Dear ladies and gentlemen, welcome to the Saint-Gobain Conference Call. If any participant has difficulties hearing the conference, please press the star key followed by zero on your telephone for operator assistance. May I now hand you over to Pierre-André de Chalendar, Chairman and CEO? Please go ahead, sir.
Good morning, everyone, and thank you for joining us. I realize that it is early, especially in the U.K. The reason we are speaking with you today, exceptionally outside of our normal reporting, is so that we can share a new, very important stage in the transformation of Saint-Gobain with you. It is an important step which changes deeply our organizational structure, which changes the way we look at our portfolio, and lastly, but most importantly, which changes our way of working and thinking about our strategy. What we are going to talk about, it's not simply an evolution, but a true transformation, an exciting one which will lead to an important improvement in the growth and profitability profile of Saint-Gobain. I announced it at the end of July, and since then, we have moved fast and decisively in order to be fully ready now.
I am here today with Guillaume Texier, our Chief Financial Officer, and with Benoit Bazin, who has been appointed under my proposal by the board Chief Operating Officer from January onwards, and he will be, in particular, in charge of leading this the transformation of the group. I am going to announce the page numbers so that you can follow the presentation which was put on our website this morning, and I start at page two. Here is a summary of the key points and figures, the most important takeaways for the market, no doubt, even if, as I said, the ambition of this plan goes much further than these figures. First of all, as explained in July, a realization of the acceleration of the divestment that we announced and a confirmation of our objectives, our program is well underway.
A new organizational structure which translates into a new financial reporting structure and which will allow us to be leaner and to gain in responsibility, accountability, entrepreneurial spirit, and agility. Finally, the financial transition of these efforts in the short term with additional savings estimated to be of at least EUR 250 million, contributing to an improvement in the margin linked to the transformation program of more than 100 basis points by 2021. As I'm sure you remember, we set out a normative margin target of between 8.5% and 10% at our investor day last year. The transformation of the group alone will bring us to the bottom of this range from 2021 without any impact on the volumes. Page three. We also want this ambitious transformation to be a structuring program for all our teams, and we have named it Transform & Grow.
Transform because it is deep and radical, something Saint-Gobain has not done in many years, and Grow because at the end of the day, on top of our short-term objectives centered on profitability, it is, of course, a step change in our growth profile that we want to achieve. On page four, you see that the transformation of the group rests firmly on two pillars: a more active and value-creating portfolio management on the one hand, and a new, leaner, and more agile organization on the other. Page five. Firstly, turning to the portfolio, we have made good progress in the execution of our divestment plan which I set out in July. After the divestment this summer of part of our Flat glass transformation activities in the U.K., you have seen on Friday that we have sold a large part of our pipe business in China under very good financial conditions.
We have now more than 10 projects of various sizes, including two that are at a relatively advanced stage, and we are able to talk about our building distribution business in Germany and our silicon carbide business in our high-performance materials division. It is perhaps the right moment to remind you of the criteria that we use as part of this process. Three in total: what is the standalone value in the, in of the business in terms of profitability and outlook? Then what is its value within Saint-Gobain, and the response to this can be very different in terms of the level of synergies and the alignment with our strategy, and this can change over time. Finally, is it the right moment to sell in terms of maximizing the valuation?
Because we also want to prioritize getting the right price for the businesses we are selling, which are this logic is something we apply very systematically across each of our business units and each of our geographies. We will take advantage of putting in place a new organization to take a fresh look at this question through the new management and reporting units that we are creating. The portfolio will be further revisited without any taboo by each of the new business units of the new organization. We are very confident in our ability to at least meet the targets that we set back in July for this subject. Page six. In terms of acquisition, we continue our strategy of value creation, targeting small and medium-sized additions to our portfolio for more than EUR 500 million a year on average from 2017 to 2020.
Given that valuations are becoming expensive, we are very prudent financially, but we continue to find good opportunities at the right level in three categories: bolt-on acquisition, which allows us to create value very quickly with synergies; technological building blocks, which allow us to offer more complete and more innovative solutions to our clients across the globe; and emerging markets where targeted acquisitions allow us to accelerate our development in new attractive geographies and to immediately increase the penetration of our offer under Saint-Gobain brand. Overall, in terms of the portfolio, we are developing two additional strategic strengths: one on acquisition over the last three years with much success, the other on divestments, which we aim to execute more systematically in the future. Page seven. The second very important pillar in our transformation project is a complete and drastic renewal of the organization, fundamentally leaner and more agile.
Frankly, something that Saint-Gobain has not done or even considered in terms of magnitudes and depth in many, many years. Page eight. This new organization will allow us to accomplish three very important objectives that I signaled in July: more alignment with our markets, more and then our customers, more agility, and more synergies. In improving on these areas, we will give ourselves a new momentum in terms of both growth and profitability. On page ten, sorry, on page nine, we start with the alignment with the market, and on page ten, Benoit Bazin will now give you a quick overview to describe how this new organizational structure will look from January 1, 2019.
Thank you, Pierre-André, and good morning, everyone. The new organization will consist of four large regions, geographic regions, organized by countries, which will manage all the businesses serving local markets. In each country, there will be one team under one country's CEO who will be fully empowered to make decisions for all local businesses. High-performance materials and automotive glass will be managed together in a global unit called High-Performance Solutions. This new organization is a fantastic opportunity to align ourselves closely with the dynamics of our customers and lead the changes in our markets. I must add that we are not jumping in something totally unknown. We have piloted some parts of this new organization in some countries over the recent past, so it works. Our teams are very enthusiastic and have reacted extremely positively to this change.
It gives them full speed of energy across the full range of Saint-Gobain, and it will also bring a lot to our customers. I'm now on slide 11, and I start with the local businesses. As you know, some of our products and services are essentially local. Distribution, construction products, building glass only move short distances. Proximity and speed are essential, and our competitors are also local. The way we develop and grow the business is quite different from one country to the other. We'll therefore have one line of management at the country level with the full power and the full range of the Saint-Gobain offer in one hand. Our country's CEOs will be fully empowered to adapt our strategy and organize their local teams in order to optimize our strength based on local market channels and customer synergies. This is what we are creating.
