Uponor Oyj

OMXH:UPONOR

Earnings Call Transcript 2021-Q1

[Jyri Luomakoski, President, CEO & MD]

Very good morning, and warmly welcome to Uponor's First Quarter 2021 Release Webcast. My name is Jyri Luomakoski. I'm the President and CEO for Uponor. And with me in this webcast is Minna Yrjönmäki, our CFO. She will on the stage soon.The numbers we released this morning, as you can see from the highlights of the first quarter, it was a strong quarter for us, more than EUR 300 million or EUR 310 million for net sales organic growth, 14.4%. Comparable OP, up to EUR 47.6 million, growing more than 60%. But what's, of course, very delightful is the margin exceeding 15% on the first quarter. And this is contributed by all of our 3 divisions.On the next slide, we see the last 5 quarters. We see the growth in the first quarter. And again, kind of loving the EBIT margin -- comparable EBIT margin, rolling the dotted line on the right-hand chart. Certainly, a year ago, kind of on the rolling basis, bypassed our 10% long-term financial target and have continued to improve from that platform since then. So even in a historical perspective, shy of EUR 50 million. In terms of quarters, EBIT is, even for the strong quarters, quite rare.On the next chart, a quick review of our geographical footprint, our top 10 national markets and the growth rates in those. Biggest contribution to the growth came from the U.S. and where we see in euros, a 20% growth in U.S. dollars. In local currency, the growth would be even higher. So we are losing something on the translation of the numbers. It's a local operation, local input costs, local revenues. So economically, we are, I would say, exposed to the translation of the profit in the end.Germany, also growing 8% the quarter, very nice. Certainly disappointing to see Finland, the negative development. And this is an area where we have a big infra business. This was also a winter with snow and let's say, normal winter conditions, and that was definitely not helpful in the finished context.And again, nice growth rate in Sweden, very pleased with our progress in the Netherlands as well as in Canada, which is significant growth percentages.On the next chart, we have from our divisions, quick snapshots. Nice improvement in profitability and certainly driven by volume growth in our Building Solutions Europe division. Demand in key markets was at a good level. Volume growth was supporting the profitability development. And certainly, our sales mix was favorable and price increases have been implemented in the first round of the year as well as flow over from those from last year, supporting profitability.Building Solutions Europe division is also the, let's say, main playground for the operational excellence program. There will be updated later on. But as we can see from these numbers and our update and release regarding the operational excellence program earlier today, we have been progressing according to plan in that area.On the next chart, Building Solutions North America division, very strong development over there, too. And demand, especially driven by the residential markets, was at a high level. But certainly, also the Commercial segment contributed to our growth despite of -- not necessarily that booming KPIs for commercial construction per se.Volume-driven profitability increased. Clearly, we have seen the increases in input costs, basically shorter inventory cycles in North America. Consequently, the FIFO effects have been hitting us, too, and freight costs. The winter storms in Texas messed up quite many supply chains and logistics and still some, in a way, hangover from those. In terms of our fundamental operations and the, say, pipe extrusion and pipe raw material value chain that remained intact, it's not directly linked to the Texas Gulf of Mexico. Petrochemical concentration, it's based elsewhere.Certainly, our focus has been on building healthy inventory levels. So some progress, but not where we would like to be. We also hear, generally, the growth in North American residential construction has in a way caught many building materials suppliers a bit and significant delays in many lighter and apparently also heavy building materials. And in that context, we are not happy about our performance. But in relative terms, we are doing well in terms of the service quality to our customers.Capacity expansion investments, certainly also planned. We have done continuously some incremental increases in capacity, so putting new production lines online and will continue to do so.And then of our 3 divisions, the most Nordic Baltic geographically concentrated Uponor Infra. Solid performance, no drastic moves. It's really in Infra, the winter season impacts more the seasonality. What's positive is that with the outbreak of the COVID pandemic, we saw that many design solutions projects, which are typically bigger projects which have a separate type of project financing on the one hand and secondly, often construction sites where people need to be close to each other, building those up. There was a somewhat drying out of that market with the outbreak of the pandemic a year ago. We have also started Q2 of 2020, and we have seen now good signs of pickup in those projects. And our profitability development in Infra was driven by good progress in Sweden and Norway. About the revenue part regarding Finland, I already mentioned.On the next chart, very quick update on our operational excellence program. We came up with an update. We are in line with the initially announced expectations and will have the EUR 20 million target of run rate savings initiated by the end of the year. But basically, turning stones and developing processes, setting up new structures, we've identified some new opportunities and have decided to extend the program by half a year until end of H1 '22. And believe that by, in a way, investing EUR 2 million more of items affecting comparability, expensing those, of course, in accounting terms, we will have EUR 5 million more of incremental savings in sight. So that's why this update was also communicated today.And last, but not least, on this section, our new greenhouse gas emission reduction targets, we -- as we communicated earlier, we have submitted our commitment to the Science Based Targets initiative on our measures, what are the targets relevant to Uponor and received the approval now in April. And the new targets on a baseline of 2019 is to reduce absolute scope 1 and 2 GHG emissions by 46% by the end of this decade and then reduce the absolute scope 3 GHG emissions from purchased goods and services and upstream transportation distribution by 14% in the same time frame. And a quicker commitment that all electricity that we purchased will be renewable by 2025.With this, happy to hand over to Minna and the financials. Minna, please.

