Uponor Oyj

OMXH:UPONOR

Earnings Call Transcript 2020-Q1

[Jyri Luomakoski, President, CEO & MD]

Good afternoon, and welcome to Uponor's First Quarter 2020 Result Briefing. My name is Jyri Luomakoski. I'm the President and CEO of Uponor. And with me on this webcast, or call, is Minna Yrjönmäki, our CFO, and she will be presenting the number part after my introduction. As we wrote in the headline, moving to the next slide. The quarter had started -- or the year had started, for us, strong on Page 2. And this was also the message actually we gave on March 19 when we considered it to be prudent to withdraw our guidance for the current year due to the COVID-19 pandemic. In the quarter, our net sales were EUR 277.4 million. So organically, in constant currency terms, growth of a bit north of 11%, reported growth slightly bigger. And comparable operating profit at EUR 29.5 million, which is a bit more than double of what we reported last year for the first quarter. For 2019, we need to remember there were some soft spots in our numbers. So as a comparison, that's a bit soft. But even trying to somehow normalize the '19 basis, definitely, this was a strong performance and also very evenly spread through the quarter. So we were not seeing any kind of last-minute behavior anticipating that our operations would be disrupted or impacted over -- from the crisis. And it was also balanced in terms of increase being visible in all of our segments. And moving to the next slide, still summarizing the group net sales and comparable operating profit. Nice growth on both, and also similarly in the margin on Page 3 of the presentation. But then looking the geographical split on Page 4, on national, on our top 10 national markets, actually, you see red numbers on the 2 geographies, that's Sweden and Norway. But the rest of the Uponor footprint geographically was also performing well. USA, where we had a very weak starting to 2019, certainly, the comparison, especially from January, was soft. Strong performance in local currency and [indiscernible] in Europe. Germany, what is also pleased to see a good start into the year and the improvements we have made in the business and our presence of the local market seem to be bearing also fruit. But I will comment national markets and some of the indicators later on towards the end of the presentation. Segment by segment, moving to Page 5, Building Solutions, Europe, our largest segment. We launched in early '19, the new fitting family, S-Press PLUS, which was impacting demand negatively. So there was prebuying before the launch of the old ones by distribution to secure availability that happened mainly in '18. And now operations have been stable, both for the fitting production, which was an issue for us, Q1 through Q3 of '19, and on our Swedish PEX production where the yields have continued to improve, and we are seeing levels that in the name of the game being continuous improvement. They are never there, but they are very, kind of, satisfactory and a good platform to have the normal type of continuous development, continuous improvement, progress going forward. So those all -- all of those things that did also harm our performance in -- back in '19, have been way, way better under control and in good shape over here. Moving to North America to Slide 6. Definitely, the performance was strong and margin expansion continued, also strong. And I'm seeing also here a question by Anssi Kiviniemi from SEB, and there is one question which is where there are any pre-buying ahead of your price increases in the history? There has been. We had price increase in North America, beginning of February. And I think the question is probably in the historical context, mainly referring to that. But from a magnitude perspective, it was not so big then. Some historical price increases have been. And comparing demand in January, February or March, there are no indications that would support that there was any material prebuying by distribution in that context. Obviously, we do not have the visibility in terms of stock values or stock quantities within distribution. So I can't, kind of, answer precisely that question, but indications do not support that there would have been any material prebuying. Moving to the next slide. And that is Page 7, Infra. So a good start into the year. So volume-wise, we could see growth, especially the stronger performance in our case was coming from Finland and Poland as national markets. And the, let's say, only corona-related impact, I could see in Q1 was relating to some of the design solution services where Uponor crews are doing some demanding installations, whether it's in water, what kind of cooling water outlets, inlets or similar ones where our crews are doing welding and installation or technical supervision that we could see in the second half of March, that those type of projects we're getting also with the travel restrictions, kind of, if not dying out but gradually fading away. Then we can move still to the next page, #8. Execution of operational excellence program continues. Yesterday, we communicated both externally and internally confirming the objectives we laid out in our October 2019 release to the program that we have a target of cost improvements of EUR 20 million by the end of '21 and also quantify that this is expected to produce approximately 200 FTEs by the end of 2021. And first initiatives have been started. We started meetings with our European Works Council, and now with the local ones, European Works Council already, before the announcement confirming the targets and quantifying the personnel impact estimates and now the progresses moving along the lines of national labor laws in those countries impacted. And here is a relevant question, maybe to this topic, before I let Minna loose with the numbers, from Svante Krokfors at Nordea, will you take any measures, excluding the announced EUR 20 million efficiency program, to reduce cost in the short term, given the decreasing order intake beginning from April? The answer is, yes, that's always the name of the game. We need to have our operations right-sized for the quantities business volumes that we are transacting. In Uponor's case, you haven't been reading, as I know, many industrial companies have had already big furloughs or temporary layoffs, et cetera. You haven't seen those type of announcements from Uponor. What we have so far been successful in adjusting the capacities is with reduction of agency workers, temps, shift model changes, voluntary arrangements such as using overtime banks, which we have in several countries where people have accumulated overtime, and they are now taking those off. So that type of big headline news flow hasn't been there, and that's the background. The background is not that we are just leaning back and watching volumes change. That's definitely not the case. And I know there are other questions pending, we will, in the Q&A session, come back and address those. But now I would like to have Minna Yrjönmäki, our CFO, to present a summary of the key financials. Minna, please?

