Interim report January – September 2016: Uponor improved performance in Europe, the North American segment suffered from supply issues

Uponor Corporation     Stock exchange release     28 October 2016     08.00 EET

Interim report January – September 2016:
Uponor improved performance in Europe, the North American segment suffered from supply issues

• Modest growth in net sales and operating profit in Building Solutions - Europe and in Uponor Infra, while growth in Building Solutions – North America decelerated and profit remained below prior year
• Net sales for July – September totalled €284.1 (274.1) million, up 3.6% or 4.3% in constant currency
• Operating profit for July – September came to €25.1 (23.6) million, a change of 6.0%; comparable operating profit^(* came to €29.0 (24.6) million, an increase of 17.7%
• Net sales in January – September totalled €830.5 (788.8) million, up 5.3% or 6.5% in constant currency
• Operating profit for January – September came to €63.5 (57.4) million, a change of 10.5%; comparable operating profit amounted to €74.6 (59.2) million, up by 25.9%
• January – September earnings per share amounted to €0.47 (0.44)
• January – September return on investment was 16.9% (17.3%), and gearing at the end of September was 56.6% (37.9%)
• January – September cash flow from business operations totalled €22.0 (17.0) million
• Uponor repeats its guidance for the year 2016, announced on 12 February 2016:
  Assuming that economic development in Uponor's key geographies otherwise continues undisturbed, the Group’s net sales and comparable operating profit are expected to improve from 2015.

*) Comparable operating profit excludes items affecting comparability (IAC)

President and CEO Jyri Luomakoski comments on developments
during the quarter:
 

• Our European building solutions segment faced a softer third quarter in terms of organic top line development, but the transformation programme initiated in Q4/2015 helped to improve the comparable operating profit, confirming the relevance of the transformation. The programme has progressed well and we estimate that the final measures will be completed during Q1/2017.
• Building Solutions - North America suffered from fittings resin supply shortages, which added to the cost burdens of the business. The underlying market growth of the PEX pipe continued to be solid in both the residential and commercial markets throughout the quarter.
• I am delighted to see the turnaround in Uponor Infra, which after a series of cost reduction programmes and continued weak demand in the Nordic countries, again reports a clear comparable operating profit improvement. We have also started a cost reduction and operational improvement programme in Canada to further improve the overall performance of Uponor Infra.
   
     

Key financial figures 

Information on the January–September 2016 interim report

This interim report has been compiled in accordance with the IAS 34 reporting standard and is unaudited. Figures given in the report are for continuing operations, unless otherwise stated. Any change percentages have been calculated from the exact figures and not from the rounded figures published here.

Uponor follows the new recommendation from the European Securities and Markets Authority (ESMA) concerning Alternative Performance Measures. Thus, the term “non-recurring items” (NRI) has been changed to “items affecting comparability” (IAC). See the table section for more details.

This document is a condensed version of Uponor’s January–September 2016 interim report, which is attached to this release. It is also available on the company website.

Webcast and presentation

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

The next results report

Uponor Corporation will publish its financial statements 2016 bulletin on Monday 13 February 2017. During the silent period from 1 January to 13 February 2017, Uponor will not comment on market prospects or factors affecting business and performance, nor will the company engage in any discussion of events or trends related to the reporting period or the current fiscal period.

Markets

Construction activity in Europe continued to strengthen in the third quarter, albeit from a low base. In North America, construction activity remained healthy in general, but the substantial increase against the previous year, as witnessed during earlier quarters, turned out to be weaker in the third quarter.

In Central Europe, Germany has continued to benefit from consumer-driven expansion in the economy. A strong labour market and low mortgage rates have translated into higher demand for residential buildings, leading to a significant increase in residential building permits and several all-time-high builder confidence survey results. The non-residential segment has remained healthy, but external political and economic uncertainties are causing hesitancy amongst businesses about the initiation of new projects. In the Netherlands, construction activity has moderated.

In Southern Europe, construction activity in Spain and France has made some gains from a low base, while the Italian market continues to be challenging. In the UK, the fallout from the EU referendum has thus far been muted.

Within the Nordic countries, construction activity has continued to trend upward. Sweden’s residential boom continues, with starts over the last 12 months reaching their highest level since the early 1990’s. In Finland, the market remains weak, but building permit figures and construction volumes indicate that the slight improvements noted earlier in the year have been sustained.

In North America, residential and non-residential construction remain largely healthy, but the substantial year-over-year gains witnessed during the quarters since the recovery began were no longer materialising in the third quarter. Rather, housing starts and construction spending were largely in line with the same period in 2015.

With regard to Uponor’s infrastructure solutions, demand in the Nordic markets was stable on the whole, with demand in Sweden and Norway improving somewhat. The markets in Poland and other central-eastern Europe remained subdued, lacking EU funding. Depressed energy prices continue to restrain oil-related investments in Canada, which is also negatively impacting on the infrastructure business in other market segments.

