Interim report Q1/2015: Uponor’s steady progress

Uponor Corporation     Interim report January–March 2015     28 April 2015   08.00 EET

Uponor’s steady progress continues despite weak European trends

• Net sales in January – March totalled €237.1 (230.9) million; up by 2.7% or -0.7% excluding non-recurring items and currency translation impact
• Operating profit came to €11.3 (4.8) million, a change of 132.9% or 31.1% on a like-for-like basis excluding a non-recurring cost of €3.8 million in 2014
• Earnings per share were €0.06 (0.04)
• Return on investment was 7.2% (3.5%), and gearing 46.7% (56.9%)
• Cash flow from business operations came to €-22.4 (-18.4) million
• Uponor repeats its full-year guidance announced on 12 Feb 2015: The Group’s net sales and operating profit (excluding any non-recurring items) are expected to improve from 2014

(This interim report has been compiled in accordance with the IAS 34 reporting standards and is unaudited. Figures in the report are for continuing operations, unless otherwise stated.)

President and CEO Jyri Luomakoski comments on developments during the reporting period:

• I am happy to report yet another successful quarter in Building Solutions - North America. We have been able to sustain the brisk growth, thanks to continued buoyancy in the U.S. residential housing market and our success in customer conversion both amongst residential and commercial contractors.
• We carried out a strategic review of the total portfolio of Uponor Infra in order to define the best synergic fit. As a result, we took the initiative and executed two non-core divestments in a timely manner. We have also completed the streamlining initiated last year and the results are visible in our numbers. With already two improving quarters behind us, the management can now focus on developing the core business further.
• In contrast to North America, our European business landscape with only a few bright spots offers little consolation. In Germany, Europe’s largest building market, the construction sector remains solid but it has flattened or even slowed a bit and has, at least temporarily, decoupled from the larger economy, which is doing well and has rebounded from the autumn slowdown.

Information on the January – March 2015 interim report bulletin This document is a condensed version of Uponor’s January – March 2015 interim report bulletin, which is attached to this release. It is also available on the company website. The figures in brackets are the reference figures for the equivalent period in the previous year. Figures refer to continuing operations unless otherwise stated. Any change percentages were calculated from the exact figures and not the rounded figures published here.

Webcast of the results briefing and the presentation A webcast in English will be broadcast on 28 April at 10:00 a.m. EET. Connection details are available at http://investors.uponor.com . Questions can be sent to ir@uponor.com. The recorded webcast can be viewed at http://investors.uponor.com shortly after publication. The presentation document will be available at http://investors.uponor.com > News & downloads.

Next interim results Uponor Corporation will publish its Q2 interim results on 21 July 2015. During the silent period from 1 to 21 July, Uponor will not comment on market prospects or factors affecting business and performance.

Markets  

In the first quarter of 2015 economic development in Uponor’s core geographical markets was characterised by continued weakness in Europe and sustained healthy development in North America, the U.S. in particular. International concerns, such as the geopolitical crisis in Ukraine and the economic challenges in the Euro area, continued to disturb market conditions in many parts of Europe. In addition, the dynamics around the lower price of oil had a negative influence on the progress of several economies, in particular Canada, Norway and Russia, to name a few.  

There were fewer weather-related influencers than in the first quarter of 2014. While North America did suffer from a lengthy period of severe cold in the first two months of the year, resulting in business slowing down, the European countries faced a rather normal winter.  

In the Nordic countries, construction activity in Sweden sustained much of its earlier liveliness. Meanwhile, the Norwegian market, influenced by declining oil revenue, showed a weakening development, which was also the case with Finland. Contradicting the general trend, Denmark made some gains, although from a very low base.  

In Central Europe, the German building market that had lost some of its strength in the latter half of 2014 continued like that in the first quarter too, in stark contrast to the booming general economic environment in the country. The building activity was mostly driven by new residential building. The renovation market continued to be subdued as it was lacking drivers in the form of high energy costs or public incentives. Starting at a low level after the lengthy decline, activity in the Netherlands was developing positively while Austria and Switzerland continued to be rather soft.   

The Eastern European markets were affected by the geopolitical tension in the region. The biggest impact was felt in Russia, where demand started to slow down clearly in the first quarter. Ignoring the general trend, demand in the Baltic countries continued to grow briskly.   