[Minna Yrjönmäki, Chief Financial Officer]

Okay. Thank you, Jyri, and good afternoon to everyone. So then let's cover some of the key figures that have not yet been covered in this part, starting from the gross profit and the developments, so on Page 10. So the gross profit, overall, so we had a very good development, both in absolute terms and relatively so the profit. Gross profit margin was at 37.6% for the quarter, been steadily increasing all across the last 4 quarters. And wherein increasing also for the Q4, it was 36%, so a nice increase also in the last part, and also absolute terms, topping the EUR 100 million -- at EUR 104 million. So clearly coming very strongly out of the strong volumes, very good volume. And the demand in the quarter reflected here. The price increase is having an impact also to this -- to the good profitability level here. Raw materials mainly being stable, and that is actually one of the questions we've seen in the questions that have come in, but even though the -- we've seen some unprecedented movement in the oil prices, that is not something that comes directly true. Of course, we have our inventory turnover. And it's not something that would directly anyhow impact into our prices. And starting from the year, then we've seen fairly stable levels. Obviously, then with the bigger volumes, then we have had leverage from the further conversion costs, which overall have been kept very well under control during the first quarter. Then moving on to the cash flow page. So our cash flow in Q1 was negative as expected, but clearly driven by the good profitability, the negative impact was smaller than even anticipated and still smaller than earlier with a minus EUR 11 million on the cash from operations and minus EUR 18 million (sic) [ minus EUR 19 million ] for cash flow before financing. Again, of course, the positive trend in the previous quarters then does turn into negative in the first quarter where the -- we -- our working capital is being then consumed with the sales volume, normally bringing this -- bringing the cash flow down and especially now with the very good demand. Then the next page for the further details on that on the quarterly cash. So EBITDA at EUR 42 million positive was, of course, a very good starting point for the cash. And overall, the change in net working capital, negative EUR 50 million, with clearly, the biggest driver is the receivables increased by nearly EUR 60 million. Inventories did not have a big, big impact. We had -- the inventory level has increased only by -- so less than EUR 10 million as -- with a good demand. So some of the internal or stock building for the summer is -- was not even done as strongly maybe that -- than expected. But then bringing, of course, our overall the operative cash flow negative. And cash flow from investments at -- overall, at EUR 8 million, bringing then the minus EUR 19 million for the overall cash flow before financing. Next page on investments. The quarterly gross investments were at EUR 6 million, half of that from Europe, basically, and then evenly from North America and Infra, but a fairly steady, not continuing on a fairly low level. We saw a little bit more in the fourth quarter last year, but then coming back to this fairly moderate level. And of course, investments is something that in this -- in our current situation, we'll keep a good eye on. We do expect that we have started to invest on certain strategic and also productivity improvement in projects, but of course, just regular maintenance that occurs every quarter. Then moving on to the interest -- net interest-bearing liabilities, and maybe just a comment on the overall balance sheet situation status at the end of the first quarter. We continue with a strong balance sheet, and we have been able to maintain also the net debt at the reasonable level. We were EUR 180 million at the end of the quarter, of course, with the strong increase in the working capital and an increase from the end of the year, and also pointing out that we have declared dividends. We managed to hold our AGM and have paid half of our annual dividend, nearly EUR 20 million out in March, also reflected already in this number. But the gearing for the quarter was at 52.2% and basically the average gearing, more or less exactly at the same level. And overall, in the numbers where the average gearing trend has been slightly up and down in the last year, this is indicating that we have absorbed the impacts of IFRS 16, which was very much visible last year, but basically it's been fully absorbed into the debt by this time. So a very, very good performance there as well. As well as on the balance sheet, which is not visible in the debt level that much, on a net debt level, but we have -- during the quarter now with the turbulence and preparing for the future, we have also worked on our liquidity, securing liquidity, even though balance sheet is strong, and we also want to make sure that we don't come off guard. So we have added some short-term debt. We've taken EUR 30 million of commercial papers in -- during the last months, or during March, basically, once the situation started to unfold and not visible in the net debt, as it hasn't really not been utilized, it's showing on our -- have a strong cash balance also at the end of the quarter, but more for preparing for the times ahead. Okay. Thank you.