We group these local businesses, country by country, into four large regions: Northern Europe, Southern Europe, Middle East and Africa, including France, Asia-Pacific, and the Americas. I can tell you I've worked over the last 10 years for quite a lot of these local businesses, and I'm very confident that this new organization is very compelling and will be extremely powerful. This new organizational structure has its strong logic today. It is also anticipating the evolution we expect for these local markets in the future. Thanks to the digital evolution, the end customer is becoming increasingly influential in decision-making. Also, the value chain, which in the past was very fragmented, segmented, is getting transformed. New models are coming which cross all the traditional lines. Organizing ourselves transversely by country gives us the ability to leverage the digital opportunities across all our portfolio of products and services.
I move now to slide 12 for the global businesses. As you know, on the other hand, some of our businesses are global by nature, products which can be transported because their value is higher. Customers also are international, and what matters is our in-depth knowledge of technical applications, our critical mass of innovation globally, and also our capacity to work across different production locations to bring the very best technical performance and service at the lowest cost. These businesses, which will be grouped together into the High-Performance Solutions unit. This unit will be managed by final markets, regrouping businesses which were previously managed by material and product. In-depth knowledge of our global client needs and our capability to co-develop innovation with them is, in effect, what we see as the differentiating factor.
We are adapting our organization by global markets so that we can further enhance our intimacy with these customers across our range of our products, servicing markets such as mobility, life science, or industry. I now hand over to Guillaume, who will set out the new reporting structure.
Thank you, Benoit, and good morning, everybody. I'm on page 13. Here is what our new organization will look like based on the first half results. First of all, in sales, on the left-hand side, according to our main new reporting lines. We will, however, continue to give an overall geographic presentation of the group, which will be useful to understand our exposure, including sales from High-Performance Solutions. You notice on the right that the size of Asia and emerging markets here is clearly much larger than the region of Asia-Pacific alone on the left-hand chart. Moving on to page 14, the split is clearly different in terms of operating income, indicating clearly the structural differences in profitability between the businesses which have very different levels of capital intensity, for example, between distribution and the manufacturing businesses.
Page 15, we will, of course, continue to report growth and profitability for each of the five new reporting units, and we will also specify the proportion of our two European businesses relating to each of industry and of distribution, conscious that this is necessary to enable a clear reading of the profitability of the group. I will now hand back to Pierre-André.
I am on page 16, and the second benefit of our new organizational structure is increased agility. I will add, because it is important, increased responsibility and entrepreneurial spirit. Page 17, we are moving away from the three-matrix level of management which has structured the group over the course of the last few decades to replace them simply with the five units of management that we have just described to you. The responsibilities of one and another will be greatly clarified, reporting lines shortened, and decision-making processes accelerated. All the incentives and bonus programs will be aligned with this new organization by country for the regional businesses and by market for High-Performance Solutions. I expect out of this an even more increased sense of ownership, drive, and accountability on the results. Page 18, this is exactly what we described to you on this slide.
We expect a lot of change which will come together with a change in management philosophy, an absolutely absolute priority given to the business on the ground with the organization designed to service them, speed with no-matrix-driven decision, tailored business decisions, no one-size-fits-all, and ownership, one line of management. Page 19, about the new senior management team, you see that the management structure is evolving significantly as a result of our new organization. It is regenerated and more international. It will allow the young managers who are the future of the group to progress. You may not fully see at group level, but in most countries, for our local businesses, our CEOs are national from the country, which is a real strength of Saint-Gobain. On this occasion, and because I know that will interest the market, we are moving in terms of CFO.
Guillaume Texier will become head of the Southern Europe, Middle East, and Africa region, and he will be replaced as our CFO by Chalendar, who is one of the most promising talents in the finance department of Saint-Gobain. Currently, Chalendar is CFO of our High-Performance Materials, but he has had an international and wide experience across several businesses within the group, having started his career with the group more than 20 years ago in India, first in finance and then as general manager. I now hand back over to Benoit.
I'm now on slide 20. Last but not least, this new organization will allow us to unlock important synergies and savings in the short term. Let's move to slide 21. We'll unlock these synergies, first and foremost, for the benefit of our customers. We'll, of course, continue to promote our strong commercial brands and sales teams for Norton, CertainTeed in the US, ISOVER, Placo, ADFORS, etc. We'll also continue to respect clearly the commercial independence, the arm's length principle between our building materials and our distribution units.
Moving to a market approach for High-Performance Solutions and a country one for local businesses will provide a stronger offer to our customers, be more efficient, more innovative, and optimize a number of things, whether that be the full breadth of Saint-Gobain product and service offering in one hand, be easier to do business with thanks to an optimized logistics or joint customer service, or simply greater competitiveness by streamlining further costs. Let me outline for you the three levels of benefits we target at local, market, and global level. I'm on slide 22, and let's start with the local level. At local level, our country's CEOs will optimize the right resources according to the winning market segments.
They will be able to go full speed to combine our best strengths to propose new solutions, not just products, but systems to our customers, whether that be in the areas of prefabrication, commercial buildings, or digital. For instance, on non-residential markets, when we talk to architects, we'll pull together under one team and one line of management our glass, ceilings, gypsum, or insulation experts. We have done it in the US recently. When we target new growing prefab markets, distribution and building materials can work more closely together. Distribution is often strong on wood, like in the U.K., or concrete frames, when gypsum is more on metal frame. Both can join the effort to go after prefab, which is a fast-growing segment in construction. With digital, we have access to a lot of channels, customers, and data.
Country by country, initiatives like the one launched in France between distribution and construction products will be further developed. We do this already, as you can see from the few examples outlined on the slide, but we have much more positive success stories across various countries and will do much more. The goal for our country's CEOs and their initiatives will be to launch a lot of those examples everywhere based on their own market potential. It works, and it brings success. We'll also benefit greatly in terms of efficiency in bringing all back-office teams together under one roof. I move on slide 23 to the market synergies. This same integrated approach will apply in the High-Performance Solutions division through a market angle. In organizing ourselves in this way, we'll be in a position to increase very significantly the value and the innovation potential that we bring to our customers.
