Uponor Oyj

OMXH:UPONOR

Earnings Call Transcript 2019-Q1

[Jyri Luomakoski, President, CEO & MD]

Good morning, and welcome to Uponor Corporation's First Quarter 2019 Result Briefing. My name is Jyri Luomakoski. I'm the President and CEO of Uponor; and with me today in the studio, Susanna Inkinen, our VP Corporate Communications, who will help with the Q&A session.Couple of highlights of the first quarter. Our net sales were shy of EUR 249 million. This compared with the reporting number of last year of EUR 277-ish million is clearly down the biggest impact on the year-on-year changes is the divestitures we did in the second half of 2018. Organic growth in constant currency terms. So we had actually some tailwinds with the FX translation, it was minus 2.2%. Operating profit was EUR 14.3 million versus the reported of EUR 17 million. But here, again the divestitures are relevant to be considered and actually operating profit improved by EUR 1.1 million on a like-for-like structure year-on-year. And what was driving that? Clearly, on the European operations, both in Infra and Building Solutions – Europe, we see the restructuring measures we did last year. They were impacting and starting to support the result development, and the flip side of the coin was that, as anticipated in connection with the fourth quarter release, some customer purchasing patterns were impacting the top line and also our bottom line in our Building Solutions – North-America operations. And Infra, overall, on the like-for-like basis, improved its profitability, and that was driven by Europe where these measures have been taking place over the last actually 2 years.Looking at group net sales and comparable OP. Graphically, we have tried to separate also the -- in black, the divested businesses. So net sales, close to flat on the like-for-like basis. Currencies driving, so that the constant currency change was 2.2% negative, as I mentioned, and then a positive one on the comparable OP. The comparable OP doesn't report on the like-for-like adjustments. Obviously, with IFRS 16, there is a 0.1 negative impact on the operating profit level out of the new lease accounting standards.Looking at the key national markets development, North America, where U.S. is dominating the Uponor revenue streams that we had declined as indicated from the context of the Building Solutions – North-America. What I am pleased to see, it's a small number, but I think the change from reporting quite of negative changes in Germany year-on-year here on a like-for-like basis was more positive development, and this also despite of the launch of our S-Press PLUS fitting system, which took place in the second half of March. So towards the end of the quarter, so early in the quarter, we were not selling much of press fitting systems in the European continent. The last week or so, we started shipping the new product so -- and Germany is the biggest market for this product category. So in that light, pleased to see that development. Finland just small improvement driven by both businesses, meaning Infra and building solutions. Sweden, again, negative. Sweden is also -- when we look at the European kind of heat map of construction markets, one of the more negative ones on the scale. And then Netherlands, Denmark following kind of on the league on positions 5 and 6, a small increase year-on-year. And the rest is smaller. Of course, Canada, with the divestiture of the big Infra business, relatively well illustrated a big drop. But organically, we were flattish.Looking at the different 3 segments -- reporting segments with Building Solutions – Europe. As mentioned, the development in the quarter was actually despite of this product launch issues, et cetera, I would categorize as positive. We improved our margin, and that's one of the key reasons behind -- or the measures so far exiting some low-margin, low-profit markets, Switzerland, Australia.And then our Asian operations, the small operations, we are reported also in this segment, and that's visible and impacting favorably here. The reception of our product launches in March at the ISH, which is in our industry, the largest trade show. And there were 4 bigger launches: the S-Press PLUS fitting system, which I've already mentioned; introduction of Phyn to the European markets; then a fully electronic freshwater station, our Comfort Port E; and then the cloud-based heating or indoor climate control system, Smatrix Pulse. Good reception shipments of S-Press PLUS have started similarly. Now the first Phyn units have been shipped in Europe, and we will be following with the shipments up Smatrix Pulse now actually during this month as we speak.Building Solutions – North America. A bigger drop on the top line, and consequently, also impacting the margin of the business, which is still not a poor margin in our relative context. And here, as we indicated in connection with the Q4 report, purchasing patterns ahead of price increases. One is FX, then second one is that typically distributors have some type of annual incentives if they reach certain volumes, certain growth rates, et cetera. And it appears that several of the key distributors also utilized these options end of last year. Consequently, the -- what we call the hangover month of January was kind of pretty bad. After that, things have been more looking as normal patterns. But Q1, generally, poor generally, easily in a way kills the quarter or contaminates the quarter.Infra, here, pretty big black bars. The divestiture of the Canadian business impacted