Half year financial report Jan–June 2016: Pick up in European demand and savings from transformation programmes strengthened Uponor
Uponor Corporation Stock exchange release 26 July 2016 08:00 EET
Half year financial report January – June 2016:
Pick up in European demand and savings from transformation programmes strengthened Uponor
- The U.S. building solutions market remained healthy and in Europe, while heterogeneous, an upturn in demand was reported in several markets; the infrastructure solutions markets remained challenging, although with signs of levelling out in Europe
- Net sales for April – June totalled €299.5 (277.6) million, up 7.9% or 9.6% in constant currency
- Operating profit for April – June came to €26.5 (22.5) million, up 18.0%, driven by Building Solutions – Europe and Uponor Infra; comparable operating profit, i.e. excluding items affecting comparability, came to €30.7 (23.3) million, a growth of 31.8%
- Net sales in January – June totalled €546.4 (514.7) million, up 6.2% or 7.6% in constant currency
- Operating profit for January – June came to €38.4 (33.8) million, a change of 13.6%; comparable operating profit came to €45.6 (34.6) million, a growth of 31.7%
- January – June earnings per share amounted to €0.28 (0.23)
- January – June return on investment was 15.3% (14.0%), and gearing was 58.5% (47.8%)
- January – June cash flow from business operations totalled -€3.4 (-19.8) 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, Uponor issues the following guidance for 2016: the Group’s net sales and comparable operating profit are expected to improve from 2015.
President and CEO Jyri Luomakoski comments on developments
during the reporting period:
- Building Solutions – Europe’s transformation is progressing well and the initial results, with modest top line growth and some cost reductions already implemented, give us confidence that our transformation programme will deliver the desired results. Simultaneously, we are making major strides in leveraging acquired technology across national borders and building up our competencies in smart, hygienic water installations, generating short-term and long-term sales opportunities.
- Building Solutions - North America maintained strong sales growth in a healthy market. Operating profit remained close to the previous year’s level, its lack of growth mainly caused by costs related to the recent temporary EP fittings replacement by metal fittings, the Canadian currency impact and costs related to the joint venture transaction with Belkin.
- Uponor Infra’s demand environment has somewhat stabilised but challenges remain, especially in Canada and Poland. Thanks to our determined cost drive, less headwind in the markets, and a stable input cost environment, we made promising headway in terms of profitability.
Uponor took an important step towards the emerging Internet of Things (IoT) market by establishing a joint venture with Belkin, a global front runner in IoT. Strategically, this is a major new step in digitalisation for Uponor and supports our technology emphasis on water hygiene and conservation in our global markets.
|Key financial figures|
Consolidated income statement
(continuing operations), M€
|Depreciation and impairments||19.5||18.3||39.1||36.5||33.0||28.2|
|Other operating income||2.0||0.7||2.4||2.4||0.8||0.9|
|Comparable operating profit||45.6||34.6||75.8||67.7||55.2||57.7|
|Financial income and expenses||-5.5||-6.4||-8.9||-7.4||-7.1||-8.6|
|Profit before taxes||33.0||27.5||62.8||56.3||43.2||49.4|
|Result from continuing operations||20.8||17.3||37.1||36.3||27.1||32.9|
|Profit for the period||21.2||17.0||36.9||36.0||26.8||32.8|
|Earnings per share||0.28||0.23||0.51||0.50||0.38||0.45|
Information on the January–June 2016 half year financial report
This half year financial 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.
From this report onwards, Uponor will follow the new recommendation from the European Securities and Markets Authority (ESMA) concerning Alternative Performance Measures. Thus, the term “non-recurring items” (NRI) will be changed to “items affecting comparability” (IAC). See the table section for more details.
This document is a condensed version of Uponor’s January–June 2016 half year financial 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 26 July at 10:00 a.m. EET. Connection details are available at www.uponor.com > Investors. Questions can be sent in advance to firstname.lastname@example.org. 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 Q3 interim report on Friday 28 October 2016. During the silent period from 28 September to 28 October, 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.
The building and construction markets in North America continued to be healthy and positive developments in demand were reported across several European markets, as well. This aligns well with publicly available key indicators which show, for instance, that permit activity, based on data covering the period up to February 2016, has continued to trend slowly upwards in both the residential and non-residential segments, while builder confidence in Europe has strengthened in most markets compared to last year.
In Central Europe, Uponor’s largest European market, Germany, continued to see improvements in its construction market in the second quarter of 2016. The economy has so far managed to brush off external uncertainties, with households driving economic growth, and builder confidence has also improved lately, reaching another post-reunification high. Order book development in the German building industry has also remained generally positive in both the residential and non-residential segments, although building activity continues to be limited by a lack of professional installers. In contrast, activity has moderated considerably in the Netherlands, but even there it remains expansionary.
