Nokian Renkaat Oyj (TYRES) Earnings Call Transcript & Summary

Hello and welcome to the Nokian Tyres' Q4 Conference Call. My name is Francois and I will be your operator for today's event. Please note that this conference is being recorded. [Operator Instructions] I'll now hand you over to your host, Paivi Antola to begin today's conference. Thank you.

Thank you. Good afternoon from Helsinki, and welcome to Nokian Tyres' Q4 and full-year 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 Nokian Tyres; and Teemu Kangas-Karki, the CFO. In this call, we will go through our Q4 and full-year results and more importantly discuss our plans for 2023 and beyond and the new start for Nokian Tyres. But now I'm handing over to Jukka and Teemu. Please go ahead.

Thank you, Paivi and welcome on my behalf as well. So first of all, I will go through the prepared presentation and the heading is "Resilient performance in 2022 and 2023, a new start for Nokian Tyres" and indeed you could also say about 2022 that was an eventful year. I move to Page 2. And here, we reflect the first steps we've taken to build the new Nokian Tyres. The most important thing is that we made a decision in 2022 to build a new factory in Romania. We went through more than 35 sites in Europe in about 6 months' time, prepared the investment proposal, decided and announced that in November, so quite a big action to rebuild our capacity. First bias will be rolling out in second half of 2024 and we aim for commercial production in 2025. Right now, we have various actions ongoing, including and purchases, permitting processes. And indeed, we've ordered the first production equipment already in late '22. Financing will be taken care with our own cash flow and leveraging a strong balance sheet. We are not looking to raise new equity to finance this factory. Actions also to increase capacity in Finland and in the U.S. are proceeding in line with the plan. So we had a plan to go order rate up to 4 million tires in Dayton. That line is very much ongoing. Equipments will be used this year and ramping up of those equipments will be taken place this year and early '24 to achieve that 4 million tire capacity or capability. Also in Nokian, we are increasing capacity. We decided that those investments on new equipment late '21 and early '22. They're being installed as we speak. And also, we are increasing ramping up the capacity increases in Nokian right now. First contract manufacturing agreements were signed in Q4 and negotiations with other manufacturers are ongoing. So the first of direct volumes we expect in the second half of 2023 and the sales process in Russia is ongoing. Move to Page 3, despite an eventful year, we had a resilient performance. And I want to highlight some of the key achievements. First of all, Heavy Tyres had all-time high net sales, all time high profitability and productivity. Vianor delivered all-time high net sales. In North America, we achieved the highest ever sales in terms of volume in passenger car tires and also, of course, production across in our Dayton factory which progressed in '22 according to plan or actually ahead of the plan in '22. Important achievement was also on new products, which were high performing. And we had strong partnerships with our customers, which drove our net sales in '22 despite demanding year and eventful year because of the war in Ukraine. I go to Page 4. So Q4 is impacted by lower supply volumes, net sales at EUR 411 million. This is 22%, declined 21% fourth quarter in comparable currencies and the most impacting reason for that was the lower passenger car tire supply volumes. Segment operating profit at EUR 13.5 million, that's EUR 88 million a year ago. We had the same reason, lower passenger car tire volumes and also changed factory mix, but we also had price increases to combat cost inflation. And we had higher net selling price or average selling price. And we'll talk more about the profitability impact in factory mix and the viable impacts soon. I go to Page 5, and which is reflecting the full year '22 performance. So all in all, our net sales were EUR 1.78 million, which is all-time high. Last year, we achieved EUR 1.71 billion, -- sorry EUR 1.78 billion net sales in '22 and EUR 1.71 billion in '21. So actually '22 despite it would be an eventful year, had the all-time high net sales of Nokian Tyres. However, in comparable currencies, the slightly behind '21 net sales. We had lower passenger car tire volumes as the sanctions came into ports and the tire imports from Russia to Europe and North America ended in July. However, we had also record year in Heavy Tyres and Vianor. This shows a strong performance by our Nokian Tyres' team and also the resilience under very demanding circumstances in '22. Segment's operating profit was EUR 221 million versus EUR 325 million in '21, again, and the supply of -- or the lower passenger car tire supply volumes as well as changed factory mix had the most important impact on the profitability. We had paving from price increases and they helped to combat the cost inflation. Based on '22 performance, the Board proposal on the dividend payment is as follows: EUR 0.35 to be paid in May and also the Board seek authorization decided on the second dividend payment of maximum EUR 0.20 per share in second half of '23. So all in all, the dividend payment proposal is up to EUR 0.55 per share. On Page 6, we have the highlights of the financial performance. I call out some key numbers here, cash flow in the final quarter, cash flow from operating activities EUR 319 million, capital expenditures EUR 70 million. In that EUR 70 million, we have about a slightly below EUR 30 million of new equipment for the Romanian factory. Our EBITDA, segment's EBITDA, the new profitability measurement segment's EBITDA at 12.5% and segment's operating profit at 3.3%. Full year net sales at EUR 1.78 billion versus EUR 1.71 billion in '21, as I mentioned earlier, segment's EBITDA in '22, 21% at EUR 367 million versus EUR 455 million or 26% in 2021. Equity ratio remains strong. So we have 65% equity ratio and interest-bearing net debt at the end of the year at EUR 141 million, capital expenditures for the year at almost EUR 130 million. And on Page 7, just to highlight also achievements in sustainability, we had excellent safety performance, lost time incident frequency was a record low at 3.2 per million hours worked. We also started to build the first zero CO2 emission factory in Romania in tire industry, introduced the most sustainable concept tire yet with 93% of the materials being recycled or renewable. And also an important achievement in 2022, we were included in Dow Jones Sustainability Europe Index, being one of the top-scoring companies in the Automobiles and Automotive components industry. With those highlights, I hand over to Teemu to give more color to financial performance and financial details. Teemu, please go ahead.

