The year 2018 marked many milestones in our history. Not only it was the centennial birthday year of Uponor, but several changes implemented in 2018 will hopefully bear long with us.
First though, looking at our key financial target of profitable growth, we made strides to the right direction, but not long strides enough. Organic net sales growth of 4.9% I would categorise reasonable in an environment of very modest market growth. While our comparable operating profit mathematically improved from the 2017 numbers, this improvement was below our initial plans. These initial plans, however, contained also businesses we divested during 2018 and hence were not contributing for the full year into our reported performance.
Uponor Infra’s North American business was considered non-core from the very beginning of our Infra joint venture with KWH Group; it was never synergistically integrated to the Infra business focusing geographically around the Baltic Sea and it was a commodity business with the ups and downs of such a business. Since the formation of the Infra JV, we were seeing more of the downs, and in late 2017, when the season for the ups came, we decided to start a process divesting the business, which then happened at end of August.
Zent-Frenger, a manufacturer of radiant ceilings was acquired in 2012. We were not able to exploit all synergies that were planned and Zent-Frenger’s route to market, different to that of Uponor’s building solution business, caused not only occasional confusion but also some conflicts in the end, and the exit in October 2018 for a price higher than our investment, was a graceful move to drive focus and simplicity.
In late 2018, we announced that we will cease our operations in Asia, and in that connection close the small manufacturing facility in China, which was opened two years before. There are clearly many facades behind a decision closing the production in one of the world’s largest economies, but first and foremost we had to conclude that our offering focusing on premium products made mainly from imported raw materials did not turn out to be, despite test marketing and prestudies, attractive enough for the very price conscious local markets. Competing in the less differentiated product categories with hundreds of local established manufacturers would have required us to make more investments to the region, where end result would still have been uncertain. Therefore we decided to concentrate on profitable growth in our key geographies, Europe and North America and focus on initiatives which support this target.
You need to dismantle to be able to build, one says. In 2018, we inaugurated the new pipe manufacturing facility in Hutchinson, Minnesota, close to the original Uponor North American manufacturing in Apple Valley, Minnesota. After some 10 expansions, we had reached the perimeters of our site in Apple Valley, and with the new facility in Hutchinson, we are also able to tap to a different pool of labour in the competitive market with more or less full employment. While the start of the Hutchinson facility caused double manning and redundant costs during the first half of the year, the start in the summer went well and now we are back to normal operations on two sites.
A few years ago we split our growth ambitions into three time and risk bound horizons: 1) we need to defend our strong position in the mainly residential driven distribution business; 2) we want to grow in commercial construction and 3) we have to build options for future growth. All of Uponor is engaged in the first horizon, often internally referred to as our bread-and-butter business. After the 2008 financial crisis we made first serious moves to adapt and offer our solutions to the commercial construction markets, and in the meanwhile, we can record some success in these efforts, as over one third of our European and some half of our North American building solutions business are already directed to the commercial construction markets. In the third horizon the buzzword digital comes also into the play. For our indoor climate solutions we have offered for decades electronics to control the heating or cooling, in the last years these electronics have become connected, offering greater benefits both in terms of energy efficiency and optimisation as well as user experience.
Year 2018 also marked the launch of Phyn Plus, the first product from our joint venture with Belkin, which is a consumer electronics company from California, and Uponor’s first truly connected offering giving the consumer a peace-in-mind in terms of identifying water leaks in the home besides giving transparency to the use of water, a vital, but scarce resource on our planet Earth.
Planet Earth, one of the three aspects of the triple bottom line focusing on planet, people and profit – a cornerstone in our approach to sustainability and corporate social responsibility. In 2018, we joined United Nation’s Global Compact and also made our prioritisation of United Nation’s Sustainable Development Goals, where we focus on clean water and sanitation, decent work and economic growth, responsible consumption and production as well as climate action. Clearly, all 17 sustainable development goals are important, but with these four, we feel we can truly contribute and have a chance of making a difference.
People, our most important asset, if one may use that word, continued to be in the centre of development actions. In 2018, our leadership development portfolio with programmes starting from self-awareness, i.e. leading yourself, to leading people and leading businesses was in full action. In aggregate, almost 100 people participated and considering the multiplier factor of good leaders leading their teams to an effective and efficient execution of strategy, the expectations of the impact are significant. With our growth initiatives, may they be in the first horizon of growth, simply but being more competitive in our traditional residential distribution business, the second horizon with commercial or the third horizon with future solutions such as connected offerings among others, all require changes throughout our company, and the changes needed in our capabilities and competencies are material and mostly dependent on our people.
In connection with the centennial birthday celebrations and documentary film of our 100 year history, I expressed to all Uponorians my expectation that the quantity of change in the past 100 years is of the same magnitude as the change anticipated during the coming 10 years. As we can see from above, speed is increasing and list of change events in 2018 would easily fill this entire annual report. That is not the nature of this document, but more to highlight that we believe we have a clear set direction and work towards it continues every day.
For that work I would like to express my gratitude to all Uponorians for their valuable contribution as well as to our shareholders for trusting their investments into Uponor.