Uponor Oyj

OMXH:UPONOR

Earnings Call Transcript 2018-Q1

[Jyri Luomakoski, President, CEO & MD]

Good afternoon, and welcome to Uponor's First Quarter 2018 Result Briefing. My name is Jyri Luomakoski. I'm the President and CEO of Uponor; and with me in the studio is Maija Strandberg, our CFO. She will later on get into the numbers of the first quarter.The year 2018 marks the 100th year of Uponor as a company. The company was founded in August 1918, and we have now started various customer events in different geographies, and here you can also see a [ pretty ] atmosphere and the library of Uponor 100 years in different Uponor geographies.The first quarter where we report 4.5% net sales growth, this was much driven by the good performance of our North American businesses. In Building Solutions Europe, we see a small net sales growth, but that's fairly unevenly distributed, so their pluses and minuses, Maija will get later on to that on international markets. In North America Building Solutions, we were growing in healthy markets, the supply was stabilized after the Q2 2017 disruption in our production and in Infra, Uponor Infra we report a strong net sales growth, which is much driven by the North America, Canadian and the Swedish market, much of Europe, the sales at start.In terms of operating profit, we see operational leverage driving the operating profit or supporting it even though at the same time, we have continued to invest into our digital initiatives, our prefab initiatives et cetera, and we also see a negative currency translation impact. So while growing and building North American in U.S. dollar terms, euro that translates to a year-on-year negative change.In Building Solutions Europe, the startup cost of Asia are still burdening the segment and in some of our European markets we had weakened sales into the year. So year didn't start that well. In North America, as I mentioned in local currencies, growth in euros the change year-on-year trends was negative, and our operating profit was burdened by the manufacturing expansion as we have guided and indicated earlier that in the first half of this year, we have to some extent double costs ramping up the production in Hutchinson. And at the same time, we have seen some increases in material costs, and freight costs are still on the high side. And the Uponor Infra Q1 operating profit improved, thanks to the significant growth we witnessed in North America and in Sweden.Looking at the individual segments in Building Solutions Europe, we see that the markets are actually not growing at the pace one would kind of derive from the newspaper headlines about the economy and the positive sentiment that prevails in the markets. Prefab initiatives, which we started a couple of years ago with acquisitions and also some greenfield initiatives on that area, continue to progress in line with our expectations and we see that they are helping our customers, both with the labor shortage topic because there is more content that earlier was done at the job site, now done -- prepared industrially and that the same time, the technical quality with the increasing complexity we see with energy and hygienic requirements on different building codes.When we look at the key European markets, winter has been colder. I think that's pretty undisputed that average temperatures in Q1 in quite many of our European key markets have been significantly or clearly below those of last year. At the same time, we need to remember Q2 last year has the Easter Holidays in full and this year, it was kind of split between Q1 and Q2. The impact on March was 2 shipping days, but overall the quarter was just 1 day short than in '17. And the startup cost as I mentioned of our [indiscernible] operation are reported and kind of burdening than in the -- than the Building Solutions Europe segment.In North America, we had a positive start into the year. We are recovering well from the supply bottlenecks we witnessed as a consequence of the production outage in '17. Translation kind of hurts, but we are not economically exposed here in terms of transactions. So we are manufacturing from locally sourced raw materials in the U.S. side for the North American market.The Annex 2 expansion, which was the last building expansion on our campus in Apple Valley, Minnesota, which was a EUR 16.3 million investment that was open in January 18, so the certificate of occupancy we got in the second half of December. And the second factory in Hutchinson, Minnesota is targeted to be used in the summer '18, so things are progressing on schedule and on our plans.Uponor Infra, overall growth, certainly driven by the strong demand development in North America, especially in Canada, which is the main market and that's also where the production assets are located. And in Europe, we saw a strong performance in Sweden, followed by Poland and much of Eastern Europe, but other Nordic markets, we had a decline in our numbers. And this is also the area where we have spent quite significant amount of time and effort and also money to restructure the platform into one in which we can nicely leverage and those benefits we were not able to see in the absence of the revenue growth.In Q1 '18 we published at the CES and -- the Consumer Electronics Show and the IBS, the International Builders Show in early January, Phyn Plus, the Smart Water Assistant with Shutoff and won numerous smart home awards in the kind of technology space, which is clearly a new space to be competing in for Uponor, but very good reception.Commercial sales have started now in the second quarter and the European introduction is planned for [ SH ] in '19, so preparations are ongoing. And we have also launched an authorized network of installers, the Uponor Pro Squad and there are already hundreds and hundreds of plumbers trained and the aggregate plan is at this stage that in the U.S. and Canada there will be over 3,000 plumbers trained in as a Phyn Plus installer enable to not only to connect the device with piping but to connect it to the cloud and configure it and have the customer then to start enjoying the benefits of the system.In February, we invested additional EUR 10 million into Finland and increased our stake to a 50% stake and our aggregate investment into the joint venture with Belkin is now USD 25 million.Also earlier this year, we have launched our finalized pilot program of our online water quality monitoring. Here on the picture, you also see 1 device based on an acquisition we did in December '15, a source of technology and this is aimed to make the portable water distribution safer, detecting from a flowing water certain bacteria, which are definitely not wanted here.Currently, the infrastructure has been -- Infrastructure segment has been the target but the technology also feasible for industrial use, residential public premises, also for building construction. And those launches will take place later on also on the building side. So started with Infra and then moving to the buildings side.This takes us through the numbers part. Maija will shed some light into the first quarter financials. Maija, please.