Thank you, Jukka. Let's start with the passenger car tire business. And as we see in the Q4 net sales, which was on a level of EUR 236 million, a decline from comparison period because of lower supply of volumes from our factories. The segment operating profit was negative in the fourth quarter, EUR 14 million. Then looking to the full year numbers, the net sales for passenger car tire was on a level of EUR 1.233 billion, increase of close to 3% with reported numbers and with comparable currencies, a decline of around 5%. And the segment operating profit for the full year, EUR 179 million and clearly down from the comparison period. As we knew the lower tires supply had a negative impact, especially in Central Europe and in Russia. The inventories are high, on a high level in the distribution that will have an impact then to the sell-in. The segment operating profit declined as expected. But we have been able to increase prices to offset the headwind from raw materials and other cost inflation. Then if we look at the net sales by quarters, here, you can clearly see the volume impact of the decline after the third quarter being the biggest decline in the fourth quarter and then the price -- positive price mix development due to the fact that we have been able to increase prices that we started already in year '21 in the second half. Then currency has given us tailwind during the year '22 and most likely in year '23, it looks like that we will have a headwind from currencies. Then looking at the performance of our PCT slightly more in detail and focus to the segment operating profit bridge. You can see here the impact from volume, some EUR 120 million price mix significantly up almost EUR 240 million. And then which is clearly offsetting the material headwind of EUR 130 million. Then if we zoom into the supply chain bucket, which shows a negative development of EUR 134 million, half of that is coming from the lower production in Russia. And then the other half of that headwind is coming from higher logistics, warehouse and custom duties from North America. So we've to remember 50-50 split of this headwind. Then, moving to the Heavy Tyres. They had a record year that we are really proud of. Net sales in the fourth quarter was on a level of EUR 65 million and the segment operating profit, EUR 6 million. The full year numbers, EUR 274 million almost is all-time high, as is the segment operating profit almost EUR 44 million. In the fourth quarter, the net sales decreased slightly due to supply constraints. And as an example, particularly were on a high level in the fourth quarter in our Nokia factory. As stated, all-time high full year net sales and profitability in year '22. Moving to the Vianor, which recorded all-time high net sales and we had a strong finish to the year in the fourth quarter, reaching EUR 129 million in the fourth quarter, and the segment operating profit, almost EUR 11 million. The full year numbers are EUR 362 million and segment operating profit, EUR 3 million. As you might remember, we had a weak first quarter and now strong fourth quarter. And therefore, we landed almost on the same level time in '21. In Vianor, we have continued to improve our operational efficiency as well as to offset the cost inflation in '22. Today, we also announced our alternative non-IFRS figures, excluding Russia. And here, you can see the figures, '22 and '21. Our segment's net sales and segment's operating profit looked in both years. And this year, we have now introduced the new term segments, net sales that we will guide in '23, excluding Russia due to the fact that the sales process is still ongoing. And if we look the year '22 and '21 net -- segment's net sales figures, you can see that they have been on a level of EUR 1.35 billion in '22 and EUR 1.39 billion in '21. And then, looking to segment's operating profit for '22. Here, you can see the segment's operating profit on a level of EUR 18 million. And here, to remember the headwind from the supply chain last year, some EUR 60 million due to the extra costs relating to moving tires out of Russia closer to customers. Then moving to the assumptions for this year, '23. We are expecting that the first half will be weak due to the constrained capacity and the seasonality. And then the second half is supported by the winter tire and all-season tire season and the offtake volume that we are getting in the second half. In Heavy Tyres, as I said, all-time high net sales and segment operating profit last year. Now we see the market softening. So the most likely is a short-term headwind, even though overall, we believe that the market is going to the right direction. Then, the guidance for this year. Now we decided to guide with absolute numbers unlike earlier years. So the net sales will be between EUR 1.3 billion and EUR 1.5 billion. The segment's net sales and the segment's operating profit percentage of net sales between 6% and 8%. And I'd like to highlight the seasonality, especially in the segment's operating profit, meaning that the profit is generated in the second half. I'm handing back to you, Jukka.