[Minna Yrjönmäki, Chief Financial Officer]

Thank you, Jyri, and good morning to everyone from me. I'm Minna Yrjönmäki, I'm the CFO of Uponor. I'm happy to run through the financial results starting then with the first chart on our net sales development, a little bit more details. Overall, the net sales -- our reported net sales grew in the first quarter against previous year by 11%. And here, also visible is that the sort of growth. Without the FX impact, it would have been slightly more, but this dollar impact is bringing this. Mainly dollar, of course, some other currencies also affecting that. The growth coming from Building Europe and North America. North America being the strongest, but a good 8.5% sales growth also in Building Europe and North America. In euro terms, again, at 22%. Whereas in local dollar terms, there is 33% growth in the first quarter. So quite significant Infra solid against last year.The next page, looking at the gross profit. Gross profit has continued also the trend lines here nicely, still continuing upward. And first quarter profitability -- profit margin also up from fourth quarter, very strongly driven by the strong volumes, although still the material cost impact that we see going forward is stronger, but was not yet that significant in the first quarter. But volume, very nicely driving it. But still, I would look at the trend line, it's kind of slowing down the improvement here.We look at some of the development last -- over the development in last year at 40.4%. However, the gross profit at a very solid level.The next page, we have the operating -- comparable operating profit bridge showing then the increase. And here forth, we've had the relatively profit margin growing also from 10.6% to 15.4% here now in '21 first quarter.As said, the input cost already is impacting, but only to a fairly small extent at this point. So it's visible here, very strongly, actually volume-driven also prices and the product mix. But volume is clearly the big driver here in the first quarter, probably the improvement as well.We did also continue to see some impacts against last year on the COVID-related cost -- fixed costs. So as -- in 2020, the first quarter was still mainly -- most of the time, we're still sort of normal operations then some of the, for instance, travel-related costs were still -- though we still see a positive impact into this year against last.OpEx savings here, also bringing further continuing. So EUR 4 million in the first quarter is the OpEx impact And then we have some negatives from mainly sort of, in a way, volume-driven overhead cost increases also against last year.Then next page, moving to the cash flow. So what is, of course, very positive is that our first quarter cash flow is at a positive. It's EUR 6 million cash flow, still small, but that would not be -- as you can see, can be seen last year, a negative first quarter, even -- we had a strong quarter also last year. But this year, driven by the very, very good profit. EBITDA, although sort of operating working capital has been increasing clearly due to the volume increases as well, but still the cash flow managed to stay on positive for the first quarter. So that's a nice, nice improvement. We have, especially on working capital items, receivable, strongly increasing against, of course, the year-end also last year, but year-end especially. And also inventories, of course, the volume-driven again, but inventories are not strongly increasing at this point as the demand has been so strong. Then a lot of -- it's slightly increasing, but not like a typical trend, we would -- what we would see in the first quarter sort of preparing for the summer as the demand has been, so strong that we are selling to a lot of the inventory.Then next page on investments. Briefly, first quarter investments at about EUR 6.5 million. On top of the typical maintenance efficiency improvement investments, we have -- are starting to see also some of the capacity expansions now coming through the investment lines for North America, especially, but still a fairly normal start, let's say, for the year in the -- on the investment line.Then on the net interest-bearing liabilities. Clearly, of course, reduced over last year, slightly increasing from the fourth quarter, but only fairly widely. And of course, we have also paid out the first part of the dividends in -- at the end of March. So that increase is visible here. But again, as seeing in the cash flow, then sort of operationally slightly positive. Positive number also reflected here in the net debt gearing at the end of the quarter, down to -- well, 9% and the average gearing at 17.9%. So continues to be clearly below our targeted level here.I think this concludes. Thank you. The brief look at the financial, very strong numbers and strong balance sheet continuing. Thank you.

