorgan.

Operator

Yes. So the first question is coming from the line of Elodie Rall from JPMorgan. Please go ahead.

Elodie Rall

Hi, good morning everyone. I have two questions please. First of all, can you confirm that the impact of the number of days in H1 on operating is about 3%? I mean you said it's 3% on topline for Q2. That's about 1% in sales in H1. Can we just confirm that it's 3% on operating profit, meaning that the underlying organic growth in H1 is about 7%?

Second, on the outlook for H2, you have said that you've done €150 million of cost savings out of €250 million in H1 already, but the outlook for H2 in France is looking more promising. Can we then assume that the 7% organic growth you've seen in H1 is sustainable into H2? Thank you.

Guillaume Texier

So the number of days again, we have a slightly positive, more than 1% effect on the organic growth of the number of days of H1 broken down between a slightly negative effect in the first quarter and a positive effect of approximately 3% on the organic growth on the second quarter. Could you repeat the second part of this first part of the question?

Elodie Rall

Sure. I was just trying to get to the impact on operating EBIT in H1. So on topline, I think it's about 1% on sales and is it fair to assume that it had a positive impact of 3% in EBIT, in operating profit in H1?

Guillaume Texier

No I think those kinds of calculations are probably a little bit farfetched.

Elodie Rall

So what would be your estimates for the impact on H1?

Pierre-Andre de Chalendar

I don't know.

Guillaume Texier

No we don't do estimates of number of days on EBIT. We do estimates on turnover.

Elodie Rall

Okay.

Guillaume Texier

Could you repeat the second question?

Elodie Rall

Well my understanding was that like-for-like growth in H1, if you exclude the number of days, impact was 7% and therefore I was trying to understand how we can think about the H2 growth, like-for-like H2 growth in EBIT, given that you've done a lot of cost savings apparently in H1 already but the outlook for France is improving in H2. Therefore, can we assume that the H1 like-for-like growth is sustainable into - in H2?

Pierre-Andre de Chalendar

I think I will answer the way I gave the objective at the beginning of the year, I said that there will be a growth in operating and I didn't want to quantify the growth in operating income like-for-like. I'm not going to quantify the growth in the second half, but given what I said, you understand that there is a floor to the operating profit growth for the full year. So I have precise the objective for the year.

Elodie Rall

Okay, thank you.

Operator

Thank you. Next question is coming from the line of…

Pierre-Andre de Chalendar

What we have gained, we have gained, in other words.

Yes, I take the question from the internet now. A question from Exane, Paul Roger. In fact, they asked three questions. What was behind the pickup in interior solutions margin in H1 and are further sequential margin improvements likely in H2?

I think I already answered but maybe Benoit you want to give more additional color?

Benoit Bazin

Again, it's a combination of good growth. We have seen the topline organic growth above 5% and we should have a good run in the second half. Mostly on emerging markets, but also good momentum on Western Europe and good operational excellence programs everywhere so we should have a full year and good year in interior solutions and there is no change in the pattern and the trend that we expect for the second half in the interior solutions.

Pierre-Andre de Chalendar

Second question, you mentioned that organic growth in HPM was impacted by the timing of ceramic contracts. Should we therefore look at H1 like-for-like growth of 2% rather than just Q2 when forecasting for the full year? Laurent, you want to answer that?

Laurent Guillot

Well in HPM as always because we have big orders for - especially for the ceramic business, we have fluctuations from one quarter to another. But as Guillaume mentioned and Pierre-Andre said before, we have contrasted evolution for markets in the U.S. Between some markets that are very positive, like LSK or automotive and others are more difficult and oil and gas market remains in a very difficult environment. So overall we should continue to see limited growth for the year but nevertheless a growth.

Pierre-Andre de Chalendar

The third question is the rate of margin expansion moderated in flat glass. Are we now closer to normalized margin in the business? Moderated, I mean 140 base points, I don't think it's a - I think it's a good growth. I don't know what means normalized margin. I think that's your vocabulary. That's not exactly the way we work, but as I said, we expect to have further growth in operating margin in the second half of this year, particularly in flat glass.

Now we go back to the telephone, with…

Operator

Yes. So we have a question coming from the line of Robert Gardiner from Davy. Please go ahead.

Robert Gardiner

Good morning, gentlemen. Can I ask two questions please? Sorry, three quick ones. Would you mind giving us the Q2 price by division? So you've given us H1 and Q1 so if you could just be more specific on price by division in Q2. Would you mind commenting on energy and raw material costs? You had flagged €100 million for full year 2016. You've done €70 million in H1. Does that mean it's going to be more than €100 million?