Net sales

Uponor’s continuing operations reported net sales of €284.1 (274.1) million for the third quarter, entailing growth of 3.6%, or 0.4% in organic terms, i.e. excluding any divestments and acquisitions. The impact of currency changes versus the same period last year was -€1.9 million.

Building Solutions – Europe’s net sales grew due to the acquisitions made in January 2016, but organic net sales in the third quarter declined slightly. The main reasons for the decline were a lower relative share of single-family buildings in contrast to flats in the sales mix, a softer commercial building market - especially in Germany, and tight competition from private label offerings, particularly in the lower price–performance categories. Weakening market demand witnessed in the Netherlands also impacted on net sales development. Net sales developed favourably in some other key markets, such as Finland, the UK and Russia.

In Building Solutions – North America, growth in net sales was modest compared to several previous quarters, reflecting a more stable housing market in the U.S., in contrast to the strong growth that prevailed in 2015. In the U.S., sales of the commercial product offering in particular developed favourably, while residential sales fluctuated. Sales development was also affected by the engineered polymer resin shortage, which created challenges in the supply of plastic fittings since it started in 2015. Demand also weakened in Canada and net sales there remained slightly below those of the comparison period.

Uponor Infra reported top line growth, mainly originating in the Nordic countries, while the continued weak market situation in Central and Eastern Europe and North America had a negative impact on net sales development.

Breakdown of net sales by segment (July–September):

Uponor’s January–September net sales came to €830.5 (788.8) million, achieving growth of 5.3%, or 2.6% in organic terms. This was mainly driven by the strong growth in Building Solutions - North America throughout the first half of the year. The currency impact on year‑to-date net sales, versus last year, totalled -€9.4 million, mainly based on the CAD, GBP and RUB.

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

Results and profitability

Uponor’s operating profit in the third quarter came to €25.1 (23.6) million, representing a change of 6.0%. Profitability measured in terms of the operating profit margin reached 8.8% (8.6%). Comparable operating profit, i.e. excluding any items affecting comparability, came to €29.0 (24.6) million in the quarter under review, showing an increase of 17.7%. Thus, the comparable operating profit margin reached 10.2 (9.0) per cent.

Building Solutions – Europe’s operating profit improved somewhat, partly as a result of an increase in net sales as well as the savings generated by the transformation programme. Plastic raw material availability and pricing were more predictable than in the previous year, which helped planning and production efficiency development. The segment’s operating profit includes a total of €0.9 million in items affecting comparability, which in the comparison period amounted to €1.0 million.

Building Solutions – North America’s operating profit declined somewhat in the third quarter. Despite being down versus last year, at 16.0% Building Solutions – North America’s profitability remained at a high level as a percentage of net sales. The segment has been growing its plumbing business, including plastic fittings, during H2/2015 outpacing the supply of engineered polymer resin which is used to produce the fittings. In order to secure customer satisfaction, Uponor’s first response was to offer certain high-volume items in lead-free brass, which has a higher cost and is therefore less attractive to the customer. For Uponor, these sourced items also generate lower gross margins compared to plastic fittings, in which our manufacturing depth is higher than for metal fittings. During the second quarter 2016, Uponor, Inc. was able to identify and qualify another engineered polymer, which enabled the reintroduction of the full range of plastic fittings for customers. This new material has a significantly higher unit cost. Additionally, the two rounds of offering changes have caused incremental costs in the supply chain, which should stabilise during the fourth quarter of 2016. As a further element, investment in the expansion and optimisation of manufacturing - combined with new recruitment - increased total overheads and conversion costs during the quarter.

Uponor Infra’s operating profit clearly improved, being supported by the favourable development in conversion costs and overhead expenses as well as cost savings from the ongoing transformation programme. In addition, the reported quarter saw lower turbulence in plastic resin availability, which generated extra costs in the comparison period. Geographically, advances were made in the Nordic countries, in particular, where net sales developed in a favourable direction. The segment’s operating profit includes a total of €3.2 (0.0) million in items affecting comparability.

Breakdown of operating profit by segment (July-September):

Financial expenses, net, in the third quarter, came to €1.7 (-0.7) million, up €2.4 million. This increase was mainly due to the strengthening of the NOK and RUB, which caused exchange losses in 2016.

Profit before taxes for July – September totalled €23.5 (24.4) million. Taxes had an effect on profits of €8.7 million, while the amount of taxes in the comparison period was €9.0 million.

Profit for the third quarter came to €14.8 (15.4) million.

The January – September operating profit came to €63.5 (57.4) million or €74.6 (59.2) million without items affecting comparability, up 10.5 or 25.9 per cent respectively on the comparison period. Key contributors to this development were Building Solutions – North America’s solid growth in the first half of the year, which was supported by Uponor Infra and Building Solutions – Europe in the third quarter.

Items affecting comparability totalled €11.1 million in the January – September period. They were related to the transformation programmes in the Building Solutions – Europe and Uponor Infra segments. In the corresponding period in 2015 such items totalled €1.8 million. Excluding items affecting comparability, Building Solutions – Europe’s comparable operating profit, was €30.8 (22.5) million and that of Uponor Infra was €8.3 (1.4) million.

