Nokian Renkaat Oyj (TYRES) Earnings Call Transcript & Summary

Welcome to the Nokian Renkaat Q3 2021 Interim Report. [Operator Instructions] This conference is being recorded. Today, I am pleased to present Paivi Antola. Please go ahead with your meeting.

Good afternoon from Helsinki, and welcome to Nokian Tyres Q3 Results Conference Call. My name is Paivi Antola, and I am the Head of Investor Relations in Nokian Tyres and together with me in this call, I have Jukka Moisio, the President and CEO of the company; and Teemu Kangas-Karki, the CFO of Nokian Tyres. As usual, we will start the call with Jukka and Teemu going through the Q3 results. And then that will be followed by a Q&A. So Jukka, please go ahead.

Thank you, Paivi. Good afternoon, and welcome on my behalf as well. I'll start going through the prepared notes a point presentation and as, on the cover mentioned, we had a strong volume and profit growth in the third quarter. But before going into financial details of the quarter, just to remind you that we announced our revised growth strategy in September in our Capital Markets Day. Some of the highlights of that strategy is that we have an ambition to become a EUR 2 billion company, midterm, midterm meaning 3 to 5 years. And that will happen by growing Heavy Tyres by 50% from thermal rolling basis ending June 21, also growing in North America by 100%. Central Europe by 50% and maintaining and strengthening the #1 position in Russia and also strengthening #1 position in Nordics and Vianor. Our financial key targets are 20% operating profit and 20% return on capital employed. So those are the highlights of our midterm targets, which we announced as mentioned, in the middle of September. I go to Page 5, which is our Q3 highlights, net sales at EUR 443 million, up from EUR 350 million or EUR 25 million -- approximately 35% with comparable currencies, all-time high third quarter, both in the Passenger Car Tyres as well as in Heavy Tyres, and we had strong demand for our products in all markets. Operating profit increased from EUR 69 million to EUR 97 million in the quarter and that was driven by -- especially by increased sales volume. We also made price increases to combat inflation that led to higher ASP. We also continued the prudent cost control, especially to ensure that the price -- the cost inflation is also controlled internally. I move to Page 6, and I call out some key numbers in our P&L. First of all, the segment operating profit percentage, 21.8% in the quarter compared to 19.8% 1 year ago. Year-to-date, our segment's operating profit is at 19.7% in '21 versus 12.2% in 2020. Cash flow in the quarter minus EUR 81 million. This is driven by increased working capital both inventories and also receivables. And on the other hand, we also had increased payables, which helped a little bit the cash flow. Capital expenditure remains below 2020 level. Also in year-to-date, we have invested in year-to-date about EUR 60 million versus EUR 119 million a year ago. Equity ratio at the end of the quarter at 66% versus 57% and gearing at 16% versus 18% a year ago. Those are some of the financial highlights. And now I hand over to Teemu to talk about the Passenger Car Tyres and financial details. Teemu, please go ahead.

Thank you, Jukka. Starting with the Passenger Car Tyres. We had a strong volume growth in all markets, especially in Russia, that is visible in our numbers. The growth rate for the third quarter was close to 30% and in absolute terms, net sales reached a level of EUR 330 million. The segment's operating profit for Passenger Car Tyres in the third quarter was on a level of EUR 97 million-plus. We have been increasing the additional ships in U.S. and in 3 factories in order to match the growing demand. All in all, if we move to the next page, where we see that the breakdown of our net sales, you can see that in the third quarter, our price mix was positive about 1.4% of which the price component was clearly above 6%. So here, you can see that we have been increasing prices as anticipated. Then moving to the breakdown of our segment operating profit. Here, volume is the biggest driver to boost the profit and as discussed earlier several times, we have a significant headwind coming from the materials and then when the factories are running with full capacity, we can see that the positive development in the supply chain basket. And the net, we are on a level of EUR 97 million and in this quarter, currency didn't play any significant role. In terms of net ASP, we can see that our price increases have offset negative PA mix impact when the share of the Russian businesses is growing stronger than in other markets. If we then move to Heavy Tyres, there we can see the all-time high third-quarter net sales and operating profit with comparable currencies, the growth rate was on a level of 36%. Net sales on a level of EUR 69 million and segment operating profit for the quarter, close to EUR 12 million and the growth was driven by new product launches, as we have been discussing earlier that we have a strong NPD pipeline coming, and that is affecting positively to our top line and customers, strong production levels as the early timing of deliveries helped to reach the top line. In terms of inventories, we can clearly see that those are on a low level as also in the Passenger Car Tyre business. And then moving to Vianor, the performance has been at a good level in all countries. The net sales growth was on a level of 4% in reporting reported numbers in absolute terms on a level of EUR 70 million and then the segment operating loss was around EUR 4 million. And as we all remember, we are now 2 main seasons of Q2 and Q4 and therefore, we are now in the middle of the main season in order to generate the profits. And maybe as a final comment of the Q3 and the second half, we clearly saw that the Q3 was stronger than we anticipated because of the lack of tires, but then in terms of our view on the second half, there hasn't been any significant changes as we see today.

