Interim report Q2/2014: Soft demand in Europe and weak infrastructure market in Finland burden Uponor’s Q2 results

Uponor Corporation      Interim report January–June 2014      25 July 2014      08.00 EET


Soft demand in Europe and weak infrastructure market in Finland burden Uponor’s Q2 results

• U.S. building markets remained strong while demand in Europe softened after an unusually lively first quarter, driven by the mild winter
• Net sales for April – June totalled €264.5 (211.4) million, up 25.1% as a result of the establishment of Uponor Infra
• Operating profit for April – June came to €17.6 (19.7) million, down by 10.9%
• Net sales in January – June totalled €495.4 (389.1) million, up 27.3%
• Operating profit for January – June came to €22.4 (25.8) million, a change of -13.3%
• Operating profit for January – June excluding non-recurring items came to €25.7 (25.8) million, down 0.5%
• January – June earnings per share amounted to €0.17 (0.21)
• January – June return on investment was 8.8% (14.7%), and gearing was 56.9% (74.5%)
• January – June cash flow from business operations totalled -€18.7 (-9.3) million
• Uponor repeats its guidance for the year 2014, announced on 14 February 2014:
the Group’s net sales and operating profit (excluding any non-recurring items) are expected to improve from 2013.

(This interim report has been compiled in accordance with the IAS 34 reporting standard, and is unaudited. The figures in the report cover continuing operations unless otherwise stated. ‘Reporting period’ refers to January–June.)

President and CEO Jyri Luomakoski comments:

• After the first quarter, which was exceptionally lively due to the favourable weather, second quarter net sales development in Europe was softer, being particularly burdened by our infrastructure segment’s weak revenue development. In North America, the U.S. building market recovery continued at a good pace.
• We are progressing well with our Uponor Infra integration and the majority of measures agreed have either been launched or implemented. However, because market trends have worsened further we will seek immediate additional measures in order to return our performance to a level which is acceptable in the long term.
• In the U.S., now our single largest national market, our business is benefiting from a tailwind created by recovering markets. Thanks to our recent expansion of our manufacturing operations, we have been able to satisfy demand and are particularly delighted by the enthusiasm our key customer groups are showing towards our offering, which we have been actively modernising even during challenging times.
• While we expect the demand volatility to continue, we anticipate the remaining two quarters to progress in a more balanced way than in the first half of the year, supporting us to maintain our existing guidance for 2014.

Information on the January – June 2014 interim report bulletin
This document is a condensed version of Uponor’s January – June 2014 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 were calculated from the exact figures and not the rounded figures published here.

Webcast and presentation material
Upon the release of this report, the presentation material for the interim report will be available at www.uponor.com > Investors > News & downloads.

A webcast on interim results will be broadcast in English on Friday 25 July 2014 at 10:00 EET. Connection details are available at www.uponor.com > Investors. Questions on the webcast can be submitted in advance to ir@uponor.com. Once complete, the webcast will be available for viewing at www.uponor.com > Investors > News & downloads shortly after the publication of the financial information.

Uponor Corporation will release its interim report for January – September 2014 on Wednesday 29 October 2014. During the related silent period from 1 to 29 October, Uponor will not comment on market prospects or factors affecting business and performance, nor will the company discuss events or trends related to the reporting period or the current fiscal period.

Markets

The business environment, after the lively first quarter, was somewhat softer in the second quarter, mainly in Europe.

After a brisk start to the year, demand for building solutions in Central Europe slowed in many markets. This is generally believed to be mainly due to exceptionally mild winter conditions in most of Europe, which enabled an early start on construction projects. In the Central European markets, the construction climate has generally remained at a reasonably good level. Despite the recent news on the slow-down in the German economy, the softening of building activity towards the latter part of Q2 seems to have been at least partly, caused by slowness in the value chain to start new projects early enough after the busy Q1.

In the Nordic countries, demand may have peaked in Sweden, but nevertheless continued at a fairly satisfactory level while, in Finland, the overall building market suffered from a persistently weak economy. In Norway, there were signs of a deteriorating market in comparison to the previous year. Denmark also suffered from continued low activity levels.

In general, the markets in southwest Europe remained weak, with a further deterioration in France in particular. As a clear exception to the general trend, lively activity levels continued in the UK markets in the second quarter.

In East Europe, the market outlook remained rather stable, with Russia and the Baltic countries showing a healthy upward trend. The Ukraine crisis therefore seems to have led to only a slight deterioration in business conditions so far.