[Jyri Luomakoski, President, CEO & MD]

Thank you, Minna. Now moving to Slide 18 and looking at the U.S. market. So residential construction, very strong. When you look at drivers, the stimulus aspects have been supporting pent-up demand in terms of household formation since the financial crisis have been driving the growth, especially on the residential sector. So construction, really, residential spending was growing. And nonres, relatively soft. Homebuilder confidence, which is the orange dotted line, still even though it's slightly down from the peak end of the year -- end of last year, second -- last quarter, it's still historically seen on very high levels. What's also positive is to see now the dotted line blue one, the ABI, the Architectural Billing Index, again, on the expansion side. So above the, in a way, water line, I would say, meaning that their billings are growing, which is confirming that. Also going forward, there will be nonres and big residential construction, so what we call commercial business.On the next chart, we have a few data points around Germany, and we have a strong underlying demand. Certainly, Germany has been suffering more than many other geographies from lockdowns related to COVID also lately. But -- and the cost concerns have been a topic for builders in terms of their confidence. Solid residential building permits, but certainly, this shortages on building materials, labor shortages are creating challenges. So limiting growth. So economy appears to have money to invest, but there is no capacity to, in a way, implement those investments.On the next chart, briefly on Finland, where we see the black line of the builder confidence. Some increase lately, but historically seen on a pretty poor level. Some uptick on the residential building permit side while continuous decline on the nonres permit side.So on the Civil Engineering segment, we see, and that's partly driven by bigger rail road, et cetera, initiatives funded by the government expansion. But unfortunately, not that much in the categories that would be relevant or very relevant for our Infra division.And on the next chart, about Sweden. Here, builder confidence has stopped its decline, has flattened but at a low level, historically low level. Interesting to see here that some small uptick end of the year also on the nonres permits as well as stabilizing rather stable trend on the residential side. House prices are up significantly, which is certainly describing this demographic demand topics and supply is still needed.And on the last chart, market outlook actually for the full year in terms of the guidance statement. But outlook now, what we can see on our geographies on the weather map, they're trying to color code. Green, we see North American residential and on the Iberian Peninsula on residential and nonres side.Relatively stable in the Nordics and the residential as well as on the infrastructure side from the demand picture, but slowing on the nonres side, which is also applicable to North American nonres demand expectations and stable on both kind of building-type segments in the continental markets, mainly Central European markets.Guidance, we have been active in maintaining the guidance up to the latest kind of stand. So 2 upgrades. First on the top line in March. And then in April, we do expect, excluding the translation impact, our net sales to increase from 2020. And then with increase, we mean more than 2.5% because we have now defined the level is plus/minus 2.5%. And the level is applicable to the comparable operating profit, i.e., last year's comparable OP plus/minus 2.5%.That concludes the presentation part. And now we have time for questions.

[Jyri Luomakoski, President, CEO & MD]

And I'm seeing here on the other screen, several questions arrived. And I think the first one came from Markku Moilanen, and that relates to bottlenecks in logistics and production cost increases that we have highlighted. Those -- so how should that be read when we made 15% margin, what kind of margin level should we expect, 10%, 12% or above?The guidance, which I just read is, unfortunately, the only one we can now, at this stage, quote. We do see this cost increases coming, and I did see several questions relating to those. As an example, which is definitely the extreme, there is a polyolefin raw material used in Infra in pipe products that about a year ago was costing north of EUR 1,000 a tonne, somewhere EUR 1,100 a tonne. And today, we talk about prices in excess of EUR 2,000 a tonne. So that's extreme. That's on the commodity grades, more technical advance grades, less volatility, but absolutely seen with higher price levels as such.And there is also, whether it's a question or statement, that we have already made 1/3 of last year's results and still you don't revise your result guidance upward. We have a strict process where we do monthly rolling forecasting review those numbers vis-à-vis our guidance. And certainly, as you have seen from the 2 updates now in March and April, that process works, when there is better information and plans that are also backed not only by demand forecast, but also, let's say, positive confirmation that we have the capacity and the raw materials to deliver that type of a demand forecast. Then, of course, that's part of the rolling forecasting process, and then guidance changes live according to that. It can't be done in any other pro way.What are the risks you see at the moment that can have such a large negative impact to your result during the rest of the year? I think it was clearly elaborated. Material cost increases and material availability topics. I touched upon the Texas winter storm thing in context with our Building Solutions North America division. It did not only, in a way, mess up some logistics and supply chains in the U.S., but U.S. is a big exporter, net exporter of polyolefins demand at the same time, like in China has continued to increase and the global demand-supply balances aren't really in equilibrium. At the same time, many big maintenance initiatives on petrochemical facilities were postponed from last year due to the COVID pandemic when it was, in a way, unknown enemy to all of us. We didn't know how protect, et cetera. Things are definitely aware of a bigger maintenance activity going out in Porvoo, and that's definitely not the only one in Europe, which is, again, bottlenecking somewhat the feedstock and even the polymerization capacities.How much additional revenue, the capacity expansion in North America, will generate? And those that are in the pipeline currently on an annualized basis, we still talk about single-digit percentages. And then, Minna, if you address the, where does the additional EUR 5 million in cost savings come from relating to the OpEx?

