Interim report Q3/2015: Uponor picks up speed in the U.S. as European demand remains stagnant
Uponor Corporation Interim report January-September 2015 29 October 2015 08:00 EET
Interim report Q3/2015: Uponor picks up speed in the U.S. as European demand remains stagnant
- July–September net sales totalled €274.1 (277.0) million, representing a change of -1.0% or organically +1.6%
- July–September operating profit at €23.6 (29.2) million, down by 18.8%
- January–September’s net sales came to €788.8 (772.4) million, a change of +2.1% or organically +4.3%
- January–September operating profit, at €57.4 (51.6) million, up by 11.4%, or 7.8% excluding the impact of €1.8 (3.3) million in non-recurring items
- Earnings per share in January–September amounted to €0.44 (0.38)
- January–September return on investment was 17.3% (14.8%) and gearing 37.9 (41.7)
- For January–September, cash flow from business operations was €17.0 (19.3) million
- Uponor repeats its guidance, given on 30 September 2015, for the year 2015: Net sales for 2015, based on organic growth, are expected to exceed those of the prior year while operating profit, excluding any non-recurring items, remains somewhat below that of 2014.
(This interim report has been compiled in accordance with the IAS 34 reporting standard, and is unaudited. The figures in the report apply to continuing operations unless otherwise stated. ‘Reporting period’ refers to January–September.)
President and CEO Jyri Luomakoski comments on developments during the quarter:
- In Building Solutions - North America, positive development continued both in net sales growth and leveraged operating profit margin. Uponor Inc.’s expansion investment has progressed according to plan and the current operational efficiency demonstrates the scalability of the business. Despite softer Canadian construction indicators, progress has also been positive there. Supplier capacity issues have caused industry-wide scarcity of base resin for engineered polymer fittings causing a part shortage for our customers. Uponor, Inc. is mitigating by a temporary substitution of higher cost lead-free brass which is likely to curb margin expansion from levels seen in the last two quarters.
- Flat demand in Europe continues to affect Building Solutions – Europe, where initiatives are being implemented, under new management, to adjust operations, especially in high fixed-cost markets with declining sales volumes.
- Uponor Infra has successfully implemented its strategic restructuring measures, but due to persistently soft key markets its performance remains weak. The recent decline in resin prices, which took place after the historically high prices seen in the spring-summer period has left us with high-cost inventories, the sale of which will still squeeze margins in the fourth quarter. The decline, however, has returned the competiveness of plastic infrastructure solutions against other materials back to normal.
Information on the January–September 2015 interim report bulletin
This document is a condensed version of Uponor’s January–September 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 have been calculated from the exact figures and not from the rounded figures published here.
Webcast and presentation
A webcast, in English, of the results briefing will be broadcast on 29 Oct at 10:00 a.m. EET. Connection details are available at www.uponor.com > Investors. Questions can be sent in advance to email@example.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 results for the full year 2015 on Friday 12 February 2016. During the silent period from 1 January to 12 February, 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.
Great differences persisted between the business environments in Uponor's key geographies, very much reflecting the situation of the two previous quarters. The North American markets, the U.S. in particular, continued their healthy growth. The European markets, overall, continued to experience soft demand, with some further setbacks noted due to internal and external political and economic challenges influencing economic development in the EU in particular. Trends in the Eastern European and Asian markets were somewhere in between.
With regard to building solutions, development of the European business landscape – which constitutes Uponor's core market area in terms of business volumes – was flat and even deteriorated somewhat in the third quarter against expectations of rather stable but low-level demand. Among Uponor's key European markets, demand for building and construction in Finland remained at a low level, while Norway, the UK and Russia were weakened from the rather stable environment that prevailed in the second quarter. Softness in the plumbing and heating industry, in particular, continued in Germany, despite the country's general economic liveliness; the heating and energy market was particularly flat. The positive development in demand reported in the Netherlands for the second quarter continued during the period. The south European markets remained flat, overall, with promising positive signals reported in Spain in the form of growth in housing permits, for instance. In the Nordic countries, Sweden continued to be lively, Denmark remained stable, but Norway experienced a drop in demand as both public and private investments were curbed following the weakening in oil prices.
While the Canadian building market posted flat or negative growth, its closest neighbour, the U.S. reported steady, broad-based growth year-on-year, although with a somewhat weaker trend than in the second quarter. The positive impact came mainly from the residential building market while the non-residential segments were soft, despite improving from the previous year. Consumer confidence in the U.S. has improved considerably over the recent months and at the end of the third quarter also U.S. builder optimism was at its highest level in ten years.
