Uponor Oyj

OMXH:UPONOR

Earnings Call Transcript 2023-Q1

[Franciska Janzon, executive]

Ladies and gentlemen welcome to Uponor's Q1 2023 results briefing and my name is Franciska Janzon. I'm from UPONOR's, Investor Relations. Today we will start with a presentation from our President and CEO Michael Rauterkus on the Group's overall development and strategy execution. This will be followed by a review from our CFO, Markus Melkko on the financials. After this, we will hear from our Board member, Hans Sohlstrom, who is Chairman of the subcommittee that has led the Board's assessment of early access nonbinding intention. The presentations will be followed by our Q&A session via the teleconference line.And with this I hand it over to Michael.

[Michael Rauterkus, executive]

Good afternoon, everybody. Good afternoon from sunny Helsinki. I'm here in the studio with my colleagues with Markus Melkko and Franciska and I'm very happy to report about our great results from Q1.Transformation is on track with strong margin. That's the title for today's session. But before we go to our numbers, as always, as we have [the] people first agenda, let me first talk about really what matters in terms of safety and you'll see here as we have always done, we focus really very much on the LTIF measure and I'm really happy to report Q1 shows a great improvement versus last year. And this is due to a very intense program we have started last year mainly also focus from our technology side as you know, we have a new technology leader and we've -- with a great new program, we made really progress in almost all our sites across the world.I'm really proud of this. This is again, another demonstration of people are capable of really making a fast improvement on a measure we really focus on. That's really very good.So moving from people to business results. The transformation is on track. We announced in February the transformation program, it is on strike, and the result is real strong margin.So let's say it is €329.4 million, it's down minus 5.8. But half of this gap versus last year is coming from the Russia being at the baseline and the closure of the Middelfart factory.The comparable operating profit was €45.5 million, very strong just down 3.7%. Again, it would be on last year's level without these 2 effects. But what I'm most proud of is really the comparable operating margin with 13.8% is high, it is at the highest level since 4 quarters.In a seasonal, weak quarter. And that's really really a great achievement. So strong comparable operating margin in tougher market conditions.Margin resilience visible in all the divisions. Transformation program on track. As you know, we started this basically already October, November last year, but then we had to work 3 months on the cyber event and then we went back to the transformation program and achieved these results.The Russian market exit is completed, was a painful administrative process but now ticking a box that's gone and out of the base.We also made a [dis] investment of the energy business on the infra side because it's noncore. And as you know, the strategy is also maximizing the core which also means what's not core where it gets sold if possible. And this is what we have done on the infra side.On the transformation. One of the big events was the closure of the factory in Ehingen, we move all this production in to Poland which also gives us an improvement of our profitability,but last but not least, again, another innovation piece here.Uponor is the first company in our industry with the SBTi validation for net -- net zero target and I come to this then later.So as always, these are the group results 329 million of net sales. So if you really compare this to the 350 million as I said, mainly half is coming through some the effects which are not yet in the baseline again, but you'll see nicely how the operating profit has really evolved.We ended up with 45 million,45.5 to be exactly, 30.8% after 13.5 12.7, 12.3. And of course, Q4, as you all know, was the exception but starting in the year was 13.8%. Operating profit is really good because as you all know, in this industry catch up doesn't really work. If you want to reach your targets in a year, you have to have a good start.Coming to Europe, while it's the -- the top line is a bit soft. The comparable operating profit is really, really good was 12.6% Almost on last year's level and of course they have been impacted by these Russia baseline effect.But when you compare the 150 million of course higher than Q4, of course it's higher than Q3. It is really in the right range. The team is there - they're doing an absolute fantastic job because clearly the market