In Southern Europe, recovery continued in Spain, demand in Italy remained stagnant and major uncertainty surrounded the UK, even prior to the ‘Brexit’ referendum.
Within the Nordic countries, demand in Sweden continued to be robust, clearly continuing to outpace its neighbours, especially in the new residential segment. Within the Swedish construction industry, the residential new-build segment continues to grow significantly, reaching a 25-year high. However, builder confidence has moderated in recent months and non-residential and civil engineering activity remains more constrained. The other Nordic markets were generally stable, with some individual signs of a fragile recovery witnessed in Finland, from a low base. However, as in Sweden, the positive trend seen in builder confidence in Finland may have ground to a halt during recent months.
In North America, construction activity growth has slowed since the second quarter 2015, mainly due to Canada, where a depressed energy market continues to take a toll on construction. In the U.S., demand in the construction market remained resilient or improved across various building segments, but overall growth has slowed from the previous year. Although construction spending in the U.S. has risen across nearly all residential and non-residential building segments compared to the same period in 2015, residential builder confidence softened somewhat during the quarter under review.
In terms of infrastructure solutions, in the Nordic markets - especially Finland - market demand stabilised during the first half of 2016 after a decline of several years. The other Nordic markets also showed stable or slightly positive development from the previous year. In Poland, the delayed implementation of EU-funded projects resulted in the postponement of many projects and the market has contracted significantly. Furthermore, the poor volume trend in the North American polyethylene pipe market has continued since the summer of 2015.
Uponor’s continuing operations reported net sales of €299.5 (277.6) million for the second quarter, representing growth of 7.9% or 9.6% in constant currency. Much of this net sales growth is based on improved demand in the markets. Acquisitions made in Germany in January 2016 contributed by €8.6 million. In constant currency terms, i.e. using Q2/2015 exchange rates, net sales would have been €4.8 million higher than reported net sales, mainly due to CAD, RUB, NOK and GBP.
Building Solutions – Europe reported 13.3% growth, partly driven by acquisitions and partly by the market recovery in parts of Europe, which paired with successful marketing initiatives and benefits from combining Uponor’s native offering with those of recent acquisitions. Of the largest markets, Germany, Sweden, Spain, the UK and Russia reported good progress in the local currency. While ongoing changes in the value chain pose challenges to standard business, advances were made in areas such as the pre-fab business, where Uponor is a pioneer, thus confirming the lack of installers as a bottle neck in business growth. In addition, the market for commercial solutions has slowly begun to pick up, following the longer-term trend of increased urban living and the need for high-rise residential and office buildings.
Building Solutions – North America, reported continued solid growth of net sales against the prior year, including in local currency. Such growth was driven by strong sales throughout U.S. geographic regions, in contrast to Canada where sales clearly contracted from the second quarter of 2015. Most of U.S. growth continues to come from the plumbing business, in particular within the commercial segment that was trending up in a favourable manner in the second quarter. In Canada, net sales development was strongest in indoor climate, supported in part by significant new product introductions made recently.
Uponor Infra reported a drop in net sales despite the emerging stability in the European infrastructure markets. The main reasons for this were continued softness in Canada, driven by the challenges in oil exploration as reported earlier, as well as a significant drop in Polish demand due to delayed implementation of EU-funded projects. In addition, net sales development in the district energy business in Finland and the Czech Republic was behind last year. Supported by stabilising demand across much of Europe, Uponor Infra was able to grow sales through its wholesale distribution chain.
Breakdown of net sales by segment (April–June):
|Building Solutions – Europe||134.8||119.0||13.3%|
|Building Solutions – North America||80.2||69.8||15.0%|
|(Building Solutions – North America (M$)||90.0||77.6||15.9%)|
Uponor’s January–June net sales reached €546.4 (514.7) million, recording growth of 6.2%, or 7.6% in constant currency. This was driven by brisk growth in the building solutions business in both North America and Europe, as well as acquisitions in Germany. In constant currency terms, net sales would have been €7.5 million higher than reported net sales. The main influence, mainly impacting on European segments, was caused by fluctuations in CAD, RUB, NOK and GBP.
Breakdown of net sales by segment (January–June):
|Building Solutions – Europe||257.8||231.6||11.3%|
|Building Solutions – North America||150.9||126.7||19.1%|
|(Building Solutions – North America (M$)||168.2||140.8||19.5%)|
Results and profitability
Gross profit for continuing operations in the second quarter amounted to €105.5 million (35.2%) from 98.6 million (35.5%) in 2015. Comparable gross profit margin came to 35.5% (35.6%).