the numbers and the base quite much. What's positive here is really that as we, a year ago on the European Infra business, reported a negative EBIT, which is not uncommon for this very seasonal business. Despite a pretty hard winter, the measures of driving cost out of the business and improving the portfolio from a margin perspective have been bearing also fruit, so that we were having the nose clearly above the waterline in the first quarter in the European infra.Before I head out to the financials, there are a couple of questions.And here, first one is from Anssi Kiviniemi at SEB. And the question is to what extent that Q1 sales growth in Building Solutions – North America of minus 11% in local currencies was due to restocking -- destocking cycle? And to what extent due to underlying markets? Should we expect also negative growth in Q2 for the division?The easiest thing is to answer on the Q2 guidance. First of all, we don't issue quarterly guidance, not a segment level guidance, and so that's from that perspective. Is it -- answer. And we -- when we look at the decline in the top line and the drops of data of inventory -- volumes inventory quantities at distributors, what we have from the North America market, the decline in the top line was really driven by this inventory cycle. So piling up inventories in the last quarter of 2018, and now moving kind of the normal stock levels. So to quantify that is extremely difficult, but that was really the driver.Next question is from Ari Järvinen at Danske Bank. What is your view on plastic material, metal price development ahead of high season '19? We've seen big volatility in the petrochemical side. We anticipated a small kind of softening on plastic prices to the spring until certain maintenance breaks in the petrochemical industry in the conversion capacity or cracking capacity were scheduled for the spring. And the general demand/supply balance is the biggest determinant in the end for the prices. We don't foresee any major changes to either direction as such, and these are Wesley's famous last words which, next week, with some news flow. On the petrochemical markets, it can be very quickly reversed, but looks relatively calm in terms of the overall picture.Then further question from Anssi Kiviniemi at SEB. Logistic issues, Building Solutions – North America did this impact both Q1 volumes and costs. How big was the negative impact and comparable EBIT in Q1? And freight issues, still -- in the U.S., there's a big scarcity of truck drivers. Apparently, there's enough equipment, but due to labor law changes last year, still a shortage. We probably could have shipped a couple of million dollars more towards the end of the quarter with trucks available. That's not hugely overly material topic. On the cost side, we are talking about the magnitude of $1 million of extra freight costs when contract carriers have not been able to perform, and we can't let our customers down. And then we have been forced to use other carriers, and obviously that's then the demand/supply balance determining those prices.And then further question from Anssi Kiviniemi at SEB. How much of Building Solutions – Europe's Q1 comparable EBIT improved compared to Q1 '18 was due to savings in millions of euro, please? And how much due to improving performance in other parts of the business?We have not specified this in detail. We indicated when we closed Switzerland and Australia as independent, our own sales offices in our organization that those in aggregate, we're losing on an annual level a bit more than EUR 1 million. And that's consequently then off the cost base, and the numbers on Asia have been transparently reported when we announced about the closure, which is impacting the Building Solution – Europe numbers. So no specific disclosure or detailed disclosure of these numbers, but I will maybe be able to help you with some when getting into the financial statements.A bit renewed bridge in the deck, which you can download from the web. You have the income statements and balance sheets in the, let's say, old known tabular format. A couple of points here. Cash flow, which, seasonally, just as a reminder, our business is that we, in a way, throw the seeds out to the field in the first and second quarter and collect the crop. So harvest the crop in the third and fourth quarter. And similar pattern to be expected here this year. Cash flow before financing slightly improving from last year, and the cash flow from operations vice versa a bit below -- but no major changes. The biggest change when you look at the components of the cash flow is that due to the slow start into the year in North America, our inventory levels are a bit on the high side, and that's reflected similarly on the cash flow side.On the gross profit margin, which has improved in reported terms and -- to anticipate the question and a bit maybe to answer Anssi Kiviniemi's question here. So there are both organic components or some tens of basis points are really organic components on the improvement of the gross margin and then resulting from these changes of, let's say, mix changes when you exit poor profitability markets. The rest is there, but both have a positive contribution to the improvement.Gross CapEx down in North America where we had a phase of fairly big CapEx items, building our patchings and getting it up and running. And now it is up and running, so it doesn't need similar big amounts of CapEx to be operative, and hence, down in the first quarter. And clearly, we are, as such, happy