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Rating Action:

Moody's upgrades Saint-Gobain's rating to Baa1; stable outlook

15 Jun 2022

Frankfurt am Main, June 15, 2022 -- Moody's Investors Service ("Moody's") has today upgraded Compagnie de Saint-Gobain's (Saint-Gobain) senior unsecured ratings to Baa1 from Baa2 and the issuer's senior unsecured MTN rating to (P)Baa1 from (P)Baa2. The short term commercial paper rating has been affirmed at P-2. The rating outlook remains stable.

RATINGS RATIONALE

Today's rating action reflects Saint-Gobain strong operating performance in 2021 and the sustained momentum in the first months of 2022. Construction activity remained firm across regions, supported by post-Covid revival and ever growing demand for solutions improving buildings' energy efficiency. While the recent increase in mortgage rates in its key markets paired with high macroeconomic uncertainty and high inflation has a potential to slowdown construction activity, especially in terms of new residential construction, Saint-Gobain benefits from its comprehensive portfolio for sustainable construction with around a half of its sales exposed to more resilient renovation activities.

The company has improved its credit metrics and reduced leverage to levels not seen in the last decade. Its Moody's adjusted gross leverage reached 3x whereas net leverage was at 1.9x at the end of 2021. Saint-Gobain's solid liquidity position can additionally mitigate a potential market slowdown, especially considering management's greater focus on free cash flow (FCF) generation. The company typically generates larger FCF in a cyclical downturn as it reduces working capital (especially in its distribution business) and cuts capex spending.

We think Saint-Gobain is also less exposed to a potential threat of energy disruption as a result of a sudden halt in Russian gas supplies to Europe compared to some of its heavy side building materials peers. First, its production is less energy-intensive compared to cement production -  its €1.5 billion energy bill in 2021 corresponds to around 3.4% of sales. Second, Saint-Gobain's energy costs are hedged at 80% for 2022, 50% for 2023 on a global scale. Thirdly, it is well diversified regionally across 75 countries worldwide, even though Europe still constitutes the majority of its sales. The company has recently estimated that thanks to various mitigation plans it should be able to limit the impact of a supply cut of Russian gas to Europe to around 2% of its sales in the three most sensitive countries (Germany, Poland and Czech Republic).  

Saint-Gobain has recently intensified acquisitions (€2 billion GCP Applied Technologies and €0.9 billion Kaycan Ltd are yet to be closed in the second half of 2022) and we expect relatively high spending on acquisitions to continue in coming years as a part of its Grow and Impact strategy. At the same time, we take comfort in the track record of previous years when Saint-Gobain has been able to successfully manage its active portfolio rotation that included both acquisitions and disposals.

The macroeconomic environment became much more uncertain following Russia's invasion of Ukraine that has further exacerbated cost inflation and volatility in energy costs. Though, Saint-Gobain is confident that it can offset inflation and increase its operating income in 2022. The company has just recently reiterated this guidance along with the announcement that its operating income margin remained double-digit in H1 2022 (10.2% in 2021). Hence, we think Saint-Gobain can sustain its improved credit metrics in the next 12-18 months. Moreover, we expect that Saint-Gobain will adhere to its conservative financial management and discontinue share buyback as well as reduce organic and inorganic investments in case of a large-scale economic turmoil, protecting its liquidity and credit profile.

Saint-Gobain's rating is mainly supported by (1) the group's large scale, leading market positions in various regions and the diversity of its product range allowing for a comprehensive offer of global solutions for sustainable construction; (2) less capital intensive and less cyclical business model than that of its pure heavy side peers; (3) positive market fundamentals for energy efficient renovations (Saint-Gobain sales exposure to renovations is around 50%); (4) conservative financial policy underpinned by the commitment to maintain net leverage ratio between 1.5x and 2.0x and targeting Baa2/Baa1 rating; and (5) improved FCF generation, strong credit metrics for the current rating category and excellent liquidity.

However, the rating is constrained by (1) the cyclicality of the group's core end markets; (2) cost inflation, in particular with regard to energy; (3) high uncertainty concerning broader implications of the military conflict in Ukraine for the global economy; (4) event risk given the active portfolio rotation and (5) increasing shareholder remuneration with higher dividends complemented by €2 billion share buybacks plans for 2021-25.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects our expectation that Saint-Gobain can sustain its currently strong credit metrics for the existing rating, namely gross leverage of around 3x and RCF/ net debt exceeding 25% in the coming 12-18 months, even considering a risk of a cyclical downturn in the building materials industry.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD MOVE THE RATINGS – UP

Positive rating pressure could arise if:

• Moody's adjusted gross debt/ EBITDA below 2.5x on a sustained basis;

• Moody's adjusted retained cash flow (RCF)/net debt sustainably above 35%.

WHAT COULD MOVE THE RATINGS – DOWN

• Moody's adjusted gross debt/ EBITDA exceeds 3.5x on a sustained basis;

• Moody's adjusted retained cash flow (RCF)/net debt sustainably below 25%.

LIQUIDITY

Saint-Gobain's liquidity is strong. The group reported around €6.9 billion of cash and marketable securities on its balance sheet as of the end of December 2021 and a €4.0 billion availability under its revolving credit facilities maturing in December 2024. Saint-Gobain's available cash sources, together with its funds from operations, should be more than sufficient to cover its regular cash outflow such as debt repayments, capital spending, working capital changes and dividends in the next 12 months. Moreover, the liquidity position of the group will comfortably cover the payments for already committed acquisitions such as €2 billion GCP Applied Technologies and €0.9 billion Kaycan Ltd, which closing is expected by the year-end 2022.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Building Materials published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74988. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

CORPORATE PROFILE

Headquartered in Paris, France, Compagnie de Saint-Gobain (Saint-Gobain) is a diversified global building materials company with operations in 75 countries. The group designs, manufactures and distributes materials and solutions that are used in buildings, transportation, infrastructure and many industrial applications. In 2021, Saint-Gobain generated €44.2 billion of revenue and €6.2 billion of company-defined EBITDA. The company is publicly listed on the Euronext market in Paris, with a market capitalisation of around €25.6 billion as of 15 June 2022.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Vitali Morgovski, CFA
VP - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
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