is tough out there. And we have managed the operating margin through strong pricing discipline, cost management and running this transformation program step-by-step both on the commercial side, but also in our factories. And this shows really how flexible, fast and agile this company is [now]North America, 125 million of net sales, in line was last year's number, in line with Q2 number. So it is really -- would be too early to say it's signals of stabilization because there's a lot of discussion on the US market. But the US in this tough market condition have delivered again a great result. Also where the comparable operating profits with 18.4% is pretty, pretty strong.There had a bit of a benefit to be open and transparent from Q4 where we couldn't ship all the orders, we gained through the [cyber] incident. So they had a bit of a strong order book. But they continue to get orders on a really good level and that's the most important thing. So here again pricing in on track, transformation program on track as well.Infra no surprise, they have a bit of a different seasonality like every year but the difference here again is the cap -- the profitability and if you would add Middelfart back on the profitability would be exactly on -- on the same absolute level than last year with lower sales.And that's again a great achievement because probably for them, it's toughest to hold -- to hold the line I always say, they hold the line on pricing. And they have done a great job to hold the line on pricing and you see this in a gross margin but you see this also in on the bottom result. So that's Infra.And now let me talk about and we picked one in the interest of time we picked one again, proof of innovation power of this company. Uponor is as you know a great global brand with a lot of innovation power. And we have set ourself the vision to become the leader in sustainability when it comes to water solutions.And I just put in here, the 3 events over the last months. I mean the first PEX pipe based on renewable raw materials, first in the industry, an old problem we solve because what do we do with a production waste? First circular our PEX pipe produced from [old PEX] production waste, again being first in the market. And then last just after the Q1 closure, we got the message we are first on the industry to receive Net Zero target approved by SBTi.First in the industry. This is what I think is leadership. We take lead in this industry when it comes to this product segment. And this is why our customers and our stakeholders love us. They love this brand because there's always something new, we always strive for better solutions. And we move on leading the way when it comes to sustainability.The strategy works. We announced last year in March the strategy and again maximizing the core we have a lot of opportunities in existing markets selling existing products at higher price more often.We also have a new innovation pipeline. We hired one of the best R&D leaders in this industry and I've worked for him with him a lot of times and soon we will announce a number of innovation for this marketplace.We also will look into how we set up R&D in the future because at the end of the day, what the people like to hear from Uponor is more innovation because the market really needs this, the underlying trend, the mega trends are intact. And this is what why people choose Uponor versus others.Sustainability is really close to our hearts. It's Finnish heritage to always be at the forefront of sustainability and we lead the place.And last but not least, people first, you saw even at this presentation where we talk about Q1 results we start with our people and the way how we do the transformation program is not just a cost cut. We do a transformation, which really deepens and improve the processes to make this company even more resilient.And that's really important. We enhance and harmonize the business processes and systems and that's so important. This company in this environment will be more resilient than ever.And this is why we announced last time a transformation program to strengthen the resilience. We prove there -- the adaptability to a changing environment because of course we can't predict what's happening tomorrow. We always say when is the new normal. We just don't know and this is why we prepare the company to face even more challenges and it really works and we deliver with superior margin.This is why we have set up this program. And the plan outcome is to have at least 30 million cost savings by the end of '24.And now we'll introduce you to Markus and he will report how we're doing on the transformation program. Thank you very much. See you later.

