Q2/2011 interim report: Uponor's strong organic growth continues

Uponor Corporation Interim report January-June 2011 10 August 2011 8.00 EET

Uponor’s strong organic growth continues

Growth in key market areas softened, except in Germany
Higher input prices affected both building and infrastructure solutions business
Net sales in April–June totalled €222.6 (204.6) million; a change of 8.8%
Operating profit for April-June totalled €15.5 (18.8) million; a change of €-3.3 million
Net sales in January–June totalled €395.8 (362.0) million; a change of 9.4%
Operating profit for January-June totalled €18.7 (20.3) million; a change of €-1.6 million
January–June earnings per share amounted to €0.15 (0.12)
January–June return on investment was 10.6% (9.0%), and gearing 67.7 (54.3)
January–June cash flow from business operations reduced to €-32.4 (-19.0) million
Full-year guidance remains unchanged

(This interim report has been compiled in accordance with the IAS 34 reporting standards and it is unaudited. Figures in the report are for continuing operations unless otherwise stated. The ‘report period’ refers to the period January–June.)

President and CEO Jyri Luomakoski comments on Uponor's performance:

In North America, we achieved a visible profit improvement from the previous year despite the sluggish market environment, thanks to our targeted sales focus. In Germany, supported by the healthy market activity, we also recorded markedly better organic growth than anticipated.
Uponor’s financial performance in the second quarter was unsatisfactory. This was mainly due to the effects of sales price increases lagging behind the rapidly elevated material costs.
Future macroeconomic uncertainties, together with the fact that our financial performance fell short of the targets in the first half of this year has resulted in the need for further initiatives to boost efficiencies and to adjust expenses to secure the Group’s profitable growth. We shall return to these plans and measures later in the year.

Webcast and presentation material:

Following the release of this report, the presentation material for the interim report will be available at www.uponor.com > Investors > News & downloads.

A webcast on interim results will be broadcast in English on Wednesday, 10 August 2011 at 10:00 EET. Questions for the webcast can be sent in advance to ir@uponor.com. The webcast can also be viewed at www.uponor.com > Investors > News & downloads shortly after the financial information is published.

Uponor Corporation will release its Interim Report for January–September 2011 on 26 October 2011. During a quiet period from 1 October to 26 October, Uponor will not comment on market prospects or factors affecting business and performance, nor will the company engage in discussions on events or trends related to the reporting period or the current fiscal period.

Markets

The optimism of the first quarter has been replaced in several markets with caution and reserve in the second quarter. The severe financial crisis in some European countries, the prolonged recovery of the U.S. economy and the mounting challenges in the rapidly growing markets of the developing countries have engaged the attention of consumers and businesses alike. Investments in building and construction have been cut back or delayed in an attempt to secure one’s own operations in preparation for the possible scenario that the global economy will take a downward turn. Challenges in the financing of investments are also becoming more evident. The public sector has not been able to offer relief as those investment resources have been widely used in warding off the recession in the past few years.

In countries where Uponor operates, construction and demand for building solutions have mainly mirrored the overall economic development. However, the German-speaking countries of Europe together with the Benelux countries provide an exception – their economies saw lively development during the second quarter, with the building markets following suit. In the Nordic countries, the strong growth experienced in the first quarter levelled out but in most cases it remained at a good level. As expected, development in Southern and Western Europe was modest, and, with the exception of France and the UK, even declining. In North America, demand in the building markets declined slightly from the first quarter, and in the USA in particular, there was a visible difference from the strong second quarter of the previous year. In Eastern Europe, differences between the markets were notable. In Russia and the Baltic States, a clear increase in market activity could be seen against last year, while in other countries the growth of demand came to a halt and, in some, took a downward turn. In infrastructure solutions, the spring season kicked off an increase in demand, as anticipated, and the markets appeared livelier than a year ago.

