Nokian Renkaat Oyj (TYRES) Earnings Call Transcript & Summary

Hello, and welcome to the Nokian Tyres Q&A conference call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Päivi Antola, SVP, Communications and IR. Please go ahead with your meeting.

Good afternoon, and welcome to Nokian Tyres' CEO's 100-day update call. My name is Päivi Antola, and I'm the Head of Investor Relations at Nokian Tyres. And in this call, I have with me, well, obviously, Jukka Moisio, the President and CEO of Nokian Tyres; as well as the company's CFO, Teemu Kangas-Kärki. So Jukka and Teemu, welcome.

Jukka, the first 100 days are now behind you. So what are your key observations so far?

Thank you, Päivi. First of all, welcome on my behalf. And indeed, my first 100 days observations are very favorable. But if I start with some personal notes first that when I was a young man, I worked at a gas station and learned a lot about tires and especially in 1970s learned about the practical view, how to change tires and how they perform and how the consumers think about those products. And then latest last week, I actually have a new car, and our testing team and R&D team did some detective work, and they found out that I have competitor tires in my car. So they took the liberty and opportunity to change into Nokian Hakka Black 2, and I tested them in the -- on the highway from Tampere -- or from Nokia to Helsinki. And I have to say that, of course, the car performed beautifully, and there's -- there was a clear difference between the competitor tires and our own tires. So in many ways, I'm very, very pleased that our products performed well, and my new car feels like a completely different car with the new tires. But some of the strengths of Nokian Tyres, I find that our products are good, they perform well. I also see that we have a good pipeline of innovation, new products coming only -- not only in Passenger Tyres but also in Heavy Tyres. We have a strong manufacturing know-how. So in terms of modern manufacturing and the capability that we have, for example, in Russia, in Vsevo, is really, really strong. Our brand is well known in the markets and in the segments where we have a historical traditional strong position. And finally, and most importantly, we have a good and strong team. And I think that one place where that was visible was our reactions and how we dealt with the COVID-19 situation. The impact could have been really significant. However, our team reacted well. We did quite a significant cost reductions. We made good focus on cash flow. And also, we did very quick decisions to stop manufacturing so that we didn't produce tires into inventory. We shut down our factories, and that maybe reacted -- not only short term, which helps the immediate situation, the company improved cash flow, but also long-term impact in a sense that when we go into the third quarter, fourth quarter and to 2021, inventories are well managed, and that allows then a good recovery of manufacturing going forward. This assumes, of course, that the recovery that was visible in the early part of the third quarter and also that the part of second quarter continues and that no new impact from COVID in terms of shutdowns and so on will come. However, if they do come, we are well prepared, and we have shown that our team reacts well. So going forward, our inventories are clean. Our operation is in a good position to run well. It's also clear that in 2020, we have a short-term tactical focus. And that means that the cash flow and cost control is very important, and that is something that the company needs to do in 2020. However, the longer-term strategy, we are comfortable with it right now. But clearly, we need to review that once the market has stabilized. At stabilization, we will need to see when that happens, maybe it's '21, maybe it's '22, depending how the COVID impact will continue. My personal guess is that in 2021 already, there will be an improvement and a clear recovery. And that allows also the revisit of the strategy and precising of the strategic targets. Right now, top line is key. Selling more tires is important. We have a strong focus on new products and innovation. There are new products in the pipeline, and as I mentioned, both in Passenger Car Tyres and also in Heavy Tyres. And when we look at the historical trend and the current situation, we can say that we have all-time high number of new product launches that have taken place during the course of this year and also will continue in the remainder of this year and early 2021. So in that sense, we are in a good position that new products come and then they bring opportunities to increase the top line and also the customer satisfaction in terms of serving various segments where those products are being targeted. More work has to be done. It's clear in distribution, especially in Continental Europe and in North America. Commercial marketing actions, promotion actions, et cetera, will have to be improved and also convincing customers will have to continue at a higher level. And that means that we need to do -- we need to have an intelligent use of commercial tools, promotional tools and also the product positioning in the marketplace. In terms of investment situation, the key investments are about to be behind us. Some of the investments will take place, some capital outlays, still minor parts towards the end of this year. But the U.S. investment, Spain test track, Heavy Tyres program, most of that is now behind us. And in fact, it started to generate cash flow, and it's really important that we get the benefit from these investments. And I am convinced and confident that our capability and our installed base now is very strong in manufacturing. And then that most of the work will have to be done in innovation, new products, targeting new products through new segments and also in the commercial activity so that we actually mobilize our commercial team, our distribution dealers to sell our products and make sure that the customers, consumers get them in the appropriate places and point of sales in the coming months and quarters. So that's in a summary where we are, and I believe that in many ways, this is a favorable situation. We clearly see that the COVID in the early part of the year is a temporary setback. Most companies experienced that. When the recovery comes, and if it continues, then we are in a great position to enjoy the benefits in terms of not having too heavy inventories and also being prepared to run our manufacturing in an efficient way.