Operating profit for continuing operations in the second quarter came to €26.5 (22.5) million, representing a year-on-year increase of 18.0%. Profitability measured in terms of operating profit margin reached 8.8% (8.1%). Comparable operating profit, i.e. excluding any items affecting comparability, came to €30.7 (23.3) million in the quarter under review, with a comparable operating profit margin of 10.2% (8.4%). Items affecting comparability totalled €4.2 (0.8) million, of which €3.3 (0.8) million related to Building Solutions – Europe’s transformation programme and €0.6 (0.0) million to that of Uponor Infra. The main contributors to the favourable performance improvement were Uponor Infra and Building Solutions – Europe.
Building Solutions – Europe’s operating profit improved as a result of the savings already achieved from the transformation and streamlining measures implemented, supported by operational leverage from higher sales volumes in several markets.
Building Solutions – North America’s performance developed rather steadily, although the operating profit declined by 2.0% in local currency and 2.7% in euro terms. Despite being down versus the comparison period - mainly as a result of managing the temporary transition of a range of plastic fittings to metal fittings and back, and the costs related to the Phyn joint venture transaction with Belkin - overall profitability remained resilient, thanks to continued net sales growth and careful expenditure management.
Regardless of lower net sales, Uponor Infra’s operating profit exceeded that of the comparison period. The main reason for this was a change in the mix of products sold and the channels employed. A key role was also played by reduced operational cost levels in Finland, following the restructuring and transformation initiatives executed in 2013 - 2015 and those that are still ongoing.
Breakdown of operating profit by segment (April-June):
|Building Solutions – Europe||8.3||6.2||33.2%|
|Building Solutions – North America||14.6||15.0||-2.7%|
|(Building Solutions – North America (M$)||16.3||16.8||-2.0%)|
Profit before taxes for April – June totalled €24.4 (21.2) million. Taxes had a €9.0 million effect on profits, while the amount of taxes in the comparison period was €7.9 million. Profit for the second quarter came to €15.4 (13.3) million.
The January – June gross profit came to €193.3 million (35.4%) against 183.8 million (35.7%) in 2015. Comparable gross profit margin at 35.6% (35.8%) was mainly burdened by competitive price pressure especially in the European building solutions business.
The January – June operating profit came to €38.4 (33.8) million, or €45.6 (34.6) million without items affecting comparability, up 13.6 or 31.7 per cent respectively from the comparison period. Key contributors to this development were Building Solutions – North America with its solid performance in both the first and the second quarter, as well as Building Solutions – Europe and Uponor Infra with their strong second quarter performance in particular.
Items affecting comparability in January–June 2016 totalled €7.2 (0.8) million, of which €5.9 (0.8) million came from the transformation programme in Building Solutions – Europe and €1.0 (0.0) million from Uponor Infra’s programme.
Profitability, or the operating profit margin, for the first half-year was 7.0%, against 6.6% in the first half of 2015. The comparable operating profit margin came to 8.3% (6.7%).
Breakdown of operating profit by segment (January–June):
|Building Solutions – Europe||13.2||12.3||7.2%|
|Building Solutions – North America||25.7||23.1||11.1%|
|(Building Solutions – North America (M$)||28.6||25.7||11.4%)|
Earnings per share, both basic and diluted, for January – June totalled €0.28 (0.23). Equity per share, both basic and diluted, was €3.22 (3.08).
Events during the period
On 25 May 2016, Uponor Corporation and the U.S. company Belkin International, Inc. announced their intention to form a partnership to pioneer the development of water sensing and conservation technology for buildings. The purpose of the new joint venture – named Phyn - is to develop products for the emerging intelligent water market, both for consumers and professional customers.
As part of the plan, two joint venture companies were established: one in the U.S. and another in Europe. Uponor initially invested $15 million in exchange for a 37.5% shareholding in the companies. The investment will impact on Uponor’s cash flow in the third quarter 2016, but will have no impact on Uponor’s profit guidance for 2016. As a minority-owned business, the joint venture company will be consolidated with Uponor’s financial accounts using the equity method. The parties have also agreed on a time frame within which Uponor has an option to invest an additional $10 million and increase its shareholding in Phyn to 50%. Uponor regards the partnership as an important step in its growth strategy, particularly in the emerging Internet of Things (IoT) market and a major development in digitalisation, which is perfectly aligned with the company’s commitment to creating safe and sustainable buildings and infrastructures.