And I'm also just wondering very quickly on your UK distribution business. As you've mentioned you've seen very little by way of impact. Some of your competitors are suggesting some weakness towards the end of the quarter. Are you seeing anything in U.K. distribution June, July? Thank you.

Pierre-Andre de Chalendar

So Guillaume, the first two.

Guillaume Texier

Okay. I will take the first two questions. The first one about specifically in Q2, the price effect by division. In flat glass, the price was positive by 2.9% after our first quarter of 2.8%. In high performance materials the price was positive by 0.8% after a first quarter of 1.5%.

In interior solutions the price was negative in the second quarter at minus 0.9%, in line with what we have in the figure of the first half. In exterior solutions, minus 2.9%, in fact in exterior solutions it's minus 2.9% in the first quarter, minus 2.9% in the second quarter and minus 2.9% for the half. And in distribution, as I mentioned, the price was negative at minus 1.3% in both quarters and in the first half.

Your other question about raw material and energy savings, yes, as I mentioned during my presentation, we saw a positive evolution of our energy, the raw materials bill for €70 million in the first half. And we continue two things that as a total for the year is going to be more than €100 million, knowing that at the end of the first half what we see - I mentioned, for example, the example of asphalt, which is also true for many other oil-related products. We saw a sharp decrease in the first half, but with the stabilization and sometimes a slight increase at the end of the half. So we expect to continue to see benefits in the second half, but I would think that those benefits are going to slow down a little bit, depending on the various raw materials.

Pierre-Andre de Chalendar

Maybe Kare you want to answer the third question on the UK?

Operator

Thank you. Next question is coming from the line of -

Pierre-Andre de Chalendar

No, no, there was a third question on the UK distribution, sorry.

Kare Malo

What I can say about the UK distribution is that we're coming from a situation where we slightly lost market share in 2015, to a much better situation in 2016, where we are back in the market. We are improving our situation and the margin and we have a better sales dynamics, which has led us to a better position and we are slightly gaining market share at the first half of 2016. I can also say that in the other markets, in France, in Germany and Nordics, we are also slightly gaining market share the first half of 2016.

Guillaume Texier

Next question?

Pierre-Andre de Chalendar

Thank you.

Operator

Yes, next question is coming from the line of Will Jones from Redburn. Please go ahead.

Will Jones

Thank you, three if I could please. The first just to confirm on trading days in the second half, am I right to think it's somewhere between 0.5% and 1% negative year-on-year, just to be sure on that one?

The second is around French renovation, can you just help us understand, at the moment is it flat, or is it still slightly down? And what would you usually expect as the lag between transactions and activity, and where are we in that current timing? And are there any other factors at play to explain why that hasn't picked up yet, as you might have expected?

And then the last one was just around European construction products and pricing in insulation and plasterboard. Do you have any plans on those two products, given the stabilization in energy costs recently, in terms of pricing? Thank you.

Guillaume Texier

So I will take the first question about days in the second half. So the days affecting the second half, as you mentioned, is going to be slightly negative, approximately 1% a slight negative, which is going to be both in Q3 and Q4.

Pierre-Andre de Chalendar

Concerning the French renovation market, I would say that globally at the moment it's probably flat. So maybe slightly positive on volume and a bit negative in price, so around flat. Historically there has been a correlation between transactions and renovation market. It's not 100% a clear cut correlation, but there is a good correlation. I have not seen that happening yet and there may be several reasons.

I think renovation is also linked to confidence, which has not been fantastic in France in the last several months. Second, I think that our customers [indiscernible] are probably seeing at the moment a little bit longer order book, but they are not really hiring because they are not sure yet. So I think there may be some demand that is not served as quickly and maybe given the credit rates, which are very low, people are - when they buy transactions, maybe they wait more to do the renovation work.

So as I said in February or March, I will talk about an improvement when I have really seen it. There are some good prospects of that happening, but I've not seen it happening, so I'm too early to call. As you understand from my presentation, I am more positive. I was cautious about new build three months ago, I'm more positive now because I have seen through our distribution activity, I've seen evidence that this is happening. The third question on the pricing construction products to Europe, maybe Benoit.

Benoit Bazin

It was pricing in interior solutions in Europe?

Pierre-Andre de Chalendar

Yes.

