Nokian Renkaat Oyj (TYRES) Earnings Call Transcript & Summary

Hello, and welcome to the Nokian Renkaat Q4 2020 Interim Report. [Operator Instructions] Today, I'm pleased to present Paivi Antola. Please go ahead with your meeting.

Thank you. Good afternoon from Helsinki, and welcome to Nokian Tyres Q4 and Full Year 2020 Results Conference Call. My name is Paivi Antola, I'm the Head of Investor Relations in Nokian Tyres. And together with me in the call, I have Jukka Moisio, the President and CEO; and Teemu Kangas-Karki, the CFO of Nokian Tyres. In this call, we will go through Q4 and full year results, followed by a Q&A. But before going to the results more in detail, Jukka, 2020, it was an interesting year, how would you summarize it?

Thank you, Paivi, and good afternoon on my behalf as well and welcome. Yes, indeed, I think that interesting is maybe one way to characterize or eventful or unprecedented, as we say, in our presentation. Nevertheless, obviously, towards the end of the year, things started to become clearer and also actions and policies, et cetera, by the governments, they are not so much on the quick reaction but more consistent, what to do with the COVID and how to get out of the COVID situation with vaccination and lockdowns, selected lockdowns and so on. And I have to say that, of course, during this demanding year when we first reacted to COVID, I believe that we said that we will focus on cost. We will make sure that we maximize cash flow. And also that we will not increase our inventories, and we will make sure that the company will be in a good shape by the end of the year. I think that, in many ways, that was achieved. Our team did well. We paid attention to safety, operated all factories quite well. Also, in terms of LTIF, accident frequency, we reduced that quite significantly; achieved a good cash position; made sure that the costs are under control and so on. This, in many ways, shows the resilience of our team and the company and I'm very, very pleased and proud that we achieved all those targets that we set out in the early part when the virus hit us and hit economies throughout the world. We ended the year with a strong balance. It's quite important, in terms of net debt, in terms of inventories, et cetera. So we did achieve all those targets we set out to do. And also, meanwhile, we advanced many actions to build the company for '21 and beyond. One is Dayton ramp-up. So we hired the second shift and started to ramp up the production. Also, now we announced in early part of this year, we announced the third and fourth shift. So that ramp-up in Dayton continues consistently. Also, in Nokia, we agreed direction and took actions accordingly and also launched a number of new products in -- during the course of 2020, but also in the beginning of '21. And I come later to our flagship product, Nokian Hakkapeliitta 10, which was announced in early January, and we gave a peek information already in December about the product. So very pleased, ended well. Eventful year, interesting year. I think our team did well. So I'm quite proud. I'm very proud of.

So many good achievements despite the circumstances. Thank you, Jukka. And let's now move on to the actual official presentation and start with Q4 results. Jukka, please.

Yes. Thank you, Paivi. So now on the presentation on Page 2, Q4, and we had impact from COVID and delayed winter in our volumes. Our net sales were EUR 413 million versus EUR 475 million in 2019. In comparable currencies, there's a decline of 7.1%. Most of that decline is actually in Passenger Car Tyres in terms of top line Heavy Tyres and Vianor performed reasonably well. Operating profit at EUR 80 million versus EUR 107 million in 2019 final quarter. Again, the impact is coming from Passenger Car Tyres sales. Teemu will talk about the profitability of the businesses. You'll see that, nevertheless, operating profit margin in, Passenger Car Tyres, despite lower sales was at the last year level. Tailwind came from lower raw material unit costs. I move now to Page 3, reflecting the full year. Then reiterate that our team did a very good performance in terms of resilience, safety, delivery of the agreed targets, while continuing to achieve and build programs for the future, especially completing and improving the investments that were in the pipeline when we started the year. Net sales were EUR 1.313 billion versus EUR 1.58 billion in 2019, a 13% decline in comparable currencies. Most of that decline was in comparable currencies in the early part of the year. We had a relatively strong Q3 and then a slightly weaker Q4. These volumes are impacted, of course, as mentioned, by COVID; also measures taken in Russia to reduce the sell-in in order to reduce the distributor on our own inventories, and also mild winter of 2019/'20. Segment operating profit full year level at EUR 190 million versus EUR 337 million in 2019. Again, the same culprit, COVID, also measures in Russia, and then because of low demand, low factory utilization, most of the factory -- low factory utilization took place in the second quarter. Tailwind came from raw materials and cost-cutting measures which then reaction -- cost-cutting was a reaction to COVID as well as also a similar reaction to maximize the cash flow. The Board proposes a dividend of EUR 1.20 per share and to be paid in 2 installments during the course of 2021. I move to Page 4, and I want to call out a couple of items which I haven't really discussed yet. One is the cash flow. So in quarter, the fourth quarter, the cash flow from operating activities was EUR 429 million versus EUR 398 million in 2019. And on a full year level, we had a EUR 422 million versus EUR 220 million in full year. You see one important topic is the capital expenditure. So we spent EUR 32 million in the final quarter versus EUR 65 million 1 year ago. And in the full year, our capital expenditures were slightly below EUR 150 million versus EUR 290 million in 2019. Balance sheet is in a strong situation. So equity ratio of 65%. And net debt is minus EUR 17 million, which means that we are slightly cash positive at the end of the year compared to having a net debt of EUR 41 million 1 year ago. So despite low profitability, despite headwinds, et cetera, we ended up the year with a debt-free balance sheet, which shows the strength of the cash generation. And I hand over to Teemu to talk about the Passenger Car Tyres. So Teemu, please go ahead.