Amongst the South European markets, construction in the UK was slowing, with the exception of the non-residential segments of the market. Most other national markets in the region have stabilised at low levels. A notable exception is France, where the market deteriorated further.   

In North America, the gradual, broad-based recovery continued in the U.S. despite another cold start to the year, which had an adverse impact on housing starts in both countries. The Canadian residential segment remained reasonably healthy, while the non-residential segment has been softening.   

In terms of infrastructure solutions demand, the markets were very much as in the first quarter of last year. In the Nordic countries, demand in Sweden remained positive, while Denmark and Norway were more hesitant. A clear contrast was Finland, whose market deteriorated even further from the weak comparable period. The largest international market, Canada, was positive overall as last year.

Net sales

The Group’s consolidated net sales reached €237.1 (230.9) million, up 2.7%. In comparable terms, adjusted for the divestment of the Thai infrastructure business and currency rate impact, the development was flat at -0.7%.

The translation impact of currencies on net sales, compared to the first quarter of 2014, and mainly related to the USD, was considerable, boosting net sales by €9.9 million, or 4.4%. The impact makes a notable variance in Building Solutions – North America’s reported Euro-based net sales.

Thus, Building Solutions – North America reported a growth of 40.6% in euro. Growth in local currency also stayed robust at 13.9%, reflecting the continued favourable business environment, especially in the U.S., while the business in Canada declined. The fact that Uponor offers products for the growing renovation and remodelling market supported growth.

Building Solutions – Europe continued to face headwinds in the European markets and its net sales declined. This trend was mainly driven by weaker demand in certain key markets, such as in the Nordic countries and Germany, and also in Russia where the construction market clearly started to decline towards the end of the quarter. In Germany, much of the drop from prior year was attributable to order shipments being delayed till April on account of the transition of the warehousing operations to the new distribution centre in March.

Similarly, Uponor Infra faced headwinds in its European markets, and net sales for the quarter declined despite the robust growth in North American operations. The drop in reported net sales compares to the divestment of the Thai business effective on 1 March 2015.

Breakdown of net sales by segment (January – March):

Results and profitability

The positive trend in gross profit was supported by a favourable input cost environment in the first two months of the quarter, influencing the infrastructure business in particular. The trend, however, turned rapidly in March driven by a sudden shortage in certain plastic raw materials.

Uponor’s consolidated operating profit for continuing operations in the first quarter of 2015 came to €11.3 (4.8) million, representing a change of 132.9% year-on-year. On a like-for-like basis, excluding any non-recurring items, operating profit was €11.3 (8.6) million, up 31.1%. The first quarter 2014 included a non-recurring item of €3.8 million as a provision for the central European distribution centre relocation. Profitability, as measured by operating profit margin, more than doubled to 4.8% from the 2.1% reported a year ago.

Building Solutions – Europe’s reported operating profit grew modestly but, excluding the non-recurring item in the first quarter 2014, there was a drop in profit. This was largely driven by plummeting net sales in key markets. The negative trend was most apparent in Germany, where increasing competition, commoditisation of certain product groups as well as increasing share of project business reduced margins. The decline in sales evidenced in Russia became even more prominent due to currency translation, influencing numbers reported on segment level.

Despite the adverse impact of the Canadian currency, Building Solutions – North America’s operating profit continued to grow steadily, supported by efficiency improvement measures and tight cost management. Although carefully managed, expenses grew somewhat in pace with business volume growth.

Uponor Infra’s operating profit improved clearly as a result of the restructuring measures and favourable input cost influence, but remained negative on account of low volumes. Performance improved in the North American operations, in particular, on account of higher sales but, due to the weaker-margin product mix over there, it was not enough to compensate for the drop in the Nordic countries.

Expenses at €74.6 (73.5) million increased by €1.1 million. Dispatching and warehousing costs remained on prior year level excluding the non-recurring cost of €3.0 million in the first quarter last year. Sales and marketing costs increased by €3.2 million, mostly driven by Building Solutions – North America whose influence was inflated by the dollar-to-euro translation.

Profit before taxes for January – March totalled €6.3 (2.7) million. The effect of taxes on profits was €2.3 million, compared to €0.9 million in the first quarter of 2014. The estimated tax rate for the full year is 37.0%, compared to 35.5% at year-end, the increase coming from Estonian income tax arising from dividends to the parent company in 2015.