to invest into good return projects. But definitely in terms of capacity expansion, we are now on a well -- kind of a well-equipped, good position that we don't have imminent needs of expanding the capacity.Net interest-bearing debt, cosmetically increasing year-on-year because of the new leasing standards. It's about EUR 44 million of so-called right-of-use assets and consequently leased liabilities that are impacting our balance sheet. In this connection also in February, the Board of Directors revised the long-term gearing target. The bracket was increased from the 30 to 70 to 40 to 80, so approximately by the change we have seen now starting into this year with the new standards, so 10-ish points in the gearing number.Outlook for the future. We have the traditional comments on U.S. We've seen big volatility in the housing starts numbers. Permits have been actually more stable, and I would say kind of a more positive than the starts. And starts in the beginning of the year because it's seasonally adjusted. Annual rates, any change also gets quickly, in a way, expanded when it gets annualized with the seasonal adjustment factor. And I'm sure that after May, the visibility in that respect will be way better and in a way, more, more realistic if there is a bias in the numbers at the start of the year.Interesting is that what we have here as a blue line on the graph, the architectural building index, which is the leading nonresidential indicator. It's been like a roller coaster, but on a narrow band historically over the last years. And it is still on a slightly expansionary territory at 50.3. And the HMI, the Housing Market Index, or home builders' confidence index is at 62, which is not a bad number as such, but that's the red curve. It was down earlier this year, and it now ticked up again. So some nervousness or cautiousness in the market definitely, but in general, things are moving ahead. Consensus forecast for housing starts is slightly up from last year. So the expectation still are that the market will grow in 2019.Germany, the world's export champion where construction has been so far insulated from the slowing trade. We have seen here confidence numbers going a bit down. But over the last kind of quarter of '18, still permits for both non-res and residential buildings were again up. So somewhat mixed signals, but activity over the last years has been pretty much limited on our side of the equation, meaning plumbing and heating, but the scarcity of installers and the signals are that the players are still 100% busy. So the outlook is pretty stable over the season here. Finland. We see leading indicators pointing towards slowing. But then again, Uponor, our business, is up pretty much on the kind of a late cyclical part of a construction cycle, construction. So maybe being kind of a late cyclical activity as such. And from that perspective, we have a positive expectation for this season 2 in our home market.Sweden. Signals are kind of as we see also in the graphs. Graphs, we've seen a downturn in the leading kind of residential permits and the confidence going down, non-res being more stable than the residential side. And this leads us to a kind of a very simplified world map of the Uponor world's stable market expectations in North America. The kind of a green positive part of Europe is the Iberian Peninsula where we see construction activity growing housing starts permits or these indicators. Positive on the continent is Europe, stable and slowing in the Nordics. And consequently, we are repeating our full year guidance, which we announced in connection with our Q4 numbers, and that is at its long formulation excluding the impact of currencies. Uponor expects its net sales to reach the level of the year '18. Net sales excluding the divested Uponor Infra North America business and Zent-Frenger. So spelled out as 1.107.7 million -- billion and -- so EUR 1.107 billion. And comparable operating profit to improve from the year '18 comparable operating profit excluding this same divested businesses and the reference numbers, EUR 83.5 million.That concludes the presentation.And we have one question here from Svante Krokfors from Nordea. How is Phyn sales developing in different markets? Losses narrowed in Q1 year-on-year, was it due to increased top line or something else?Phyn, as I mentioned, we launched in the ISH show Phyn for Europe, and the first shipments have taken place over the last couple of weeks. So those haven't yet impacted Q1 performance on the share of our associated company losses where it's being reported. So it's a combination of some sales development in North America and tighter cost control obviously a year ago when we launched Phyn in January at the CES and then came out in the spring. The kind of the burn rate was also higher in that connection. In the European launch, we got good quantity of visibility and publicity and many have seen in different type of magazines, construction-related and digital, let's say, world magazines. Articles, good coverage. So won some awards in that area and are positive on the success of our European launch.That, on my screen, seems to also conclude flow of questions. We will be back with our second quarter numbers towards the end of July. We are now heading to the main season of the year. And despite the snowflakes on the sky in Helsinki this morning, we are firmly believing that spring is coming and the construction season is coming. So look forward to be in touch with you latest in connection with our Q2 results. Thank you.