Thank you, Jukka. Starting with the Passenger Car Tyres and looking at our net sales development. In the fourth quarter, our net sales declined on comparable currencies 9.8%. On a full year basis, the decline was on a level of 18%. Looking at our segment operating for the fourth quarter, on a level of EUR 66 million, and our profitability was almost on a same level than in comparison period. One reason for that, despite the lower volume, was the fact that we were running our 2 factories in Russia and in Finland on a higher load compared to Q4 2019. Then in terms of average sales prices, which declined on a comparable currency, so while the product mix improved, there, we should remember that our customer base is most likely less fragmented than our peers. So one reason to drive this development was the customer and country mix. If we then move to the next slide where we can see the quarterly changes for net sales. As I said, the Q4 price/mix was driven by customer and country mix, this negative development. And then what clearly stands out here is the currency development, it has been going to the wrong direction in terms of sales and profit. And the main driver is naturally the weaker ruble which started to deteriorate in the third quarter and then continued in the fourth quarter. Then moving to the next slide, where we can see the full year bridge. And if I focus on the segment operating profit, there, we can see the volume impact and the tailwind from materials and lower factory load in the factories on a full year basis. And maybe one of the key topics from this slide is the currency impact. So you can see that in the Passenger Car Tyres, we had a headwind from -- mainly from weaker ruble, about EUR 26 million for the full year. And if we look on a quarterly basis, you can see that in our earlier slides and in the appendix that we had a headwind, about EUR 10 million in the third quarter and additional EUR 10 million in the fourth quarter. If we look how the ruble has developed in the past years, you can see that in 2019 the ruble was on a level of 72 against euro and then in 2020 on a level of 82. And in January this year, it is on a level of 90 or were on a level of 90. And if we would take a look to the future, so I would say that the good proxy if the ruble stays on this level that we could get a EUR 10 million headwind in the first quarter and in the second quarter, depending on the volume and the currency. So if you would take a base year from 2019 and then taking the second half from last year and then anticipating the first half of this year, you could anticipate a significant decline or impact from the currencies. Then moving to the Heavy Tyres. In the fourth quarter, the net sales on a comparable basis grew 0.9%. On a full year basis, the net sales declined 1.8%. Looking to the segment operating, for the fourth quarter was on a level of EUR 5 million decline from Q4 '19, which was on a level of EUR 10 million. And factors impacting this decline in segment operating profit was the planned production shutdown in our Nokian factory in Finland and then maintenance work related to the investments and shutdown that we took already in the fourth quarter in order to be in a good position this year. And moving then to Vianor business unit. So the top line was declining on a comparable currency, 2.4%. Segment operating profit, on a level of EUR 10 million. And as a reminder, 2019 Q4 we had EUR 2 million profit from sale of real estate. So the decline was smaller on a comparable basis. Some highlights in sustainability that we are proud of. We are the first in the tire industry to have the science-based targets to reduce CO2 emissions. Those were approved last year. Safety is our priority and our lost time injuries frequency has been declining. And last year, we were on a level of 3.7. We are continuously fighting against the climate change and the rolling resistance of our tires have been going down from 2013 level about 8.5%. And we continue to innovate in order to make progress in this front. And we are also happy to be part of the sustainability indices. And this is the testimony of our good work that we have been doing and continue to do in the future as well. Going back to you, Jukka.

