Key risks associated with business

Uponor’s financial performance could be affected by a range of strategic, operational, financial and hazard risks. Climate change also causes risks to the company.

1 Strategic risks
2 Operational risks
3 Financial risks
4 Hazard risks
5 Climate risks
6 Policy or legal risks
7 Market and reputation risk

1 Strategic risks

Changes in the global economy and financial markets may have negative impact on Uponor’s operations, performance, financial position and source of capitals.

In 2020 COVID-19 pandemic caused economic uncertainty to the markets. Uponor’s management has prepared different scenarios concerning the possible financial impacts of COVID-19. The management has utilised these scenarios to assess the validity of impairment calculations, fair values of assets, recoverability of deferred tax assets, contract modifications and expected credit losses. Based on these analyses, the management’s judgement is that Uponor’s liquidity and financial position has remained strong and the pandemic has not had an impact on the valuation of Uponor’s assets.

Uponor’s key operating areas are Europe and North America, where exposure to political risks is considered to be relatively low in general. However geopolitical tensions in general do not show any signs of easing, thus Uponor constantly follows geopolitical events and developments in order to react accordingly if needed.

Uponor does not expect Brexit to have any major impacts on its business.

Demand for Uponor’s products depends on business cycles in the construction sector. Uponor mitigates this risk by distributing its business to two main geographical areas:  Europe and North America. In addition Uponor has three business areas: plumbing solutions, indoor climate solutions and infrastructure solutions, which mitigate risk further. Uponor’s products are used both in new construction projects and renovation projects, and in the latter the demand is usually more stable than in more cyclical new construction.

Increasing competitive pressure through e.g. private labelling creates a risk to Uponor. The company mitigates this with constant R&D investments and increasing its capabilities to expand in commercial segment.

Uponor’s ongoing operational excellence programme aims to achieve annual savings of €20 million by the end of 2021. The company is exposed to a risk of capturing the savings within the planned timeline.

Since Uponor’s net sales are divided among a large number of customers, most of which are distributors (wholesalers); end-market demand for the company’s products is distributed across a wide customer base. The five largest customer groups, whose sales are distributed between over 20 countries, generate roughly one third of Uponor’s net sales.

Digitalisation, emerging technologies and capabilities related to those areas are needed to build new business opportunities for Uponor. Uponor’s ability to attract and retain talents to drive change are key to Uponor’s future success. Uponor manages this risk by building its employer brand and developing and training its current employees, e.g. in their leadership skills. Uponor also aims to build networks that complements its own knowhow.

In most of the countries, where Uponor's operates, there are local regulation concerning plumbing solutions and Uponor needs national product approvals for a large proportion of the products it sells. The company closely monitors laws and regulations related to its products and raw materials under preparation, in order to anticipate their impact on Uponor and its customers. Uponor also participates actively in different trade organisations’ work and aims to influence local and regional decision makers in questions related to energy, health and water usage.

2 Operational risks

The prices of raw materials used in Uponor’s products are susceptible to change, driven by several factors including petrochemical and metal product price fluctuations, supply capacity, market demand among others. In recent years, Uponor has been able to pass most of the effects of such fluctuations onto its selling prices with a reasonable delay. Whenever feasible, Uponor manages the risk of fluctuations in the price of metals and plastics raw materials through supply agreements with fixed prices, and by means of financial products. Uponor continuously and systematically uses financial instruments to manage price risks associated with electricity prices at Nordic level.

With respect to component, raw material or services sourcing, Uponor aims to use supplies and raw materials available from several suppliers who are also expected to follow all aspects of Uponor’s Supplier Policy and framework contracts. Wherever only one raw material supplier is used, Uponor seeks to ensure that the supplier has at least two production plants, which manufacture the goods used by Uponor. The company continuously develops systems for material and raw material quality control and supplier accreditation.

There are risks associated with product liability related to products manufactured and sold by Uponor. Product liability is addressed through centralised insurance programmes at Group-level.

Digitalisation and smart solutions expose Uponor to cyber risks. Therefore Uponor is monitoring cyber, data and information threats. Uponor’s business processes are managed by using several IT applications, the most important of which are the ERP systems. A system criticality review and contingency planning are included in the implementation and lifecycle management of major IT systems.

Uponor has adopted a stance of zero tolerance with respect to health & safety, compliance & laws, and environment risks. Uponor applies an ISO 9001 quality management system and an ISO 14001 environmental management system, which ensure consistent quality as well as enhance production safety, environmental law compliance and productivity while reducing the environmental impact and risks of Uponor's operations.

In its project business operations, Uponor is seeking to manage risks related to issues such as project-specific timing and costs. As far as possible, such risks are covered in project and supplier agreements. In addition, Uponor actively enhances its employees’ project management skills.

Uponor can be exposed to different judicial proceedings. In 2020, such proceedings had no material impact on Uponor’s result.

3 Financial risks

Uponor aims to ensure the availability, flexibility and affordability of financing by maintaining sufficient committed credit limit reserves and a well-balanced maturity distribution of loans, as well as by using several reputable and well-rated counterparties and various forms of financing.

The company manages its liquidity through efficient cash management solutions and by applying a risk-averse investment policy, investing solely in low-risk instruments that can be liquidated rapidly and at a clear market price.

Interest rate movements expose Uponor to changes in interest expenses, as well as in the fair values of fixed-rate financial items. The interest rate risk is managed by spreading Group funding across fixed and floating rate instruments.

The international nature of its operations exposes the company to currency risks associated with various currencies. In 2020, approximately 60% of Uponor’s net sales are created in currencies other than the euro. Correspondingly, a major part of expenses associated with these net sales are also denominated in the same local currencies, markedly decreasing the associated currency risks. The Group Treasury function is responsible for managing and hedging Group-level net currency flows in external currency markets, mainly by using currency forward contracts and currency options as hedging instruments.

Uponor is also exposed to currency translation risk, which manifests itself in the translation of non-euro-area subsidiaries’ equity into euro. According to the company’s hedging policy, non-euro-area balance sheet items are not hedged, with the exception of some internal loans, which are classified as net investments and included in hedge accounting. Only reputable and well-rated banks are used as currency hedging counterparties.

4 Hazard risks

At the year-end 2020, Uponor operated 16 manufacturing facilities in Europe and North America. Uponor co-ordinates property damage and business interruption insurance at Group-level on a centralised basis, in order to achieve extensive insurance cover neutralising the possible financial damage caused by risks associated with machine breakdowns, fire etc.

Various and numerous measures are taken in order to manage the risks associated with property damage and business interruption. These include unit-level Business Contingency Plans, safety training for personnel, adherence to maintenance schedules, and actions taken to maintain the availability of major spare parts.

5 Climate risks

Uponor has identified that climate change can cause transition risks to the company. As Uponor’s manufacturing facilities are located in inlands and further away from areas which are more exposed to extreme weather conditions, the company have no material physical risks related to climate change.

6 Policy or legal risks

As Uponor’s main raw material is plastic, produced using fossil fuel, i.e. crude oil, tightening regulations and/or taxation around fossil fuels can increase Uponor’s operational costs and set new requirements for Uponor’s products. To mitigate the risk, Uponor’s R&D actively participates in projects seeking alternatives for fossil oil based resins. Uponor also participates in different trade organisations’ work and aims to influence local and regional decision makers in questions related to energy, health and water usage.

7 Market and reputation risk

Uponor’s customers’ demand can shifts towards products, which are produced from renewable and recycled raw materials. If Uponor fails to introduce new materials on time, the company can lose market share. If Uponor continues to use fossil based resins, when competitors move to other options, it can cause reputational damage to Uponor and its brand.