Uponor’s Q3 net sales grows driven by new infrastructure joint-venture and continued U.S. growth

President and CEO Jyri Luomakoski comments on developments during the reporting period:

  • Uponor Infra’s integration is proceeding well and I am delighted with the motivation our personnel are showing in finding new ways to move the business forward.  I firmly believe that Uponor Infra will become a key asset in Uponor’s future development.
  • We have continued to enjoy a good business environment in North America. In the third quarter, some other key markets such as Germany and Russia showed promising development.
  • In Europe, despite flat net sales development, our focus on value-adding activities enabled us to improve our operating profit year-on-year. In North America, we are witnessing steady growth in the U.S. as more and more residential and commercial building projects utilise Uponor’s advanced and sustainable technologies. Our ongoing capacity expansion investment shows our commitment to satisfy growing demand there.

Markets

Development of the market environment in Uponor’s key geographic regions i.e. Europe and North America showed a mixed trend in the third quarter of 2013 compared to the second quarter while showing a mainly improving trend in comparison to the third quarter in 2012.

In Europe, building and construction market sentiment stabilised in several countries after the weaker trends witnessed in the spring. The main reason for this was growing confidence in the recovery of the European economies. It stimulated building investments in some of the larger economies, in particular. Despite these positive developments, several markets have yet to get back on track.

With a view to specific market segments, commercial and public building remained flat or even weakened in practically all countries throughout Europe, whereas residential building benefited from improved consumer sentiment, due to gradually reviving confidence in the economy.

In Central Europe, German building solutions demand developed steadily in the third quarter in clear contrast to the weaker sentiments characterising the first and second quarters of 2013, and offsetting doubts in the strength of the German economy. Other Central European markets showed less strength, with the Benelux building markets, in particular, remaining subdued. The Central European region is still affected by the long winter period, which will negatively impact on annual building and construction output for 2013. In the Nordic region, Finland and, to some extent, Sweden declined somewhat compared to the previous year. The Danish market remained subdued while Norway continued to show a more lively activity. In Southwest Europe, a positive pick-up in the overall building market was witnessed in the UK, although this was not yet visible in Uponor’s application areas. The other lar! ge markets, France, Spain and Italy, continued to be soft. In Eastern Europe, demand in the bigger markets of Russia, Poland and also the Baltic countries remained rather stable but several other markets lost their impetus.

The overall competitive environment in the European building solutions markets was characterised by overcapacity, increasing price competition, more private labels attempting to capture market share as well as several smaller brands increasingly fighting for survival.

North American demand for building solutions continued to be brisk. Although growth in the housing market remained healthy in the U.S., it has slowed somewhat from the previous quarters due to higher mortgage interest rates and overall concerns about the country’s economy. The softening of the Canadian housing market continued as expected, largely for demographic reasons and due to a reduction in earlier pent-up demand.

The infrastructure solutions markets followed a similar pattern to previous quarters, with demand remaining at a rather low level. The weak positive signals noted in Sweden, Denmark and Canada in comparison to the previous year were more or less counterbalanced by overcapacity, rising imports and the resulting fierce competition.

Net sales

Uponor’s continuing operations reported net sales of €279.3 (211.3) million, showing a growth of 32.2 per cent, mainly from the inclusion of the new Uponor Infra businesses since July 2013 and from the continued growth of business in the U.S. Adjusting for the establishment of Uponor Infra, organic growth was 2.3 per cent against the third quarter of the previous year.

Building Solutions – Europe reported modestly negative net sales development at -0.5 per cent. Mainly driven by weak markets in Central and Southwest Europe, this hides the fact that a number of national markets, including Germany, Russia and Denmark, showed a rebound in net sales in the third quarter, while there was a decline in some others, such as Norway, the UK and Spain.

Building Solutions – North America continued on its growth path, driven by the pick-up in residential building demand in the U.S. and due to Uponor’s increased penetration in selected segments of the commercial market. Net sales in Canada declined somewhat, reflecting market developments.