[Markus Melkko, executive]

Thank you, Michael. Good afternoon, ladies and gentlemen. My name is Markus Melkko. I'm the CFO of Upono Group. Like Michael said, I'd like to start by showing you a bit of the achievement that our team has already achieved with the transformation program.Like Michael said, it's more about transformation in the ways we work. How do we get more lean and resilient. But it also then has the benefit of delivering cost benefits as well.And on the left hand side, you can see that we announced the program in the February webcast. And during the first part of the year, I mean the first couple of months we've already delivered and executed on actions that are delivering 14 million annualized savings. And first of those benefits are already visible in the Q1 numbers.As part of the transformation program, it unfortunately is also a bit of a reduction in our headcount. But you can see that actually with the actions that we've taken there, were already minus 8% with the transformation actions, sale of [district] energy business reduction, and then the other changes there being our ability to also manage through normal attrition. For example, the -- the headcount, if there is a person who has left then we have reshuffled the activities and not necessarily backfield.So the transformation program is well on track. And like we said when we announced the whole program, we will report out quarter after quarter on our progress.The targeted savings are 30 million and we confirm that we estimate that the cost for the program would be within the €25 million range announced in February.Then just to indicate a kind of a tick in the box, coming back to our communication from Q3 22. We said that we will focus already in the back half of last year, we started our focus on margin management, as well as cost and capacity management.And with this, I'm happy to report out that as part of the transformation program and in addition to the other productivity activities that we've done we are well making progress, especially on the margin management side. As you already saw from Michael's presentation, I will talk about the gross profit margin in a minute also. But just one thing to highlight, that we're making good progress with the margin, as well as in the cost management.Then Q1 net sales as well as the operating profit development, like Michael already said, the net sales were down some 20 million and roughly half of that is actually related to the exit from Russia as well as then closure of the Middelfart factory.And approximately 4 million of the Russia exit is in the BODE number as well then roughly 4 million in the [due] Uponor in infra number on the middle five exits or middle five closures, so that you know gives you hopefully an indication of the magnitude of those actions that we've taken to the manage the baseline.There was a bit of lower market activity and that's visible then as the delta in the net sales and then on the comparable operating profit margin. it's a very healthy for €45.5 million. It's a slight decrease and it's mainly coming from the comparable gross profit which is driven by the volumes what I just explained to you. So from a margin management perspective, a strong start to the year.Then moving on to the gross profit margin and this is something that I've discussed in all of the quarterly calls and if we take out the Q4 '24 which is an outlier because of the cyber incident, the rolling 4 quarter gross profit margin is showing the trend upwards. That's something that we've followed up on a long term, but especially I would like to draw your attention to the Q1 gross profit margin, comparable gross profit margin was 40.1 and then the reported gross profit 39.5% So also there we see a bit of impact from that transformation program. Part of the items affecting comparability were actually into costs in the affecting the gross profit as well.But all in all 40% gross profit margin is a strong start to the year and we will stay focused on margin management also going forward.The reasons for the improved cost profit is like Michael already pointed out to their related to our focus on productivity and efficiency gains in our production. But then also our discipline with pricing as well. So managing margin will stay a focus also for the coming quarters.Then moving forward to cash flow, which was at a healthy 23 million level this year. A year ago, it was a bit of an exception because typical to the industry we saw the last year, the material prices go up and also the inventory levels but during Q1 '23 the positive cash flow amounted to 23 million, mainly because of the more normalized and lower change in net working capital.Typical to our business is that the cash flow profile is a bit of a bell curve over the year. So that that's then expected also during the course of this year as well meaning that the Q3 – 2 and Q3 cash flows will then be even stronger positive ones.Investments in the cash flow chart there on the left hand side do include the gain from the sale of the District Energy business and then as well then the financing cash flow like typical to our quarter 1s includes the first dividend payment as decided by the AGM on the 17th of March, which amounted to 24.8 million.So that leads me to the balance sheet discussion and for that purpose, I would just like to highlight that the balance sheet is really strong. We are in a strong financial position. The gearing at the end of the quarter was 7% and the rolling 4 quarter gearing was at 10.3%, both very strong and well below our financial targets.The interest-bearing bad debt continued to decrease and obviously supported by the good cash flow development and then from financing position meaning the external financing no change versus the Q1 last year or the end of the year position either.So all in all this balance sheet is strong and it supports us while we continue to pursue our strategy and stay the course with our strategy.And with that, moving forward to the financial targets. These are the financial targets we communicated in our CMD March last year. And we purposely did that in 2 phases. The first way is phase from '22 to '24 as an organic growth target of 4%, an OP margin target of 12% and then we made the commitment that our ambition is to accelerate the growth rate from '25 onwards and also the drive for higher OP margins from '25 onwards.And these are driven by the activities that we are now taking. We're maximizing the core, we're building on the innovation pipeline and as well now we're going through the transformation program to build a leaner and more agile organization, helping to drive the margins going forward.And then there in the light gray, the Q1 actuals for these ones, the organic growth number you see there is you know just to report it out growth, growth numbers, so we haven't cleared it out from the Russia exit or the district [heating] district energy business sale. But the market was a bit slower in Q1, the comparable operating profit margin strong and well above the target and then the gearing target we discussed already.With this I would like to hand over back to Michael for the outlook for the rest of the year.

[Michael Rauterkus, executive]

We talk about the outlook for 2023. And as you know, and this is most important, the long-term trend is really intact, and this what all numbers we have access to really say, they are just not in our [indiscernible]if this is in Europe, or in the US so this is why we think this crisis, you compare to the financial crisis 10 years ago. It's -- this is a total different situation.Because at the moment, what you see is the current situation is I would says almost balanced between the tailwinds and headwinds because we are in a really good industry, there is demand for safe water supply, there is demand for more energy systems, and there is growth in selected segments, so its up on us to be in the right markets and to address them with the right innovations, and this is really our chance.And as I've shown, the company is really very agile to really to make sure we are playing in the right sector. At the same time, the mobility’s that are [high] and there are some headwinds, uncertainties as you know, interest rates rising, however, it looks like now that might stabilize a bit and of course like any other company, there's some general cost inflation.But there is one thins really important, number one, it's a strong brand, a strong brands like [a premium] we can hold prices, and we can actually in tough situations, and this is what's really qualifying a brand, taking share. So we can manage this crisis better than competitors. and that's really important.So why we have to manage this volatility. The outlook remains unchanged. So we [indiscernible]to be between 1.3 and 1.4 billion this year, and we also stick to the operating margins north of 10% despite all the investments we have made.And with this statement, I would like to hand over Hans Sohlstrom. Thank you very much.