Great. And how would you summarize what will change in Nokian Tyres now with you as the company's CEO?

I think that we need to put that into perspective of the company also that in the past years, we've had a number of important initiatives to improve our capacity, capability and also expand our geographic reach. Now when these programs are coming to an end, then clearly the focus will move into external. So we need to look at the commercial opportunities, new product launches because that's the starting point of the revenue plan, that we have the right kind of products, we have -- we target the right segments, we have a good distribution with commercial tools and promotional programs. So that is very important. Then the investments, we will see the benefits. So rather than initiating a lot of new programs immediately now, I think that we will focus on the cash flow generation and make sure that the system we have put in place, of course, we keep on improving it, and we keep on gaining efficiency, productivity and all that. But the system we have put in place, it's time for that to deliver. So in terms of revenue plan, new products and so on, cost efficiency, that is something. But then in terms of capital outlay, we've done a major part of that. And so therefore, we now look to benefit from the actions taken. And so that, of course, is the big thing that changes with the new CEO, but that's mostly dependent on the company timing also. In terms of how I look at the situation is that I'm relatively straightforward. So we focus on selling more tires, operations. And then we also make sure that the company operates in a world-class way in terms of achieving the results so that we have good commercial programs, good innovation, marketing and also strong administration that supports the achievement. But the important thing is to make sure that the system that is in place delivers.

Thank you. And now before we open the line for questions from the audience, I will take a couple of questions, which have been frequently asked by investors. And even though you said that this is not the time to review the longer-term growth strategy or the financial targets, let's still start with the financial target. So how do you see Nokian Tyres' financial targets from 2018, above 5% annual growth and EBIT at the level of 22? Are these realistic?

I think that, first of all, 2018 is a different time compared to 2020. We hope that when we go to '21, then we start going back to a more normal level. But in terms of having the capability and investments mostly behind us, I think that the growth targets are 5%. So if I say that in 2021, 5% growth is something that we aim to have, I think that everybody will say that you were far higher in top line in 2019 and '18, so that is not a relevant target. And I fully agree, we need to get back to that EUR 1.6 billion type of net sales. And then setting a target to about 5% after that means about 1 million tires per year more. So we have that kind of capacity and capability invested in Dayton. And also additionally, we have added capability in Heavy Tyres. So I would say that the 5% or higher growth after achieving the level that we had in 2018, 2019 is something that is a good target to aim for. Profitability-wise. So again, 2018/'19 was a different time compared to where we are right now. And clearly, you saw that our second quarter segment operating profit was about 9%, still higher than our competition. I think that our first and most important aim is to be better than competition. When we look at 20%, 22% target level, I think that when we go back to normalized level, it's a good ambition to aim for. Can I say exactly 22%? We need to see what -- how the world will look like after the COVID and the post-COVID period. But we surely want to be the most profitable tire company, and therefore, we aim high.

And can you comment a bit on the tools how to support margin rebound in 2021 and beyond?

I think that one of the most important is we established that the system is now in place, so we have investments behind us. We surely, again, want to continue the productivity gains and efficiencies and all those and make sure that every day, every quarter, the productivity improves. But then besides that, I think the new products is something that we start the margin improvement and revenue plan. So that is one of the key focus areas because new products always allow also to have a new price point. You try to say -- sell the same and old all the time. So you probably face declining prices and so on. But if you have a good pipeline of new products tailored to market segments, to specific car models or car model categories, so that way, that allows to have a good product -- good price point and good product margin. Equally important is the strong industrial plan, even though we have the investment behind us, so it doesn't mean that we cannot specialize our factories, so that we load the most productive factory first, which is Russia, then we continue to make sure that our North American factory is in a good momentum and good position. And therefore, we see that, that is also very cost-competitive. So first, Russia, then North America and finally, we have the Nokian factory where we have the R&D specialty tires and also all kinds of development activities, but also it's the oldest factory, so in terms of productivity for Passenger Car Tyres, there we have the highest cost. And so therefore, Nokia needs to benefit from the Heavy Tyres direction, so adding the investments and volume increase in Heavy Tyres that will keep the competitiveness of Nokia. But of course, Nokia will have to be more and more Heavy Tyres, so bigger volume that way and then more specialized products in terms of testing, R&D, technology development, while the big volumes will have to be elsewhere. Sales and commercial excellence is something that we need to put more emphasis on. So promotional tools, new point of sales, distribution, dealer support and similar things, that will then help us to move the product. And finally, of course, the cost discipline so that the cost discipline never goes away. So it's important to pay attention to that.