Being one team on aerospace, for instance, will step up the intimacy between our teams and their customers, not only on the product but also on the functions that we bring to them. Our technological bricks are each individually very powerful, and they will be even more so when more closely associated with each other under systems. We'll also have a stronger anticipation of the market trends and opportunities for growth. I move to slide 24, which is the third level of synergies, and this is an important one. We'll be the synergies of a small but important set of central functions. In the same way as we are giving more power to the businesses on the ground, bringing a central organization to some key functions has also some key advantages to further push group benefits on scale, expertise, and innovation.
These functions have a different philosophy, one of service to help the operations on the ground be successful and not of line management. What is new and very powerful is that we group all these functions, whereas they were split by vertical business lines in the past. One or two examples to illustrate. For instance, we create one marketing and development team centrally, grouping the top 20 Saint-Gobain product managers. This means that we will have in one team the full Saint-Gobain offer, helping the country to grow their business and also design their systems, let's say for wood construction, facades, including all products, glass, gypsum, insulation, etc., in one go. Also, digital roadmap for High-Performance Solutions and regions will be further enhanced. This central team will emulate the community of our 1,600 digital experts and the 300 we hired last year alone.
On the manufacturing performance side, we'll keep the expertise of our individual directors by business line, of course, but move them into one central team, which will enhance the fertilization of world-class manufacturing rollouts across all the entire group, also the management methodology of strategic CapEx, as well as best practice sharing between our plant people. As you can see, what was sometimes in silos of business units in the past will now be unlocked. By transforming ourselves deeply like that, we will unleash growth. We will also significantly gain in productivity and cost. On the cost side, we have identified many benefits to pull people in one team. It is true at the central level. It is also true country by country, either for shared service functions such as joint customer service, marketing or logistic teams, administration or finance, and also sometimes consolidating management positions.
All this is a case-by-case basis, country by country, and market business unit by market business unit for High-Performance Solutions. The potential is there to gain in efficiency and reduce our cost to sales. A few examples on slide 25 for global synergies. All these group synergies are also very valid in the area of research and development. We know that critical mass counts a lot, and one technology can be applied in several markets. We have noticed numerous times the unexpected cross-fertilization, either by technology like ceramic thermal expertise for fire-resistant plasterboard or electronic glass properties for said glass or security, or also by function like the acoustic research we develop in the same lab for glass bearings in automotive, insulation, or ceilings. These global synergies will also apply for systems.
Our R&D teams will work together with a direct input from the one Saint-Gobain offer that I just described under this marketing group, and they will develop new solutions by application, such as flooring, partition, or facades. Here you have the example of external thermal application combining Weber within High-Performance Solutions, insulation, mortars, and gypsum. All in all, we are confident about our local, also our market, and our strong global synergies that our new organization will power on all the assets of Saint-Gobain and allow us to go full speed for more growth and profitability. I now hand back to Guillaume.
Thank you, Benoit. Moving to page 26. This new organization will unlock potential. It will allow us to accelerate our growth, but in the short term, it will also be a source of very concrete savings. In the course of the preparation of this transformation, we have done an extensive job evaluating synergies in each function and in each country, and we have identified potential savings of more than EUR 250 million, which should be in place by the end of 2020 for a full-year effect in 2021. The first savings will come through in 2019. They will come from the simplification of the central organization and in-country synergies, but also from the increased responsibility given to businesses on the ground and greater agility for managers. These savings will be in addition to the savings program we already have in place of EUR 1.2 billion between 2017 and 2020.
On slide 27, overall, the transformation will therefore allow us to accelerate growth, even though we are not yet able to quantify this impact. It will also allow us to improve our profitability by more than 100 basis points by 2021, and therefore, this alone will put us in a position to reach the bottom of our normative target margin range of 8.5-10% that we indicated for the group last year. Let me maybe explain this a little bit more. You remember that when we gave this normative range, we said that we would get there through two levels, some internal self-help in a way, and some externals, mostly linked to leverage on volumes. What we are saying today is that the self-help part will be sufficient to get to the bottom of the range.
This is good news, as in the same time, we continue to enjoy well-oriented markets. I will now hand back to Pierre-André, who will conclude.
Yes, I am on page 28, and you see the timeline of this transformation plan, which is rather quick. You see the main steps. I will not go through them one by one, but you see that we will progress rapidly to implement the plans outlined today. Our ideas are clear. Our team is in place and motivated, and nothing is standing in the way of us progressing at full speed to put our plans in place. On page 29, as you can see, it is a major challenge for the group with many plans, that for the portfolio, that for the organizational chair, and that for the teams. It is a result of substantive work that has been carried out over the course of recent years, and that allows us today to clearly accelerate and set in motion a new stage which will completely transform the group.
Benoit and myself, together with the whole management team, are convinced that the Transform & Grow plan will allow us to exploit Saint-Gobain's numerous strengths to their full advantage. Thank you for taking the time to join us this morning. Now, Guillaume, Benoit, and myself are at your disposal for any questions.
Ladies and gentlemen, if you wish to ask a question by phone, please press zero one on your telephone keypad now. We've received a first question from Paul Roger, Exane BNP Paribas. Your line is now open. Please go ahead.
Hi, yes. Good morning, everyone, and congratulations, in particular to Benoit and Guillaume on the new roles. I just have two questions, please. Firstly, can you just indicate how radical you're actually prepared to be with the next stage of the portfolio review? Maybe also, if you can comment about how important you think distribution activities are within the new structure. Secondly, the headline target here is obviously the 100 basis points margin improvement. Can you tell us whether senior management incentives will be aligned with that target, and also what it would mean for return on capital? Thank you.