Thank you, Teemu. And I continue with the presentation. So first of all, to revisit our Hakkapeliitta 10, which is our major launch, this autumn, 10 needs a 4x testing in Finland, Sweden, Russia, and it comes with 140 different SKUs and is really good winter tire. On the next page on 12, Hakkapeliitta 10 EV, which is a tailored model for electric vehicles and hybrids. There are certain expectations of parameters in EV version that are important. First of all, the EV vehicles are heavier. So, therefore, there is a higher load capacity in the tire, as well, as the higher torque in EVs and therefore, it needs to have a higher grip for higher torque. It's made from sustainable materials. So this is in line with our sustainability targets, and we include more and more renewable and recyclable material in our tires. Hakkapeliitta 10 EV also comes with lower noise, and that allows a higher driving comfort for EVs and hybrids. And finally, what is important for the improved battery range and sustainability matter as well. There is ultra-low rolling resistance in this winter tire. So this is our highlight and now key products in this season. On Page 13, just to recap that sustainability is important to be rooted in all what we do, including our midterm financial targets, nonfinancial targets, we had also introduced those in September. So we want to bring new environmental and safety innovations to our products. Our ambition is to have 50% of the tire made from renewable or recyclable materials. We also aim to reduce our CO2 emissions in line with the size-based targets, which were approved in 2020. We further want to improve our workplace safety and keep on monitoring and improving the monitoring of the sustainability of our suppliers. We have published our sustainable natural rubber policy in September. Also, we announced that we made a 10-year agreement to have renewable wind energy for electricity in is Finnish factory and Vianor. And also in June, we announced that we've installed a solar power plant on top of our Finnish logistics center in Nokia. Our guidance on Page 14 is unchanged. We expect that incomparable currencies, the segment's operating profit and net sales are expected to grow significantly. And recapping our prepared notes with our revised growth strategy. We have an ambitious leap forward. We aim to be a EUR 2 billion company in midterm and growing in Heavy Tyres by 50% from rolling 12 months ending June '21, growing North America by 100%, Central Europe by 50% and strengthening #1 position in Russia and also strengthening #1 position in Nordics and Vianor. And our 12 month rolling sales at the end of June, EUR 1.52 billion. And now at the end of September, our 12-month rolling sales are EUR 1.65 billion, which is all-time high, probably 12-month revenue of the company. With that, I end my prepared notes, and I open for questions. Paivi, please go ahead. Thank you, Jukka. Thank you, Teemu. And now operator, as Jukka said, we would be ready for the questions from the audience, please.

[Operator Instructions] And our first question comes from the line of Akshat Kacker of JPMorgan.

Akshat from JPMorgan. 3 from my side, please. The first one on pricing. Obviously, it was a very strong quarter with a 6.6% increase, I think, somewhat offset by the Russian mix. But it would be really helpful if you could give us a broad summary of the price actions that you've taken in your key markets? Just trying to understand if there are more price increases with the new product range that will come through in Q4, helping price mix into year-end? And if you still think that pricing can offset the different cost inflation headwinds that you will see across 2021 and 2022? That's the first one, please.

