Nokian Renkaat Oyj (TYRES) Earnings Call Transcript & Summary

Hello, and welcome to the Nokian Tyres Q2 2021 interim report. [Operator Instructions] Just to remind you, this conference is being recorded. Today, I'm pleased to present Paivi Antola. Please go ahead with your meeting.

Good afternoon from Helsinki, and welcome to Nokian Tyres' Q2 2021 results conference call. My name is Paivi Antola, and I am the Head of Investor Relations in Nokian Tyres. And together with me in the call, I have Jukka Moisio, the President and CEO of the company; and Teemu Kangas-Karki, the CFO of Nokian Tyres. In this call, we will go through the Q2 results, followed by a Q&A. So Jukka, Please go ahead.

Thank you, Paivi, and good afternoon, on my behalf. Welcome to Nokian Tyres results call. I'll start with the prepared notes, and I'll move to Page 2. And just to reflect the highlights of this quarter. So our net sales and operating profit increased significantly. Net sales were EUR 416 million, about 55% up with comparable currencies compared to 2020 Q2. That was driven by strong demand in all markets and also all the business units and business areas contributed to growth, keeping in mind that Q2 in 2020 was particularly hit by COVID pandemic. Segments' operating profit was at EUR 89.6 million, up from EUR 24.4 million in 2020, Q2. The biggest impact came from increased sales volume, and then we had some headwind from currencies by EUR 5 million in the negative territory. I move to Page 3, some of the financial highlights, call out some key numbers. As mentioned, the top line up and segment operating profit up. The percentage in segment operating profit was 21.5% versus 9% in second quarter 2020, and segments' earnings per share at $0.51 versus $0.09 a year ago. Particularly a good development in cash flow despite the fact that we increased quite a big receivables and working capital as the business picked up compared to 2020. Nevertheless, we delivered positive cash flow in the quarter. Capital expenditure in the quarter were below prior year, and this reflects the fact that some of the major investments that we were still completing in 2020, these programs are now behind and we are looking to get the benefit from those. To mention, particularly, the Dayton factory and as well as Spanish test track of the 2 investments that we've completed since the second quarter 2020. Half year numbers, top line is up by 41.5% in constant currencies. Segments' operating profit at 18.5% in 6 months versus 7.4% a year ago. Segments EPS at EUR 0.80 per share versus EUR 0.16 a year ago. Return on capital employed at this point of time 12-month rolling is at 13.9% versus 10.6% a year ago. And equity ratio after 6 months strong 66%, as well as gearing low at 9.4%. Interest-bearing net debt at this moment after 6 months is EUR 140 million and capital expenditure year-to-date 6 months is slightly below EUR 40 million. With 12-month rolling our net sales are now at EUR 1.62 billion versus SEK 1.3 billion in full year 2020. At this point, I hand over to Teemu, our CFO, to talk about the financial results of the segments and other financial details. Teemu, please go ahead.