Thank you, Paul. In terms of the portfolio evolution, as you have said, first, we are moving according to what we said in July, and our EUR 3 billion program is well underway with the two new announcements and the one that, in fact, closed last week. We were waiting for regulatory approval, which we never know exactly when they are going to happen, but I am very pleased about this divestment that we have done in China under very good conditions. The way we will look at our portfolio in the future is going to change significantly, in fact.
I think that this very significant change in the approach, this radical, I would say, change in the approach of Saint-Gobain, which is to look at our portfolio and activities by country and by regions, but mostly by country, and not according to a product line worldwide, is going to change radically the way we look at our businesses. That means that we will review our portfolio within the framework that we have in each of these countries and to see whether the combination that exists today is the right one for the future, whether what are our strengths and what are our weaknesses in this portfolio. From that standpoint, it means that we will have absolutely no taboo compared to the business line that we have worldwide, and we can make significant moves. This new approach will, of course, be including all our activities.
When you talk about whether it is a distribution business or whether it is one of the different of our industrial activities, that is what led us to consider that in Germany, our distribution activity was not its best place in the future, was not within the Saint-Gobain portfolio in Germany. Now for the second question on the incentives, maybe Benoit, you want to answer? Yes, I can answer that, Paul. Yes, clearly, all the managers will, of course, have that in their target. We are announcing it internally today. All the country managers, all the region managers, and the market business need for High-Performance Solutions will have their contribution under this new savings plan clearly identified, and that will be part of their incentives for sure.
Guillaume, you want to add something on the return on capital?
Yeah, because I think Paul had a question on return on capital. I think, as Pierre-André mentioned, we are revisiting all portfolio, and there is no one specific business targeted. You can assume, even though it's not a guidance, that the return on capital evolution will be very much in line with the return on sales evolution.
Okay, that's very clear. Can I just have one quick follow-up?
The return on capital is different from our different business. At this oration, between the return on capital and the return on sales is different within our different businesses because of a very different capital intensity. I'm sure you well all know that.
Yeah, no, that's very clear. Just a quick follow-up. On the 40 basis points improvement in margin that is linked to the portfolio review, that is basically just 40 basis points coming from the EUR 1 billion divestments you've already announced. If you do more, it could change potentially.
It's coming from the EUR 3 billion, yeah, from the EUR 3 billion turnover which I was already announced. Yes, if you do more, there could be more effect, absolutely.
Got it. Thank you very much.
The next question is from Jean-Christophe Lefebvre-Moulin, CMCIC Market Solutions. Your line is now open. Please go ahead.
Bonjour, messieurs. It's a follow-up question regarding Paul Rogers, Christian. First, the disposal of the pipes assets in China, this asset was profitable or loss-making first? Secondly, could we have an order of magnitude of EBIT margin of the German distribution business? Many thanks.
On the pipe business in China, it was around break-even. In terms of distribution in Germany, it is lower than the average of distribution.
Yes, but you cannot be more precise, Pierre-André, or is that?
As we have launched this process, you will know more when we are more advanced on this process.
Okay, okay, it is well advanced now, the disposal of.
Yeah, we are launching the process. We have launched the process.
Okay, but it's only targeted Raab Karcher Germany, not the subsidiaries in the Czech Republic, or not?
No, the Czech Republic, we already divested three, four years ago.
Okay, okay.
No, no, it is all our businesses in distribution in Germany. On the other end, all our businesses in Germany are not under the Raab Karcher brand.
Okay, there is also Pierre-André, maybe?
There are different brands in different specialist markets.
Okay. Many thanks, Pierre-André.
The next question is from Samuel De Veld of ODDO BHF . Your line is now open. Please go ahead.
Yes, good morning. Thank you for taking my question. I understood from the last capital market day that you wanted to invest in building distribution. What makes you believe that investing in Germany is not sufficient to keep it now? I'd like to understand because capital market day was in May 2017. I had a question also on Mr. Bazin, as the new Chief Operating Officer. Does that mean that he will be the next CEO when the time is right?
On the first question, we are investing in distribution, and one of the important acquisitions, bolt-on acquisition of 2018, is in distribution in Norway. What we said clearly in distribution is that the local strength and market share is a key element, together with the link we can establish with the rest of our activities within the country. That is the second point, which has led us to consider that in Germany today, to answer the three questions that we asked generally, this business does not fit our long-term view. I would add one thing also is that digital has really, in the last few years, changed very significantly the way we need to approach our businesses. In the construction area, there has been very significant impact from digital in terms of the way to go to market.
To name a few, all the activities under what is called BIM, Building and Instrument Modeling, are clearly changing the way to look at our market. Benoit gave a few examples during our presentation. The impact of the end user is very important. When we look at that, we may have different views on our different businesses in distribution in the different countries. You have seen on the other end that in France, and Benoit gave examples, the cooperation between our businesses to set up our new website was clearly instrumental to get closer to the end user. We do not see in Germany this as a strong possibility. Now, on your second question, I would remind you that my mandate, I was re-elected in June six months ago, six months ago for four years. That means that my succession is not today a topic.
On the other end, I thought it was important for me to have another, in French we say mandataire social, so another legal representative, and that's what I proposed to the board. Given the transformation program we have, which is a major one, I want to have the best adapted team around me, and that's the one I'm presenting today. Benoit is going to lead this transformation together with me.
Thank you.
The next question is from Élodie Raoult, JP Morgan. Your line is now open. Please go ahead.
Hi, good morning, everyone. Thank you. I have three questions, please. The first one is about you thinking between acquisitions and buyback. I mean, why not today announcing a bit more buybacks, given the rating of the share price lately? My second question is on the targets that you've actually disclosed at your last investor day, so the mid-term margins. I was just wondering how we can reconcile those mid-term margins that you've given with this new guidance. It's going to be a bit complicated, but if you could help us on that, and if they are still valid. My last question is, on restructuring costs, would you have some of that associated with the cost savings and the phasing of it? I.e., how much of those cost savings will actually translate in the bottom line? Thank you.
Guillaume will answer these questions, Elodie.
