U.S. Markets closed

Edited Transcript of UNR1V.HE earnings conference call or presentation 26-Jul-19 7:00am GMT

Q2 2019 Uponor Oyj Earnings Presentation

Vantaa Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Uponor Oyj earnings conference call or presentation Friday, July 26, 2019 at 7:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jyri Luomakoski

Uponor Oyj - President, CEO & MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Jyri Luomakoski, Uponor Oyj - President, CEO & MD [1]

--------------------------------------------------------------------------------

Good morning from sunny Helsinki. This is Uponor's Half Year Result Briefing 2019. My name is Jyri Luomakoski. I'm the President and CEO of Uponor, and with me in the studio is Susanna Inkinen, our VP, Corporate Communications. She will be helping us with the Q&A session. (Operator Instructions)

A couple of highlights of the second quarter of this year. Net sales, EUR 292.6 million, so this is compared with the numbers of last year. Excluding the divested businesses, slightly more, but there were also tailwinds from currency. So organically, we are talking about a negative 0.5% in constant currency terms.

Operating profit, EUR 25.3 million versus the reported EUR 28 million. But considering that we divested Uponor Infra North America and Zent-Frenger, the growth organically was 12.4%. So flat top line, 12.4% growth in the OP on a comparable structure.

The challenges of the second quarter concentrated to Building Solutions – Europe where we had a top line and OP decrease. Top line decrease was somewhat planned considering the divestitures and also closure of Asia, which was reported here, but that the operating profit decreased the operational issues relating to our S-Press PLUS launch ramp-up, scaling challenges with that. And still continued topics on the operations in our Swedish PEX factory where the yields are not what they should be.

And North America where we had, in the first quarter, basically a very weak January, and then things started to improve, and a solid performance in the second quarter. And Infra, which has now been restructured really to be around the Baltic business, the profitability continued to improve. But as planned, Infra's top line was not moving upwards.

Looking at the quarter-by-quarter numbers. You can, of course, see here from the black bars that this is, in a way, on a quarter basis, the last -- second last quarter with bigger needs to explain the numbers with the divestitures that were carried out in Q3 of last year. And hence, still in October, we will need to have kind of the reported quarter numbers and the like-for-like, which I really want them also for our guidance purposes. And important here really to realize that the operating profit and, hence, the underlying profitability of the going concern, portfolio improved in the second quarter.

In key market terms, a significant change in the U.S. The Infra North American business also had some U.S. -- or Canadian business had some exports to the U.S. So still, on a comparison period, we have a bigger black bar. So good growth in the U.S. market. And tackling North America in that context, the Building Solutions business, pretty flat in Canada where construction indicators are not moving favorably.

These are now the quarterly numbers. Historically, we've always seen -- shown the year-to-date numbers, but general feedback has been that everybody takes the year-to-date numbers and then that dates back to the previous presentation and makes the deductions to calculate the quarterly numbers. So here are they.

Now seasonally, Finland bypassing also Germany on the list. Important for us, as you might recall in the first quarter, like-for-like, so excluding the Zent-Frenger divestiture, our business in Germany grew by EUR 1 million in the quarter. The same magnitude here, and that's not necessarily numbers that changed the world. But it's mentally important that after several years of struggling with a top line decline in the market, we've been able to stabilize, and that's typically required until you can grow.

And bigger national market where we had a negative development was Sweden, both in local currencies and in euros, and this is much driven by the Swedish building construction market where the boom is. These are over and, consequently, we haven't been able then to grow against these headwinds in the marketplace.

In terms of the Building Solutions – Europe numbers, as I indicated, certainly somewhat disappointing. A year ago, approximately, after we had consolidated the PEX production to Sweden on the European continent, we started having yield issues and scrap issues in the production. We have hence -- or since then actually continued to improve, except May where we had bigger -- 2 bigger power outages, and that was not driving our trend better, but progress has been still slower than we have wished for.

The good news around Building Solutions – Europe is that we made a major product category launch of a new fitting family, S-Press PLUS, which you can see also in the picture, pressing a multilayer connection with a press fitting. And this launch, generally when you look at the customer acceptance or customer desire, has went -- has gone really well. It seems that the product -- new product is much appreciated by our customers. When we have been scaling up the production, there have been still issues and some rework needed on the items we had produced before the launch to stock.