[Jyri Luomakoski, President, CEO & MD]

Thank you, Minna, and moving straight to Slide 16. Obviously, we have withdrawn the guidance, so indicating that predicting the future is more difficult than ever. It's probably not the first time over the years in this role I have said that, but that still applies. And looking at some indicators, trying to help you see how we think and what we see, observe on the key -- some of our key markets, national markets. And U.S., obviously, a key contributor, both top line and profitability, to Uponor. Actually, until February, construction spending was up, and growth was driven much by residential spending. Now just last week at the ABI, the Architectural Billing Index for March, which actually was the all-time low indicator of 33. That's a confidence indicator, which is deemed to be a good leading indicator for nonres building with a time horizon of 9 to 12 months when it's believed to be kind of relevant and correlate with activity. And the ABI, it's comparing billions of architects, whether they went up or down versus the prior month, and when you dig into that data further, you see that it's been above on the expansionary area for several years. So billings have been continuing to grow and now for a 1-month change, you have most of the architects reporting that they have come down. So it's always with these type of indicators, one needs to do the homework pretty well to read into it what is the message, and it might sound even kind of more drastic than it potentially is. Housing stats published for March, they actually fell 22% from the seasonally adjusted annual rate of February. But actually, they were on the March 2019 level. And this was despite of some restrictions on some states in the U.S. to perform and carry out construction work. Homebuilder confidence plunged 42 points, which is the lowest point since June 2012. So you don't need to go back to the financial crisis to see these type of levels. And in terms of government restrictions, in most states, both residential construction as well as nonres construction has been deemed as essential activity, that's in the federal guidelines. Biggest deviations, I think, Pennsylvania was the first one, banning all construction, then City of Boston, followed by the State of New York, and State of Washington was also quite early on stopping job sites in the U.S. Moving to the next page where we have on Page 17, Germany. For most of the quarter, actually, construction activity has been healthy. We haven't seen any government restrictions on construction sites as such. So none closed based on an official mandate, but we all know that some of these physical works get less efficient when you maintain this 2-meter distances, et cetera. And the latest data point we have from the construction industry turnover is relating to January, permits, residential permits, we have February, which was up 4% compared to '19. And new orders, slightly down in February for the construction industry. And then in March and April, which is represented by the black line on the slide, the construction builder confidence taking a clear drop in the last 1.5 months. Then moving over to Page 18. Finland, we had actually a pretty steady construction activity in the quarter. There was not the normal phenomenon that construction job sites would have been shuffling, snow in the south of the country, in the north very less construction takes place, we had apparently sent all of our snow to the north of Finland. And civil engineering was driving the total construction turnover in Jan and Feb. But then looking at the residential permits, we saw in February, 22%, compared with the last year, and nonres, minus 23. And confidence, which has been already on the weak and soft side for quite some time in Finland, fell further in March. That's, again, the black line on the chart. And then final market of our top one, Sweden. We saw continued slowdown of the residential construction during the quarter. Nonres was some momentum. Interesting enough is that after a couple of years of housing starts declining in Sweden, Q4, actually, had a small gain of 4%, but permits were down. So we don't have too much of fresher data points directly from the market. These leading indicators and government restrictions in Sweden were not applicable. So job sites have continued. All the Nordic countries, though, have reported some labor scarcity, Finland, it's not uncommon that a lot of Estonian, I mean the Estonian workers, especially in the job sites in the south of Finland, approximately 1/3 of the workforce is commuting for the working weeks from abroad. And in Sweden, it's from other Baltic States, but also Estonia. And the travel restrictions certainly have made those individuals to make the choice, whether they stay in the country where their work is or they go to their home country to their families and quarantine themselves, et cetera. So those have been then on the individual level, the typical topics. And then finally, moving to Page 20. Our guidance statement, market outlook. Guidance statement is much promised because there is no guidance as such. So we withdrew it on 19th of March. And that's simply due to the lack of feasibility. We don't know how long these lockdowns will last, what will be their impact on the economy. So when kind of lockdown and restriction-based life is returning to normal, how close to normal or what is the new normal in terms of economic aspects, then the societies and the economists can turn to. And looking at some of the key market developments. And obviously, we expect there will be negative impacts to construction activity after the first quarter. And in the U.S., as I just explained, regional differences. We see homebuilders have, now many of them have, now published over the last few days their first quarter, also pretty good results, but I can't recall that anyone would have issued a guidance for this whole year. And that's reflective of the builders' confidence having dropped. In Germany and the Nordic countries, we did not see any stoppages of construction activity, but it is clearly expected to slow down. And then looking at the Southern Europe and the U.K., where we have seen over the last 5 to 10 days, the first job sites opening again, and we had weeks where our revenues in those parts of Europe, part of Italy, Spain, France, the U.K. has been minimal, if existent at all. And we have certainly seen that things are picking up. But to what level they will be picking up, that remains to be seen later during the quarter when we see kind of what are the damages to the economy. That concludes the presentation part. So we can flip to the blue page, and I would like to address now questions that have been -- and there is still time to post additional ones through the webcast.

