Saint Gobain: Strong First Half 2007 Growth

SALES: up 6.0% to €21,779 million up 6.9% like-for-like*OPERATING INCOME: up 15.3% to €2,093 million up 16.6% like-for-like*RECURRING NET INCOME**: up 31.2% to €1,067 millionNet income amounts to €465 million, taking into account the €650 million provision for the Flat Glass fines (European Commission).* based on average exchange rates for first-half 2006** excluding capital gains, asset write-downs and the €650 million provision for the Flat Glass fines (European Commission)DOUBLE-DIGIT GROWTH IN OPERATING INCOME (at constant exchange rates***)GROWTH IN RECURRING NET INCOME** OF AT LEAST +20%** excluding capital gains, asset write-downs and the Flat Glass fines (European Commission)*** based on average exchange rates for 2006Performance of Group SectorsAll of the Group’s business sectors saw a rise in like-for-like sales (constant Group structure and exchange rates) in the six months to June 30, 2007 (see Appendix 1).

Organic growth for the Group came in at +6.9% (including a +3.7% price impact and a +3.2% volume effect). Business trends observed in the first quarter – which had been boosted by particularly favorable weather conditions – generally held firm over the three months to June 30, 2007.

Vigorous construction markets in Europe, bolstered by the impact of regulations promoting energy efficiency in the building industry, more than offset the significant downturn in the US housing market. Trading momentum remained very strong in Asia and emerging countries (organic growth of 19%), where the swift expansion of the Group continues apace. Demand related to capital spending and industrial output also remained largely robust.

The Flat Glass sector delivered the Group’s strongest growth in like-for-like sales, which surged +12.9%. Construction in Europe is on an upward trend, with a high capacity utilization rate, a very favorable pricing environment and vigorous growth in coated glass for thermal insulation. Sales of automotive glass performed well over the first half of the year. The operating margin for the sector jumped to 13.1%, versus 9.1% in the same year-ago period.

High-Performance Materials reported +2.4% like-for-like sales growth, with a +5.1% advance in the Ceramics & Plastics and Abrasives businesses on the back of robust industrial capital spending. The operating margin for these businesses continued to advance, coming in at 14.0% for first-half 2007 compared to 13.8% for the same year-ago period, while the Reinforcements business delivered an improved 6.7% operating margin versus 3.2% for first-half 2006 despite a dip in sales (down -4.5% on a like-for-like basis). Overall, the sector’s operating margin represented 12.1% of sales versus 10.8% of sales over the six months to June 30, 2006.

Construction Products (CP) posted +4.1% like-for-like growth (+3.4% on a reported basis) and its operating margin held up well, edging up to 13.1% (versus 12.9% in first-half 2006). Buoyant demand in construction markets across Europe and in emerging countries (76% of sales) more than offset the significant slowdown in US construction (24% of sales):

- Interior solutions businesses (insulation and gypsum) reported solid organic growth of +6.6%. The upbeat trading environment in Europe, which was further boosted by energy-efficiency measures in the building industry, offset the fall in volumes and prices in the US. The operating margin for these businesses advanced to 15.9% (versus 15.8% in the year-earlier period).

- Exterior solutions businesses (exterior fittings, mortars and pipe) posted very modest +0.8% growth. US activities (siding and roofing products in particular) reported a sharp downturn, while sales of mortars and pipe in Europe and emerging countries performed well. The operating margin for exterior solutions businesses remained virtually unchanged year-on-year, at 8.7%.

The Building Distribution sector posted a strong +13.3% rise in sales on a reported basis, buoyed by acquisitions made in 2006 and solid organic growth of +8.7%. Building on favorable first-quarter trading conditions, the business delivered robust sales in France, Scandinavia, and southern and central Europe, and improved its performance in the UK. The sector delivered a further increase in its operating margin, which came in at 5.2% compared to 5.0% in first-half 2006 and 4.9% in the first six months of 2005.

Like-for-like sales for the Packaging sector climbed +6.5%, thanks to the sales price increases implemented over the last few months and robust volumes in Europe, which resulted in maximum utilization of existing production capacity. Excluding Calmar and Desjonquères, which were sold on July 1, 2006 and March 31, 2007, respectively, operating income for the sector surged by almost +25%, with the operating margin advancing nearly two percentage points from 9.2% in the first six months of 2006 to 11% in first-half 2007.