[Minna Yrjönmäki, Chief Financial Officer]

Yes, sure. Certainly. So as Jyri mentioned, we have continued and, of course, evaluate all the possible benefits that the initiatives under the operational excellence program can bring. And it's not really anything new. It's more of the extent and of the same. So we are going through the business processes ways of working, some -- implementing new tools, and that we have not upgraded, for instance, the number of people impacted by the program in this. So it's more that we expect that the process improvements are a little bit more than originally sort of estimated.But there's also been some -- that's why the sort of the time line, just commenting on that as well. At the same time, time line was extended to the first half of '22. So we do see that some of the initiatives take a little longer than we had already, let's say, originally estimated. And maybe also, the pandemic is taking a little bit longer than at the time that we planned all those activities. So that's also the extension of the time line.

[Jyri Luomakoski, President, CEO & MD]

Thank you, Minna. Then we have from Anssi Kiviniemi, SEB, a series of questions. Whether we can open up the strength, where the strength in gross margin came from, purely volumes or favorable mix or other elements contributing significantly? And as Minna's bridge slide was having the biggest favorable block that was mainly relating to the volume, but some favorable mix elements in that, too. And when you look at the margins in our different divisions and where the biggest growth came from, so that's inherently likely to increase or improve the gross margin. How much more you have capacity to grow? Further question from Anssi Kiviniemi at SEB. And capacity to grow in Europe, less of an issue in North America. As I said, we've been producing full steam and have added a single-digit percentage of capacity so far or is in the pipeline to be added. And definitely, we are living with this dynamic situation and making all that we can to make sure that we can serve our customers and improve and increase our capacity.From Anssi, change in input costs slightly negative in Q1, EUR 1 million to EUR 2 million. Could you open up how large the pressure will be in Q1? I think that's probably a typo, probably refers to Q2, EUR 5 million, EUR 10 million. Minna, do you want to comment on that?

[Minna Yrjönmäki, Chief Financial Officer]

Certainly. So of course, we have seen that especially, say, in Europe, the inventory situation has been more sort of normal, and we do have the normal sort of inventory turnover there impacting then to the -- how quickly the resin or the input cost increases are impacting to our margins and how -- when it's visible in our result. So therefore, there's this slight delay that is now starting to really pick up, and it will be really more significant in the first quarter. I guess, maybe not giving any clear estimate of what the euro number will be, but we do see that this -- and then of course, that is the main risk and some of the further price increases coming onboard rather later in the year than in the second quarter. We do see the pressure for second quarter margins to be quite strong.

[Jyri Luomakoski, President, CEO & MD]

Thank you, Minna. Further from Anssi, factors that boosted gross margin, will they remain in place in Q2 and onwards?The factors in terms of good capacity utilization that we expect based on the demand picture that we have communicated in the guidance to remain in force. Mix is always more difficult to really foresee. But then on the input cost side, definitely. As Minna just commented, we have those pressures that were not necessarily favorable, but they will be more unfavorable going forward. Also, with the FIFO effects are being visible.Then from Anssi Kiviniemi still. Your customers probably know that pex pipe is costing a lot more later in the year '21. Have you seen any prebuying or timing impact in Q1 volume strength? Any buying to the inventory for your customers?It's always, as I have many times commented, difficult to see as we don't get point-of-sale data from distributors and we do not get generally inventory data from distributors. Some anecdotal points of evidence, which do not necessarily paint the whole picture, but give some indication is though that we don't see that stuff would be piling up in the distribution centers of distributors. And traditionally, that would be the place where it would pile up because the outlets -- local outlets are not -- they are in a way terminals where goods come in and go out, but not built for as big buffers.And secondly, some anecdotes about really scarcity in terms of plumbers contacting even some management members and asking that this important customer and my wholesaler is out of our promises to deliver your stuff in 2 weeks' time, and I would like to do it now quicker. What can you do? Those indicate that at least in those couple of instances, those plumbers haven't filled their garages neither with Uponor products as this type of request. But it's really anecdotal evidence and not something that an auditor would say that there is a clear audit to, say, one way or the other.And then I'll take the final from Anssi later on from the list. Greenhouse gas reduction, 46% from where they will come. I mean, Minna, do you want to address that how much from electricity sourcing and how much from other sources?