We see clearly the end of the tunnel and the light out there in -- not too many weeks out of the current time point when we have completed reworking old stuff. And we'll continue to be able to serve our customers in a better way to support their business and have them being equipped with the products they like and they want to have. So that's clearly a temporary impact we are seeing here.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Jyri Luomakoski, Uponor Oyj - President, CEO & MD [1]

--------------------------------------------------------------------------------

And a couple of questions here already relating to actually Building Solutions – Europe from Anssi Kiviniemi at SEB: The production issues in Europe impact gross margin. How much? How is the raw material situation?

Our charts say that it remains to be relatively good. So the production issues yesterday did impact our gross margin. It's all items that are above the gross profit margin line item on the income statement, percentages we have not disclosed. But these issues in Sweden and with S-Press PLUS, in aggregate, we are talking about several million euros that shouldn't be there as a cost. S-Press PLUS has shorter time frame when we know those will be off-burdening the numbers and a bit slower curve to work out the issues in the PEX production.

How is the raw materials situation, our charts say that it remains to be relatively good, was the other part of the question. Raw materials situation is pretty stable and, going to need to knock wood, we have seen now soon a year of surprisingly stable, looking back kind of a couple of decades in the industry, stable raw material pricing, especially now referring to the plastics side.

And then Svante Krokfors from Nordea: Can you elaborate on the production problems in Virsbo? Magnitude, negative impact? Why solving is prolonged? How long do you expect solving to take?

Difficult to give a precise time line. As I said, continuous improvement. But when are we on levels that we think are satisfactory? That is likely to be during the coming year, not in this year. This is rather complicated set of topics. We have a change of certain processes. The regulations are challenging, and we have a very high ambition. And it's not only an ambition, it's very binary, but we are just making compliant product and good product. And then the reject rate, in a way, has been higher than we would wish here.

And relevant -- while there was -- from Ari Järvinen, Danskebank: What is your view on plastic material pricing in Europe and the U.S.? Were the prices up seasonally in H1? What is H2 outlook?

I think I addressed that topic. So pretty stable and there are no big changes. So what we can see? Obviously, we know that there, you don't need much of world political things to happen, a small crisis; so a bigger crisis somewhere in the Middle East that petrochemical products prices might make a jump, but let's hope that the world remains stable also in that front.

Building Solutions – North America where we had a bit of a rollercoaster ride. January, as I mentioned earlier, was a big challenge, maybe a hangover month from the end of the year. Some distributors catching up with some annual programs and buying ahead of price increases, and that went in a way the first quarter. Now we are seeing a normalized pattern in terms of purchasing. And we have seen pretty stable environment on the housing start side.

Anssi Kiviniemi at SEB is asking: We have seen weaker momentum in Europe's housing starts and the housing market. Should we be worried? And how is the commercial market? Currently, outlook on that side is still for growth.

I will return to that on our outlook slide. Certainly, housing starts have been also a bit going back and forth, and the consensus on what will be this year's housing starts have been moving up and down.

Then Svante Krokfors: Relating to North America, how have the freight industry problems in North America being solved? Lower or over economic activity or increased supply of transport?

It has been less of an issue. It's approximately a year ago where due to labor law changes, the number of trucks would have been probably enough, but there weren't drivers to operate those. And that was slowing down and increase in prices, so freight trades have remained high. But gradually, we have also been embedding those into our selling prices and working on the freight-free allowances, et cetera. So it has been less of an issue. But still, occasionally, what I hear operationally, we would wish for Friday 10 trucks and we might get only 8, and the missing 2 trucks have to carry stuff out of the DC to our customers first on Monday. But the magnitude of, I think, the whole system has, in a way, been aligned to the new normal in that respect.

And then also from Svante Krokfors at Nordea: What were the customer purchasing patterns in Q2 in North America and Europe? And what to expect for Q3?

As I indicated, normalized purchasing patterns. And where we have visibilities into the inventory levels of distributors, they are normalizing. So the kind of tanking up, building up ahead of price increases, that, that stuff has been, in a way, melted off that we see to be typically kind of quite normal ones.

And this is also a question, Mika Karppinen at Handelsbanken, has asked: Have you seen any changes in distributors' willingness to have inventories?

No changes as such. I think the situation is pretty normal.

Uponor Infra, a bit black. You can see on the North American divestiture having an impact on the comparable still for the coming quarter, and the dotted line showing really the comparable current portfolio operating profit margin. And a good continued focus on the design solutions and the higher-added value solutions, not necessarily driving the net sales up, but driving the margins and the operating profits up. And that's been following the agenda set for this reporting segment.

On the financial statements, Q3, you will get a more thorough presentation. Our new CFO, Minna Yrjönmäki, will start on the 5th of August. And she will be joining me then for reporting in the third quarter here. Couple of comments. So the gross profit margin as such has increased year-over-year, and that's really driven by the portfolio restructuring. And that has been also one of the intents clearly with the restructuring changes implemented into the company.