In contrast to Europe, the North American building markets showed a positive trend after the severe winter in the first quarter. This is particularly true of the U.S. markets, where demand continued to strengthen compared to the comparison period in 2013. Demand in the Canadian market continued on more or less the same level as in the first quarter of 2014, or weakened slightly.

The European infrastructure construction market environment was challenging and demand declined further. In particular, business conditions weakened in Finland, which is probably facing its weakest building market in 17 years. Sweden was the main positive exception. Infrastructure construction demand in Canada remained resilient, in the face of stiffening competition.

Net sales

Uponor’s net sales for continuing operations in the second quarter came to €264.5 (€211.4) million, a rise of 25.1 per cent year on year which was mainly due to the establishment of Uponor Infra on 1 July 2013. In addition, the continued growth of Building Solutions – North America made a positive contribution to the financial results. Currency translations in April – June 2014 had a considerable negative impact, of around €8 million, on Group net sales.

Including the combined historic net sales for 2013 of the Uponor Infra businesses in the comparison, consolidated net sales declined by 2.1 per cent. This was largely a result of continued slow net sales development in Europe, both in terms of building solutions and the infrastructure solutions businesses, the latter showing year-over-year growth of -8.2 per cent. The greatest year-over-year negative impact due to weak market demand was recorded in the southern European countries, including France, where the temporary cancellation of a product approval in the fourth quarter of 2013 continued to play a role.

Amongst the 10 largest countries, including Uponor Infra, euro-based net sales in the second quarter grew in all markets except for Spain and Norway.

Building Solutions – Europe saw its net sales decline in the second quarter, due to softer than anticipated activity in several national markets. This was a result of various factors, such as the anticipation effect of the many projects begun in the first quarter thanks to the mild winter, and the resulting slowness in starting new projects due to bottlenecks in planning and tendering in the second quarter. A second reason was continued caution among private and business investors faced with tight financing opportunities, which was particularly due to fragile economic development and the political crises in Ukraine and the Middle East. Some of the positive highlights of the second quarter include modest net sales growth in several central European markets as well as in Finland, despite the economic headwinds there; the appearance of the first signs of stabilisation or even growth in the Netherlands; and the fact that market preparation initiated in the previous year in the UK has begun to bear fruit.

In North America, growth in net sales continued, supported by an improving national economy in the U.S., in particular, and the positive effects this is having on home sales and housing starts. In addition, the commercial business addressing the non-residential segments of the market continued to develop well. A key success factor in Uponor North America’s growth was the careful targeting of customer initiatives at growth regions. Net sales development in Canada was also favourable, particularly in plumbing products, despite the rather ponderous overall market development.

Combined with political uncertainties, the slow recovery of the European economies continued to influence net sales development in Uponor Infra. Development in Finland was particularly weak and the merged businesses fell behind the combined net sales figure for 2013. In addition, sales were affected by a major project delay in Poland. Aside from a few new opportunities in areas such as the district heating markets, the mainstream business was slow in highly competitive markets.

We should point out that, due to the extraordinary weather-related factors, a quarterly comparison of developments between the first and second quarters of 2014 is particularly challenging. A comparison of the half-year performances for the period January – June is therefore recommended.

Net sales by segment (April – June): 

January – June net sales came to €495.4 (389.1) million, an increase of 27.3 per cent on the comparison period which was mainly due to the inclusion of the new Uponor Infra businesses. In comparison to combined historic net sales by the new Uponor Infra businesses, growth in consolidated net sales remained positive, at 1.8 per cent, or 5.0 per cent excluding currency impacts. Group net sales development was burdened by Uponor Infra in particular, whose January – June growth, compared to the historic 2013 figures, was -2.5 per cent.

Currency translations in January – June 2014 had a negative impact of €15.7 million on Group net sales. The greatest impact came from the U.S. and Canadian dollars, SEK, NOK and the rouble.

Net sales by segment (January – June):

Results and profitability

Uponor’s consolidated gross margin for continuing operations in the second quarter was 32.8 per cent, showing a year-on-year drop of 6.3 percentage points. This is mainly attributable to the larger share accounted for by the infrastructure solutions business, which has traditionally had a lower gross profit margin.

Operating profit for continuing operations in the second quarter totalled €17.6 (19.7) million, down 10.9 per cent in year-on-year terms. Profitability measured in terms of the operating profit margin came to 6.6 per cent, compared to the 9.3 per cent reported for the rather strong second quarter in 2013. Operating profit for April – June, excluding non-recurring items, came to €17.1 (19.7) million, down 13.4%.