Profit for the first quarter of 2015 amounted to €4.0 (1.8) million.

Breakdown of operating profit by segment (January – March):  

Key events

A new distribution centre in Hassfurt, southern Germany, close to the main manufacturing operations, was opened for business in March. The distribution operations in Wettringen, north-western Germany, were shut down at the same time. Due to optimised logistics and more flexible human resourcing arrangements, Uponor expects to achieve €2 million savings annually from the second quarter 2015 onwards.

On 23 February, Uponor announced that its U.S. subsidiary, Uponor, Inc. is expanding its manufacturing facility in Apple Valley, Minnesota with completion expected by December 2015. The €16 million investment will be mostly used toward expansion of an additional 8,175 m ² of manufacturing and office space, including manufacturing equipment that is required for capacity needs in the near-term.

On 25 February, Uponor announced that its majority-held subsidiary Uponor Infra Oy sold its majority shareholding of 65.99% of the shares in Wiik & Hoeglund PLC, a company listed on the stock exchange of Thailand. Uponor Infra also signed a license agreement with the buyers whereby Wiik & Hoeglund PLC was granted a license for Uponor Infra’s proprietary Weholite technology. The net sales of the divested business amounted to €23 million in 2014, and it employed 210 staff. Uponor Infra Oy made a decision to withdraw from the business in accordance with its strategy to focus on markets where it can command a strong market position and achieve operational synergies.

Furthermore, on 30 March it was announced that Uponor Infra Oy, for the same reasons, divested its fully owned Finnish subsidiary, Extron Engineering Oy, a specialist in the business of designing and manufacturing machinery for the plastic products industry. The net sales of the divested business in 2014 amounted to €5.6 million, and it employed 19 staff. Uponor Infra will also in the future continue to license and sell certain technologies relevant to the infrastructure business.

On 25 March, Uponor established a captive insurance company, Uponor Insurance Ltd, a fully-owned subsidiary of Uponor Corporation. With the new company, Uponor aims to improve its management of Uponor Group’s global liability programmes and gain access to comprehensive insurance coverage under favourable terms. The domicile of Uponor Insurance Ltd is Guernsey, which has a tax treaty in force with Finland. The company thus pays its taxes to Finland, in accordance with domestic Finnish taxation regulations.

Short-term outlook

The near-term economic outlook in Uponor’s core geographical markets does not contain any noteworthy changes comparing to the outlook given in February. The scenario of the North American economies developing healthily and Europe, overall, continuing rather flat remains more or less unchanged.

Customer demand in the building and construction markets is expected to follow the general economic trends. In Europe, the demand drivers in building and construction remain weak, while in North America growth is likely to continue, although at a somewhat slower pace than in the past few quarters.

The supply chain environment in the plastic products industries, in Europe in particular, is somewhat disturbed by an acute shortage of certain key raw materials, which is putting pressure on input prices and affecting the industry’s ability to serve customer orders. This trend is expected to continue into the foreseeable future, thus curbing business at the start of the high season. Uponor is actively managing the situation to alleviate any customer concerns but this unforeseen trend may still impact Uponor’s infrastructure solution business, in particular.

Uponor repeats its guidance for the year 2015, announced on 12 February 2015:

The Group’s net sales and operating profit (excluding any non-recurring items) are expected to improve from 2014.

Uponor’s financial performance may be affected by a range of strategic, operational, financial, legal, political and hazard risks. A more detailed risk analysis is provided in the section ‘Key risks associated with business’ in the Financial Statements 2014.

Uponor Corporation Board of Directors

For further information, please contact: Jyri Luomakoski, President and CEO, tel. +358 20 129 2824 Riitta Palomäki, CFO, tel. +358 20 129 2822

Tarmo Anttila Vice President, Communications Tel. +358 20 129 2852

DISTRIBUTION: NASDAQ Helsinki Media www.uponor.com

Uponor is a leading international provider of plumbing and indoor climate solutions for residential and commercial building markets across Europe and North America. In Northern Europe, Uponor is also a prominent supplier of infrastructure pipe systems. The Group employs approx. 3,800 persons, in 30 countries. In 2014, Uponor's net sales exceeded €1 billion. Uponor Corporation is listed on NASDAQ Helsinki in Finland. www.uponor.com