[Maija Strandberg, Chief Financial Officer]

Thank you, Jyri. Good afternoon also from my side. My name is Maija Strandberg and I'm the CFO of Uponor. I would like to comment here shortly the numbers as we reported them today. Our net sales for Q1 2018 were EUR 277 million, up 4.5% from previous year. Operating profit group rose reported operating profit as well as comparable operating profit being a EUR 17 million for the quarter. Earnings per share remained at the same level EUR 0.11 per share. Return on equity on annualized basis, 11.1% and return on investments 9.9%. Net interest-bearing liabilities, EUR 212 million down from previous year's EUR 224 million. That led to quarterly gearing at 66.3% being now again also for the first quarter within our reported range.At the end of the quarter, we employed 4,200 employees roughly, that's up [ 6.8% ], the increase coming from North America, but also from our European factories. As Jyri mentioned already, this quarter we experienced quite strong translation impacts mainly coming from U.S. dollar, Canadian dollar, as well as Swedish Krona. Our comparable gross profit came to EUR 93.2 million, up in euro terms, while percentage-wise down slightly, key impacts being our investment and ramp-up costs in North America, somewhat higher freight costs also in North America, but we have also experienced some upward trend with our supply costs. Expenses continue reported wise downward trend and operating profit being at EUR 17 million for the quarter.Several results in associate companies minus EUR 2.1 million relates to our investment in Phyn and Phyn activities are consolidated into Uponor figures using equity method. Profit before taxes was EUR 13.2 million for the quarter. The estimated tax rate we used was 29.9%. We continue to still analyze the total impact of the U.S. tax reform and continue to guide if there are reasons found profit for the period being EUR 9.2 million, 25% up from reported results last year.Segments Jyri already commented in his presentation very much, but as you can see the main improvement in a quarter actually came from Uponor Infra segment. Net sales up strongly driven by Canada, as well as Sweden and also results up. There the main impact comes from our Canadian operations and improved leverage while the European operations continue to still underperform to our targets. Building Solutions North America, here you can see also the impact of the translation euro wise measured both net sales as well as operating profit actually down, while looking at the segment in U.S. dollar terms, profitability is up. First quarter was quite a difficult quarter for us in the Building Solutions Europe segment and the results are burdened by the Asian segment ramp-up costs, but also by several other factors, namely some upward trend in our material costs as well as uneven balance between the segment sales.Moving on to looking at the sales in the quarter, no change actually in the order of our 10 largest markets. You can see that basically a strong sales growth continues in U.S., Sweden. Sweden especially driven by our Infra segment in Canada and in Poland, while the first quarter was quite challenging for us and a couple of other larger markets being Germany and Finland.We continue to invest in the growth elements. The investments in the quarter totaled just under EUR 10 million. As Jyri mentioned, this quarter we also invested into additional share of the Phyn operations by USD 10 million. This year 2018, Uponor actually pays out our investments in 2 installments; first installment was paid in March and the second is scheduled for September.Net cash flow from operations improved to EUR 30.5 million. That is burdened by slightly a negative trend in networking capital driven by more normalized inventories in North America, the cash flow from operations being EUR 25 million negative compared to EUR 23 million negative previous year.That actually concludes the financial comments and I would like to turn it over to Jyri to comment on our outlook.

