Q3/2011 interim report: Uponor's growth accelerates in North America, Europe slows down
Uponor Corporation Interim report January-September 2011 26 October 2011 8.00 EET
Uponor’s growth accelerates in North America, Europe slows down
- Germany, Sweden and USA posted strong net sales, despite global uncertainties; margin development continues to be a challenge
- Net sales for Jul–Sep totalled €213.6 (205.5) million; a change of 3.9%
- Operating profit for Jul–Sep totalled €19.7 (23.5) million; a change of €-3.8 million
- Net sales for Jan–Sep totalled €609.4 (567.5) million; a change of 7.4%
- Operating profit for Jan-Sep totalled €38.4 (43.8) million; a change of €-5.4 million
- Jan–Sep earnings per share amounted to €0.32 (0.32)
- Jan–Sep return on investment was 15.3% (15.5%), and gearing 53.7 (40.9)
- Jan–Sep cash flow from business operations came to €-4.9 (7.9) million
- Full-year guidance remains the same as announced on 27 September 2011
(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. The ‘report period’ refers to the period January–September.)
President and CEO Jyri Luomakoski comments on developments during the reporting period:
Despite global concerns, we were able to achieve a strong net sales growth in some of our key markets, such as the USA, Sweden and Germany. Customers’ interest in our offering, such as the energy-efficient heating and cooling systems remained high. For instance in Iberia, we recorded double-digit sales growth figures in some product groups.
Our gross profit has markedly declined, mainly due to slowness in passing input price increases onto sales prices in Europe. Also our operational leverage has been weaker than planned.
- We have begun actions to streamline our organisation, save on costs and further boost efficiencies. This means speeding up some projects in the Supply Chain area e.g. European central warehousing, but these actions will not jeopardise the execution of our long-term strategic initiatives.
Webcast and presentation material:
The presentation material for the interim report will be available at www.uponor.com > Investors > News & downloads.
A webcast in English will be broadcast today at 10:00 am, followed by a teleconference for any questions. Instructions on how to join can be found on our website, www.uponor.com > Investors > Q3/2011 webcast. Alternatively, one can send an email during the webcast or in advance to firstname.lastname@example.org. A recording of the webcast can be viewed in the same location shortly after the live broadcast.
Uponor Corporation will publish its financial results for 2011 on Friday, 10 February 2012. During the silent period from 1 January to 10 February 2012, Uponor will not comment on market prospects or current issues relating to business and performance.
In its second quarter 2011 report, Uponor indicated that the optimism characterising the first quarter had given way to caution in several markets, with growth softening, with the exception of Germany. With a similar trend continuing into the third quarter, towards the end of September Uponor announced a change in its guidance, adjusting its full-year 2011 estimations downwards.
While demand in some key geographical markets, such as Germany, continued to develop steadily or even grow in the third quarter, mounting concern over a second global financial crisis and the resultant increasing uncertainty began to have a negative impact on businesses and end-users in many markets, slowing demand for building and infrastructure solutions. This was most clearly felt in the project business, i.e. the building of large commercial and other non-residential objects, where projects in the planning phase encountered more frequent delays than expected. This was the case, for instance, in some southwest European countries. In contrast, demand in the residential market held up reasonably well, especially in central Europe, Sweden, Denmark and Russia, but signs of softening also emerged there towards the end of the quarter. In North America, the housing markets have remained at a very low level, with consumer confidence also ebbing, although a modest increase was noted in US residential building permits.
In the infrastructure solutions market, the demand pick-up evidenced in the second quarter fell back and markets were weaker than in the strong third quarter of 2010. Some softening was noted towards the end of the quarter, especially amongst retailers more oriented towards the residential sectors of the market and who emphasise careful inventory management.
Competition in building and infrastructure solutions remained tight and price-focussed.
Uponor’s net sales growth continued in the July-September period, although at a lower pace than in the preceding two quarters. The Group’s consolidated net sales reached €213.6 million, as against €205.5m in the comparison period in 2010, representing growth of 3.9 per cent. The Group’s organic growth halted, with growth in consolidated net sales coming mostly from the acquisition of the German company Zent-Frenger earlier in the year.
The greatest growth was generated in Building Solutions – North America, where growth in euro-terms reached 11.2 per cent and 19.6 per cent in US dollar-terms. This growth was largely based on systematic, long-term investment in sales and new products, which is bearing fruit despite the challenging market environment.
In Building Solutions – Europe, the net sales growth was a result of the Zent-Frenger acquisition, supported by strong residential demand in certain markets. In other areas, such as in Southwest Europe in particular, net sales growth was weak or even negative.