[Minna Yrjönmäki, Chief Financial Officer]

Right. Okay. So this is, of course, a long-term target now, 10 year -- over the course of next 10 years and related to the scope 1 and 2. And we do have, of course, still many who have calculated what can be done, and this is -- electricity is being one of those. But I don't know -- I do not, unfortunately, have now exactly that fleet now available and I don't know how much is from electricity source. But we -- it is one of our resources and uses that -- and our production, of course, where this scope 1 and 2 is related to and then towards our supply chain downwards. So I don't have that exact split, but of course, electricity is one key factor there.

[Jyri Luomakoski, President, CEO & MD]

Thank you, Minna. And on the baseline, we need to remember that already for many years, like in the Nordics, we have been sourcing renewable electricity already. So it's not moving from 0% to 100% in this time period.Then we move over to Matias Rautionmaa at Danske Bank. Your full year guidance implies declining comparable EBIT in the rest of the year, even though you expect positive demand trend to continue and more cost savings to come through. Can you elaborate the logic here.I think we outlined a bit already in the earlier context of the earlier questions that yes, we expect that the markets with, in a way, stimulus and other momentum to create good demand, but input cost inflation on the one hand side and then potentially even restricting availability of raw materials, et cetera, will not make it too easy for the balance of the year. And this cost savings, yes, they are relevant. But when you look at the big picture and the result improvement, for example, in the first quarter, yes, we have from OpEx some savings, but in the bridge, that's a smaller item.And then also from Matias Rautionmaa. Input cost tailwind seem to be ending as you indicate. Do you see the sustainable gross margin level going forward being more like on the '19 level or on the '20 level?And we do guide just the top line and the comparable operating profit, not 4 quarters. Any single line items in between, reflecting back to the years in '19, our capacity utilization was not necessarily that optimal could have been better. And '19, we still suffered something on impacting our gross margin on the scrap. And kind of yield topics in our production after some reorganizations and restructurings, those were not impacting us in '20. But '20, we certainly had some benefit from kind of a favorable input cost market. So those are some of the ingredients hopefully helpful for thinking about that topic.And then from Matias taken by the person asking the question. What are the drivers behind the 8% sales growth in Building Solutions Europe? Have you seen any restocking there? Has the positive trend continued also in April?And here is context in North America, we have slightly some visibility into this stock situation on the distribution chain, as I commented earlier here in Europe less. And from that perspective, certainly, it's very difficult to touch in a price increasing environment. You tend to see that the demand planning parameters, distributors our supply planning and sourcing parameters are somewhat favoring, increasing the stock levels. But it's again not so that anybody would be sourcing for 6 months to their backyard or products and building products. These are stored inside, so it's always constrained space topic.And when you look at the geographical split in the early part of our slide deck, certainly, we saw multiple key Building Solutions, Europe divisions, markets with favorable. So it's a bit broader-based good development over there.On the April trend, we have not commented anything as such to facts earlier disclosures in a way to remind in April and May, our comparison numbers are quite soft. That's when the COVID impact business kind of went stable until the end of March. And suddenly April 1, we saw on the order intake pattern last year a drop. So April and May are probably easy to beat in terms of the softness of the comparison numbers. And nothing has come to our attention regarding our progress in April that would not be consistent with what we have guided and stated about our expectations, both kind of quantity and quality, meaning geographically on the weather map, et cetera.Then we move to Pauli Lohi at Nordea. Has there been any material changes in demand picture in April compared to Q1?And I think that question was -- the fact answered just a sec ago. My screen is at least at this stage kind of all questions -- and until the bottom of the screen and by scrolling, it doesn't show me any new ones. That means that the Q&A session is ending. Thank you very much for taking the time to attend. And with the progress in our second quarter and H1, we will be back online in the last week of July. Thank you very much. Bye.

[Minna Yrjönmäki, Chief Financial Officer]

Thank you.