[Jyri Luomakoski, President, CEO & MD]

Thank you, Maija. Commenting on the outlook for the full year would be [ released ] after May when we see how the real construction season has started, but obviously we need to do something at this stage and when we here, look at some of the leading indicators for residential construction, we see couple of negative changes in the permits and starts namely Germany, Canada and Norway. But otherwise, generally a positive set of numbers indicating that the markets continue their development quite sound.A few of our key geographies within Europe, when we look at the building permit activities, these are the Eurostat numbers, which are always not a notch kind of behind, not that quickly to compile and aggregate all the numbers, so we have data through November '17 being in early May. That somebody would argue somewhat outdated, but we see in aggregate a continued growth in the residential permits and in the non-risk side, which is a more volatile graph you see here, as the blue one been that's been generally a bit mixed picture, but a small upward trend also visible over there.Builder confidence in the EU area remains solid and has been that since October and most of the key markets are. Actually, we see that the confidence index has developed favorably only the U.K. being one with a negative change. On the U.S., we are seeing a continued expansion on the housing starts numbers, which have had some type of hiccups earlier this year, a bit back and forth. But the overall trend is healthy and from that perspective, we see that the growth in the economy remains robust and they are through the tax breaks also a lot of kind of tailwinds in the economy. And we see the homebuilder sentiment is high. It's reached its top in December, 18 years, so this millennium, basically the highest level in December. And we have seen activity increasing both in the residential and non-residential segment.We continue to keep hearing labor shortages being kind of a curtailing factor for the growth. So the economy as such creates more demand than the industry, meaning builders and installers in our case, are able to put in place. In Germany, strong labor market, strong economy continues, but we have seen now for about a year, the trend of our housing starts take -- or sorry housing permits, building permits for residential homes actually on a small decline. At the same time, the construction confidence is on a very high level. And when you kind of compare the structure of the construction in Germany, multi-occupancy, multi-family construction has continued to increase and the hits in the permits have been more on the single-family home, residential.Our agenda for the balance of the year fairly short, strategy remains intact and we are continuing the penetration into the commercial segment. Prefab has an important role in that, also supporting the residential segment and digital offerings, important element in our Building Solutions Europe segment, as it's also in the other segments.Uponor Infra, when we did the production consolidation in early '17 in Finland, all plastic pipe production into one site, that start-up in the new combined site has been slower than anticipated and still high. And the agenda is to make sure that these inefficiencies to high scrap rates are the yields, not at where they could and should be, but they get now converged through the targeted levels.And in Building Solutions North America, we are now enhancing our customer experience, working with our segment-specific sales and marketing initiatives, and now good progress on moving to the industry-leading supply of products. With the hiccups we had in Q2 '17, we were not necessarily performing at a level we would like to be and what's the best in the industry and are now progressing well to that direction. And certainly, Phyn Smart Water Assistant, we tried of being the spearheading digital initiative where we are helping to transform the [ age back ] and also paving the way to the European launch in the early '19.In terms of our guidance, we are continuing on a historically seen high level of CapEx where we have also estimates published that it will remain roughly on the same level as in '17 where it was EUR 63.4 million and this is much driven by the capacity expansion programs in North America.And when we look at the overall market picture relating to construction with increased political tensions and volatility, which we have seen in the world, kind of politics and world market commodities equities, et cetera, but there are no signs of major changes in the underlying construction markets that we would expect them to materially affect our business. And with this assumption that economic political developments in Uponor's key geographies otherwise continue undisturbed, we repeat our Q4 -- in connection with the Q4 release published guidance that excluding the impact of currencies, we expect our organic net sales and comparable operating profit to grow from those of 2017.Before we move to the Q&A session, just a reminder, we are arranging a Capital Markets Day for investor and analysts on Thursday, the 17th of May and the location is the Uponor facilities in Apple Valley, Minnesota in the U.S. where we have over the last years, invested significantly and filled the original campus now with buildings to support our growth, and this will be also broadcasted live as a webcast either via the investors.uponor.com webpage or via the Uponor IR app. And you can find more under the investors.uponor.com/CMD2018 and also use that as a channel to register.This concludes the presentation part, and now we can move to the Q&A session. Thank you.

