Risks associated with business
Uponor’s financial performance could be affected by a range of market, operational, financing and hazard risks.
Uponor’s principal areas of business are Europe and North America, where its exposure to political risks is considered to be relatively low in general. However, the situation changed somewhat during the years 2015–16, when Uponor opened production facilities in the St. Petersburg area in Russia and in Taicang, near Shanghai in China.
The Ukraine crisis and its repercussions have kept the political risks associated with Russia on the agenda and Russia’s growing involvement in Syria has not reduced them. Sanctions imposed by the U.S. and EU against Russia, and Russia’s counter sanctions, are still affecting business conditions in Russia and elsewhere in Europe, particularly in Finland, and no solution is in sight in the foreseeable future. These tense relations have had a negative impact on the European markets and on fragile economic growth on the continent. Russia’s share of Uponor’s net sales was around 2.0% in 2016.
The European economy and Europe’s economic climate show signs of recovery, but the upturn remains slow and fragile. The new administration in the U.S., following the presidential election, and the UK’s decision to move on with ‘Brexit’ are weighing on risk sentiment. In addition, the upcoming French and German elections, and uncertainties related to them, are casting a shadow on the risk landscape in 2017.
Unrest and military conflicts in the Middle East have led to unpredictable levels of volatility and huge challenges facing Europe. Uponor is continually monitoring the situation and performing internal assessments of the potential risks facing Europe and the euro area, and their possible repercussions for Uponor’s operations.
Since Uponor’s net sales are divided among a large number of customers, most 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, whose sales are distributed between over 20 countries, generate roughly one third of Uponor’s net sales.
Demand for Uponor’s products depends on business cycles in the construction sector. Uponor's main end market has traditionally comprised single-family housing. However, the company's products are increasingly being supplied for multi-family residential and non-residential building construction, where Uponor plans to increase its sales further. Demand often fluctuates differently within each of these two sectors. To a certain degree, such fluctuations are being offset by demand for renovation projects, which is not always as discretionary as that for new housing projects.
Roughly one quarter of Uponor's annual net sales come from the infrastructure solutions business. In addition to construction sector cycles, demand for infrastructure products depends on civil engineering and publicly funded investments in 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. For example, Uponor seeks national product approval for a large proportion of the products it sells. It also closely monitors any laws and regulations under preparation, in order to anticipate their impact on Uponor and its customers.
2 Operational risks
The prices of raw materials used in the manufacture of plastic pipe systems are susceptible to change, driven by several factors including petrochemical and metal product price fluctuations, supply capacity, market demand etc. In recent years, Uponor has been able to pass most of the effects of such fluctuations onto its selling prices with a reasonable delay, in such a way that this has not resulted in any material losses in income. Whenever feasible, Uponor manages the risk of fluctuations in the price of metals and plastics raw materials through supply agreements with fixed prices, and by means of financial products. Uponor continuously and systematically uses financial instruments to manage price risks associated with electricity prices at Nordic level.
With respect to component and raw material sourcing, Uponor aims to use supplies and raw materials available from several suppliers. Wherever only one raw material supplier is used, Uponor seeks to ensure that the supplier has at least two production plants manufacturing the goods used by Uponor. The Group implements systems for material and raw material quality control and supplier accreditation.
Uponor manages its organisational and management risks, such as employee turnover and distortion of the age distribution, by continuously analysing its human resources and ensuring that its organisational structure supports efficient operations. Personnel development programmes focus on enhancing leadership skills in a multicultural matrix organisation. Uponor’s internal employee surveys provide important information on our employees’ engagement, by measuring various aspects of engagement, alignment, the working environment and motivation. Action plans are agreed and followed up based on the survey results, resulting in better performance and employee engagement.
Uponor’s business processes are managed using several IT applications, the most important of which are the ERP systems for the company’s European and North American operations. A system criticality review and contingency planning are included in the implementation and lifecycle management of major IT systems. Contingency plans can include activities such as failover planning, backup and restore management, and testing. Disaster recovery tests are held every two years for key systems. IT-related risks are evaluated as part of Uponor’s risk management process, with an increasing emphasis being placed on the security aspects of IT systems. Uponor IT systems are regularly evaluated by external parties, including in 2016. These reviews are used as input for further security improvements. In addition, Uponor has been acquiring insurance that covers certain risks within IT applications over a period of several years.
Uponor applies an ISO 9001 quality management system and an ISO 14001 environmental management system, which enhance production safety, environmental law compliance and productivity while reducing the environmental impact and risks of Uponor's operations. In Germany, Uponor has implemented a certified Energy Management System based on ISO 50001 for all factories. A further rollout to all Uponor production sites is planned by 2020.