Yes. On acquisition and buybacks, first of all, you've seen that since the beginning of the year, we have done substantially more share buybacks than last year. We are at approximately 13 million shares bought back year to date, and the last one we bought were a few weeks ago. That's the first thing. In terms of acquisitions, we continue to find, and I think we had a slide in July on that. We continue to find good acquisitions. We generate a lot of value for the company and for the shareholders based on synergies or based on development acceleration in emerging countries, for example. We continue to do that. I think it's very clear in terms of buybacks that we continue to march quite actively to our target, which is to get back to 530 million shares.
You have seen over the last few years that we have accelerated on this path. The second thing in terms of mid-term targets, I mean, you heard Pierre-André saying that we had a target for the group of 8.5-10% of margin, which is basically the weighted average of the targets by sectors that we had given at our investor day meeting. Very clearly, we continue to have those targets in mind. In fact, because we will continue to disclose the proportion of distribution in the European regions, you will be able to look at the evolution of those targets on the industrial side and on the distribution side. Those are still valid. We will probably do an investor day at some point to update on all of that.
Basically, the targets are in line with what we had announced at the investor day meeting. Finally, the restructuring costs, yes, there will be restructuring costs. It's not fully evaluated at this stage because we will do a detailed country-by-country and function-by-function analysis of the timing of what we are doing. Basically, you saw that there was an impact of EUR 50 million positive in terms of synergies in 2019. I would expect that this could be offset in terms of order of magnitude on the non-operating charges by what we will have to do in terms of restructuring. This is not a guidance. We will still need to update you probably a little bit later.
Okay, thank you.
The next question is from Mike Beth, Database Analysis. Your line is now open. Please go ahead.
Thank you very much. I think I've got two questions, please. Firstly, my understanding is Benoit has already been doing some of this in the construction products businesses in terms of moving away from products to countries. If that's the case, could you please just talk a little bit about how that's influenced broadening this to the group? I can see the benefits. Presumably, there's been some drawbacks. Has there and has that been tackled when we've looked at this? Sorry, it's three questions. My second question is conflicts between products and distribution. I mean, having them as two separate businesses externally has maybe kind of made them less of a concern. I mean, is it a concern now that it'll be more difficult to show the separation for alternative suppliers to the distribution businesses from Saint-Gobain?
The third one, on the glass business, which is now being split, obviously, there's a lot of linkage between the construction, the basic float, and the automotive glass. I mean, how easy is it to do that separation? Is it just an accounting separation, or is it actually how the business is going to be run as well? I presume it's how it's going to be run, but how are you going to implement that, please? Thank you.
Concerning the first question, I'll start, and maybe Benoit will add something. Benoit, you are right, Mike. Benoit moved his organization in construction products internally from this activity report management to more regional management. We go one step further in the fact that we really are not going to have any more of these activities as they have been structured. I would say from that standpoint, this will make things easier. It is taking the consequences of what at a broader level of what Benoit started. Maybe Benoit, you want to add something? Yeah, I could add that we have done that in several countries. The pilots work. The very important point in that case is to make sure we select the best teams. Very often, we have a large business. I take, for instance, Austria, we have a large gypsum business.
Insulation and mortars were smaller. I would say the big brother helped the smaller ones to open doors, to meet new customers. That is on the growth side. The teams have reacted extremely positively in terms of additional growth. Also, on the efficiency side and being easier to do business with, when you consolidate same customer service, same logistics, it helps a lot. We have several countries doing that already. I would say the drawbacks or the points of attention are to make sure that the training of our people, our salespeople, is extremely important. Sometimes we did it in Ireland some years ago. We underestimated a bit the training. The training and making sure we select the best teams, I would say, are the two points which are extremely important. Now, maybe on the.
You want me to take the second question?
Yes, if you want to take the second question on distribution.
The second question between. [crosstalk]
You know Benoit has been in charge of distribution and then in charge of construction products. So this topic, he knows it very well.
I will try to keep my two brains into one now.
Yes.
No, but clearly, we keep the arm's length relationship between building materials and distribution. That's the only way we can stay competitive on both sides, internally and externally. It's absolutely clear, and we'll continue to reinforce the message. That being said, there are new opportunities that we can tackle together. If I think of innovation, I think we can do much more in terms of testing new products in our distribution channels. We did it for Habito, the new robust plasterboard we launched in France last year with Point.P. Innovation could be one. The fact that you have one line of management at the country level will accelerate the decisions. Innovation is one. You could think of digital, the route to market and channels and the way we reach out to end customers is quite blurred in those days.
Putting our forces together will be, I think, a big plus. We could think of logistics that we can do more together. We are selling a lot of traded goods in our building materials. If I think of mortars, we have 10-15% of traded goods. Sometimes the barrier to do more is that we do not have the logistics to break in bulk, so we can leverage our strengths of logistics to do that. There are many, many examples. I quoted also the prefab. It is a growing market. Rather than do it in several silos, we can do it in one. British Gypsum is very strong on metal frame. Distribution bought Scott frame, which is more wood frame, I think, earlier this year or late last year. Clearly, setting a prefab business unit could be a great advantage.
There are many, many aspects where, besides the arm's length relationship, which we'll keep, having one team in one country will clearly boost the growth and also maybe leverage a bit more the back-office function that we can, without any impact to the customers, combine.
On the glass point, this is obviously, Mike, a very important question, and we have thought a lot about this. Because, of course, from a technology standpoint, from an R&D standpoint, automotive glass and architectural glass are extremely linked, and from the R&D standpoint, there will be one boss on that. That will not change. I extend on that, on the relationship, as Benoit said, for all our innovative solutions, they are often in terms of the, I use always this sentence, they are the locomotive from the standpoint of the group in terms of innovation, both in terms of methodology and in terms of the approach to the market and in terms of the solutions which move from one to the other. That is an important point. We are very mindful of that.
While on the other end, we think that it's very important from a market standpoint and a customer standpoint to have a split between those two, we will have the main plants, tools which are serving both markets, which are our float glass especially in Europe, will be in one hand. From that standpoint, because those tools are common for the two divisions. I think for us, it is a time now where we think that there is much more value in addressing and putting the organization aligned with markets.