Infrastructure Solutions also reported modest growth, supported by price inflation and somewhat revived net sales in the Scandinavian countries.
Breakdown of net sales (July-September):
|Building Solutions – Europe||140.9||137.9||2.0%|
|Building Solutions – North America||33.2||29.9||11.2%|
|(Building Solutions – North America, USD||46.8||39.2||19.6%)|
For the January – September period, Uponor’s net sales reached €609.4 million (€567.5m), growing 7.4 per cent from the comparison period. The translation impact of currencies in net sales amounted to €1.4m in comparison to the previous year, mainly coming from the US dollar.
The clear deceleration from the early part of the year reflects the gradually weakening business climate. Despite mounting macro-economic concerns, the key longer-term drivers supporting Uponor’s sales growth, i.e. the increasing importance of sustainability as a decision-making criteria and the demand for complete solutions, continue to remain high on Uponor customers’ agenda.
Breakdown of net sales (January-September):
|Building Solutions – Europe||411.0||380.8||7.9%|
|Building Solutions – North America||89.4||87.9||1.8%|
|(Building Solutions – North America, USD||126.9||115.3||10.1%)|
Results and profitability
Uponor’s consolidated operating profit in the third quarter was €19.7 million (€23.5m), a decline of 16.2 per cent. In percentage terms, this was a slightly smaller decline than in the second quarter. Profitability or the operating margin declined to 9.2 per cent from the 11.4 per cent reported a year ago.
The operating profit clearly declined in both European segments, whereas a strong improvement was recorded in Building Solutions - North America. European operations were burdened by a combination of factors, including increased sales and marketing costs as well as the fact that price increases did not yet have a full impact on the whole quarter. In certain markets, issues related to the product and customer mix also impacted negatively on profitability. In North America, Uponor leveraged its strong market position, for instance, through successful marketing programmes and effective implementation of price increases. Favourable profitability development was also supported by driving efficiencies in production. In Infrastructure Solutions, operating profit did not reach last year’s level, despite price increases. The performance was largely affected by a margin squeeze in the distribution and project channels where price increases could not be fully passed on, especially concerning Finland.
Profit before taxes for July–September totalled €18.4 (22.0) million. The effect of taxes on profits was at €6.1 million, while the corresponding amount of taxes in the comparison period was €6.6 million. Profit for the third quarter amounted to €12.3 (15.4) million.
Breakdown of operating profit (July-September):
|Building Solutions – Europe||13.4||21.5||-37.7%|
|Building Solutions – North America||4.9||1.9||+156.2%|
|(Building Solutions – North America, USD||7.0||2.5||+177.1%)|
The Group’s January–September 2011 operating profit at €38.4 (43.8) million fell €5.4 million or 12.2 per cent short of the corresponding figures last year, impacted mostly by weak development in Building Solutions – Europe. The highly positive development in Building Solutions – North America was insufficient to compensate for decreases in other segments. The weaker performance in Europe was mainly due to the lack of organic growth and increases in material costs that could not be fully passed on to sales prices.
Profitability, or operating margin, was 6.3 per cent, as against 7.7 per cent year-on-year. January-September earnings per share totalled €0.32 (0.32), both basic and diluted. Equity per share was €3.18 (3.40), basic and diluted.
Breakdown of operating profit (January-September):
|Building Solutions – Europe||33.9||46.9||-27.7%|
|Building Solutions – North America||8.3||2.1||+298.1%|
|(Building Solutions – North America, USD||11.8||2.7||+331.2%)|
Investment and financing
Capital investments in the third quarter were mainly targeted at maintenance and improvement. Gross investment in January–September amounted to €12.8 (9.4) million, i.e. clearly below depreciation which stood at €20.8 (22.4) million. The largest single investment was the acquisition of a 50.3 per cent stake in the German company Zent-Frenger Gesellschaft für Gebäudetechnik mbH in April.
Cash flow from operations came to €-4.9 (7.9) million, due to higher taxes paid and increases in sales receivables and inventories.
Uponor continues to focus special attention on safeguarding liquidity at a good level as well as following up accounts receivable, among other issues, to reduce credit risk.
In June, Uponor issued a dual tranche bond totalling €100 million. The first tranche, a floating-rate bond totalling €20 million, will fall due in June 2016, and the second tranche, totalling €80 million, in June 2018. Furthermore, an interest rate swap was concluded to transform part of the floating-rate tranche into a fixed-rate tranche for four years. Interest rate hedging was included in hedge accounting starting from the interest rate swap date. Also in June, Uponor paid back the €80 million pension contribution borrowed back from a Finnish pension insurance company. At the time of the payment, €40 million remained.