In its Project Business operations, Uponor seeks to manage risks related to issues such as project-specific timing and costs. Such risks are covered in project and supplier agreements in so far as possible. In addition, the staff's project management skills are being actively enhanced.
3 Financing risks
Major disruptions can occur in the international financial markets with very little warning. For this reason, although the situation now seems rather stable from Uponor's perspective, significant risks may arise in relation to the availability of financing in the future. Uponor aims to ensure the availability, flexibility and affordability of financing by maintaining sufficient committed credit limit reserves and a well-balanced maturity distribution of loans, as well as by using several reputable and well-rated counterparties and various forms of financing.
The Group manages its liquidity through efficient cash management solutions and by applying a risk-averse investment policy, 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 expenses, as well as in the fair values of fixed-rate financial items. The interest rate risk is managed by spreading Group funding across fixed and floating rate instruments.
The international nature of its operations exposes the Group to currency risks associated with various currencies. A significant proportion of Uponor’s net sales are created in currencies other than the euro. Correspondingly, a major part of expenses associated with these net sales are also denominated in the same local currencies, markedly decreasing the associated currency risks. The Group Treasury function is responsible for managing and 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 subsidiaries’ equity into euro. According to the company’s hedging policy, non-euro-area balance sheet items are not hedged, with the exception of some internal loans, which are classified as net investments and included in hedge accounting. Only reputable and well-rated banks are used as currency hedging counterparties.
4 Hazard risks
At year-end 2016, Uponor operated 15 factories in ten countries as well as several sites assembling prefabricated products. The products manufactured in these plants generate most of the company's net sales. Uponor co-ordinates property damage and business interruption insurance at Group level on a centralised basis, in order to achieve extensive insurance cover neutralising the possible financial damage caused by risks associated with machine breakdowns, fire etc.
Another major risk is associated with product liability related to products manufactured and sold by Uponor. Product liability is also addressed through centralised insurance programmes at Group level.
A Group-wide Business Continuity Management and Business Interruption Analysis project launched in 2015 was completed in 2016. No significant new risks regarding business continuity were discovered. Various and numerous measures are already being taken in order to manage the risks associated with property damage and business interruption. These include safety training for personnel, adherence to maintenance schedules, and actions taken to maintain the availability of major spare parts. The integrity of the supply chain has been and is one of the main focuses of risk management.
Audits and training conducted at Uponor’s production sites by, and in cooperation with, insurance companies also form an essential part of Group risk management. When needed, suppliers’ production facilities may also be audited.
Cyber risks and threats are subject to constant monitoring by default.
5 Risk management in 2016
Because the business environment in many of Uponor’s major geographical markets remained challenging, the management and monitoring of market risks continued to play a key role in the field of risk management. Uponor conducted risk assessment exercises in the spring and autumn of 2016 in relation to the core risks identified, and updated its risk management plans accordingly. In 2016, in cooperation with insurance companies, Uponor assessed the functionality and preparedness of its risk management in four production units. The results showed the level of risk management to be sound in all units.
After a challenging 2015, the commodity markets relevant to Uponor normalised in 2016. The availability of raw materials was good overall and price formation occurred in accordance with normal market mechanisms. In order to minimise risks, Uponor continued to add new, approved raw material sources to the supplier portfolios of its business units. Since late 2015, a number of challenges were encountered in the steady supply of resins for plastic plumbing fittings in the USA. Uponor found a solution to the issue during 2016 and updated its supply chain procedures for the future accordingly.
With volatility still dominating the global economic arena, concern about the availability of bank and market-based funding on favourable terms remained on the agenda. To secure longer-term funding, Uponor has diversified its financing risks through various funding instruments, maturities, multiple counterparties and markets. When funding is not being raised from money or capital markets, special attention is paid to the quality of counterparties. Only solid, well-rated banks or financial institutions are used. The size of Uponor’s total committed revolving credit facility programmes is €200 million, with maturities ranging between 2019 and 2021.
As in previous years, special attention was paid to the monitoring of accounts receivable and the handling of credit risk.
Together with changing tax policies, global economic volatility has increased companies’ tax risk exposure, giving tax risk management continued prominence within Uponor. The company has proactively endeavoured to focus on good tax governance and has assigned a more explicit role to tax risk assessment within its risk assessment process.
Uponor is involved in several judicial proceedings in various countries. The year 2016 saw no materialisation of risks, pending litigation or other legal proceedings, or measures taken by the authorities that, based on current information, might have been of material significance to the Group.