Thank you, Teemu. Then moving on Page 11. In '21, we focus on growth and cash flow. Moving on to Page 12 and immediate priorities. So we have been launching a number of new products, and we expect them to generate excitement and the volumes in addition to our existing product line -- product offerings. And we will then keep on improving our go-to-market activities to ensure that, indeed, we are close to our customers and consumers in introducing the new products. Important to look at the cash flow. We will protect that by prioritizing investments. We expect that the capital expenditure in 2021 will be below what we reported in 2020, so below EUR 150 million. Also, when we look at the market, we expect that the recovery is likely to happen. So from 2019 to 2020, roughly, the market went down in terms of volume, this is about 12%. And we expect that when we look at the market studies and various sources that anywhere between 5% to 9% recovery expected in 2021, depending on the market. So that will suggest that 2/3 of the decline that happened between '19 to '20 will be positively recovered in 2021 and then potentially a full recovery in '22. This is, of course, subject to many buts and ifs, but this is the best market outlook that is available out there right now. Some of the products that we are launching this year. So we have product for all season in North America, Nokian Encompass, which is exclusively available to Discount Tire. So that is something we do 1 distributor. Then we have launched already Nokian Tyres One, which is introduced in the early part of this year. We have launched the Nokian Nordman 8 and Nokia Nordman 8 SUV. And also in the autumn of 2020, we launched Nokian Hakka Green 3, which is then targeting to '21 summer season. Most important launch is Nokian Hakkapeliitta 10, which is essentially the new next-generation winter tire. So it's been introduced 1 week ago to internal and external audience. Important to look at the various dimensions of that. So we have the more studs, superior winter grip. We also have a comfort and reduced noise level, good and better on-road stability and SilentDrive technology, which then allows also silence and noise canceling features of the tire, especially for the electric vehicles. So we have this Hakkapeliitta 10 to cars, SUVs and electric vehicles. Over 140 products. And it is expected to go into production this spring for the season of 2021 winter. Also, new products in Heavy Tyres. Nokian Tyres Intuitu, which is a smart tractor tires, gives on-time information to driver about temperature and air pressure. Also gives the same information to us via cloud. We have the Nokian Ground King, a number of new products there. Also, Nokian E-Truck, which is a tire range for delivery trucks. And then we have Kare Semi-Slick, which is the backhoes in railroad operations. So a number of new products coming to the market, and this is very important for us because we have a capability and we are building the manufacturing in the U.S. and also seek to fully utilized Russia and then build Nokia towards Heavy Tyre step by step, but also keeping the premium tire, Passenger Car Tyre manufacturing in Nokia. When we then look at the outlook for 2021. Here on Page 16, I have some key assumptions or we have some key assumptions. One is that the demand for replacement car tires is expected to increase, driven by strong demand and increase in new car sales. Demand for Heavy Tyres' core products are estimated to increase. We also recognize that uncertainties due to COVID pandemic remain, especially the introduction of vaccination and reduction of local lockdowns and similar, how will that evolve. But we can consider for COVID that help is on the way. When the help will help, it's something that we need to look market-by-market and quarter-by-quarter. Then we talked about Russian ruble. And clearly, the weakness of Russian ruble in January 2021 will have a headwind to our net sales and profitability, as mentioned by Teemu. We also expect that because of the recovery, the raw material costs are likely to increase. Also, as we all have read in the newspapers, the logistics costs are quite fragile at this point of time, early part of the year. That may stabilize throughout the year. But in this -- at this time, the cost of containers and cost of transportation likely to be on the high side. However, the guidance for 2021 is that our net sales in comparable currencies and segments operating profit are expected to grow significantly. And we expect that global car and tire demand is expected to pick up, but the COVID pandemic continues to cause uncertainties for the development. This is formally our guidance. And then I end our prepared presentation here, and I hand back to Paivi to lead to Q&A session, please.

Thank you, Jukka, thank you, Teemu. So operator, now we would be ready for questions from the audience, please.

[Operator Instructions] Our first question comes from Gabriel Adler from Citi.

Gabriel from Citi. Can I start please with the outlook? Could you help us better understand how to interpret your expectations of significant growth in both revenue and operating profit? Can you offer any more specific color maybe on the target for 2021? Because it's very difficult to interpret significant growth as a metric when we're coming off such a low base in 2020. So that's my first question.

So we expect, as I said, significant increase. And for us, significant means double digit. And we will specify the guide along the year. And we are not giving a more detailed guidance at this point of time. But as stated already a couple of times, want to highlight the effect of Russian ruble exchange rate to our top line and profit.