Net sales

Despite the challenging market environment, Uponor managed to increase the net sales of its main product groups in several markets. This is mainly due to the recent successful launches of new solutions involving active and extensive sales promotion and the new customer segmentation approach implemented over the last couple years, which are now applied effectively in various marketing and customer services. In the building industry, energy efficiency, offering solutions that can be flexibly used for various applications, as well as sustainability of the business and its products, are gaining ground as important selection criteria. This created a beneficial atmosphere that Uponor was able to benefit from in the sales and marketing of it products and solutions in all of its markets.

Uponor’s net sales in the second quarter were €222.6 (204.6) million, up by 8.8 per cent year-on-year. The Group’s organic growth in net sales was at 5.7 per cent. In Building Solutions - Europe, net sales in Central Europe increased particularly due to the buoyant sales in Germany. In Germany, net sales were further increased by the acquisition of a majority shareholding in Zent-Frenger, effective since the beginning of the second quarter. In the Nordic countries, the growth in Building Solutions improved from the first quarter, but with clear differences between the countries. Net sales in Southern and Western Europe remained unchanged while the building markets in this area remained stable or saw a decline. In Eastern Europe, net sales increased in almost all markets, although variation between different countries was significant. In North America, where the building market continued to decline, net sales clearly increased in Canada but decreased in the USA, as measured in local currency. Net sales for infrastructure solutions increased, mainly due to the increased sales in Sweden and Denmark.

Price increases implemented to cover the increased costs positively affected the net sales by a growth of €5.0 million compared to the previous year. The Group announced price increases during the second quarter, affecting mainly the Building Solutions business. They will be giving results mostly during the last two quarters of the year.

The impact of currency fluctuations on January –June net sales was €0.8 million positive year-on-year, and was primarily caused by the positive impact of Swedish krona and the negative impact of US dollar.

Net sales by segment (April–June):

M€	4-6/2011	4-6/2010	Change
Building Solutions – Europe	147.8	130.9	13.0%
Building Solutions – North America	29.5	33.5	-11.8%
(Building Solutions – North America, US$	42.8	42.5	0.8%)
Infrastructure Solutions	47.3	42.6	11.0%
Eliminations	-2.0	-2.4
Total	222.6	204.6	8.8%

January – June net sales amounted to €395.8 (362.0) million, up 9.4% from the comparison period. A part of the growth stems from the acquisition in Germany in the second quarter.

Net sales by segment (January–June):

M€	1-6/2011	1-6/2010	Change
Building Solutions – Europe	270.1	242.9	11.3%
Building Solutions – North America	56.2	58.0	-3.1%
(Building Solutions – North America, US$	80.0	76.1	5.2%)
Infrastructure Solutions	73.3	64.5	13.7%
Eliminations	-3.8	-3.4
Total	395.8	362.0	9.4%

Results and profitability

Consolidated operating profit in the second quarter totalled €15.5 (18.8) million, down by €3.3 million year-on-year. Profitability or the operating profit margin declined to 7.0 per cent from the 9.2 per cent reported a year ago.

Despite the price increases, the increases in raw material costs could not be recovered from customers in full due to the challenging market environment. This had a negative impact on the operating profit for Infrastructure Solutions, in particular. The higher cost level not only in plastic raw materials, but also in metal, components, energy and logistics compared to a year ago had an impact on all business groups. Following the trend of the first quarter, large investments in marketing measures, especially in Building Solutions – Europe, negatively affected profitability in the second quarter. Furthermore, some minor expenses related to the safeguarding of the quality image in the Building Solutions - Europe’s operations and products fell due during the reporting period. Accurately targeted cost savings had a positive impact on the operating profit of the North American business.