Understood. Thank you.
The next question is from Anup Menon , Bank of America. Your line is now open. Please go ahead.
Thank you very much. Good morning, gentlemen. Three quick ones, if I may. Firstly, can you give us a feel for the headcount reduction that you're planning as part of this plan? I appreciate if you don't want to give too much detail, but is it a few dozens, a few hundreds headcount reduction? Secondly, I couldn't see any mention of Sika in your statement. So I'm guessing now you're seeing your stake in Sika as a purely financial stake, and you're not really integrating it in your new organization. And lastly, if I may, I know it's not really the topic of the day, but it's been a month since you reported your Q3 sales. Have you seen any change in the business environment since you last talked to us? Thank you.
I'll re-answer very quickly first, Arnaud, on the third one. I can confirm the guidance we made on Q3 last month, and we have not seen changes in the picture that I gave you with Guillaume at this conference call. We are completely in line with what we said. In terms of Sika, as you know, we had in mind, and we still have in mind to realize some synergies with Sika where appropriate. As I told you already, the process needed some healing. We have already had recently some exchanges in the businesses, so that there is no change in the philosophy on that. Concerning the impact of this transformation of Saint-Gobain on the headcount, we don't provide numbers. Guillaume told you about the synergies that we expect. There will be some changes to shrink our structural and our organizational headquarters, I would say, by country.
There will be some significant reorganization in these aspects. What is the impact on headcount? Frankly, I have no answer yet to this question, but clearly, we will treat those topics the way it has to be treated in the different countries.
Okay, thank you very much.
The next question is from La tif Abid of Barclays. Your line is now open. Please go ahead.
Yeah, good morning. Thanks for taking my question. I got three, actually. The first one is on the EUR 250 million savings target by 2021. I was wondering if you could give us an idea of how much of that is hard cost-cutting and how much of that is the value synergies you mentioned with the new organization. The second question is, I'm not sure I completely understand what the new organization changes at the local level. If I assume that, let's assume I'm running Isover in France, what is the new organization practically changing? I mean, is it just the reporting people, the people I'm going to report to where changes are going to happen, or is my business in France also going to be impacted by this organization change?
Lastly, I mean, from what I understand, effectively, the new reporting structure is going to remove the sector information for the capital markets. How do you think that's going to help in terms of reducing the conglomerate discount that Saint-Gobain is suffering? I was wondering if you had any view, any comment on that.
Guillaume, you want to answer the first question?
Yeah, I can answer the first one on the EUR 250 million. First of all, I don't know what is the difference between hard savings and soft savings. What I can say is that you see that we set ourselves a target of EUR 250 million and also a target of 100 basis points improvement, which is basically the addition of the effect we had already given on portfolio management and of those EUR 250 million. All those savings are going to go to the P&R very clearly. In terms of breakdown, what I can say is that approximately a little bit less than half is going to be the evolution of the central overall structures, activities, sectors, delegations. The other half is going to be in-country, the synergies between businesses, basically. I'm not going to get into more details on this one. Yeah.
On the reporting, yes, the main changes are going to be on the reporting line, which is a much simpler line of reporting above the different units. If you take the example of Isover France, it will be very straightforward. The second thing is the relationship within the countries are going also to change, which is the second part that Guillaume mentioned. He is the one who is going to be looking at this as part of his new role will be to be the CEO of France. That will be a significant change for him. What was the first one?
The last one was sector information removed and conglomerate discount. I can start by saying that, first of all, we continue to give the profitability and the evolution of the high-performance solution sector. That is one. Secondly, we continue to give the breakdown in the European regions between manufacturing and distribution. You continue to get information. Thirdly, in terms of what is relevant to understand the evolutions of the market. In fact, this is mostly the way the questions are organized when we are on roadshows. We look at the rest of the businesses mostly on a regional basis because that is what makes sense in terms of the dynamics and in terms of the strategy of the businesses. I think, in fact, we are giving slightly more details.
Secondly, we are giving details which are fully in line with the way the business should be looked at.
This is a radical change in the way we are going to look at our businesses, which means that given the footprint that we have in a given country, we may add businesses that we do not have in other countries because they are quite useful, or we may subtract businesses that we have in many countries because they do not fit the portfolio of that country. I think that from that standpoint, it is a very significant change on the way we are going to look at our portfolio. Benoit, I want to add something on the second question.
I could add another example rather than Isover France. For instance, let's say glass Germany. In the past, for a decision, you had to go to the glass activities and the innovative material sector. That is two levels. You had to go also to the German delegation.
That's the three management levels that Pierre mentioned. In the future, there will be one boss for Germany taking all the businesses of Germany and maybe grouping in one marketing team, glass, gypsum, insulation, mortars, have one key account for all these business lines when we talk to large contractors, one DIY team, one logistics team. That's substantial savings we could get. The target for the German CEO will be to optimize the P&L, to go from 1-3% operating profit more with all the free reins to decide quickly rather than to refer to three management units.
It is clearly optimizing the resources on growth, tackling the winning segments, the winning market channels, putting the right engineering resources on those segments, sometimes combining some management positions like we have done recently between Gypsum and insulation in some countries, and clearly optimizing the growth and the benefits to our customers and the cost side when you merge customer service, logistics, and some back-office functions. It will be a crystal clear mandate for the CEOs of the countries to optimize growth and P&L of Saint-Gobain.
Which means also, as I said, no one size fits all. This, what Benoit just described, which could be the case for Germany, could be done very differently in another country given the footprint that we have in these different countries.
That's helpful. Thank you.
The next question is from Yassine Touareg on CIEL. Your line is now open. Please go ahead.
Yes, good morning. I would have two questions. First, what are the main risks that you have identified to carry out this large transformation program, and how do you consider to address those risks? My second question is that we understand that you have given clear incentives to country CEOs. Could you give us a little bit more detail about the specific metrics for those country CEOs' incentives?