Thank you, Jukka. Starting with the Passenger Car Tyre business unit, key figures and highlights. Our net sales grew with comparable currencies, almost 75%, driven by strong growth in Russia, followed by North America, Central Europe and Nordics. All main markets clearly increased the net sales. Our average sales price decreased due to the increased share of Russian volume, which was the case already in Q1. And our operating profit clearly increased because of the sales volume, and we were able to record segment operating profit close to EUR 71 million, and our segment operating profit for the period was on a level of 25%. In U.S. and in Finland, we have added new shifts to increase the production due to the fact that the demand is strong in all markets. If we move then to the next page where we can see the breakdown of our net sales and segment operating profit. And starting with the net sales, we can see that, clearly, volume is the main driver. And then the price mix is close to flat, minus 1% negative. And then you had a headwind from the currencies. I repeat the same comment that I made in the Q1 call, where I stated that the region or the business area mix impact coming from Russia is about 3% negative and then the net price mix is about 1% for the Passenger Car Tyres. Then moving to the segment operating profit, here maybe highlighting the material impact or the increasing -- or decreasing material cost in the Q2. And for the full year, just reiterating our guidance that the raw material prices are increasing for the full year. In Q1 our estimate was about 9%. Now our estimate has increased to the level of 12%. Meaning, that in the second half, we will have a strong headwind from material unit costs. So meaning that if the full year guidance is 12%, and for the first half we are small positive impact, then simple math indicates that in the second half the impact is negative around 24%-25%. And in order to offset that factor, we continue to increase our prices, as we have already done in the first half, in the second half in order to be in a better position to protect the profitability of our Passenger Car Tyre business unit. Then if we look other aspects in the segment operating profit, you can see that the currency headwind, SG&A being closer to the normal level after the -- last year when we cut the costs. And then we haven't recorded any bad debts provision in the period. Let's move then to the Heavy Tyres, where the net sales and segment operating profit continued to grow. Our comparable currency net sales growth was on a level of 53%, in absolute terms on a level of close to EUR 63 million. And our segment operating profit close to EUR 12 million, and the segment operating profit for the period was on a level of 18.8%. The volume development was driven by the customers' strong production levels and also the new product launches that we have made. And, therefore, the demand was strong in all product segments within the Heavy Tyres business unit. And if we look at the first half operating profit for Heavy Tyres, we recorded all-time high segment operating profit. The inventories are at a low level in Heavy Tyres despite the fact that we do our utmost to produce whatever we can to serve our customers in the best possible way. Then moving to Vianor, the performance has been good and all countries recorded top line growth with comparable currencies 8% in absolute terms, close to EUR 92 million and the segment operating profit on a level of EUR 10 million and the profitability being on a healthy level of 11%. The operating profit improvement for the business has continued to be strong, supported by stable operations that we do in the service centers. As we have highlighted, the focus for this year it's about growing the top line and focusing on the cash flow. And therefore, we have recorded a strong cash flow for the first 6 months, as commented by Jukka. Moving to our assumptions. There are no major changes. The demand is strong for the replacement car tires and for our Heavy Tyres' core products. Russian ruble is always a key factor in our performance. And then one addition that we wanted to include in our assumptions at this point is the logistics cost that we clearly see pressure coming from there. And the full year impact is about high-single millions coming from the logistics cost. We have not changed our guidance due to the fact that the assumptions have not changed and therefore, we state that our net sales with comparable currencies and segments' operating profit are expected to grow significantly for the full year. Okay. Handing over back to Jukka.

Thank you, Teemu. I wanted to just remind that we have a all-time high number of new launches -- new product launches. And I want to draw your attention to Hakkapeliitta 10, which is our flagship mid-range that will be available to consumers in the fall of 2021, and that will include safety and SKUs for passenger cars, SUVS, hybrids and EVs. A very comprehensive size selection and also good benefits in winter grip, comfort and reduced noise level, better on-road stability and SilentDrive technology. This is simply to highlight our key product, but also keeping in mind that we have been launching late 2020-early '21, and we continue to launch record number of new products. And this is an important driver for our top line and also in terms of getting higher and better price points for our products. Also to remind that we are committed to safe and sustainable manufacturing, so in the quarter and this year, we've been included in the European Climate Leaders 2021 list for significant greenhouse gas emission reductions. Our U.S. factory also earned ISO 14001 certification in May and LEED v4 Silver certification in March. Our Finnish factory earned ISO 45001 certification for occupational health and safety in January. And we inaugurated a solar power plant on the Finnish logistics center in June. These are some of the highlights in our sustainability, and that is an important part of our operation and important part of our commitment going forward. I move to Page 13, our priorities for second half 2021. We want to drive the growth with new product launches and continuous improvements in go-to-market activities, so volume growth. We want to protect our cash flows by prioritizing investments and capital outlays and also manage our working capital carefully. We will take mitigating actions to reduce the impact of cost inflation. These mitigating actions consist of price increases, which we've done in the early part of the year. We continue to do them in the second half. And as Teemu was pointing out, there's significant raw material cost, logistic cost increases in the pipeline. We will counteract them with price increases. And also, we want to keep the cost under control. So this is the second mitigating action. So there are 2 things to protect our profitability and cash flow against the cost inflation. And we believe that with our valued brand, strong expertise and strong production capacity, we are well positioned to develop and meet those expectations in the second half. So this completes my prepared notes. I want to remind everybody that we have a Capital Markets Day scheduled on September 9, 2021, starting at 1:00 o'clock. The invitation to this Capital Markets Day went out today. So please put that on your calendars and keep in mind, that that's the moment when we talk about the long term, medium-term targets and ambitions. Now I open and hand over back to Paivi, and we open for Q&A. Paivi, please.