[Hans Sohlstrom, executive]

Thank you, Michael. Good afternoon, ladies and gentlemen. I am Hans Sohlstrom,member of Uponor's Board of Directors and Chairman of the subcommittee that has led the Boards assement of [Alexis] nonbinding and conditional intention to make an offer for Uponor with a price of €25 per share.I would like to briefly comment on Alexis nonbinding intention and the Boards word supported by our advisers. We have assed the nonbinding interest and whether it is in the best interest of Uponor shareholders.We have taken into account among others, Uponor's market and completive position. balance sheet and long-term prospects, recent performance and execution of its strategic transformation program. We have also taken into account possible consolidation opportunities in the industry in light of , Uponor's market position.Uponor announced this morning that its Board of Director has unanimously decided to reject Alexis's nonbinding intention. In the Board's opinion, the indicative reflect offer price of €25 in cash per share does not reflect Uponor's value and long-term prospects. And it is, therefore, not in the best interest of its shareholders.The Chaie of Uponor's Board and CEO of [Oras Invest] and [indiscernible] recused herself from the decision. Oras Invest the company's largest shareholder, holding approximately 25.7% of all shares has decided not to accept the potential offer by Aliaxis. As previously disclosed, Uponor's Board has engaged with Aliaxis already 2022. The Board's terminate the discussions with Aliaxis towards the end of last year.I would like to share shed some further light on the Board's decision to reject Aliaxis conditional and nonbinding indication. I mentioned some of the factors that the Board believes favorable support the company's long term prospect.Uponor is successfully executing its new transformation strategy focusing on growth and margin expansion. Uponor aims to become the leader in sustainable water solutions in the industry. The company's profitable growth strategies centers around driving organic growth by maximizing the opportunities in its core business, a step change in innovation, a people first agenda to drive and engage performance based culture and leading the construction industry towards net zero emissions, while at the same time improving the resiliency of the company.A strong balance sheet also allows Uponor to pursue inorganic growth through M&A in line with its strategy. Uponor is well positioned to seize opportunism created by the growing demand for energy-efficient heating and cooling systems, as well as for sustainable solutions for safe and clean water.Further, Uponor hsd strong brand and long term customer relationships. The company has a unique footprint and market position. There are only a few global brands in this industry and Uponor is one of them.Uponor operates under its own well-recognized brand in 80 countries with a strong business in North America and Europe. Uponor is an expert in its field with a legacy of industry first in pioneering sustainable innovations and unique capabilities that enable Uponor to fulfill its customers needs and lead the change in sustainable water solutions.Uponor is not a building materials company. It is a water technology innovator. Also, Uponor currently [enjoys] strong performance and business outlook under its highly capable new management team with experienced members that know the industry and have managed global brands within the industry and that have proved track records in driving commercial, technology, productivity and margin enhancements.Uponor reported solid financial performance last year, as well as in the first quarter of this year with margin resilience visible in all divisions performance. The Groups compare quarters back and the comparable profit margin is its highest level since 4 quarters band the comparable gross profit margin is also improving.The execution of the transformation program with of half of the expected saving of the program already underway is proved of [digelity] of the team and strong strategy execution.In conclusion, the Board of Directors welcomes Aliaxis as a shareholder of Uponor and will evaluate any further proposals made by Aliaxis or any proposals made by another party in accordance with the best interst of all Uponor shareholders.The Board remains focused on pursuing Uponor's strateg, the company enjoys strong performance under its new management team and has a strong position and opportunities for future profitable growth. Thank you. Now over to you, Franciska.

[Franciska Janzon, executive]

Thank you, Hans. My goal and markets for you presentations. Now it is time to open up for Q&A. And all our speakers are available for questions. With this, I hand it over to our teleconference line operator to welcome the first question. Thank you.

[Operator]

[Operator Instructions] The next question comes from Anssi Raussi from SEB. Please go ahead.