So, if I start with the comments that we have made several times in our earlier calls that we anticipate to offset the cost inflation with our price increases in all markets. And we are looking carefully with the raw material development is going and in line with our view. We will then further implement price increases as we go further. And regarding the price increases in different markets, they vary so there are no one fits all solutions for different markets.

Jukka, can you comment something about the new products and their impact on prices?

Yes. New products are, of course, an important driver, and they allow us to have new price points and so therefore, obviously, they have a major contribution to going forward and allowing us to improve the mix. And so, therefore, for example, Hakkapeliitta 10 in various markets and EV version, for example, comes under price premium versus a normal offering. And we hope to continue that by launching as part of our strategy by launching new products continuously. We've had a record number of new products launched in the past couple of years, and we aim to continue that.

Understood. Talking about mix, I want to go back to one of Teemu's slides from the CMD on category margin where you showed that all-season tire margins are lower than summer tires. Can you tell us what actions are you taking there? And by when do you expect to improve the margin profile of business at least above the summer tire business?

As you stated, it has been visible in our communication already for a long time that such that the product mix has some negative headwinds in terms of net sales or the profitability development. Having said that, what we are also then now working to improve the mix or the profitability impact is the rim size development. And that is one example of the actions to mitigate the headwind coming from the product mix development in the coming quarters and years to come.

Understood. The last one is on passenger car production capacity in Dayton and Finland, please. Can you talk about the current annualized production run rate as a [indiscernible] And when do you plan to hit the Q2 million level at Dayton and the EUR 5 million in Finland on an annual basis?

Yes. We said as part of our Capital Markets Day that ambition is that we go towards EUR 5 million in Finland. So that's the capacity that is available and also that we've authorized investments and steps to go all the way to EUR 4 million in Dayton and [indiscernible] very much making the progress as anticipated so that we expect that in mid-term, we will hit those numbers and look at the end of quarter, we are basically on track to make that progress.

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

Thomas Besson of Kepler Cheuvreux. I have a few questions as well, please. Firstly, could you talk about the development in Russia in terms of both demand and the level of dealer inventories? It's been the main driver of your revenue beat over in the quarter. Clearly, currencies and oil prices suggest an improvement there. But could you discuss whether you effectively expect a substantial improvement in market conditions in Russia in Q4 in 2022 or whether it's still too early to talk about that now? That was the first question.

Okay. So thank you for the question related to Russia. First of all, as we ended last year, so the inventories were at normalized level. And so therefore, this year, the selling has been different compared to 2020 and driven by, of course, the demand in Russia. What we see is that the demand is essentially growing. But our selling has been growing faster for the reason that surely certain product allocations by competition has not taken place. So therefore, there is a higher demand for tires for those suppliers who are operating allocating capacity in Russia. Inventory levels at this point of time are relatively normalized. So we don't see any extra inventory anywhere. Obviously, it's subject to the winter season, which has started in parts of Russia continues right now, and then we will see how the season will end up when we go into full November and early December. But our anticipation is that the inventories are at normalized level in Russia. And so, therefore, when we go into 2022, we don't see any or handover excess inventory and on the other hand, there's not a significant upside potential in building the pipeline in Russia. So we see quite a normalized situation right now. Then we can talk about the currencies and...

And in terms of our Russian ruble, if we compare to Q3 of this year and last year, they are roughly on a same level, what is the difference within the quarter was that last year in the beginning of the third quarter, it started to depreciate this year, this quarter, it has started to appreciate. So currently, the Russian ruble is some around 82 against euro when the quarter is -- for the quarter is somewhere around 86, 87. So now knocking the good properly, the Russian ruble stays on this level or strengthens, let's see.

When I look at your mix, I mean, the summer and also shares have been higher, winter lower. I mean the weather is still mild this year. Do you expect the full year or the full year mix to get closer to the previous year? Or do you believe that we're going to see a further erosion of the winter share?

I think that what you will see is that absolute number of winter tires and so on will remain at good level and even grow. However, it's clear that the all-season is growing in Europe and also in North America for us, so that those season share will be growing in our total mix. And then the summer this year, particularly summer was quite strong in the early part of the year. And then when we go into 2022, we will then see how this turns out. But obviously, the absolute number of winter tires is an important driver for us, and that will be growing. But all season is very, very strong, of course.