Profitability, or the operating profit margin for the January – September period was 7.6 per cent, against 7.3 per cent in the comparison period. The comparable operating profit margin came to 9.0 (7.5) per cent.

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

Earnings per share for January–September totalled €0.47 (0.44), both basic and diluted. Equity per share was €3.41 (3.26), and diluted equity per share was €3.41 (3.25).

Events during the period

During the July-September period, progress was made in initiatives that had been launched earlier in the year. On 13 July, Uponor Corporation and Belkin International, Inc. completed the partnership agreement, announced on 25 May 2016, and formed a joint venture company in the United States and Europe for the development and commercialisation of intelligent water technology. The new joint venture, named Phyn, develops water sensing and conservation technology for both consumers and the building industry. As a minority-owned business, the joint venture company was consolidated into Uponor’s financial accounts using the equity method.

The finalisation of the new factory premises in Taicang, China, has continued as planned and the first production lines are currently being installed and tested. Employees began to move into the new office in October 2016.

As part of the transformation programmes in Europe, Building Solutions – Europe relocated its office in the UK to a location close to London and completed its consultations with personnel. By the end of the third quarter, a total of 10 offices throughout Europe had been closed since the start of the year, while net reduction in personnel, relating to the transformation programme, amounts to 143 persons. Uponor Infra continued to streamline manufacturing by centralising production in fewer locations in Finland and Denmark. A total of 31 jobs were lost in Uponor Infra as part of the transformation programme during 2016.

The quarter also saw the launch of a new product, Uponor Barrier PLUS, the first 100% plastic potable water pipe for use in water transport in areas with contaminated soil, in order to avoid potential risks to human health in urban and other brownfield environments. For the first time, the new Uponor Barrier PLUS is based on a non-permeable polymer in place of the aluminium layer, resulting in a durable but fully-recyclable pipe system. The system, which uses standard fittings for pressurised potable water piping, will be sold by Uponor Infra organisations in Finland, Denmark, Norway and Sweden.​

Events after the reporting period

In October 2016, Uponor Infra decided to restructure its Canadian manufacturing operations. This initiative will include the further consolidation of manufacturing as well as measures to streamline operations. Measures aimed at creating operational savings will also have a minor impact on jobs in various locations in Canada.

Short-term outlook

The near-term economic outlook in Uponor’s core geographical markets remains rather stable although uncertainty regarding longer-term stability is mounting. The main drivers for such uncertainty are continued political turbulence in Europe and its neighbouring regions, doubts about the economic strength of the European Union, as well as the sustainability of the global economic development currently being supported by public expenditure. In addition, increased volatility, which is becoming the norm in the business environment, may cause short-term bumps on the road.

Notwithstanding what is said above, demand in the building and infrastructure market in Europe is likely to develop satisfactorily, due to the fact that economic development in some countries, such as Germany, continues to be strong and is driving private consumption, while in several others pent-up demand for residential building is being actively satisfied in the form of new build and renovation.

In North America, the brisk building market in the U.S. may begin to plateau, a trend which may be reinforced in the shorter term by the nation’s focus on issues on the political agenda rather than business or personal life. No major changes are anticipated in Canada.

The next two quarters will mark the completion of Uponor’s internal transformation programmes in Europe. While, in 2016, the focus has largely been on transforming and renewing the businesses and structures, the subsequent quarters will see the targeted benefits and savings coming in. For both Building Solutions – Europe and for Uponor Infra, Uponor considers its businesses to be in a much better position to meet future challenges, targeting stronger profit development than in the last few years. In Building Solutions - North America, investments in manufacturing capacity will support further growth in step with the markets.

In connection with the results briefing on 12 February 2016, Uponor stated that the Group's capital expenditure would increase from that experienced over the last few years. Uponor estimated that capital expenditure, excluding any investment in shares, will amount to circa €58 million in 2016, against €50 million in 2015. Some key reasons for the increase were the continued high emphasis on new offering development, extensive European transformation initiatives including manufacturing footprint optimisation, as well as a plan to establish a factory in China. While most of the initiatives have been executed as planned, there have been some delays, which may result in capital expenditure remaining somewhat below the previously communicated figure of €58 million.

Assuming that economic development in Uponor's key geographies continues undisturbed, Uponor repeats its full-year guidance, announced on 12 February 2016: the Group’s net sales and operating profit (excluding any items affecting comparability) are expected to improve from those of 2015.

Uponor’s financial performance may be affected by a range of strategic, operational, financial, legal, political and hazard-based risks. A more detailed risk analysis is provided in the section ‘Key risks associated with business’ in the Financial Statements 2015.

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

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Uponor is a leading international systems and solutions provider for safe drinking water delivery, energy-efficient radiant heating and cooling and reliable infrastructure. The company serves a variety of building markets including residential, commercial, industrial and civil engineering. Uponor employs about 3,700 employees in 30 countries, mainly in Europe and North America. In 2015, Uponor's net sales totalled €1,050 million. Uponor is based in Finland and listed on Nasdaq Helsinki. www.uponor.com