Available committed bilateral credit lines amount to €190 million, none of which was in use at the end of the reporting period. At period end, €25.0 million was in use under the €150 million domestic commercial paper programme.
The Group’s solvency at 41.9% (45.8%) has developed steadily. Interest-bearing liabilities increased to €126.8 (101.5) million, funded by the issuance of the dual trance bond. The period-end cash balance totalled €9.9 (4.1) million. Gearing rose to 53.7 (40.9) per cent, and is still aligned with the long-term financial targets.
Uponor started up a joint venture company in Beirut, Lebanon, in order to serve the Middle East region and benefit from the business of growing economies. In the same connection, two new sales offices were opened in Dubai and Saudi Arabia.
Uponor made a decision to discontinue the European Business Development unit in charge of penetrating new markets, mainly due to the fact that its mission had, to a great extent, been completed. In the future, the business development focus will turn to the Asian markets. As part of this development, the Uponor sales office in Turkey was closed and the office in Croatia downsized, turning these countries into export markets.
Within the European Supply Chain, Uponor made plans to continue its warehousing and logistics development, by consolidating distribution functions into larger units in Sweden and Germany.
To support its growth strategy, Uponor actively continued its promotion of recently launched product innovations, such as RTM fittings, PEXa pipe expansion tools and self-attaching underfloor heating systems. These exciting innovations – together with those still in the pipeline - will enable Uponor to benefit more strongly from the continuing penetration of PEXa and multilayer composite pipe technologies in plumbing applications.
In North America, Uponor entered a partnership with two leading sustainability organisations in the development of a home template meeting the ‘passive house’ and ‘net zero’ energy standards for single family homes. Furthermore, Uponor was selected as part of the Emerald Circle, a group comprising of innovation leaders from among U.S. companies committed to sustainability.
In Infrastructure Solutions, the introduction of the successful IQ range of storm water pipes continued, with new dimensions simultaneously added. This technology represents a new concept in storm and surface water pipes, which is unique in that the same fittings and chambers are compatible with another Uponor novelty, the twin-wall Ultra Double sewer pipe system. In parallel with the above development, a new three-layer sewer pipe system has been developed which enables a markedly improved carbon footprint.
The macroeconomic uncertainties emerging in the second quarter began to spread during the third quarter. For obvious reasons, the impact was greatest in southwest Europe, but was also clearly felt in northern Europe. To a large extent, Central Europe’s larger markets have maintained their resilience as far as Uponor’s business areas are concerned. In North America, the U.S. building markets remain at historically low levels, and any pick up has been effectively hindered by domestic problems in the U.S. economy. The Canadian markets have posted a flat or modestly positive development.
While great uncertainty remains as to the future direction of the global economy and the GDPs that drive building and construction demand in Uponor’s key markets, longer-term business drivers are having a positive impact on demand in Uponor’s business areas. These include global trends such as the growing importance of energy-savings, sustainable construction methods as required by builders, building-owners and end-users, as well as the increasing value of offering total packages as an integral part of the building process, aimed at faster execution and higher overall quality.
For several months now - and in the coming months – Uponor has and will present a range of product innovations that will help the company benefit from the above-mentioned global trends, as soon as market demand returns to more normal patterns.
However, Uponor’s financial performance may be affected by several strategic, operational, financial, and hazard risks. A detailed risk analysis is provided in the company’s Annual Report.
The management has initiated actions to improve focus, reduce cost and improve cash flow. Among other measures, the company is exiting poorly performing markets, and carrying out a plan to reduce overhead and personnel costs through various measures. Production is being curtailed, in order to run down inventories in line with anticipated demand and to support this year’s cash flow.
Uponor repeats its guidance for the year 2011, as stated in its stock exchange release on 27 September 2011:
Uponor's net sales are expected to improve on their 2010 level, but operating profit should fall somewhat short of the previous year's reported result. The Group's fixed-asset investments are not expected to exceed depreciation.
Forecasting the results of the net working capital improvement programme is exceptionally challenging; hence, Uponor will not issue guidance on full-year cash flow for 2011.
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
Vice President, Communications
Tel. +358 20 129 2852
NASDAQ OMX - Helsinki
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. Uponor offers its customers solutions that are technically advanced, ecologically sustainable, and safe and reliable to own and operate. The Group employs approx. 3,200 persons, in 30 countries. In 2010, Uponor's net sales totalled €750 million. Uponor Corporation is listed on NASDAQ OMX Helsinki in Finland. http://www.uponor.com.