Uponor Infra reported net sales of €105.1 million, up by €64.8 million from the pre-merger numbers due to the merged infrastructure solutions businesses. However, net sales was slightly behind the combined net sales of the businesses in 2012, in a predominantly stagnant market.

Breakdown of net sales by segment (July–September):

M€

7-9/
2013

7–9/
2012

Change

Building Solutions – Europe

129.3

129.9

-0.5%

Building Solutions – North America

46.9

43.1

8.8%

(Building Solutions – North America (M$)

62.4

54.5

14.5%)

Uponor Infra

105.1

40.3

160.8%

Eliminations

-2.0

-2.0

Total

279.3

211.3

32.2%

Uponor’s January – September net sales reached €668.4 (621.9) million, an increase of 7.5 per cent, or -1.4 per cent in organic terms, as a result of the weaker first and second quarters in the current year. When adjusted for the currency effect, the Group’s organic growth in the January-September period would have been -0.4 per cent.

Breakdown of net sales by segment (January-September):

M€

1-9/
2013

1–9/
2012

Change

Building Solutions – Europe

367.5

396.1

-7.2%

Building Solutions – North America

127.9

113.0

13.2%

(Building Solutions – North America (M$)

168.6

145.6

15.8%)

Uponor Infra

177.7

117.6

51.2%

Eliminations

-4.7

-4.8

Total

668.4

621.9

7.5%

 

Results and profitability

Uponor’s operating profit in the third quarter totalled €28.2 (22.1) million, up by 27.5 per cent in year-on-year terms, mainly reflecting the inclusion of the new infrastructure solutions businesses. Organically, excluding the the new Uponor Infra businesses, growth came to 16.6 per cent. Profitability measured in terms of the operating profit margin reached 10.1 per cent, or organically 11.9 per cent, from the 10.4 per cent reported a year ago.

This positive performance development was driven by a stable input cost environment, efficient cost and overhead management, and the leverage effect of increased volumes. All segments reported improving figures, despite a tough competitive environment, particularly in Europe.

Uponor Infra’s operating profit for the current quarter includes the impact of the joint-venture company’s establishment on 1 July 2013. The segment’s operating profit is burdened by €1.1 million coming from the consolidation in progress of the Swedish and Danish operations. However, the business was able to reduce expenses and improve profit margins as a result of an improved product portfolio in a stable raw material price environment.

Breakdown of operating profit by segment (July-September):

M€

7–9/
2013

7–9/
2012

Change

Building Solutions – Europe

14.6

13.9

5.2%

Building Solutions – North America

7.7

7.5

3.1%

(Building Solutions – North America (M$)

10.2

9.6

7.4%)

Uponor Infra

6.1

2.4

159.5%

Others

0.2

-1.4

Eliminations

-0.4

-0.3

Total

28.2

22.1

27.5%

Profit before taxes for July–September totalled €26.4 (19.5) million. The effect of taxes on profits was €8.7million, while the amount of taxes in the comparison period was €7.1 million. Profit for the third quarter came to €17.7 (12.4) million.

Operating profit for January–September was €54.0 (47.5) million, up 13.6 per cent from the comparison period, mainly due to the inclusion of the new infrastructure business in the Group from the third quarter onwards. In organic terms, operating profit rose by 7.4 per cent. Profitability, or the operating profit margin, reported was 8.1 per cent, with the year-on-year figure coming to 7.6 per cent. Exchange rates had only a marginal translation impact on the operating profit for January – September.

Breakdown of operating profit by segment (January–September):

M€

1–9/
2013

1–9/
2012

Change

Building Solutions – Europe

32.4

37.8

-14.1%

Building Solutions – North America

18.9

14.3

32.4%

(Building Solutions – North America (M$)

24.9

18.4

35.5%)

Uponor Infra

6.7

2.6

152.1%

Others

-2.9

-6.4

Eliminations

-1.1

-0.8

Total

54.0

47.5

13.6%

Earnings per share for January–September totalled €0.41 (0.35), both basic and diluted. Equity per share was €3.06 (2.76), basic and diluted.