Benoit Bazin

Clearly it's a local situation, country by country. We have already some markets which is positive, like in the UK. Other big markets like France, Germany, have been a bit more challenging in the first half, but clearly we are pushing prices for the second half and during 2017 with a better price position. It's a priority. And the other point on top of that is we have also the mix impact. We are working very much towards more added value products, more innovation, which impact also the operating margin. But clearly it's a price mix effect and we are moving towards more mix and added value products.

Pierre-Andre de Chalendar

Next question on the phone.

Operator

Yes, next question is coming from the line of Josep Pujal from Kepler. Please go ahead.

Josep Pujal

Yes, good morning, so two questions for me. Would you say, looking at what is happening with costs and what is happening with roofing prices, flat glass in Europe, et cetera, that your prices have bottomed? That this minus 0.6% that we have seen in H1 is the bottom?

My second question is on France, if you can help us to understand, because we have a flat figure like-for-like 0.6%, despite that there is close to minus 2% effect from pipes that the prices are down, that the renovation is flat. So what is doing well in France right now and how do you see these evolving in the coming quarters? Thank you.

Pierre-Andre de Chalendar

I don't understand what I have not answered already on the question in France. I think I talk about the positive evolution of the new market and I talked about what's going on in renovation. This is affecting both our distribution business, which is the biggest one in France and it's affecting our construction products and I would say to a large extent also part of our flat glass activity, which is driven by construction. So I think I have given you the various ingredients of what happened and how it could move. And as you understood, I think it's progressively heading into more positive numbers.

In terms of price, I would say that I think that globally we should see an easing, so progressively a better pricing situation. I'm cautious on that, but probably and we are working on that, a bit more positive impact in the second or less negative impact in the second half than in the first half. But this will not be a huge change. Next question.

Operator

Yes, next question is coming from the line of Mike Betts, Jefferies. Please go ahead.

Mike Betts

Yes, thank you very much, I've got two questions. Firstly, on cost savings. On Slide 38, it refers to cost savings in 2017 and 2018. Is that a new program? And I guess related to that, the increase in non-operating costs in H1, was that to do with that? And are we likely to see a further substantial increase related to it in H2?

And then secondly please, on the high performance materials, clearly margin 14% is pretty good, although I think it made 15.7% in 2011. Is that what we saw in 2011, the peak margin that this division could make? Or could it do higher? And then secondly, could you also talk about the seasonality, if any, in the business between the two halves, because it seems quite volatile in recent years? Thank you.

Pierre-Andre de Chalendar

On HPM, I think the margin in 2011 and you have a very good recollection, Mike, was a peak we had. I don't say it's impossible to get there, but for the time being, for this year, as I said, we hope to continue to have good margins. So it's more at the level that we have had last year and this year, that's more the way I would set the expectations for this year. In terms - I forgot the first question.

Guillaume Texier

Cost savings.

Pierre-Andre de Chalendar

Cost savings, you want to…

Guillaume Texier

I can answer on the cost saving side, you were asking about the cost savings program, is it a new program? As we mentioned during our end of the year results, the new cost savings program is a combination of the continuation of action programs that we had already in place, talking, for example, about world class manufacturing, operational excellence on one hand, and purchasing programs. For those two kind of programs are continuing and are going to continue to give results as we extend them to the totality of the organization. But on top of that, we add new programs which are based, for example, on automation industry 4.0 in our plans on one hand, and logistics efficiency on the other hand, which are even adding to this effect.

So you're right to point at the restructuring charges in the first half of 2016. Part of this acceleration is due to the fact that we are pushing those programs and starting those programs, yes.

Mike Betts

Guide for the year, will the charge be double what it was in the first half?

Pierre-Andre de Chalendar

No, less.

Guillaume Texier

No, I think I pointed to the fact that we will see compared to last year figure a reduction in non-operating charges compared to last year figure…

Pierre-Andre de Chalendar

For the total year.

Guillaume Texier

For the total year, which means that we are going to see less charges in the second half compared to the second half of last year.

Mike Betts

Okay. And then just back to HPM, if I could very quickly. The seasonality of that business, is there any seasonality between the two halves?

Pierre-Andre de Chalendar

I think, as you have mentioned, it varies, so I don't think there is a significant seasonality. Laurent, you want to make an addition? I don't think it's very, HPM is not related to the weather, or whether it's cold or hot, so I think…

Laurent Guillot

No, there is no significant seasonality in HPM. You have sometimes big contracts and…

Pierre-Andre de Chalendar

Yes, that's more what…

Laurent Guillot

Not so big contracts and that's more the impact that we have, that we may have sometimes.