Analysis of the interim consolidated financial statements for first-half 2007

The interim consolidated financial statements can be found in full at

Group sales advanced +6.0% on an actual structure basis. Like-for-like*, Group sales moved up €1,395 million, or 6.9%, including a 3.7% price effect and a 3.2% volume impact. Changes in the scope of consolidation had a small 0.5% positive impact, while the impact of currency fluctuations was a negative 1.4%, reflecting mainly changes in the value of the US dollar.

The breakdown of like-for-like sales by geographic area reveals vigorous trading in France (up +6.5%) and other western European countries (up +9.2%). The downturn witnessed in the US (-7.2%), due to a correction of the housing market, is largely in line with the trend observed in the second half of 2006 and first quarter of 2007. The emerging countries and Asia region delivered the Group’s strongest organic growth, at +19%.

By geographic area, France accounted for 29% of first-half sales, with other western European countries contributing 44%, North America 13%, and the emerging countries and Asia 14%.

* Based on average exchange rates for first-half 2006

Operating income jumped +15.3% or +16.6% at constant exchange rates*. The Group’s operating margin leapt to 9.6% of sales (12.6% excluding Building Distribution), versus 8.8% of sales in the six months to June 30, 2006 (11.1% excluding Building Distribution). With the exception of North America, all geographic areas reported profitability gains.

Non-operating costs came in at €776 million in first-half 2007 (versus €157 million in first-half 2006) and include a €78.5 million charge for restructuring costs, a €47.5 million charge for asbestos-related litigation involving CertainTeed in the US (versus €50 million in first-half 2006) and lastly, a €650 million charge to the provision set aside in respect of the two proceedings conducted by the European Commission into the Flat Glass sector.

Further to its investigations in February and March 2005, the European Commission sent Statements of Objections to Saint Gobain Glass France (glass for the construction industry) on March 12, 2007, and to Saint-Gobain Glass France, Saint-Gobain Sekurit Deutschland and Saint-Gobain Sekurit France (automotive glass) on April 19, 2007. The two Statements of Objections, which were also sent to Compagnie de Saint-Gobain in its capacity as parent company of these entities, concerned an alleged breach of Article 81 of the Treaty of Rome.

The Statements of Objections claim that the above-mentioned glass subsidiaries contacted or met with one or more competitors to discuss pricing strategies or market share stabilization, or to exchange illicit information.

Following a review of the case and the objections, Saint-Gobain Glass France is not challenging the allegations made in respect of its construction glass activity, while Saint-Gobain Glass France, Saint-Gobain Sekurit Deutschland and Saint-Gobain Sekurit France have acknowledged the claims against their automotive glass businesses but are challenging the scope given to certain such claims by the Commission.

In their responses to the Commission, the companies concerned nevertheless set forth a series of arguments based on the seriousness and duration of the alleged infringements, the amount of sales generated by the activities to be taken into account in the claim, and the impact of the repeat offence. Compagnie de Saint-Gobain has formally denied any liability whatsoever for the allegations made in the two cases. Based on the arguments set forth, the Group decided to set aside a total provision of €650 million in its accounts at June 30, 2007.

Capital gains and losses and exceptional asset write-downs came in at €3 million, compared with €13 million in the same year-ago period. Capital gains of €252 million arising mainly on the sale of Desjonquères, were almost fully offset by exceptional asset write-downs (€249 million, including around €190 million relating to the planned sale of the Reinforcements and Composites business).

Business income fell back -20.9%, after taking into account the above-mentioned factors (non-operating costs, capital gains and losses and exceptional asset write-downs.

Net financial expense improved +6.1% to €351 million compared with €374 million in the first six months of 2006, reflecting mainly the reduction in net debt.

Recurring net income (excluding capital gains and losses, exceptional asset write-downs and the provision for the Flat Glass fines) advanced +31.2% to €1,067 million compared with €813 million in the year-earlier period. Based on the average number of shares outstanding at June 30, 2007 (364,639,299 shares), recurring earnings per share amounts to €2.93, up +22.1% on June 30, 2006 (€2.40).