Then one question we get is the North American strategy. What is the target and the plan to get there? And of course, there is always the question, what will be the margin impact?

Yes. So we are in a ramp-up phase in the Dayton factory right now, and we are about to hire the second shift. So we are able to move into all the continuous production, and that's part of the ramp-up. So we have 2 shifts, 3 shifts. And then we add capacity and expand the capacity. And ultimately, the capability at this point of time with relatively modest investment is about 4 million tires. So it takes a while to get there, but our plan is clear that we ramp up, and we achieve those targets. How do we make it? So clearly, the important thing is, again, the product innovation and the product launches so that we have the right kind of products and right kind of services to the car categories that are important in North America. In order to achieve that, then we need to have a good distribution. So one of the key things what we do right now is that we find more distribution point of sale. So we are approaching about 5,000 this year, and we've added a double-digit percentage growth in terms of point of sales during the course of 2020. In order to make all of them hungry and successful, it's clear that we need to have the right products, and it's equally clear that we need to have the production coming from our North American factory because if we long term continue to supply significant volumes out of Europe or Russia than to North America, then obviously, the profitability is not optimized that way. So these are some of the things we do in North America. Most importantly, of course, to have the relevant product and product offer and equally to have it available to consumers. And so therefore, all these steps need to take place at the same time.

Let's then shift topics a little bit and talk about capital allocation. What are Nokian Tyres' capital allocation priorities going forward?

I think that we basically -- first of all, the capital allocation is such that a lot of these investments are ready. And so therefore, the capital will go with smaller pieces into improving efficiency, debottlenecking the lines, complementing the existing, so that means organic growth. But not a significant piece of capital. So this is more step-by-step improvements and making sure that we get the most out of our installed base and existing system. But there are always things to do, debottlenecking improvements. And clearly, molds for new products is an important part of investment plan going forward. Then we look at the M&A opportunities, and to the extent we defined value adding and good return opportunities, we'll pursue those and finally, then dividends and share buybacks. And we will not want to build overliquidity on our balance sheet so that whatever it is, overliquidity, then we will find a way to return that to shareholders, but it's also important to keep in mind that as we operate in Russia in a significant way, so it's important that our balance sheet is strong enough to tolerate the uncertainty and potential risks that relate to operations in Russia. And historically, we have always had a strong balance sheet. I think that, that will continue, but there's no need to build overliquidity. So to the extent we cannot find good organic growth, investment opportunities or M&A opportunities, then we will look at how we can return that overliquidity to shareholders. But please be prepared that we want to keep a strong balance sheet for the reasons explained.

Do you want to comment on CapEx this year or next year?

Yes. We have basically the guidance in the early part of the year already that we will reduce from EUR 200 million to about EUR 170 million in 2020. We believe that we might be below that EUR 170 million and then when we go to 2021, we will be below what we invest in 2020. So there will be a declining expectation of the capital outlay. As I said, the important part is to make sure that we have the molds for new products. At the same time, we want to debottleneck our current operations and so on. But by and large, the system we have in place is well invested. And so therefore, we don't foresee significant capacity increases to the tune of tens of millions in the immediate future. But keep in mind that longer term, of course, we want to make sure that we ramp up the North American operation to a level that is competitive and appropriate for the marketplace in North America.

You already mentioned dividend. Can you comment on the possible additional dividend payment for which the Board has the authorization from the AGM?

I think that from the management point of view, the important focus, as mentioned earlier, is on cash flow, working capital, cost efficiency and so on. So we'll do that part, and we also make sure that we enjoy whatever the recovery there is and make sure that, that comes to our top line. But those actions together should allow the Board to make a decision about the dividend already this fall. At least at latest by the next AGM, I expect that they make a decision, but most likely before the year-end. What the decision will be, I don't want to speculate, but clearly, the Board also understands that if there's a good generation of cash flow and good momentum in the company, then there's also a reason to reward the shareholders. But what that dividend will be, I cannot speculate -- I don't want to speculate at this point. Our job is to make that possible.