Operating profit by segment (April–June):

M€	4-6/2011	4-6/2010	Change
Building Solutions, Europe	13.9	16.4	-14.7%
Building Solutions, North America	2.7	2.0	30.0%
(Building Solutions, North America, US$	3.8	2.7	40.7%)
Infrastructure Solutions	1.7	3.1	-45.2%
Other	-2.6	-2.7	6.8%
Eliminations	-0.2	0.0
Total	15.5	18.8	-17.4%

Profit before taxes for April–June totalled €13.5 (15.5) million. The influence of taxes on profits was at €4.5 million while the amount of taxes in the comparison period was €4.7 million. Profit for the second quarter amounted to €9.0 (10.8) million.

January-June operating profit was €18.7 (20.3) million, down €1.6 million from the comparison period. Profitability, or operating margin, was 4.7 per cent, as against 5.6 per cent year-on-year. January-June earnings per share totalled €0.15 (0.12), both basic and diluted. Equity per share was €3.00 (3.30), basic and diluted.

Operating profit by segment (January–June):

M€	1-6/2011	1-6/2010	Change
Building Solutions - Europe	20.5	25.4	-19.3%
Building Solutions - North America	3.4	0.2	+2,039%
(Building Solutions - North America, US$	4.8	0.2	+2,188%)
Infrastructure Solutions	-2.3	-0.9	-143.0%
Other	-3.7	-4.6	21.2%
Eliminations	0.8	0.2
Total	18.7	20.3	-7.8%

Investments and financing

During the reporting period, investment targets mainly included maintenance and improvement operations. The largest single investment was the acquisition of a 50.3 per cent majority stake in the German company Zent-Frenger Gesellschaft für Gebäudetechnik mbH. The deal was finalised on 11 April. Integrating Zent-Frenger into Uponor has proceeded well.

Gross investment in January - June came to €9.2 (5.4) million. This was less than depreciation which amounted to €14.0 (15.0) million. Following the regular seasonal fluctuations, cash flow from business operations decreased to €-32.4 (-19.0) million.

As markets remain unstable, special attention is being focused on safeguarding liquidity at a good level. Follow-up of accounts receivable and other actions to avoid credit risk realisations are being actively continued.

The Group’s funding structure was reformed when two convertible bonds totalling €100 million were issued in June. The amount of the five-year floating-rate loan totals €20 million and the amount of the seven-year floating-rate loan totals €80 million. The purpose of the reform was to extend the financing base and to prolong maturity. Investors comprised domestic institutions.

Furthermore, an interest rate swap was concluded to transform part of the floating-rate loan into a fixed-rate loan for four years. Interest rate hedging was included in hedge accounting starting from the interest rate swap date.

In June, Uponor paid back the €80 million pension contribution borrowed back from a Finnish pension insurance company. At the time of the payment, €40 million remained. Available bilateral credit limits amounted to €190 million, none of which was in use at the end of the reporting period. At period end, €74.5 million was in use of the €150 million from the domestic commercial paper programme.

The Group’s interest-bearing liabilities increased to €150.9 (130.8) million. The period-end cash and cash equivalents totalled €36.2 (6.8) million. Gearing rose to 67.7 per cent (54.3 per cent), and remains aligned with the long-term financial targets.

Key events

The marketing of new products and systems introduced at trade fairs in the early part of the year were continued. The most important new innovations in the Building Solutions business included the unique RTM fittings technology. It has attracted wide customer interest and wholesaler advance orders have exceeded expectations. The RTM technology represents a completely new type of compression joint eliminating the need for tools. Another major innovation in Building Solutions is the PEX installation tool developed in cooperation with a leading tools manufacturer to facilitate easier handling and faster installation of Quick & Easy fittings. Both products have contributed to Uponor’s strengthened position as an industry leader and the winning of new sales channels.

During the second quarter, new products were introduced into Uponor’s control systems portfolio. The most remarkable achievement is a novel control unit for indoor climate systems enabling efficient and energy saving heating and cooling control through just the one device. The unit is fully compatible with Uponor’s Dynamic Energy Management (DEM) which was launched last year. The DEM system was complemented with a wired wall thermostat offered as an alternative to the wireless model launched last year.