Okay. Understood. Two more questions, please. One on raw materials and then one on all-season tire. So on raw materials, clearly, a big benefit this year likely or seem to reverse next year. Can you talk a little bit about how much of this you think you can offset with price/mix, given that your price/mix has remained negative for several quarters now? And also whether you put any price increases through perhaps already in January and February, like we've seen at other tire manufacturers? And then my last question on all-season tires is just, I guess, a slightly broader question about how structural perhaps you think this shift is from winter season that we're seeing at the moment? How much of the volume decline can you attribute to the winter season being weak? And how much of it is pointing towards more structural shift from your customers towards all-season tires underway from winter?

If I start with the raw materials guidance. So in the fall, we expected -- or we had an outlook that the raw materials could increase by 2% to 3%. Now our view is that it's going to be on a level of 4% to 5%. But that is clearly dependent on the overall demand. And current view for us is around 5% increase in raw materials for this year.

Okay. And talking about the all-season. So all-season is a category, especially in Europe, that grew in demand also in 2020 despite the fact that there's a 12% overall decline in overall tire demand. We expect that the category actually gains both from winter and summer tires. And I believe that it becomes category in between. So that on the other hand, some people from summer will upgrade to all-season, and then some people from the winter will also go down to all-season. And we expect that, that will carve out the position between those 2. Which one will lose more? Of course, probably Continental Central European winter is something that may shift more towards all-season. What we do see is that in the Nordics, where you have a clear winter seasons and so on, you still rely on winter tire studded or non-studded, maybe a friction tire, and then you have a summer tire. So that evolution is mostly in the Continental Europe at this point of time.

Okay. Could I just follow up, please? On the raw materials and your point around assuming a 5% increase, do you expect to offset any of that with price/mix next year?

So there is clear pressure to increase prices.

Typically, the industry has been quite disciplined in doing that. And especially now when there's a demand recovery, we believe that there is a good momentum to ensure that the raw material increases are also in the selling prices.

Our next question comes from Akshay Katkar from JPMorgan.

Akshay Katkar from JPMorgan. Three from my side, please. The first one, again, on pricing. You are still seeing some pricing pressure on a low comp from last year. I'm keen to hear your thoughts on what are you seeing specifically in Russia and Europe going into the first few months? That's the first one. The second one is the impact of the weak ruble on profitability. Can you just help us understand again how should we think about the drop-throughs on an EBIT level? Don't you have a natural offset between the translation impact from lower revenues, but an offset from the transaction impact in terms of the cost structure, a majority of which is in Russia? That's the second one. And the third one is an update on the ramp-up of Dayton. How many units do you plan to produce in 2021? And what are the U.S. factory ramp-up costs that you expect for the year versus the EUR 27 million that we had in 2020?

I'll start with the pricing in Russia and Europe in early part of this year. So when we went into the year, we expected that the raw material prices go up. And so therefore, our pricing is also done accordingly. Remember, maybe important to remember, in 2020, we did in Russia especially commercial actions to ensure that the inventory, distribution inventories and so on would go down. And therefore, we supported the sell-out with various commercial actions. We don't see similar need for commercial actions in 2021. So therefore, we expect that the pricing will be more attractive to us. I take also the Dayton. So we are ramping up Dayton. So we actually hired the second shift in latter part of 2020. And we are starting now with 2 shifts. And we've announced that we will also hire the third and fourth shift by summer and, therefore, ramp up the factory to continuous operations. And expectation is that it will produce more than 1 million tires in 2021. And the run rate towards the end of the year will be above 1 million tires per annum. And then we'll take it from there when we go to '22, that -- what additional actions needs -- can be taken, needs to be taken to further ramp up the factory.

And in terms of the Russian ruble impact, as you probably remember, since 2018 Capital Markets Day, I've been communicating the fact that we benefit from strong ruble, and weak ruble, on the other hand, is a headwind for us. And now last year, when there is a significant change in the Russian ruble in the third and fourth quarter, that became visible to all of us. And as I said, it's a good proxy, looking from last year that we had a EUR 10 million headwind from -- mainly from Russian ruble in the third quarter and in the fourth quarter, and as I said, in Q1 and Q2, if the ruble stays on this level, you can make a proxy of EUR 10 million for the first 2 quarters of this year. So this shows you the sensitivities, in my opinion.

Just following up there. I think the question on pricing in Europe was still left. And the second one on the expected ramp-up costs for Dayton in 2021.

Yes. Okay. So Dayton, we expect that we go to EBITDA-positive clearly in 2021 with the anticipated shifts and ramp-up. And then European pricing, the same story as in Russia, that we don't see any pressure to reduce prices. We have the contrary situation that new products improvements in pricing.

Our next question comes from Mattias Holmberg from DNB.