The weak development in operating profit was mainly the result of unsatisfactory top line development in Uponor Infra, whose impact exceeded the integration benefits which are beginning to be realised – according to plan – as a result of the merger. In Building Solutions – Europe, in addition to a slight decline in net sales a higher share of lower-margin products in the sales mix burdened profitability. A stable input cost environment and continued good progress in Building Solutions – North America made a positive contribution to the financial results. Group overheads increased due to the impact of Uponor Infra.

Operating profit by segment (April – June):

Profit before taxes for April – June totalled €14.0 (17.6) million. Taxes had an effect on profits of €4.6 million, while the amount of taxes in the comparison period was €5.8 million. Profit for the second quarter came to €9.4 (11.8) million.

The January – June operating profit came to €22.4 (25.8) million – or €25.7 (25.8) million without non-recurring items – down 13.3 per cent from the comparison period. Key contributors to weaker development in 2014 were the European segments, which lagged behind the prior year’s level. Profitability, or the operating profit margin for the first half-year, was 4.5 per cent, against 6.6 per cent in the comparison period in 2013.

January – June non-recurring items totalled €3.3 million, including a positive €0.5 million net contribution in the second quarter. In the first quarter, Uponor announced the relocation of the German distribution centre to a new custom-fitted building in southern Germany in early 2015. The second quarter items include the sale of Uponor Infra’s Forssa manufacturing facility in Finland as well as machinery relocation and reassembly expenses.

Earnings per share, both basic and diluted, for January – June totalled €0.17 (0.21). Equity per share, both basic and diluted, was €2.80 (2.68).

Operating profit by segment (January – June):

Investments and financing

No major new investments were ongoing or launched in the second quarter. In Europe, an investment adding new extrusion capacity for the recently launched seamless aluminium composite pipe was completed and preparations to install further capacity were ongoing, targeting completion for the autumn, in order to meet demand. In North America, actions aimed at maximising production output continued e.g. by adding new resin mixing capacity and taking idle machinery into use from elsewhere in the Group. Otherwise, ongoing investments were related to maintenance and development work.

In January – June, gross investments in fixed assets came to €12.4 (10.4) million. This was clearly below depreciation, which came to €17.9 (14.4) million. Cash flow from business operations totalled -€18.7 (-€9.3) million.

Uponor continues to pay attention to maintaining liquidity at a healthy level. A risk of bad debts remains in Europe in particular; in order to manage this risk, Uponor is therefore actively following up on trade receivables, among other elements.

During 2014, Uponor has renewed its funding programmes, with a €50 million revolving credit facility being signed in April as the final step in this process. The main existing funding programmes on 30 June 2014 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, with none of this amount in use at the end of the reporting period. Further, €19.0 million in commercial papers was issued under the €150 million domestic commercial-paper programme at the period-end.

The Group’s solvency ratio improved slightly to 39.2 (35.5) per cent. Net interest-bearing liabilities amounted to €154.3 (146.2) million. The period-end cash balance was €17.9 (7.3) million. Gearing was 56.9 (74.5) per cent.

Short-term outlook

Despite the fact that the market environment in Europe at the end of the second quarter seems weaker than at the end of the first, Uponor does not see any major changes in the business outlook compared to the statements issued in connection with the first quarter result in April 2014. Thus, Uponor continues to be prepared for a lengthy protraction of the current low activity levels, with limited expectations of market growth.

Economic development in Europe is likely to remain weak for the near-term future. Modest, fragile growth is expected in the building and construction markets, driven by the stronger national economies, whose markets have remained more resilient. It is likely that the weaker economies have bottomed out, but no real turn-around for them is yet in sight. In North America, the recovery of the U.S. economy is expected to remain on track, providing a favourable business environment for building solutions in particular.
 
Uponor repeats its guidance for the year 2014, announced on 14 February 2014:
The Group’s net sales and operating profit (excluding any non-recurring items) are expected to improve from 2013.

Uponor’s financial performance may be affected by a range of strategic, operational, financial and hazard risks. A more detailed risk analysis is provided in the section ‘Key risks associated with business’ in the Financial Statements 2013.

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 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. 4,100 persons, in 30 countries. In 2013, Uponor's net sales exceeded €900 million. Uponor Corporation is listed on NASDAQ OMX Helsinki in Finland. http://www.uponor.com.