Saint-Gobain Earnings: Volumes Continue to Decline, No Surprise in Upgraded Margin Guidance

No-moat Saint-Gobain SGO reported a 1% decline in organic revenue during the second quarter, driven by 7% lower volumes (of which 2% was from fewer working days), a further acceleration from the 5.5% fall in the previous quarter. We aren’t surprised by Saint-Gobain raising its full-year EBIT margin to double digits from between 9% and 11%, which we had already incorporated into our estimates. The spillover effect of price increases already implemented during the previous year, combined with a favorable shift in the group’s product mix due to recent portfolio management, supported a record 11.3% EBIT margin during the first half. We reiterate our EUR 62 fair value estimate and view shares as fairly valued.

There is a clear divergence in demand geographically due to contrasting macroeconomic conditions. The Americas remain resilient, delivering 5.7% organic revenue growth on largely unchanged volumes during the second quarter. Asia-Pacific grew 7.6%, mostly driven by good growth in China against a weak comparator. The fortunes appear a lot more grim in Europe where the Northern Europe and Southern Europe segments reported organic revenue declines of 8.4% and 2.4%, respectively. We expect the top-line performance to remain challenged for the remainder of the year, as price increases implemented to compensate for significant inflation last year begin to get incorporated into the prior year’s base. However with energy prices declining from record levels last year and selling prices remaining stable, we are confident management will achieve its double-digit EBIT margin target for the full year.

Free cash flow grew 30% to EUR 2.2 billion during the first half of the year, which will allow Saint-Gobain to continue its strategy in reinvesting toward higher-margin construction chemical businesses.