In April, Building Solutions – Europe launched 75mm Q&E fittings and a new Milwaukee expansion tool extending the offering range from 63 mm/6 bar pipes all the way up to 75 mm and 10 bar pipes. These products are used in tap water riser installations and local heat distribution (LHD) installations. At the end of April, Uponor Infra launched Decibel, a modern silent soil & waste pipe system that combines an aesthetic visual appearance with the product’s inner mineral layer, which helps to eliminate noise.
On 16 May, Uponor, Inc.’s factory expansion in Apple Valley, Minnesota was inaugurated in the presence of state and local dignitaries.
In early June, Uponor arranged a Capital Markets Day in Hassfurt, Germany, where the management presented the company’s near-term strategic focus areas to investors.
On 20 June, Uponor, Inc. began reintroducing the remaining engineered polymer (EP) fittings, which were suspended in 2015 owing to a temporary resin shortfall. This will enable Uponor to gradually build up towards offering its North American customers a full range of EP fittings to.
In its first quarter report, Uponor further referred to the following events:
On 4 January, Uponor Holding GmbH completed the acquisition of all shares in two German companies, Delta Systemtechnik GmbH and the KaMo Group, as announced on 30 November 2015. This acquisition broadened Uponor’s portfolio and competencies in the increasingly important hygienic drinking-water delivery sector. On 7 January, Uponor Corporation announced the acquisition of the entire shareholding in a Finnish start-up company specialising in online water quality monitoring. These are all included in the Building Solutions – Europe segment.
On 19 January, Uponor announced that its Finnish subsidiaries Uponor Infra Oy and Uponor Suomi Oy had concluded co-determination negotiations in Finland. As a result, a total of 126 employment contracts will be terminated by September 2016. As a consequence of this, Uponor Infra will relocate all of its pressure pipe and standard chamber manufacturing operations from Vaasa to Nastola, Finland, by the end of 2016. The transfer is proceeding according to plan.
Events after the reporting period
On 13 July 2016, Uponor announced the closing of the partnership agreement with Belkin International, Inc. with regulatory approvals and other customary closing conditions completed. The companies have established two joint venture businesses: Phyn LLC, based in Los Angeles, California, and Phyn Oy, which is domiciled in Helsinki, Finland, and aims to be a pioneer in the development of water sensing and conservation technology for buildings. Uponor has a 37.5% ownership in both of these companies.
Notwithstanding the UK’s EU referendum, no other sudden, noteworthy changes have occurred which might influence the near-term economic outlook in Uponor’s core geographical markets as portrayed in the outlook issued on 12 February 2016, in connection with the full-year 2015 financial results announcement. Naturally, the UK vote can have shorter and longer-term impact on the development of GDP in the UK and the EU. In general, lower GDP growth would have an adverse impact on the industry. A direct impact of ‘Brexit’ on Uponor’s business would likely be limited due to Uponor’s low exposure to the UK market.
Apart from this, the economic and political environment in Europe has continued its slow progress towards stabilisation. This was evidenced in the second quarter, when building activity in a number of countries across Europe picked up. In addition, demand for infrastructure solutions was on a firmer footing than in the previous few quarters. The political situation in Ukraine and the refugee situation have both entered a calmer period, causing less concern for investors.
In North America, the U.S. economy is expected to continue to enjoy a strong tailwind, perhaps with a moderate slowdown. The building and construction markets are, nevertheless, expected to remain buoyant, driven by pent-up demand from over the last several years or so, as well as increasing interest in building sustainable homes and commercial premises. In Canada, the economy has already slowed down, somewhat affecting building market demand.
In the autumn of 2015, Uponor announced extensive transformation programmes in its European businesses, involving both Building Solutions – Europe and Uponor Infra, with the purpose of improving market presence, boosting net sales and improving performance through structural changes and cost savings. The implementation of these programmes has mainly progressed well and, despite the fact that many initiatives are still in the pipeline, tangible benefits have already been secured. Manufacturing capacity enhancements were successfully executed in North America, supporting continued profitable growth.
Uponor continues to focus on investing in research and development in order to maintain its lead in the building industry’s transition towards a more sustainable economy. One such example is the formation of Phyn, a joint venture with Belkin International, Inc. which will support Uponor in developing and offering smarter control and monitoring solutions for the plumbing profession.
In connection with the results briefing on 12 February 2016, Uponor stated that the Group's capital expenditure will increase from that experienced in 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. Reasons for the increase included the continued high emphasis on new offering development, extensive European transformation initiatives including manufacturing footprint optimisation, as well as a plan to establish a greenfield factory in China.
Assuming that economic development in Uponor's key geographies continues undisturbed, Uponor reiterates its full-year guidance, announced on 12 Feb 2016: the Group’s net sales and comparable operating profit are expected to improve from 2015.
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 2015.
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 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