Investments and financing

The largest ongoing investment is the capacity expansion in the Apple Valley, Minnesota facility in North America, which is planned to be inaugurated by the end of 2013. Other investments during the reporting period were mainly targeted at maintenance and development.

Gross investments in fixed assets in January–September reached €19.1 million, exceeding the previous year’s level of 12.3 million, the increase coming mainly from Building Solutions – North America. However, this was below depreciation, which amounted to €23.9 (21.2) million.

Cash flow from business operations in January–September came to €41.5 million, from €2.1 million in 2012. The 2012 cash flow was burdened by the payment of €15.0 million in taxes, surtaxes and interest, with respect to the taxation decisions by the Finnish tax authorities at the end of 2011. Further improvements in 2013 came from higher profit and positive cash flow from financial items.

In order to manage risks related to the difficult business environment, Uponor is placing a special focus on reducing credit risk related to trade receivables. Uponor also aims to keep its own liquidity at a high level, while minimising refinancing risks. The main existing funding programmes on 30 September 2013 included an €80 million bond maturing in 2018 and a €20 million bond maturing in 2016. Committed bilateral revolving credit facilities, maturing in 2015, totalled €190 million; none of these back-up facilities were in use during the period under review. At the period end, €3.0 million of commercial papers were issued under the €150 million domestic commercial paper programme.

The Group’s solvency ratio improved to 41.2 (37.5) per cent. Interest-bearing liabilities amounted to €135.2 (117.7) million. The period-end cash balance totalled €25.0 (8.7) million. Gearing decreased to 45.8 (58.3) per cent.

Short-term outlook

The global macro-economic outlook continues to be challenging after several years of uncertainty. Uponor is looking towards the future with cautious optimism and forecasts the markets to develop in a rather stable manner for the near-term.

Building markets within the European region are slowly beginning to recover from the economic crises. More recent trends have been somewhat mixed, with the largest and most dynamic economies taking the lead while several other markets continue to suffer. Uponor estimates that this trend will continue, influencing demand for both building and infrastructure solutions.

In North America, the building markets have already recovered a great deal of ground. Demand, particularly in the residential building sector, is expected to remain rather healthy, although there are risks related to the strength of the U.S. economic recovery. The Canadian building and infrastructure markets are expected to remain fairly stable in the short term.

With the introduction and implementation of the new European organisation and the establishment on 1 July 2013 of the new joint-venture company, Uponor Infra, Uponor is actively taking advantage of the related momentum to develop its operations. In this, it aims are greater agility, improved efficiency, and enhanced customer satisfaction. Uponor will continue to develop its offering and promote key value propositions in order to grasp existing opportunities, even in subdued markets, wherever such opportunities arise in renovation and refurbishment, sustainable low-energy building, and in communities preparing for extreme weather conditions.

With respect to the economic and business environment, Uponor remains prepared for a lengthy protraction of the current low-to-moderate activity levels, with limited expectations of market growth.

The company’s management continues to focus on its core businesses, cost-efficiency and operating leverage, and cash flow. Further actions to reduce overheads and other costs may become necessary in selected markets, if the economic outlook remains weak.

Uponor cancelled its guidance on 1 July 2013 due to structural changes arising from the launch of the new joint venture company, Uponor Infra. New guidance is to be expected in February 2014, upon the publication of the 2013 Financial Statements.

As always, 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 ‘Key risks associated with business’ section of the 2012 Financial Statements.

Next results report
Uponor Corporation will publish its financial results for 2013 on 14 February 2014. During the silent period from 1 January to 14 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.

Uponor Corporation
Board of Directors