Risks associated with business

Uponor's financial performance may be affected by several strategic, operational, financial, and hazard risks.

1 Market risks
2 Operational risks
3 Financial risks
4 Hazard risks
5 Risk management in 2011

1 Market risks

Uponor's principal areas of business are Europe and North America, where exposure to political risks is low. Since Uponor's net sales are divided among a large number of customers, the majority of which are distributors (wholesalers), end-market demand for the company's products is distributed across a wide customer base. The five largest customer groups generate approximately one third of Uponor's net sales, which are distributed between 26 countries.

Demand for Uponor's products depends on business cycles in the construction sector. Traditionally, Uponor's main end market has comprised single-family housing. However, the company's products are increasingly being supplied for commercial and public building. Fluctuations in demand often differ between these sectors. Fluctuations are also being offset to a certain degree by demand for renovation projects, which is not always as discretionary as new housing projects. Nearly a fifth of the company's net sales are generated by infrastructure solutions. In addition to the construction sector cycles, demand for infrastructure products depends on civil engineering and publicly funded municipal development. To safeguard against risks associated with economic cycles and fluctuations in demand, the company has developed its sales forecasting processes and enhanced the flexibility of its organisation and supply chain.

In many countries, Uponor's operations are regulated by local legislation. Uponor closely monitors laws and regulations under preparation, to anticipate their impact on Uponor and its customers.

2 Operational risks

Prices of raw materials used in the manufacture of plastic pipe systems are susceptible to other petrochemical and metal product price fluctuations. In recent years, Uponor has been capable of passing the effects of such fluctuations on to its selling prices with a reasonable delay, in such a way that this has not resulted in any major losses in income. Uponor manages the risk of fluctuations in the price of metals and plastics raw materials through supply agreements with fixed prices, whenever feasible. Uponor manages the risk of fluctuations in electricity prices at Nordic level by using financial instruments.

With respect to component and raw material purchases, Uponor aims to use supplies and raw materials that are available from several suppliers. Any sole raw material supplier used should have at least two production plants manufacturing goods used by Uponor. Uponor implements systems for material and raw material quality control and supplier accreditation.

Uponor manages its organisational and management risks, such as employee turnover, distortion of the age distribution, and unnecessary recruitment, by continuously analysing its human resources and ensuring that its organisational structure supports efficient operations. Personnel development programmes focus on enhancing management skills in a multicultural environment.

Uponor's business processes are managed using several IT systems, the most important being the ERP systems for the company's European and the North American operations. System criticality review and contingency planning are included in the introduction of major IT systems and cover, for example, failover capability design, backup and restore planning and testing. Disaster recovery tests are held on a biannual basis for key systems. In addition, external audits are performed.

Uponor applies an ISO 9000 quality management system and an ISO 14000 environmental management system, or comparable systems, which enhance production safety and productivity while reducing the environmental impact and risks of Uponor's operations.

In its Project Business operations, Uponor seeks to manage risks related to project-specific timing and costs, for example. Such risks are covered as far as possible in project and supplier agreements. Furthermore, the staff's project management skills are actively enhanced.

3 Financial risks

The uncertainty of financial markets poses considerable risks to the availability of financing. Uponor aims to ensure the availability and flexibility of financing by maintaining sufficient credit limit reserves and a well-balanced maturity distribution of loans, as well as by using several banks and various forms of financing.

The Group manages its liquidity through efficient cash management solutions and by investing solely in low-risk instruments that can be liquidated rapidly and at a clear market price.

Interest rate movements expose the Group to changes in interest expense and fair value of fixed rate financial items. Interest rate risk is managed by spreading the Group funding across fixed and floating rate instruments.

The international nature of its operations exposes the Group to currency risks associated with different currencies. A significant part of Uponor's net sales are created in currencies other than the euro. Subsequently, expenses associated with these net sales are also denominated in the same local currencies, decreasing the currency risks. The Group Treasury function is responsible for hedging Group-level net currency flows in external currency markets, mainly by using currency forward contracts and currency options as hedging instruments.

Uponor is also exposed to currency translation risk, which manifests itself in the translation of non-euro-area results into euros. According to the company's hedging policy, non-euro-area balance sheet items are not hedged, with the exception of internal loans classified as net investments and included in hedge accounting.

4 Hazard risks

Uponor operates 10 production plants in five countries. Products manufactured at these plants generate the majority of the company's net sales. Uponor co-ordinates indemnity and business interruption insurance at Group level on a central basis, in order to achieve extensive insurance cover neutralising the financial damage caused by any risks associated with machine breakdowns, fire, etc. Another major hazard risk is associated with product liability related to products manufactured and sold by Uponor. Product liability is also addressed through insurance at Group level.

Various measures are taken to manage risks of indemnity and interruptions to business. These include safety training for personnel, adherence to maintenance schedules, and actions to maintain the availability of major spare parts.

5 Risk management in 2011

With burgeoning growth at the beginning of the year giving way to a recession and declining markets after the summer, the risk management focus returned to market risks.

The steep increase in raw material prices during 2011 emphasised the importance of risk management actions in sourcing.

In the first half of the year, risks were comprehensively mapped and risk management plans updated accordingly. The risk identification and assessment process was further developed. During the autumn of 2011, the impact of business interruptions was analysed in all production units, and their business continuity management plans were updated.

In 2011, Uponor assessed the functionality of risk management in six production units. The results showed that risk management was sound in all units.

New groupwide crisis management guidelines were published in 2011.

As the economic crisis continued, amid growing concern about the availability of back finance on favourable terms, Uponor issued two bonds to secure long term funding. With this bond issue, Uponor extended the maturity structure and diversified its sources of funding. During the second half of the year, after the weakening of market conditions, accounts receivable and credit risks received special attention.

The year saw two significant materialisations of risks. Uponor decided to impair a vendor note issued in 2008 to the buyer of the municipal infrastructure business that Uponor divested in the UK and Ireland. The vendor note was issued to cover a part of the purchase price. Its total sum including capitalised interests amounted to €6.0 million.
Additionally, at the end of 2011, Uponor received taxation adjustment decisions from the Finnish tax authorities related to years 2005-2008 totalling €14.6 million, including taxes, interests and penalties. Uponor intends to appeal against the decisions, which relate to a dispute on market-based transfer pricing of the company's internal service charges. Uponor booked €5.1 million surtaxes and interests on delayed payments related to the dispute in its 2011 financial statements.

Uponor is involved in several judicial proceedings, in various countries. The year saw no other materialisation of risks, pending litigation or other legal proceedings, or measures by the authorities that might have been material significance to the Group.