Thank you. And now operator, we would be ready for questions from the audience, please.

[Operator Instructions] Our first question comes from the line of Akshay Katkar from JPMorgan.

Three from my side. The first one on our distribution strategy and the sales network. You did mention a few things that you want to do in North America. Can you comment on what are your initial observations for Europe? And what would you like to change in that region? That's the first one. The second one is around your Passenger Car production capacity. You mentioned that all 3 factories will play a very important role in your growth story. Can you give us an update on the planned ramp-up of capacity at Dayton over the next few years? How much of the current fixed cost structure support in terms of annual output right now in Dayton? That's the first one on Passenger Car production capacity. And the second one, if you could, can you quantify the rough amount that you will save in logistics and import duties once you transfer the 2 million units for the North American market from Russia to the Dayton factory? Those are my 3, please.

Okay. Thank you for the questions. So first of all, about the distribution strategy in Europe. So clearly, we've been present in Europe for a longer time compared to North America. And also if you can compare to Russia or Northern Europe, Scandinavia, so we have a relatively mature distribution network. So there's more work to be done in Europe in order to expand our distribution and support our distributors and dealers in order to make our products available. But to the extent that we would expand that at the same rate as we do in North America, not needed. But clearly, we are looking to expand our distribution in Europe as well. I don't have specific numbers here that -- how much of new point of sale and so on we are adding. But as I said, in North America, double digit; in Europe, single-digit type. In PCT, ramp-up of the Dayton factory. So we basically go to 2 shifts now. We expect that when we go to 3 shifts and before we make an investment, we are about 2 million tires, and then we make some additional small investments, and then we go up to 4 million. And that's essentially our immediate plan. So 1 shift, 2 shifts, 3 shifts and a little bit additional investments, and then we are at about 4 million, which is then the minimum efficient scale of the factory. Then we have space to add more when that time comes, but this is the immediate one. And we talk about -- in the immediate, when we talk about the strategy type of period, so 3 to 4 years. And logistics and the cost savings in terms of shifting from Europe to North America, I don't have a specific number here. I'm sorry about that. And we can look at that later on. But at this point of time, I don't have that number to give.

Can I confirm you said some additional investments to expand to the 4 million capacity? Can we have a rough amount that you're thinking about?

Yes. We talk about -- in 3 to 4 years, we talked about double-digit million numbers, which are not close to 100 and which are not close to 0 -- 10. So you can take maybe the average point.

And the next question comes from the line of Pasi Väisänen from Nordea.

This is Pasi from Nordea Bank. Well, indeed, if I hear right, you actually said that you will increase the amount of partners and -- or increase the point of sales in Nokian Tyres. So is this actually going to lead to an increased marketing expenses? And is there a chance that you actually are going to face a declining price point by trying to take a market share from the competitors? And secondly, what is actually the price point? Could you actually highlight something from the U.S. factory or from the Dayton in terms of kind of sales volumes you are currently making? And lastly, I mean, of course, that Russian situation, what's the most recent inventory situation in Russian sales channels as you have actually seen it in August, September?

Okay. Why don't we start with the Russian comments? We said already in the next month -- quarter 2 that we had a plan in 2020 to go back to normalized level at the end of the year and we are basically pursuing that plan so that we expect that by the end of this year, our Russian [ operations are almost leveled ] when we go into 2021 and we can run the production and the sell-in at the expected market development. Obviously, the sell-out continues to normalize at this time and our sell-in is lower. And we compare those and we reduce our sell-in in order to reduce the inventory level in the pipeline. When it comes to North America, yes, we are expanding our network. We are hiring -- recruiting more distribution and dealers. And I think the more important thing rather than pulling into price is the launch of new products because a big part of this that we'll be actually getting to the bigger distribution and more dealers in North America is that we have new products. So actually, this is one of the things that we need to do internally, is to develop and make sure that we have to get the appropriate product offer as we haven't historically. We have historically been in North America mostly in the winter tire, studded winter tire and often New England and Canada states. Now when we have other products and segments, then the important thing is to have new products and innovation in that sense. So how that plays out in terms of what commercial tools, what marketing programs, promotional programs, e-commerce, et cetera, what tools will be used. We have to enter step by step. It's normal in North America that you have these cross-unit and in between you have the various commercial tools also. And if we use those in an intelligent way, we believe also that in combination with new products and localized manufacturing that in terms of making money, that broader picture is still attractive to us. Then about the net sales prices in North America right now, we don't really have any specific moment on this.