Mike Betts

Understood, thank you.

Operator

Thank you. Next question is coming from the line of Sven Edelfelt from Natixis. Please go ahead.

Sven Edelfelt

Yes, good morning, I had two questions. Firstly, last year you sold some underperforming distribution assets. Any chance this year you are working on the same kind of disposal for H2? Or at least anything you would like to share with us? I'm thinking of small businesses, where your market share might not be big enough. Second question and I already have this one, so I apologize for this. Since you have recently changed your logo and Pont-a-Mousson is no longer part of it, would it mean that you are open to a disposal of this business? Thank you.

Pierre-Andre de Chalendar

Well I start by the second. No, you see that we have kept and it's very intentional, we have kept the roots with the bridge, but we have tried to modernize and to make it more dynamic, introducing also colors. And so there is no hint to see about our pipe business. Concerning the first question, we continue to be opportunistic about that and on those subjects we prefer to talk after it's done than before it is done. But we will continue to be opportunistic. Next question.

Operator

Next question is coming from the line of Gregor Kuglitsch from UBS. Please go ahead.

Gregor Kuglitsch

Good morning, thanks for the call, I've got a few questions as well. One, just simple, can you just confirm about the UK exposure on a profit basis at the Group level please, maybe in reference to 2015, that will be helpful. The second question is could you give us an updated view of foreign exchange impact on profit and maybe also confirm what it actually was in the first half.

And then just maybe a clarification point on margins, I think you mentioned that margins in flat glass are expected to be up in the second half. Can I confirm that is in reference to H1, or is that in reference to H2 last year? Just wanted to be clear on that point, thank you.

Pierre-Andre de Chalendar

Well I start with the third one, both; on the UK I think our sales in the UK is around 11% at the moment of the Group. In terms of the foreign exchange, maybe you want to answer?

Guillaume Texier

Foreign exchange on operating profit, as we said, the operating profit is improving by 7.3% on a real basis and 10.2% on a like-for-like basis. The difference between those two figures is foreign exchange and perimeter. It's approximately for the two effects €40 million, and in those €40 million it's a combination of a negative exchange rate effect and a very slightly positive perimeter effect, which is also a negative exchange rate effect. You would be right in assuming it's in the range of €50 million.

Pierre-Andre de Chalendar

Next question.

Operator

Thank you. Next question is coming from the line of John Fraser-Andrews from HSBC. Please go ahead.

John Fraser-Andrews

Good morning, two questions. First one is in flat glass, given the volume increase you've had, could you just comment on where capacity utilization is in Europe and prospects for further price increase. Could you also just say within the 2.9% price growth broadly how that splits regionally? Then the second question is in pipe, can you give some color and where your order book sits for pipe and whether we're looking at just a stabilization against a lower base last year, or are we seeing any cause for optimism in that pipe business, thank you.

Pierre-Andre de Chalendar

Maybe, Patrick, you want to answer that question?

Patrick Dupin

Yes, on the capacity utilization on the flat glass, we said upon the first half the capacity utilization is quite good, with a couple of repairs in the market that bound some capacity. And we consider that it will continue on the same structure for the second half. And on the price, certainly we will see a stabilization of the four-millimeter price which is today at a decent level. But what concerns all sales, we have also in the construction product a good mix improvement on our overall mix price is improving quarter-on-quarter, which is a good sign.

Benoit Bazin

Pipe in the short-term, there is no real improvement expected, so the backlog of orders has been a bit delayed. So the second half of this year should not improve dramatically versus the second half of last year. A bit better, but not the upstream we were expecting six months ago. We are, nonetheless, talking about big topics, big orders, big projects for the years to come. So the outlook in the midterm is still very positive, but in the short term for the second half there is no real improvement on the backlog of orders.

Pierre-Andre de Chalendar

I have another question on the internet from Laurent Runacher from Exane. Operational leverage in flat glass, well we have seen it's good and it's going to continue to materialize.

And the second question, your view on H2 and margin for this division, in view of peers' rising margin targets. Well we have done the same, because we have increased - we said that the margin is going to increase. As you know, there is a significant gap in the profitability of Saint-Gobain versus our two main Japanese competitors. So maybe which were doing much less good than us, maybe they are catching up a little bit, but we are going to continue to see, as far as we are concerned, an improvement in our margin in flat glass, like Patrick just confirmed it to you.