[Jyri Luomakoski, President, CEO & MD]

Up first, there is Anssi Kiviniemi from SEB asking, you talk about declining daily order intake volumes from the beginning of April. How much have order intake declined compared to Q1, minus 10%, 20%, 50%? This is important to understand the market dynamics as currently. There is -- in some countries, construction projects are continuing. And in some countries, they have hold intakes. I tried to describe a bit the map and with respect, for example, to the U.S., the National Association of Homebuilders have on their webpage, made a collection, published a nice map with different states and how important they are for the U.S. construction and what's been the restrictions over there. The -- we have not disclosed and the month has not yet ended, even still a bit more than a day to go. The numbers for April, it's definitely not 30%, extreme of minus 50%, but it is still something that's material worth mentioning. But -- so you can maybe read from my comment on the cost adjustments, if it would be minus 50% or close to that, then the announcements of curtailing production, et cetera, would have been on a completely different magnitude. The prebuying topic, we already discussed or tried to answer. Anssi Kiviniemi from SEB continues, with raw material situation is a tailwind, was in Q1 and will be even more so going into Q2? And I think Minna already answered that in her presentation. Certainly, the question was posted before. Minna was live here. And the correlation what we've seen on the world oil price and plastic resin prices, which I think is mainly the raw material referred to here, that correlation is far from perfect. It's even way less correlating than diesel or gasoline. Because over the last 6 weeks, I visited once the gas station, not much of driving these days. And I couldn't see any good correlation between the price on the meter or the pump versus what I read every day online on the oil price. And especially in our Building Solutions area, the very high-grade qualities, they have historically also been relatively stable. So if oil price goes up 10% or 20% or, whichever direction it might be that you don't see any change at all, and it's more the question of the demand and supply balance in these areas. And what it's also always important to remember is that, if there would be a material decline or a material tailwind from raw material prices, we have an inventory turnover [indiscernible] is the name of the game in accounting. And we usually talk about a level of 2 months on the inventory cycle, which then it would anyhow need to kind of turn around before. It is visible in our income statement. There's a question from [ Sakari Cali ]. What is -- what was the impact of inventory change for the Q1 result? I'm not 100% sure I'm catching the questions, Minna, or, kind of, the essence of the question. Minna, any comment, is that referring -- if it's referring to distributors' inventories? I think that was already answered, but Minna on our numbers, any, maybe you can share with them?

[Minna Yrjönmäki, Chief Financial Officer]

Yes, but also commenting -- but there's -- and if we're thinking about it, if there had been a strong inventory buildup, that could have had and also of COVID impact slightly, but the inventory was only slightly increased in the quarter, so not a big impact. That's how I read the question.

[Jyri Luomakoski, President, CEO & MD]

Okay. And actually, in normal circumstances, we would have definitely wanted to increase and maybe even in these current circumstances, increased our inventories a bit more. But demand has been pretty strong, driving the preparation for the main construction season in terms of inventory buildup at our end, not to meet the original goals. Maybe with perfect hindsight in 6 months, we will be then potentially happy about that. Then Svante Krokfors from Nordea. Phyn losses seem to remain and even increase. What is the outlook for Phyn? How will COVID-19 impact on Phyn's sales outlook? The share of associated company results, the negative number was slightly up or negative number was slightly bigger than in the previous year Q1, and certainly, Phyn as a new category, now what we have seen over the last 6 weeks when the corona crisis broke out, the focus of homebuilders or other partners in the chain with whom we've been, good progressing discussions about new partnerships in terms of somebody taking the Phyn product as a standard feature, for example, to the homes they built. Those have been pretty much put on pause because there's been other priorities by those parties. So that type of business development activity has been probably more impacted by the COVID-19 phenomena than our kind of bread-and-butter daily business. Then we have a question from Tommi Saukkoriipi from SEB Investment Management. How is no-name competition doing currently? So in terms of private label, we have not seen in this quarter or, I would say, also not in the last couple of quarters, any material change. So in those markets where it's established, it is established, but has not to make any big moves or strides forward. So I would not be able to identify any material change on that part. My screen of questions is, kind of, ticked off to my belief, and that means that also getting a signal from our corporate communications that no further questions on the cyberspace on their way to my desk. This means that it's time to thank you for joining us today on the Uponor Q1 2020 Result Briefing. Thanks for spending the time. I hope this was informative also in this format under these circumstances, and we continue our work to serve our customers. And certainly, first and foremost, to keep our Uponorians and our stakeholders and business partners healthy and safe in these circumstances, and we will be back late in July with our H1 report. Thank you very much for joining. Bye.