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

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

Akshay from JPMorgan. The first one on price increase. Can you comment on the price increases that you have implemented in your core markets as of now -- Nordics and Russia, as well as the price increases in Europe and North America to offset the different elements of cost inflation that you spoke about -- raw materials, freight, logistics, et cetera. It would be helpful if you could quantify the net increases that you've been able to pass through in different markets? That's the first one. The second one is on Russian market. You've, obviously, seen some very strong volume growth coming in the first half, and you've also won market share in summer and all-season tires. Can you just share your expectations for rest of the year in terms of what are you seeing on market dynamics? Just talking about different elements like inventory levels, pricing and overall consumer sentiment as you look into the second half? And the third one is on Dayton. Just saw limited mention of Dayton in the prepared remarks, has there been any change in the ramp-up plans of the plant looking out beyond 2021? Those are the 3.

If I start with the price increases by region. As I said, we have implemented price increases in all of our markets. Clearly, highest increases are in Russia where they are significant in terms of percentages. Then in Central Europe and Nordics and North America, they are lower than in Russia. But the ambition is to offset in local currencies the price increases. And the impact for the calendar year is we cannot fully -- we cannot offset the calendar year impact, because the raw material prices are increasing, but on a rolling basis. That is the ambition to fully offset the input cost price increases.

If I continue with the Russian market. So, obviously, we have had a good trading in Russian market. Why that happens is that we are strongly dedicated to Russia. It's an important market for us. We also see that some of the competition may not prioritize Russian market the same way we do. So, therefore, we've gained market share. And we continue to see that momentum strong throughout the year and also into 2022. Inventory levels in Russia from, our perspective, are healthy. So, therefore, there is -- we don't see any excess. We see a strong sell-out as well as strong sell-in our pipeline. And as Teemu was talking about the price increases, so we've implemented price increases in Russian market, which are offsetting the raw materials and aiming to offset those also into 2022, keeping in mind that the environment is -- the cost increases are coming. But we are quite pleased of the Russian momentum, and we expect to enjoy a good -- strong volume into 2022. Dayton, no change. It continue to ramp up. It started the third shift during the quarter. And after the quarter in July, we started the fourth shift and we continue to ramp up. In terms of just a general comment about the production. Essentially, we are running flat out in all our factories. We have had a short summer break in late June, early July, but we are -- been loaded and our main important task is to find additional capacity and capability, which we can mobilize in order to supply the market. And this is the situation. So in terms of Dayton, no change, we keep on ramping up and our ambition is to go into higher volumes in 2022.

One quick follow-up, if I may, on price increases. Is it possible to split out the price mix impact in Q2? Can we separate price and mix, please?

As I have said earlier, in terms of going into the specifics within the price mix, in our case, we should look at long term trends not to -- to only look at the one quarter or even first half due to the fact that our customer portfolio is more condensed than with our competitors. So there are things that are not transparent on a long-term basis.

But if you look at our -- yes, and if you look at our mix at macro level, then winter tires, about half of the volume and then summer tires, all-season is the other half. And that, typically, is not the case. Typically, we have more winter tires than what we have had this year in the first 6 months.

Yes, I was just trying to get to the underlying positive price impact in that number.

I understand that.

Maybe just to reiterate what I've said earlier in the call that the region or the -- be a mix impact, the negative impact is about 3%. So taking that into account, the price mix is plus 2%, give or take.

Our next question comes from the line of Thomas Besson of Kepler Cheuvreux.

It's Thomas Besson, Kepler Cheuvreux. I have a few questions as well. Firstly, I'd like to comment -- to get a few comments on your new range that is going to support your market share and profitability in the next 2, 3 years, but particularly in the second half. Could you discuss the level of interest from your dealers and the level of orders already in the first part of the year for this Hakkapeliitta 10 range, please? That's the first question. The second question is more on the bridge. You report for the second consecutive quarter in a row kind of a reversion of provisions for bad debt of EUR 5 million, so that's EUR 8 million for the first half. Could you indicate if there is more of that to come in the second half? Or if you've already reversed everything that could be reversed in the first half? And thirdly, I'd like to get a few comments, if that's possible, on the level of profitability, which is achieved in Dayton in 2021 compared with your plan? Are you ahead, thanks to the very unusual pricing environment in the NAFTA or are you just in line with plan in North America?