On the risk of execution, as it is a large transformation of the group, there are, of course, risks. That is why also, in my view, it is very important that I use both a new team and a team which has been extremely experienced. If you take the first, my senior management team, they have had significant experience of our various businesses being in different positions. I think from that standpoint, we are going to, for me, it is a very important limitation of the risk. Second, we have made a lot of pilot trials in various ways of the way this, Benoit mentioned some of them, of the way this organization is going to work. I think that I am really ready to jump into this new way.
I have been pushing in the last 10 years Saint-Gobain to be more customer-driven, and I think we have already accomplished a lot. I progressively got to the conclusion that our long-lasting basic structure and organization, which was at its merit at its time, is now an obstacle if we want to generate more growth and competitiveness for Saint-Gobain, and it is also too heavy. I think that is why we are going to simplify significantly. It is clear that we will need the best teams in each country, but I am confident that we have that in the majority of countries today. These are going to be one of the priorities of the team, and especially of Benoit and the regional managers to make sure that they drive those countries. In terms of the metrics, Benoit, you already answered. Maybe you want to be a bit more explicit.
It's again very clear and very straightforward. Country CEO, whether it's Indonesia, Germany, US, or whatever, 70% of the incentive will be on the final results of his or her country. Straightforward, return on capital, cash, and profit. For the remaining 30%, it will be 5% on safety because that's part of the core values of Saint-Gobain, and we continue to pay very strong attention to that. Within the 25% remaining, 1% will be on portfolio if there is something to acquire or to divest in his or her country. The rest will be on contribution to this new organization, including, of course, the targeted savings for the relevant country. That's very straightforward. 100% of the country incentive is on the country, and that's something we have already defined with Pierre-André.
Thank you very much.
The next question is from Josep Pujal , Kepler Cheuvreux. Your line is now open. Please go ahead.
Yes, good morning. Two for me. The first one is on CapEx, please. How do you think the new organization will influence CapEx? Will you end up, for a given amount of sales, invest more, or you think that it will be virtuous and you will end up investing less and more precisely where the needs are? My second question is to come back on the buyback. You have mentioned several times the EUR 530 million shares, I would say, target. Is this, I would say, an absolute target, or is there something which refrains you from going ahead of that if the conditions are there, the market conditions are there? Thank you.
I can answer already the second question. We will talk about next step, if there are next steps, when we are there. Compared to the objective we had, we are halfway, I would say, today, because I think we are currently, Guillaume, we are at 543. So we are a little bit more than halfway compared to where we were two years ago. We are moving in that direction. We have a goal. When we will be at that goal, we will see what we do next, if we do something next. Honestly, I have no—I do not know yet. We will review that when we are there. On CapEx, I do not think there is going to be a strong influence. Maybe, Benoit, you want to answer?
Joseph, it's a good question. First, of course, the group will continue to manage the total envelope on the CapEx and the allocation on the growing segments, countries. That's not going to change the total picture and total amount of CapEx. It's under the control of the group. Second, I was a bit quick for the sake of time, but we'll have four central functions in terms of global synergies. I mentioned R&D. I mentioned marketing and development. We'll have one on technology and industry performance, where we'll continue to keep the expertise on CapEx. We'll have one central team on all the methodology on CapEx, whether it's a new plasterboard in Vietnam, whether it's a new float line in Colombia, or whatever. The technical expertise and the management of the CapEx will remain for strategic CapEx at the central level.
The fourth central function that we'll have is that we'll have a distribution performance to make sure also that we continue to leverage European private label, European rebates that we have on top of the different countries and continue to benchmark the operational performance of the different distribution business units. The CapEx will, of course, manage the envelope at the group level and, second, continue to leverage the expertise business line by business line and with one methodology on all the strategic CapEx.
Understood. Thank you.
The next question is from Will Jones, Redburn. Your line is now open. Please go ahead.
Thanks. Good morning. Three for me as well, if I could, please. First, just around thinking about, I guess, the role of the country manager. Clearly, it could be the case now that a given country manager has a wide range of products under his or her remit. If, for example, that person was an expert historically in distribution and now has to manage flat glass and construction products businesses as well, I just wondered to what extent you think there's a learning curve that some of these country managers need to go through because, obviously, there's huge variety now under their guise in terms of business types. The second was just checking around purchasing. I would guess there's some kind of global or divisional deals you have for certain raw materials in the manufacturing divisions.
To what extent, I guess, are those arrangements impacted at all as you move from product lines to country lines? The final one was just around, I guess, how much history you're planning to give us in terms of, obviously, the new segmental breakdown. Thank you.
I can answer the first one. Clearly, in our choice and selection of the best managers country by country, we pay high attention to that. That's point number one. Very often, we have a large business, much larger than the other one. By definition, we pick up this one to grow the other ones. The second part of the answer is that, of course, we keep also some business unit managers below. If you run, let's say, gypsum in Indonesia, you have a big mortar guy. You keep some teams, whether it's product management, whether it's manufacturing expertise dedicated to the product lines. We make a good combination, one head for the country and very often, logically, the largest business, but keeping the experts below line by line. That's a good balance.
On purchasing, this is not going to affect the way we organize on purchasing. It has been, depending on the line, it has been progressively centralized. You know that we have had significant savings in purchasing over the years. We still have in our cost program outside of this new plan. We still have objectives to improve. They are not going to change. The purchasing central department will report to Benoit, and no change in that. On terms of history, Guillaume?
Yeah. In terms of history, I mean, we gave in the presentation an idea of the results for each one. At the time of the full year results, we will give you a full set of results for 2018 under both formats. I suggest overall that you have further discussions with Vivien to understand precisely how it's going to work.
Okay. Thank you.
The next question is from John Messenger, Redburn, London. Your line is now open. Please go ahead.
Hi. Sorry. One more from us, please, as well, if I could. Just referring back to slide 17 and to come back to this point about how you are going to interface with the market. Can I just understand you had the 14 delegations and you had 12 activities there. So kind of 168 decision-makers is the implication from that slide. Can I just understand how many country CEOs are they going to be going forward and how many product line CEOs? I'm thinking it's kind of 35 to 40. Is that correct? Because I guess it just implies a very similar number of decision-makers at the top. The second one from me was really on that point. Pierre-André, you mentioned, I think, the majority of country managers have been appointed. Can I just understand how many of those are in place?