Operator

Yes, so the question is coming from Arnaud Lehmann. Please go ahead.

Arnaud Lehmann

Thank you very much, good morning, gentlemen. A couple of questions for me please, firstly on your M&A strategy. Obviously Sika is spending, that could last a few more months, maybe a few more years before we get more visibility or a conclusion. In the meantime, I think you said you were looking at small M&A, but obviously your net debt position and your financial leverage is quite low as well. So would you - beyond Sika would you consider something a bit more meaningful in terms of size for acquisition, if there was an opportunity? That's my first question.

And my second question is a bit topical, I guess, on pensions. Obviously low interest rates, they're pretty good for your refinancing costs, but on the other hand might lead to some increase in your pension liabilities. So could you give us a bit of color on that please?

Pierre-Andre de Chalendar

So on M&A, as we have already said, we are not working on a significant acquisition, but there may be more. We have a reasonably good pipeline at the moment, more of the small and medium size that we have seen in the last 12 months, but we are not working on a big acquisition. On the pensions, maybe Guillaume.

Guillaume Texier

Yes, on the pensions you are absolutely right, on our commitment side; the low interest rate is creating a big increase of what we have on our balance sheet. But on the other hand, since the way we - the interest rate is also favorable on the other side of the balance sheet, so overall €1.1 billion negative evolution on one hand. But on the other hand, especially because we are benefitting from low interest rate in the way we allocate our money in the UK, we had a positive effect of approximately €900 million at the end of the semester on this side. Which means at the end of the day, a total effect on shareholders’ equity of €277 million before taxes.

Arnaud Lehmann

Thank you very much.

Pierre-Andre de Chalendar

Okay, are there more questions in the room? Yes?

Unidentified Analyst

Coming back to the glass division, as you know, it's cornerstone in this division, certainly not the flat glass, but the architectural glass, where the situation is a bit challenging in terms of prices, because we have some independent family-owned players, notably in Germany. Where do we stand with price hikes in the architectural glass?

Pierre-Andre de Chalendar

You mean the downstream?

Unidentified Analyst

Yes, the downstream transformation.

Pierre-Andre de Chalendar

The increase that we have seen in the upstream are progressively passing to the downstream, but there is, as usual, some delays and this is normalizing, but it has been - I would say it has been a little bit a draw on our profitability overall, which would have been better in the first half. Progressively we are seeing an improvement also there in the downstream.

Unidentified Analyst

The downstream announced price hikes this year?

Pierre-Andre de Chalendar

Well, the downstream is not one; it's a collection of countries, collection of businesses, which are different. So overall yes, we have had improvement. Not until now as much as what we have seen in the upstream, but it's progressively catching up.

Unidentified Analyst

Also in Germany, which is…

Pierre-Andre de Chalendar

Yes, yes, a bit everywhere. But it depends, you have double glazing business, you have facades, you have some different interior glass business, you have a number of segments and they all have their own dynamics. So the situation varies by segment.

Unidentified Analyst

Yes, good morning, gentlemen. So I have two questions please. My first question is on your operating income in France, because when I look at your sales in France, it is slightly positive. And when I look at your operating income it's negative, I guess, maybe for pipes. So if you can give us a little bit of insight where it is coming from, if it is coming only from pipe, or if in the distribution in France you also have some negative. So that will be my first question.

My second question is on the distribution. If we look a little bit longer term, what would it take to get back to a normal margin level in the long run, I would say? Or maybe medium term.

Pierre-Andre de Chalendar

On the second question, I would answer a little bit; I don't know exactly what is a normal margin. We consider in distribution that there is - in the next few years we should have a significant improvement in our margins. But I am not able to have a precise normalized goal.

Unidentified Analyst

I was more thinking going back around the 5%.

Pierre-Andre de Chalendar

That will take some time.

Unidentified Analyst

That will take some time.

Pierre-Andre de Chalendar

That will take some time. On the question of France, I think that we have improvement in distribution, even though as Guillaume. Sorry, between my past and - what Guillaume said, we have because of deflationary pressure, we have fixed costs are not going down in distribution. So we don't see leverage from the volume as much as we would like. The rest is mostly linked to pipe and I would say it's not - there is another element which is more a one shot, which was that we have had some repairs in our flat glass furnace which is impacting the profit of the first half in France.

Pierre-Andre de Chalendar

Okay, if there are no more questions, I thank you for your assistance.

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