Net income came in at €465 million, down -41.7% on the year-earlier period due to the provision for the Flat Glass fines indicated above. Based on the average number of shares outstanding at June 30, 2007, (364,639,299 shares), earnings per share amounts to €1.28, a fall of -45.5% on June 30, 2006 (€2.35).

* Based on average exchange rates for first-half 2006

Cash flow from operations stands at €1,932 million, up +17.6% on first-half 2006. Excluding the tax impact of capital gains and losses and asset write-downs, cash flow from operations advanced 12.6% to €1,883 million, versus €1,672 million for first-half 2006.

Capital expenditure edged up +1.4% to €822 million, as against €811 million in the six months to June 30, 2006, representing 3.8% of first-half 2007 sales versus 3.9% of sales for first-half 2006. Strong growth-driven capital spending in Construction Products and Flat Glass businesses continued apace, accounting for just over 50% of total capital expenditure. By geographic area, emerging countries and Asia continue to account for a significant part of growth initiatives and represent around 30% of total Group capital spending, double the contribution of these businesses to sales.

Investments in securities totaled €432 million in first-half 2007, including €285 million relating to the Building Distribution sector, where 34 acquisitions brought in €560 million in full-year sales, and €72 million relating to the Construction Products sector.

Net debt stands at €12,007 million at June 30, 2007, an increase of 3.5% on end-2006 (€11,599 million) and a fall of 12.6% compared with the same year-ago period. Net debt represents 80% of consolidated shareholders’ equity, compared with 107% at end-June 2006.

Update on asbestos claims in the United States

Some 4,000 claims were filed against CertainTeed in the first six months of 2007 (around 7,000 claims over the last 12 months), broadly in line with the number of new claims recorded in 2006. Around 5,000 claims were settled over the period, bringing the number of outstanding claims at June 30, 2007 to 75,000, versus 76,000 at December 31, 2006. Total damages paid over the last 12 months totaled USD 78 million at end-June 2007, compared to USD 83 million at December 31, 2006.

2007 outlook and targets

The Group expects its markets in Europe, Asia and emerging countries to remain robust in the second half of the year. Despite the fact that no swift turnaround seems likely in the US construction market, the global trading environment should remain largely favorable. Accordingly, the Group is raising its targets for 2007:

- Double-digit growth in operating income at constant exchange rates (average exchange rates for 2006)

- Growth in recurring net income of at least +20% - excluding capital gains and losses and the Flat Glass fines (European Commission).

These objectives take into account the sale of Desjonquères at March 31, 2007 and of the Reinforcements and Composites business in second-half 2007.


Following the sale of its plastics packaging business (Calmar) in 2006 and its glass flasks business (Desjonquères) in the first six months of 2007, the Group has recently announced its intention to sell its Reinforcements and Composites business before the end of the year (2006 sales of €715 million, representing around 60% of total sales for the Reinforcements business) to Owens Corning. The Wichita Falls plant, which delivered sales of around €180 million for the Reinforcements and Composites business in 2006) will be the subject of a separate sale agreement.

The Group intends to press ahead with its strategy by carrying out acquisitions in the construction, energy and environment markets, by pursuing its R&D and innovation initiatives, and stepping up its geographic expansion efforts in emerging countries.

The Group believes it is ideally placed to meet its ambition of worldwide leadership in the construction markets, offering innovative solutions that address the fundamental global concerns of growth, energy and the environment.

This clear market strategy will also allow Saint-Gobain to leverage growth synergies in a more integrated Group and unlock significant cost savings of around €300 million in 2010.

By 2010, the Group expects its growth and profitability momentum to gather pace, with 5% annual growth in sales (excluding acquisitions and currency impacts) and double-digit annual growth in earnings per share. The Group has lifted its targets as from 2010 and is tabling ROI of between 22%-25% (versus 20% previously) and ROCE of between 13%-14% (versus 12% previously).

Forthcoming results announcements

Sales for the first nine months of 2007: October 25, 2007, after close of trading on the Paris Bourse.

600450 Saint Gobain: Strong First Half 2007 Growth

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