Have some come from outside to create and inject a bit of change into the way those things are going to be managed going forward? Finally, when the country manager generates his profit and his cash flow in the year, you mentioned, obviously, centralized CapEx decision-making. How much cash will he be allowed to keep, or will effectively his cash generation and his profits be, at least theoretically, if not physically removed from the country? Will that be controlled by the group in terms of his decision-making for the following two, three, four, five years? As in, the asset allocation is clearly centralized, but will he have some ability to say, "Look, I'm here and rewarded on profit growth.
For me to make the most of this country operation, you need to leave a certain amount of cash with me before you then decide whether I can spend $100 million on a major project? Just to understand what is going to happen at the physical and real level.
I start with a point on this last point, is that the cash has never belonged to the operation. So there is distinction between cash and profit. Of course, if there is good profit, it means that the business is going well. In terms of capital allocation, it's easier to get more. Maybe, Benoit, you want to answer more broadly on this point?
On the country organization and the yeah?
Yeah. Yeah. Basically, we will have 24 countries or cluster of countries, what I call cluster of countries, that if you take, for instance, Czech Republic, Hungary, Slovakia, that's one guy. Basically, 24 countries grouped into four regions. You see it's quite simple. Again, within the country, we don't replicate different activities that are within a country. You will have progressively one marketing team, one supply chain team. Of course, you will keep some business unit experts because for some sales forces, we'll keep them separate. For other, for instance, the non-residential prescription market, we'll create one team. When you target the do-it-yourself markets, it's more merchandising, which is relevant than product expertise. You group into one team. Again, the decision-making at the country level will be extremely simple while keeping the know-how when it's necessary on the product and expertise.
are 24 clusters of countries or countries into four regions. On the high-performance solutions side, there will be four main markets: mobility, life science, industry, and construction industry. You see it is quite straightforward and simple. Coming to your, sorry, the other question regarding whether we have a bit of fresh blood and different people. We have a combination of both, some existing managers which have grown through the ranks within Saint-Gobain, and some managers that we have promoted from outside or from recent acquisitions. I think of Denmark, someone will come from just joining us from outside, same in Romania, same in Vietnam. The person who is going to lead the marketing and development group, so that is the first time ever we have a group offer in one hand, is a woman coming from outside. She joined us 18 months ago from Bosch.
I'm not going to advertise for Bosch, but I think it's a good school of management. You see a good combination of internal and external, a bit of fresh blood and ideas, and also a bit of diversity. We have, I think, a good mix of that, and we'll continue to nurture that for sure.
Great. Thank you very much.
The next question is from Phil Roseberg of Bernstein. Your line is now open. Please go ahead.
Good morning. Good morning, gentlemen. Two very quick questions from me. The first is, clearly, one of the important goals of this transformation is an improvement in growth that you mentioned on several occasions. I've not really heard any sort of clear targets for what that growth improvement will be. At what point, or can you quantify the growth benefit? Linked to that is, I believe, the 100 basis points all-encompassing margin target is without the impact of volumes. Did I get that correct? Any growth potential is not within that number. My second question is, on M&A, you don't seem to have changed your goal, still greater than EUR 500 million per year. Do you rule out specifically large acquisitions? I know everybody's talking about the BASF building chemicals company that is now being offered for sale. Is this something that you're looking at?
In terms of growth, yes, we have not put a specific target on growth, even though it is medium-term, probably the biggest objective we have in mind. These 100 basis points do not include an impact of growth. You are correct on that. On M&A, I never rule out. I say that anything. The priority for Saint-Gobain is small and medium-sized acquisitions. That being said, we will look at targets when they come, and I will not specifically comment on any situation there.
Just to come back on the growth target, is that something that you intend to quantify at some point? Because it seems such an important lever for your transformation.
That's something I have internally, but I'm not ready to communicate externally about.
Fair enough.
The next question is from Gregor Kuklich of UBS. Your line is now open. Please go ahead.
Hi. I've got two questions, maybe two and a half. The first one, just on the phasing of the savings. Can you just provide a little bit of background why it takes two to three years? Are you kind of phasing in different countries as you go along without kind of putting too much risk into the overall operation? Is that what's going on in terms of just to understand why I suppose we'll have to wait till 2021 to see the full benefits? The second question is just to be 100% clear. The EUR 150 million is just purely cost. There's nothing related to any other synergies, be it on, I don't know, gross margin or cross-selling or anything like that. It's just pure cost. Those are the two questions.
Yeah. Yeah, Guillaume.
Yeah. The fact that we are ramping up, first of all, it's going to be relatively quick because you see that in terms of getting to the full year speed, which will allow us to get to the 100 basis points, we are going to be there at the end of 2020, first of all. Secondly, no, there is no phasing between countries. All countries will start to work, not even January 1, but today, in fact, to define their action plans. You will see the effects of that as soon as 2019, as we have said. In this kind of putting in place synergies, there are things which are immediate and simple in terms of reorganization. There are things which, in terms of reducing costs in the countries by putting things together, it will probably take a little bit longer time.
That is the reason why it is ramping up between 2019, 2020, to get to full speed at the end of 2020. Believe me, we do that without any phasing and in an accelerated manner. Secondly, in the EUR 250 million, as Pierre-André said, we did not take into account in those EUR 250 million any growth synergies. It is going to be cost synergies for the full EUR 250 million. If there are growth synergies beyond that, they will come, clearly. We expect that we are going to be able to unlock additional growth. By caution, we did not take that into account in the EUR 250 million. I hope it is clear.
Thank you.
We have not received any further questions, so I'll hand back to the speakers.
Thank you. I think we are all in Saint-Gobain very excited about this transformation plan. I thank you for all your questions. Our next meeting will be on the 2018 results on February 21 of 2019. Thank you, everybody, and have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.