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Rating Action:

Moody's Changes Outlook on Saint-Gobain's Baa2 rating to stable from negative

02 Jun 2014

Frankfurt am Main, June 02, 2014 -- Moody's Investors Service, ("Moody's") has today changed to stable from negative the outlook on the Baa2 senior unsecured ratings of Compagnie de Saint-Gobain SA ('Saint-Gobain'). Concurrently, all Baa2 ratings and the P-2 short term rating of Saint-Gobain have been affirmed.

"The change in outlook was prompted by improved financial metrics in fiscal year 2013 as expected by Moody's, in particular the improvement of RCF/Net debt to 19.0% from 14.1% in 2012," says Falk Frey, Senior Vice President and lead analyst at Moody's for Saint-Gobain. "Moreover, the stable outlook anticipates further improvements in operating performance and credit metrics in the current year and thereafter which are needed to position Saint-Gobain more solidly in the Baa2 rating category," Frey added.

RATINGS RATIONALE

In fiscal year 2013, Saint-Gobain has made good progress in restoring credit metrics towards a level that would be more commensurate for the current Baa2 rating. Still, metrics, especially leverage and cash flow coverage ratios, are weak for the Baa2 category, but are balanced by the strong business profile of Saint-Gobain with a good geographical and even better product diversification. Despite the cyclicality Saint-Gobain's divisions are exposed to, its diversification should help stabilizing the consolidated performance to some extent. Given overall positive growth expectations in Saint-Gobain's major markets, Western Europe and North America, operating performance should improve in the current financial year. This might, however, be offset by a more aggressive financial policy, including higher capex spending, debt-financed external growth and somewhat higher shareholder return. This leaves little headroom for weaker-than-expected performance in 2014 and 2015.

Consolidated revenues stabilized (-0.3%) on a like for like basis but a negative currency development resulted in a 2.7% decline in revenues and a 3.5% decline in reported operating income. Financial performance of Saint-Gobain in 2013 improved considerably in H2 after a weaker H1 impacted predominantly by poor weather conditions. All business units reported an improvement in operating income in the second half, driven by positive trends in Western European markets (0.9% organic growth) as well as in Asia and emerging countries (10.4% organic growth) whereas North America was impacted by a decline in business linked to capital spending and which also led to volatility in the Exterior Products division. Despite the slight decline in Saint-Gobain's reported cash flow from operations but due to a sharp reduction in capital expenditures, a tight control of working capital reported free cash flow improved to nearly EUR1.2 billion in 2013 from EUR0.8 billion in 2012. Together with cash income from divestments of EUR357 million and only EUR100 million spent for acquisitions as well as only EUR180 million of cash dividends paid, Saint-Gobain was able to reduce its high gross debt to EUR18.2 billion from EUR 19.5 billion on a Moody's adjusted basis, and thus improve key credit metrics. With the positive trend in operating performance starting from H2 2013 and continuing in the first quarter 2014 with reported group sales up 2.6% compared to Q1'13 (+6.8% like-for-like) driven by good volume growth (+5.6%) and pricing (+1.2%) development, Moody's gains confidence in Saint-Gobain further strengthening its financial metrics in the current year.

LIQUIDITY

The liquidity position of Saint-Gobain is sound. The group reported EUR4.4 billion of cash and marketable securities on balance sheet at year-end 2013 and EUR4 billion availability under its revolving credit facilities (EUR2.5 billion maturing in December 2018 and EUR1.5 billion maturing in December 2018). Alongside the group's operating cash flow generation before working capital, this should be largely sufficient to cover the cash needs of the group over the next 12 months, which mainly consist of working capital requirements, working cash requirements (estimated at 3% of revenues), dividend payments, non-discretionary capital expenditure and approximately EUR2.5 billion of short-term debt maturities (including commercial papers). In addition, Saint-Gobain has a well spread maturity profile and has maintained good access to the debt capital markets even at times of elevated market volatility.

RATIONALE FOR STABLE OUTLOOK

The stable outlook assumes that Saint-Gobain will improve its operating performance and financial metrics in 2014 and beyond, exemplified by (1) RCF/net debt to remain at approximately 20% over the next two to three years; (2) debt/EBITDA levels declining below 4.0x in the current fiscal year from 4.2x in 2013, driven by improvements in EBITDA and slight reduction in gross debt as well as (3) interest coverage EBIT/Interest expense rising above 2.5x in the current year and beyond from 2.4x in 2013.

The stable outlook also assumes that Saint-Gobain will maintain financial discipline with regards to balancing shareholders' and bondholders interest in a way that would protect any deterioration of its currently weak financial metrics within the Baa2 rating category.

WHAT COULD CHANGE THE RATINGS DOWN/UP

Given the present weak rating positioning of Saint-Gobain there is currently no short term positive rating pressure. Over a longer-term horizon, a rating upgrade to Baa1 would require that Saint-Gobain demonstrates its ability to improve its leverage (measured as debt/EBITDA consistently below 3.0) and its cash flow coverage (measured as RCF/net debt in the low-to-mid twenties).

The rating could come under downward pressure if Saint-Gobain would not be able to retain RCF/debt debt of approximately 20%. Also, a further increase in leverage well above 4.0x debt/EBITDA (from 4.2x in FY2013) or a further decline in interest coverage well below 2.5x EBIT/interest expense (2.4x in 2013) would also lead to negative pressure on the ratings.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was the Global Building Materials Industry published in July 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Paris, France, Compagnie de Saint-Gobain is a diversified global building materials company with operations in 64 countries. The group operates four business segments: Building Distribution (45% of 2013 revenues), Construction Products (25%), Innovative Materials (Flat Glass, High Performance Materials) (21%), and Packaging (9%). In 2013, Saint-Gobain reported consolidated sales of EUR42 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Changes Outlook on Saint-Gobain's Baa2 rating to stable from negative
No Related Data.
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