Last question, could you give us some qualitative comments on the evolution of profitability by region? I know you don't disclose that. But just as an indication, whether you are happy with the development, notably in the Russian and North American business. You talked about the substantial mix detention, but with the market environment normalizing, currencies improving, et cetera, Russia's contribution should improve as well. And I assume that the North American business is very much supported by an annually strong pricing environment. Is that fair?

So as a qualitative comment naturally, which is visible in our numbers that all business areas are improving their profit and profitability. And if you look at the geographical net sales development, Russia being the main driver, of course, then the impact is also there significant.

Okay. And you comment on the North American margin development?

As I said, all business areas are developing to the right direction comparing last year.

Our next question comes from the line of Michael Jacks at Bank of America.

My first one relates to the early deliveries. Are you perhaps able to quantify the impact of this in Q3 revenues? And should there be any reversal in Q4?

It's difficult to quantify the impact. But essentially, what we saw, if I try to qualitatively describe what we saw is that certain markets, there was worried with the distributors that are there enough tires in the market. So they're actually quoting deliveries early in order to ensure that they have products for the winter season, and that is the driver. Will there be any reversal, but we don't think so. But as Teemu was saying that our expectation for the second half is pretty much unchanged so that the early delivery is obviously something that we are happy in quarter 3, but the full half year, we expect similar trading as we had in when we went into the second half in August.

Clear. And then could you please give us a sense for what your exposure is to sea freight and what proportion of your contracts are annually negotiated?

So sea freight is especially important for -- as we speak, for our North American business as we at the moment, ship majority of our tires to North America. So we can see that there is a headwind in the sea freight and also in our material unit cost in general, is impacted by the sea freight as well.

All right. And then last question. Are you starting to experience any significant wage inflation in your operations? And how is this developing regionally?

Yes, this is part of the cost inflation and inflation environment that as we see from material transportation logistics. And also, we see that there is growth in the wages and salary costs locally in various markets. And this is also part of our inflates we said that the cost inflation will continue. So this is part of our expectation that -- and it's part of our price increase and cost mitigation actions that you see what we can do about this cost inflation. But yes, we do see, yes.

Maybe just following up on that, sorry. Just trying to get a sense for what the level of incremental inflation is that we should expect. I mean a lot of the sort of inflation items that we saw in Q3 and started to rise towards the end of the quarter, and I would imagine that you've got price increases already towards the beginning of the quarter. So trying to get a sense for what proportion of inflation and is yet to reflect in the cost base, maybe perhaps looking into Q4 and Q1 next year?

Yes, I think that maybe if I respond to qualitative view again that we try to ensure that our price increases offset these inflationary environment impacts. And so we act on those accordingly.

Our next question comes from the line of Giulio Pescatore of Exane.

The first one is on mix. Can you help us understand the drivers, so the components of the negative mix headwinds between the product costs and maybe regional costs and all that and just maybe trying to understand what was the strongest component and which one it actually will reverse in the next quarters?

As we have been discussing also in the previous calls, this year, one of the biggest negative mix component is coming from the business area mix when the Russian share is increasing faster than other markets. And that then implies that the net ASP in euros are below the average. And in this quarter, we were able to offset more than the headwind coming from the negative BA mix.

Then you saw that our -- as we discussed earlier in this call that obviously, our product mix, especially in the early part of the year bigger part of the summer tires than we usually have an also all-season growing. However, of course, in quarter 3, winter tires were the main deliveries. But overall, in the year, the share of summer and all-season will be higher, although the absolute number of winter tires will also be higher.

Okay. So biggest impact from regional mix and product mix and I guess there was also some positive impact from the new product launches, some mix within winter.

Indeed. And as we have discussed it many times when we launch new products, so that allows for the new product, new price points, but also behind that product and repricing the other product offers offering so that we have a right kind of price points in various categories, and this is visible now in this year as well.

Okay. The second question on Russia. I mean are you worried at all about the covid situation in the market? Do you foresee the risk of any lockdown? Or are you seeing any risk of that? And are you taking any preventive actions to potentially offset the lockdown of your factory in St. Petersburg?