Demand for infrastructure solutions was closely aligned with that for building solutions. Uponor Infra's business is heavily affected by its large share of operations in Finland, where home building is at a low level and investments in civil engineering have reduced as a result of the country's weak economy. Another large infrastructure solutions market, Canada, has been struggling with the impact of low oil prices, which has reduced infrastructure investment in exploration projects. As a result, competition from that segment is seeking volumes from the general infrastructure pipe systems markets, thus intensifying competition.
Uponor’s continuing operations reported net sales of €274.1 (277.0) million for the third quarter, entailing a decline of 1.0%, or a growth of 1.6% in organic terms. The impact of currency changes was €5.6 million.
Building Solutions – Europe reported weakening year-on-year net sales development from the third quarter 2014, mainly due to weak trends in key European markets such as the UK, Norway and Finland. In Germany, indoor climate systems sales, in particular, faced headwinds as low energy prices curbed the renovation business. Brisk growth in net sales was reported in the Netherlands and in Sweden; Spain and Austria also showed promise. A general, Europe-wide trend influencing Uponor sales lies in the market’s growing acceptance of lower-priced standard systems. These are being increasingly introduced as private label products and through new routes to the market. This trend is visible both in indoor climate and plumbing solutions in several key regions of the continent.
In Building Solutions – North America, growth of net sales against the same period in 2014 remained strong. In local currency, net sales for the quarter grew by 16.4%. Most of this growth came from the plumbing solutions business in the U.S. Growth is mainly coming from traditional residential market rise and from commercial plumbing initiatives.
Uponor Infra reported a drop in net sales as a result of multiple factors including the divestments of the Thailand-based pipe business and the Finland-based Extron technology business in the first quarter of 2015, prolonged weakness in key European markets and a tighter competitive environment in Canada.
Breakdown of net sales by segment (July–September):
|Building Solutions – Europe||121.2||123.5||-2.0%|
|Building Solutions – North America||75.1||54.7||37.4%|
|(Building Solutions – North America (M$)||83.6||71.8||16.4%)|
Uponor’s January–September net sales reached €788.8 (772.4) million, recording growth of 2.1%, or 4.3% in organic terms. This was driven by the strong growth in North America throughout all three quarters of 2015. The currency impact on year‑to-date net sales totalled €27.8 million, mainly coming from the USD whose effect was partly offset by the RUB. Growth excluding the effect of currencies and the divestments made in the first quarter of 2015 totalled 0.7%.
Breakdown of net sales by segment (January–September):
|Building Solutions – Europe||352.8||366.4||-3.7%|
|Building Solutions – North America||201.8||144.7||39.5%|
|(Building Solutions – North America (M$)||224.4||195.2||15.0%)|
Results and profitability
Uponor’s operating profit in the third quarter came to €23.6 (29.2) million, amounting to a year-on-year decrease of 18.8%. Profitability measured in terms of the operating profit margin reached 8.6% from the 10.5% reported a year ago. Operating profit excluding any non-recurring items came to €24.6 (29.3) million in the quarter under review.
Offsetting the particularly strong performance in Building Solutions – North America, this negative development was driven by major falls in profitability in both Building Solutions – Europe and in Uponor Infra.
Building Solutions – Europe’s operating profit was mainly burdened by weak net sales development especially in the more higher-margin markets of Europe and the €1.0 million in non-recurring items from ongoing streamlining measures. Overheads also grew slightly from the comparison period.
Building Solutions – North America’s performance developed steadily, with both the operating profit and margin clearly exceeding last year's figure. In addition to a boost in net sales, the trend was supported by discipline and careful management of discretionary expenses while pursuing growth, which helped to offset the impact of the weaker Canadian currency.
Uponor Infra’s operating profit in the third quarter primarily suffered from the weaker sales volumes in key markets. While the resin availability issue that emerged in the second quarter had already dissipated in the third, the impact of extreme resin price volatility, while depleting existing product inventory built up in a higher resin price environment, had a short-term adverse effect on profit. The above mentioned factors offset the cost benefits successfully gained from the restructuring measures implemented in 2013 – 2014 and mainly concerning Finnish operations.