[Jyri Luomakoski, President, CEO & MD]

Thank you. We have received now a couple of questions, and if we will start in the sequence as we see them they are submitted. The first one is from Anssi Kiviniemi from SEB. Share of results in associated companies and joint ventures, it was EUR 2.1 million negative, this is clearly higher than in previous quarters. Is this all Phyn, should we expect similar run rate going forward for the quarter or should we expect losses to increase in Q2 as you're closing on the launch of the new product. First question, yes, it is all Phyn. So it is our share, which last year inside the Phyn, we owned 37.7% of Phyn. So from the development burn rate, the corresponding share was booked with Uponor now. In February, we increased our share to 50% and our burn rate before launch had increased going forward. We don't expect that number to grow because starting Q2 also Phyn has some small revenues from the [indiscernible] products Phyn is delivering to Uponor. So that's kind of the picture with Phyn. Now more specific guidance on Phyn is not issued, it's a joint venture guidance just on the aggregate growth. Then the next question also from Anssi Kiviniemi from SEB. How should we look at the sold units in Phyn Plus Smart Water Assistant + Shutoff, should we expect thousands of units sold in 2018 or tens of thousands? Obviously time will show as many as possible. This is clearly our target and goal and from that perspective, once we are more than 1 month after the commercial deliveries has started into this in the coming quarters, I hope we are in a position to quantify it more specifically, which one of these alternatives is there more likely. Then, still from Anssi, Jyri, could you quantify the cost of ramp-up of new production capacity in North America? We have not specifically or separately quantified that cost, but clearly I see something we are mentioning here, and we have also indicated that in the Q1 and Q2 when we are in the ramp-up phase starting the production in Q3, we will have extra costs and when we indicate, something like that obviously we are talking about the 7-digit numbers in this time horizon, otherwise it would be not, it wouldn't be material, and worth even mentioning. And then the final question from Anssi Kiviniemi at SEB is, could you quantify the costs that came for Asian ramp-up, millions? On an annual basis, we expect that to be a couple of millions and in the quarter, it was more than last year in the Q4, a couple of hundred thousand euro more than Q1 '17. So it is burdening the Building Europe performance. So those were the questions from Anssi. And then we have from Ari Järvinen at Danske Bank a set of questions. First one, compared to some other building materials companies, for example, Geberit Piping in Europe, Uponor is underperforming, what are the main reasons for underperformance? I have seen the headlines Geberit published there first quarter. Today, obviously it's been a day with Uponor board meeting, et cetera, so there's been something. Also on the plate then running into the analysis of the company's performance, quickly I saw that the Geberit Piping was in local currencies up 4% and that's predominantly a European business. So, correct from that perspective, the growth was higher. I haven't analyzed the [indiscernible] recent number. So from that perspective, difficult to comment on what is here alleged as underperformance versus these years. Second question from Ari Järvinen, is new government of Germany is planning tax [ rates ] relating to energy saving projects. Do you do anything to elaborate on this? We are closely following the development historically on energy saving projects, the biggest beneficiaries in my belief had been installation companies and boiler companies because those are in a way quick wins to get improvements on the energy performance. But what are the specific details, too early to comment, of course, if installation is added, then there is no business related to us. If the heating system, for example, the boiler is changed or even converted to heat pump tenders, so demand for some pipe system products. Our biggest margin burdened related to ramp up in China. Same question is actually -- as Anssi Kiviniemi had [indiscernible] follow-up question here and said on the annual basis there's couple of millions and we don't see that there is in this year from that perspective.And then fourth question from Ari Järvinen is what kind of course dynamic should we expect related to the U.S. capacity ramp-up during coming quarters? And as syndicated Q1, Q2 we have ramp-up costs we expect that in Q3 those will be rather irrelevant in magnitude and we have also had good progress in updating all these relevant product approvals to be able then to have a sellable approved products available to our customers in Q3. And then new question. we got from Anssi Kiviniemi, we see the gross profit decline in Q1 compared to previous year due to U.S. ramp-up costs logistic cost in U.S. and imports cost? We have also rate prices laid in, so should we expect gross margin to improve from below 34% level going forward? On the [indiscernible] also I would like to add that, when you look at the growth in our portfolio, the biggest growth comes from operating -- which is inherently lower gross profit margin business, specific guidance on gross margin we have not issued and we will not do so. So the latter part of the question on expecting this gross margin to improve, I'm not in a position to the share this. The gross margin is very important measurement and good price management and cost management we are working for ways to optimize the gross margin sometimes in percentages is not exact number we want to optimize if you have excess capacity for example in some segment, you would like to optimize or maximize the dollar or euro type of an amount and that might percentage wise dilute the margin, but create profits and cash flows to the company and economic benefit and that's not a single straight answer.I do not see any more questions flowing in at this stage, that's looks like the case. So on the online, no questions. So thank you very much for following the Uponor first quarter earnings release webcast and then Q&A session. And just again reminding investors and analysts on our CMD still in May, still time to join us in Apple Valley, Minnesota to see the latest capacity expansions that are online and get an update on Uponor strategy and way forward. Otherwise, we will be in touch in late -- latter part of July with the second quarter and the half-year report. Thank you for joining.