[Anssi Raussi, analyst]

Thank you and hello, everyone. My first question, goes to Hans, if I may. SO how into the future you are looking when you assess this nonbinding offer like, what kind of time horizon did you had in your assessment?

[Michael Rauterkus, executive]

Yes. Thank you for the question. Of course, we are -- as I mentioned, one of the reasoning for our very clear unanimous decision is the fact that we have insight into the strategy, the transformation strong of Uponor, as well as also the strong execution, which the management has performed since last year. So of course, we are looking into the coming years. But I don't want to give an exact time horizon, we are convinced about the value of for this company in light of the strategy and opportunities out there for the company.

[Anssi Raussi, analyst]

Okay. Thank you. And then I have a couple of questions about the business and Q1 and Q2. So firstly about your EBIT margin in Q1. You mentioned the pricing discipline and efficiency, but was there anything like really special behind 13.8% comparable EBIT margin like – did you hold back some costs which will come back later or something like that or is this just so-called normal level right now?

[Michael Rauterkus, executive]

Whatever normal level is unseen. No, I think what you -- what the difference is really, you start – I always was talking about let's make sure we run the right mix here. We focus on core. We focus on margin, but I must admit really I hoped for but I wasn’t quite sure because remember, we are fighting against cyber for 3 months and then starting really this transformation. I was hoping we would see the first impact already in the first quarter.And I'm really proud of the team because they delivered. Because many of this transformation goes – you go for big projects and then you see 9, 12 months, nothing. And here, shows a bit the agility of the company, right, so they could really switch on and to be fair, also, we had this – we had some of the elements already in our pocked back in October, November, but we couldn't execute them but as soon the cyber crisis was over, we could push the button and move on with the strategy. And you saw already a bit of this already in the baseline, of course. And this effect, will stay.

[Anssi Raussi, analyst]

Yes, I agree. Its difficult to say what is normal, in this market.

[Michael Rauterkus, executive]

Exactly. What is normal If you could answer this question - yes. No, this is – but I in the context, I need we need to see this in the context and this is why I think this margin management, clearly -- this stays, and also to reset the cost base it's not just a haircut. It's a has true transformation, because not only, Markus has shown the headcount development, but also we also invest in some parts.And especially on those which are really important for the future. So what you have seen from Marcus is the net effect.

[Anssi Raussi, analyst]

Yes. Clear. And then about Q1. Like how would you describe month-on-month development during the quarter, like try to figure out the starting point for Q2 and if Q1 numbers actually described the current market conditions or if its going to be worsened Q2?

[Michael Rauterkus, executive]

I mean it is – it is really hard to say. I must say what we see is on a week by week, sometime even day by day more volatility when it comes to our order book. And this is also a bit of an effect, which is also healthy because we use -- where we have some of the wholesalers which have been caustious in the past where we have seen a reduced the inventory. Now every order of course is self-through and but this also means or us managing these orders gets a bit more stressed because our whole sellers are more cautions. But we haven’t seen a certain pattern here, but of course, there is, of course, the one number we always focus on this is really the order intake and the top line because, clearly, with all the -- even the best transformation program in the world you need to certain top line to manage the business.

[Anssi Raussi, analyst]

Yes. And actually one more for Hans. Have you heard from Aliaxis after you came out with your assessment results or your publicstion?

[Hans Sohlstrom, executive]

I have a contact with Eric Olsen, the CEO of Aliaxis, yes.

[Anssi Raussi, analyst]

And have you agreed that you continued your discussions in the coming day or can you comment on?

[Hans Sohlstrom, executive]

We have -- actually, we have a meeting later on this afternoon. But actually say from the Boards statement it was very clear that the current indication doesn't give any reason to continu8e a process or a dialog.We are open for of course, for other proposals from Aliaxis, as wells as also other actors in the market.

[Anssi Raussi, analyst]

Yes. And one more like, I think I know the answer, but do you have many other [proposals] on table?

[Hans Sohlstrom, executive]

We cannot comment on that.

[Anssi Raussi, analyst]

That's what I thought.

[Operator]

[Operator Instructions] There are not more questions at this time. So hand the conference back the speakers, for any closing comments.

[Michael Rauterkus, executive]

Thank you, very much for attention today. And thank you Ansi for that question. And we will be back with our Q2 report in the summer.

[Franciska Janzon, executive]

Thank you very much also from my side. Thanks for the question and see you next time at the Q2 release. Thank you.+