Yes, we, of course, follow the coverage situation quite carefully. And so far, our factory has been operating well. We have had cases like everybody probably operating Russia, but we've been able to take mitigating actions and continue operating in a good efficiency. We don't expect that to change significantly. But always, always, we are careful and we take care of the safety of our employees, all the time.

Maybe just one last one on the U.S. ramp up. I mean, you reiterated the target of 1 million units this year. Is there any scope to do better than that?

We basically are running towards our 4 million target, and we are on track. And even when we can achieve higher, so the year is not yet also we will see. But clearly, we are making good progress.

Thank you. Our next question comes from the line of Gabriel Adler at Citi.

I just have 2. The first is on basically the supply chain bucket in the bridge. Could you elaborate a little bit on what was driving the strong reversal had a positive impact there? And then my second question is on the guidance because you've maintained what is quite very guidance with significant growth despite only having a few months left in the year now. Would you like to take this opportunity maybe to clarify the guidance at all on the call following this print.

If I start with the supply chain. And there, it's good to remember that last year, we had a significant negative impact and now this positive is the reversal of last year negative. So that's in its simplicity, the reason. Now the factories are running at full capacity as we speak. And therefore, it is a positive thing for our profitability compared to last year.

And to guidance, it's unchanged. We made the guidance in February this year, and we are tracking according to that guidance. So no reason to change.

Okay. Can I maybe follow up on the supply chain bucket point? Because I think the negative last year was around EUR 9 million. So it would be interesting to understand if there's anything else within that portion of the bridge that you're including -- I know you mentioned sort of cost reduction measures, do you celebrate on that if that fee included any more detail on what will go to is between the 17% this year and the 9% negative last year.

The main reason for the development year-on-year is the fixed cost absorption. Last year, we didn't have the full fixed cost absorption because the volumes were on a low level. Now we have the full fixed cost absorption. And then there are some other items that are not as significant as this full cost absorption difference year-on-year.

And next question comes from the line of Panu Laitinmaki of Danske Bank.

I have 2 questions. Firstly, just coming back to this early deliveries and the outlook for Q4. Just to clarify, to understand, you don't expect a reversal in the early deliveries, but then it sounds like you are more cautious on Q4. So has your view changed on Q4 than what it was when we last spoke? And then secondly, can you provide a number for the expected inflation on raw material costs? And has this view changed from what you do at the time of Q2 report?

So if I start with cost inflation of the raw material headwind, it has gradually increased slightly, but we are already on a high level as we have been speaking earlier. So there will be a significant headwind in the second half as communicated earlier, but no major change from the significance.

And following that and talking about the expectations for the second half and we went into the second half in August, our view from that hasn't changed significantly. Obviously, we are very happy about the quarter 3 volumes, and we will see then how the final quarter will turn out to be, but we have no chance of expectations.

Our next question comes from the line of Pierre-Yves Quemener of Stifel.

2 questions, I guess, I'll go over what has already been raised. Regarding the raw mix price increases, is it still value that you expect to fully offset the cost only by the first half of 2022. That would be the first question, please.

So what we have been discussing is that on a rolling basis, we will offset the cost inflation, not giving any specific time frame.

Okay. And once again, a follow-up on the volume. I'm not sure I totally remember what you said, what were the trends you were expecting for the second half of '21. But given the staggering volume number in the third quarter, do you not expect a positive development on the volume side in the fourth quarter of this year?

So we basically, at the time when we talk about the second half, we were supplying and running that out. And I think that essentially, our situation in that sense when we have been operating in the second half hasn't changed. So we expected strong volume development and has been -- it has materialized partially in Q3 due to early deliveries, but we also expected that good volume development continued in the second half of 2020. But we haven't changed that expectation, the expectation as we had it in August is pretty much the same.

Okay. So likely positive, if I understand you correctly in the fourth quarter of 2021?

It can be interpreted that way, yes.

[Operator Instructions] There are no further questions coming through, I'll hand back to our speakers for the closing comments.

Thank you. So if there are no additional questions, it's time to finish this call. Thank you, Jukka. Thank you, Teemu, and thank you all for joining and have a good day.

Thank you, Paivi. Thank you, Teemu. Have a good day.