In North America, a pre-assembled technical unit to facilitate a faster installation of underfloor heating systems was introduced. All necessary components, excluding the pipes and thermostat, are pre-installed into the unit at the factory. It not only accelerates the installation process in the technical room, but also helps to improve installation quality. A new installation panel accelerating the installation of underfloor heating pipe loops was also introduced.

The infrastructure solutions offering was also modernised. Uponor’s IQ storm drain pipes introduced in Sweden last winter were successfully introduced in the Danish markets. New chamber solutions were also launched.

Measures to implement the new customer segmentation model in all marketing-related activities continued. During the report period, business group development and marketing organisations were reorganised.

In June, Uponor signed ENCORD’s Sustainable Development Charter together with other industry leaders. ENCORD is the European Network of Construction Companies for Research and Development and the charter is aimed at promoting sustainable building and construction in Europe.

Uponor reported its 2010 environmental performance figures as part of the Investor CDP 2011 survey. Uponor participated in the survey for the first time last year. In connection with this, the drafting of group-level long-term sustainability targets to develop operations further was initiated.

In early April, a new distribution centre was officially opened in Móstoles, Spain. The same building houses a training centre and the headquarters of the Southern and Western European area. The building is heated and cooled with Uponor solutions utilising renewable energy sources.

In May, Uponor established a joint venture called Uponor Middle East SAL in Lebanon to improve sales in the area. In the same month, the Romanian Rep Office was turned into a subsidiary.

Short-term outlook

2011 started out with careful optimism, but in the second quarter, uncertainties have re-emerged in the macroeconomic development of Europe, the USA and Asia. This has had an impact on the investment moods of both consumers and businesses, slowing down the recovery of housing construction markets that are otherwise on solid ground. The effects vary between different market areas.

The positive signs observed in the German-speaking countries in the spring continue to exist, and business development has been favourable. This trend is, however, expected to slightly slow down towards the end of the year. In the Nordic countries, demand for building solutions has decreased since the first quarter, but is expected to remain stable for the next few months. Demand for infrastructure solutions is also expected to remain at current levels in Northern Europe. The positive signs observed earlier in Southern and Western Europe have not been sufficiently strong to stimulate the markets. Furthermore, with certain countries facing severe financial problems, increases in demand are not expected. According to construction statistics, a flat development is anticipated in North America, and the markets are expected to remain close to the current levels.

The future development of housing and construction markets depends on the development of the global economy, which might cause significant changes in the operational preconditions of the company and its customers. Currently, forecasting any overall lines of development for the economy or world politics is extremely challenging. Furthermore, Uponor’s financial performance may be affected by several strategic, operational, financial, and hazard risks. A detailed risk analysis is provided in the company’s Annual Report.

The international financial crisis of the past few days may expand and affect Uponor’s business environment and the preconditions of business. Based on the present situation, the company maintains its full-year guidance:

Organic growth in Uponor’s net sales is expected to accelerate from the 2010 level, and operating profit is expected to improve on last year’s reported result. The Group’s fixed-asset investments are not expected to exceed depreciation, and efficient net working capital management measures will help to retain a good cash flow level.

Uponor Corporation
Board of Directors

For further information, please contact:
Jyri Luomakoski, President and CEO, tel. 020 129 2824
Riitta Palomäki, CFO, tel. 020 129 2822

Tarmo Anttila
Vice President, Communications
Tel. 020 129 2852

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Uponor is a leading international provider of plumbing and indoor climate solutions for residential and commercial building markets across Europe and North America. In Northern Europe, Uponor is also a prominent supplier of infrastructure pipe systems. Uponor offers its customers solutions that are technically advanced, ecologically sustainable, and safe and reliable to own and operate. The Group employs approx. 3,200 persons, in 30 countries. In 2010, Uponor's net sales totalled 750 million euros. Uponor Corporation is listed on NASDAQ OMX Helsinki in Finland. http://www.uponor.com