Maybe if I start with the Dayton and profitability. So we are basically on our plan. So there's no change in that. Obviously, we will see then at the end of the year, because the bigger part of the volume is expected in the second half simply based on the fact that we add more shifts and they've become operative as we speak. So, therefore, of course, the volume and the profit generation is expected to be strong in the second half. Now, most of the profitability improvements in the first 6 months are coming from strong loading of Russia and also improved loading and Heavy Tyres performance. If we talk about the Hakkapeliitta 10 expectations, so it's in the early stages and shipments and so on. And I believe that the performance of the tire is very good. So we are very pleased with the performance as we've tested that and so on. Obviously, what is important to see is that what is the external tests and what they -- kind of feedback they give and those will be available in the early fourth. But so far, we see a good demand on that. And I think that especially this time, we have a very good and strong offering in winter tires throughout Nordic, Russia and also Canadian, and even northern part of the U.S. territories. And especially, for example, in Russia, when we have Hakkapeliitta 10, Hakkapeliitta 9, Nordman 8, we have quite a strong lineup of winter, same applies to Nordics and North America. And as this is very important for us, we've also taken enough capacity and enough focus to make sure that we are capable to deliver for that season. That's all I can say at this point of time. I believe that when we have a third quarter behind us during the third quarter there will be test results and similar available that externally you can also verify that this is high performer as a product.

Then you had the question regarding the bad debt provision. It's good to think that in the light of the events that we faced last year due to provision, and therefore, the picture was more bloomy than it is at the moment. And therefore, we provided with our best estimate bad debt provision last year. Currently, naturally, the outlook is better. And therefore, we haven't put any bad debt provision year-to-date.

Yes. Strong performance throughout the value chain, including our sales, our distribution and so on.

I was asking if there are going to be more releases of bad debt provisions from last year in H2 or whether you've released everything you had, because it's been a decent boost in H1?

So these are not releases. This is the buildup between last year and this year. So last year, we booked provisions this year...

I understand. So is there going to be, again, a gap between last year H2 and this year's H2? Or are we seeing all the benefits of that difference for the year?

As I commented, the outlook is more positive than a year ago. But hard to comment in advance the bad debt provision. But at least how it seems today, I'm optimistic about the second half.

Our next question comes from the line of Mattias Holmberg of DNB Markets.

Given what you know right now about raw materials and logistics costs, will you be able to fully compensate with price increases this year? Or should we expect it to be a net negative?

As I commented for the calendar year, I'm not expecting to offset raw material price increases fully. But on a rolling basis, that's our ambition level in local currencies to offset the impact of increased costs.

We watch this raw material evolution carefully. And obviously, as we have seasonal pricing and continued focus on this, we will seek to increase prices and to mitigate this as we go along, because this is an environment that everybody understand that cost inflation is there. And that important thing is to take actions to mitigate that. And the actions are really twofold. One is to increase prices. The second one is to contain costs. And with these 2 we seek to secure the profitability development. But this is an environment that is not going to stop, but most likely this year cost inflation will continue well into 2022 is our expectations. So, therefore, working on that continuously is vitally important.

Maybe I'm just not smart enough, but can you please explain sort of what's preventing you from simply adjusting your prices to cover the cost at this point and why you need a longer time to compensate?

As we said, this is our ambition that we offset, but obviously takes a little bit time to work. So you don't work step-by-step, but you work a little bit with -- in Heavy Tyres, we have escalation, de-escalation, which had slight lag. And then in the other places, we have worked as quickly as we can.

And finally for me, you mentioned, I think, single-digit million high logistics costs for the full year. Would you be able to specify how much of that you've seen in H1? Or if it all is sort of an H2 issue?

I would say that if you split that by 2, then you are close enough because it has started already in the beginning of the year.

Yes. And it was clearly visible in the second quarter -- that logistic costs and the availability of containers and such at higher price was visible and also experienced by us.

Our next question comes from the line of Sascha Gommel of Jefferies.

I've got a few items. Firstly, on the guidance, we're now halfway through the year, but you still remain fairly vague about your '21 performance. Any particular reason why you're not more kind of detailed in your guidance for this year?

No particular reason. We believe that we provided the guidance early in the year and don't see any need to change that because it covers our expectation of the full year.

I see. Okay, perfect. And then my second question would be on the mix impact in the second half of the year. Is it fair to assume that the negative impact from kind of the Russia improvement and -- will be lower and then the new products will drive a positive product mix? Is that the right way to think about the second half of the year?

Especially, our expectation is that the negative impact will be smaller in Q4 due to the fact that Q4 was already a strong quarter in Russia, therefore, the growth expectation for Russia in the fourth quarter is lower than in the first 9 months.

And the new products, obviously, when they go-to-market are being delivered and they command a better pricing than the order existing. And this is, of course, something that we expect to help our second half. Hakkapeliitta 10 as mentioned is something that is important for us, but also all the other new products.