Just to remind all of you, our Capital Markets Day presentation in 2018 where you can see a relative ASP level compared to the PCT average.

That's clear. But just to kind of -- to crosscheck, could you actually repeat what is the most recent breakeven date assumption for the Dayton plant currently?

Breakeven assumption...

Kind of a month or year.

Okay. When we start seeing the profitability that is attractive and so on, we need to go above 3 million tires. We believe that, that 3 million tires can be achieved, what do you think, Teemu, in 2.5, 3 years, something like that. Then we see a profitability that is not hampering or hindering the company performance in any shape and form.

The next question comes from the line of Henning Cosman from HSBC.

Just on that last point, actually. Can I just clarify that you're saying in 3 years when you reach 3 million tires that the U.S. will not be dilutive to what you then want margin level for the company to be, 18% to 20%? Is that what you're saying?

What I'm saying is that when we get to a point that we actually focus the production because this -- the whole production system now, it's not only one factory. So we need to start from the point of view that, first of all, we first reload the Russian factory, then we load to the maximum capability in North American factory. We will have a swing in Passenger Tyres in Nokia, and then we drive a higher volume of Heavy Tyres in Nokia so that the mixing department obviously sells more volume through Heavy Tyres and less for Passenger Tyres. And this whole system allows us to get to a level that, as we earlier commented, that is 20% EBIT, a reasonable target going forward. Yes, when we go beyond or to the next -- after this COVID time, and when we start looking at the targets, then 20% is a relative target. But it's not only one factory, it's a whole system because we have a system-wide plan for the manufacturing and industrial plan. And this is important that the industrial plan is strong and supports then making the company-wide margins good.

Yes, understood. Yes, Teemu?

And building on this roughly 3 million level in Dayton, that is the level where we see that we are then finishing these non-IFRS exclusions from the Dayton factory. So we will be then on a -- more on a normal level at the Dayton factory.

Yes, exactly because it sort of leads me to my actual question, which was when Päivi asked you about the tools for the profitability improvement, you said that it's mainly the investments being behind you, but doesn't that also mean that the D&A is now starting to kick in as far as P&L profitability is concerned for the U.S. and so on? And I imagine it's still true that the U.S. is in tendency rather dilutive as compared to the Russian factory. I mean it's helpful that you're talking about that 20% ambition in 3 years' time, let's say. But if you could just put that in context again with the D&A and the structurally dilutive character of the U.S. vis-à-vis Russia.

Yes. And therefore, it's important that we get the full utilization -- as high utilization as possible in North America with new products and so on. But you are right. Of course, the D&A will kick in. At the same time, if you go into a situation now that the capital outlay this year, next year and the year after will be relatively modest, so we also win some of the D&A back because the investment plans in the immediate 2 to 3 years will be relatively, let's say, subdued because we are quite well set for the volume growth and quite well set for the immediate future.

Sure. And the other question was about your review to the strategy once you see a market normalization. Can I just ask you along what dimensions you would want to review the strategy? Because I would imagine it's relatively simple. You just basically try and refill the existing capacity as quickly as possible. And beyond that, you add step-by-step capacity for organic growth. So maybe you can just share with us a little bit what sort of dimensions you're thinking of when you're thinking about a midterm review of the strategy.

Maybe it's simply that. I mean you hit the nail. It is exactly that we will look into situation that how the recovery comes, what kind of market segments are evolving, where can we play our know-how best and then direct the company accordingly. And I'm not saying that the fundamental strategy of being growth company, selling the capacity and targeting the attractive markets is not going to change, but what's in it then will have to be detailed. But maybe we see that that's enough.

Yes. And then very lastly, if you don't mind on the dividend again. I mean Päivi, again, asked that in a way, but is it fair to say that -- I mean, you commented that you basically see the momentum and the liquidity level going in the right direction, and it's therefore also fair to reward the shareholders. But maybe more for next year and beyond that, you're not really thinking of a lower absolute dividend level than what we've seen in, say, 2018, '19, it's rather that level or above. Is that fair to think about?

I think that this is something that I cannot speculate on behalf of the Board. So we need to see that how the momentum continues and what's the comfort level of the decision makers in the company. Obviously, for the management, the important thing is to deliver the cash flow and deliver the turnaround and the momentum in top line.