Cash flow from operations on last year's level. Cash flow before financing improved or less bad. Well, seasonally, if you take a 10- or 20-year look, you would see that cash flow tends to be negative in Q1, Q2. And we make the cash in Q3 and especially in Q4 in this industry and in this business.

And the biggest difference is relating to CapEx, which has declined or decreased in all of the segments. So obviously, we have pretty tough comparables still. We built the Hutchinson factory out, started to use it in North America last summer, approximately a year ago, and now it's up and running. And the CapEx needs, hence, are -- have been less so. It's shy of EUR 10 million gross CapEx in the first half of the year.

Gearing. So the balance sheet is stronger even though the gearing number as reported would indicate something else. So obviously, the leasing standard IFRS 16 leasing assets or right-of-use assets being accounted, and the corresponding debt position is taking up the number. But on a like-for-like basis, balance sheet structure strengthened.

Outlook, a couple of comments. There were also questions relating to the U.S. housing starts. We saw, when I look at the consensus forecast as collected for U.S. housing starts, the benchmark for '18 is 1.24 million. It was above that some 6 weeks ago. It came to at par with prior year. And for the first time actually since a long time that I can recall, the consensus was going up. And normally, it's been more that the housing starts have moved kind of slightly up. And the consensus, initially, the longer you look out there, has been pretty much higher and it's been converging to the reality and meaning it's been moving kind of downwards. And now we saw a small -- it's 20,000 units, not dramatic, but it's I think, directionally, it's important.

June housing starts, which we got some about a week ago out, so they were up 6.2% versus June '18. Permits were essentially flat. Earlier this year, we've seen permits pretty much on a good level. And then housing starts staying pretty close to the prior year number, so no big movements. Homebuilder confidence is at a pretty decent level, 64, so it's on the expansion side, clearly.

The Architecture Billings Index, which is an indicator for residential side, has softened in the recent months. Certainly, commercially, North America has grown for us as Uponor, and it's a big share from our total business. But still, we are on a penetration game over there. So if commercial construction volume moves up plus/minus 5%, we don't think that would have any material impact on our progress on that side.

In Germany, other industries, I think it's mainly the automotive, which has, due to various reasons, been having different type of challenges and certainly impacting the overall economy. Construction sector has been doing positive, and stable building permits on last year level and also non-res side too. Builder confidence is still very high, a bit down from last summer, but still on a good level. And construction companies have reported increases in their revenues compared to last year.

Finland is certainly more tricky. We see all leading indicators weakening. If it were on Helsinki, you'd still see many cranes, et cetera, so it's not that construction would have stopped. It's not fairly distributed within the country. That's clear also to recognize here. And we are seeing permit levels trending downwards both on resi and on the non-resi side.

And Sweden, civil engineering investments are helping to keep the total construction spend kind of relatively stable, but the residential segment, we see those signs. We have seen now for some 18 months to continue permits in the residential down in the first quarter. The second quarter numbers, we don't yet have available. Civil engineering, there are a lot of construction, et cetera, so it's not necessarily municipal infrastructure, which is in the focus of civil engineering projects. And generally, the builder confidence has been unfortunately on a downward trend, what we can see from different sources.

Our guidance remains intact. When we look at the type of a weather map for our key geographies, stable in North America. So a bit positive on the market side in the U.S., marginally negative in Canada, but obviously U.S. being the dominating part of that segment's revenues. South of Europe, especially in the Iberian Peninsula, continued growth. On the continent and East Europe, in general, stable, while a slowing trend visible in Finland and Sweden.

And we are repeating our full year guidance, which we announced on the 13th of February earlier this year in connection with our Q4, really is that we are expecting our net sales to reach the level of '18's structurally adjusted net sales, which is eliminating the impacts of the divested businesses in North America. Infra and Zent-Frenger in Germany, which is EUR 1,107.7 million or EUR 1.107 billion, and comparable operating profit to improve from the similar structural adjustments made to improve from the benchmark, which is EUR 83.5 million.

That concludes the presentation. I'm here on the screen seeing no new questions. I hope I didn't miss any that were made and posted here via the webcast application.

I thank you very much for your attention. And as said, we will be back end of October with our third quarter numbers. And at that time, we're also joined by our new CFO, Minna Yrjönmäki. I wish you all a continued warm, nice summer and the main autumn season is soon starting for us, and we are well prepared to tackle with that. Thank you.