A question on your Russia guidance. Can you help us understand a bit how you -- or what metrics you look at to produce this forecast? I'm just reflecting that AEB earlier this year published forecast saying they saw roughly 2% growth in Russia car sales in 2021 and your forecast is obviously a bit higher than this. So I'm just curious to hear what you base this on.

You were asking the Russian new car sales forecast or did I...

Yes, you hear correctly.

So that is our own expectation in Russia. And as you remember from the -- from earlier years, our own view has differed from the official estimates.

And one more question also on Dayton. I read in the report that you said that the ramp-up was a bit slower in 2020 due to COVID-19, but I'm not certain if that refers to the later part of the year or the earlier part. Can you just clarify if this is an issue you've had in the latter part of the year or an old issue?

It's basically a delay in the early part of the year, and we actually hired the second shift after the summer when the clarity in situation with COVID became more predictable. And then we decided that it's right time to continue to ramp up. But the early part of the year was the time when we had a delay. Now we don't have any delays at this moment going into '21. It obviously takes time to hire the shifts.

Our next question comes from Thomas Besson from Kepler Cheuvreux.

I have a few questions as well, please. First, I'd like to come back to the new products you're launching. So the Hakkapeliitta 10 or the Nordman 8. Could you remind us how much it accounts for the overall volumes or revenues of the Passenger Tyres business this combined studded winter tire products that are going to be replaced over the next, what, 12, 18 months? Or just over the next 6 months? And also, when you introduce that new generation, talk about the price points at which you launched it versus the Hakkapeliitta 9 or the Nordman 7, please?

Okay. So the first question is what's the share of the winter products in our lineup. And all in all, the winter tires are about 7%. And obviously, Nordman is a bigger category than Hakkapeliitta. But nevertheless, in combination, they are about 7%.

Okay. And do you mind talking about the price point at which they're going to be introduced versus the previous version, please?

Yes. The Hakkapeliitta 10 is going to be the new premium point. And then Hakkapeliitta 9 and Nordmans are lined up below that price point.

Okay. So it's a fair comment. You care to say that these products are going to be more expensive than the previous generation or not?

Hakkapeliitta 10 is going to be more expensive than Hakkapeliitta 9, the predecessor, yes. Okay. But of course, it's a market by market. But now we talk about the Nordic, Russia and also North America.

Okay. I'd like to come back to the guidance. I understand you don't necessarily want to specify it, but we have a consensus figure for 2021 of about EUR 1.5 billion and a consensus figure somewhere around EUR 265 million of adjusted EBIT. What I call adjusted EBIT is after the element that are reclassified somehow. Is your guidance consistent with that? Or do you believe analysts are too optimistic for 2021?

We see no reason to comment it up or down. We are confident saying that, having talked about all headwinds and tailwinds, we expect that we have a significant top line and profitability growth in 2021. And but we promised that we will specify the guidance as the quarters continue. So that clearly, we understand that COVID is one element, then the lockdowns will be eased and then the vaccination will help and so on. So there are a number of uncertain elements. But nevertheless, we are confident when we go into the year at this moment that we have a significant improvement in both the segment operating profit and top line.

That's very clear. And I agree on the uncertainty. I make another try on the pricing question. You are the price setter for the Nordics and for Russia. Have you planned to raise prices in March, April or the next summer season? Or is it something you do not comment before doing it?

Basically, the basic idea behind new products is that they command a premium and we start from that angle. And then we obviously look at the pricing of the competitive products and our novelty product and we go from there. But of course, the ambition is to ensure that the newest products are commanding a premium pricing. But then, of course, step by step, every market, we make the launches and we make the price list, then we talk with distributors and customers.

Okay. I have a last one, please. Is it fair to believe that you were very strongly pushing inventories down in your distribution channels in the Nordics and in Russia because you were going to introduce these new products, so to make room and not to disturb the pricing initially of these new products? Or it's not related at all?

I think that we set out in early part of the year to ensure that we do not build any extra inventory and so on. And we agreed that we will then reduce the inventories in the distribution channel. But obviously, these things go hand-in-hand, that when we go into the next winter season, it's easier to go to winter season when the pipeline is relatively well managed and there is no excess products in the pipeline. And that, at the end, it helped us to make sure that the distribution stocks and our own inventories are low at the end of the year. It also makes sense for our distributors. But it also helps and surely secures a better launch of new products. So they all go hand-in-hand, but which one is chicken and which one is egg, I think that this time, the chicken was really the COVID that started the whole program. But obviously, we also recognize the benefits of helping our new product launches.