Breakdown of operating profit by segment (July-September):
|Building Solutions – Europe||8.4||15.0||-43.8%|
|Building Solutions – North America||15.7||9.2||70.6%|
|(Building Solutions – North America (M$)||17.5||12.1||44.0%)|
Profit before taxes for July–September totalled €24.4 (27.8) million. The effect of taxes on profits was €9.0 million, while the amount of taxes in the comparison period was €11.0 million. Profit for the third quarter came to €15.4 (16.8) million.
Operating profit for January–September was €57.4 (51.6) million, up 11.4% from the comparison period. When non-recurring items are excluded, the operating profit was €59.2 (55.0) million, an increase of 7.8%. The operating profit margin came to 7.3%, while the equivalent figure for 2014 was 6.7%. Currency exchange rates had a €6.3 million positive translation impact on the operating profit for January–September.
Breakdown of operating profit by segment (January–September):
|Building Solutions – Europe||20.7||30.3||-31.7%|
|Building Solutions – North America||38.8||22.2||74.9%|
|(Building Solutions – North America (M$)||43.2||29.9||44.2%)|
Earnings per share for January–September totalled €0.44 (0.38), both basic and diluted. Equity per share was €3.26 (3.10), and diluted €3.25 (3.09).
Investments and financing
In the U.S., the extension of Uponor, Inc.’s current factory with a new annex building, adding 8,175 m2 (88,000 sq. feet) of manufacturing and office space, is progressing according to plan and should be completed during the final quarter of the current year. Uponor, Inc. also made other, smaller investments that support a higher production output. Uponor, Inc. markets PEX-based plumbing and indoor climate systems.
In Russia, Uponor invested in the manufacture of the Ecoflex local heat distribution pipe, with the company’s first Russian factory being completed during the third quarter.
Any further investments during the period were primarily targeted at maintenance and development.
Gross investments in fixed assets in January–September came to €30.4 million, exceeding the previous year’s level of 21.4 million. This was slightly higher than depreciation, which amounted to €27.1 (27.0) million.
Cash flow from business operations in January–September came to €17.0 million, from €19.3 million in 2014.
Uponor continues to ensure that it keeps liquidity at a healthy level. The risk of bad debt is mitigated, among other actions, by active follow up on trade receivables and through the extensive use of credit insurance.
In 2015, Uponor has finalised the renewal of its back-up facilities, with a €50 million revolving credit facility agreement signed in August as the final step in this process. The main funding programmes in place on 30 September 2015 included an €80 million bond maturing in 2018 and a €20 million bond maturing in 2016. Uponor’s available committed bilateral credit facilities totalled €200 million, maturing in 2019 and 2020, with none of this amount in use at the end of the reporting period. The amount of commercial papers issued under the €150 million domestic commercial-paper programme was €7 million at period-end.
The Group’s solvency ratio decreased to 41.1% (42.4%). Net interest-bearing liabilities declined to €114.8 (122.9) million. The period-end cash balance, excluding €41.1 million as restricted cash, totalled €20.7 (21.2) million. The restricted cash relates mainly to cash inflows into an escrow account from parties contributing to the funding of Uponor, Inc.´s pending U.S. class action settlements, as outlined in the release of 10 June 2015. These amounts are expected to be used later this year, after court approval of the settlements has been obtained.
Gearing fell to 37.9% (41.7%).
Uponor estimates that, for the remainder of the year, the current economic trends in key markets in Europe and North America will continue. In addition to macro-economic and political fundamentals, demand in Uponor’s business areas is driven by a range of factors, such as consumer confidence, public investment and funding policies, as well as energy price development.
The lacklustre business environment in Europe is expected to remain more or less unchanged, reflecting a lack of internal and external drivers of change. In North America, development in the U.S. is likely to continue to be positive, although the speed of growth may not be as rapid as in the last quarter.
Uponor has begun a streamlining programme to adjust operations to the challenging business environment in Europe. Initiatives in Sweden and the UK have already been launched and further measures are being prepared with a view to improving Uponor’s performance in countries such as Germany.
The temporary erosion of gross margin late in the third quarter caused by sales of inventories made prior to the decline in resin prices in the summer, and impacting on the infrastructure solutions business in particular, is expected to continue throughout the fourth quarter.
Uponor repeats its guidance, given on 30 September 2015, for the year 2015:
Based on organic growth, net sales for 2015 are expected to exceed those of the prior year while operating profit, excluding any non-recurring items, remains somewhat below that of 2014.
Uponor’s financial performance may be affected by various strategic, operational, financial, legal, political and hazard-related risks. A more detailed risk analysis is provided in the ‘Key risks associated with business’ section of the Financial Statements 2014.
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
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