Thank you, Teemu. So we go back to looking at 2023, and it will be a new start for Nokian Tyres. So what will happen and what is important for us. First of all, we count on our team. We've been through '22, which has been quite a demanding year. We look optimistically into '23. We have our agenda quite full. First of all, we work on the factory, in factory in Romania. We have a very tight schedule to build it and to get the first tires dropping out, which is the latter part of 2024 and then commercial production starting in 2025. The second one is that the Nokia, our factory capacity increase is ongoing. So right now, we are ramping up new equipment as we speak and increase the capacity. Same with the Dayton, new equipment is coming, and we are wrapping them up. And we have factories fully utilized at this point of time. All the tires we can make are being made and being shipped in the second half, mostly as Teemu was saying about due to seasonality and focus on winter tires and our core products. We have also already made an agreement to have contract manufacturing. We keep on negotiating traditional contract manufacturing opportunities, so that we complement our product portfolio in late '23 and especially in '24-'25. And as you may remember, we announced in December that we have already concluded one agreement that will help us to supply the winter tires in Central Europe. At the same time, it's important that we provide our customers with world-class production services. It's important that we'll process from our factories to our customers and consumers continue uninterrupted. We will drive leadership in safety, product quality and sustainability, building on our achievements in '22 in sustainability and safety, which was, safety was a record level. And also we're included in the Dow Jones Sustainability Index in '22. We aim to do the same in '23. We also will use this opportunity to improve our processes and build our systems and capabilities for the next stage of Nokian Tyres' growth. And this is important when the new factory in Romania comes on stream. And I move to Page 18, which is capturing all these key initiatives and actions that we see. We have an investment phase in '23-'25. So in factory, Romania, capacity increase in Nokia, Dayton factory completion and growing contract manufacturing. In '26-'27, we will see a significant growth phase and based on the new products and investing capability and we target to have EUR 2 billion net sales at the end of that period or during that period. Obviously, many of you remember that when we had the Capital Markets Day in 2021, we were aiming to be at EUR 2 billion company midterm. Now we still aim to the EUR 2 billion company midterm, took some important hits in '22 and it was a demanding year. However, we, as a group, we focus on key actions. We are confident that implementation will be successful. Financially, we are able to do it. And we have a strong cash flow, strong balance sheet to rely on and that will allow to build the new Nokian Tyres. This is the end of the prepared presentation and the final page says it's a new journey, and it will be a new journey.

Thank you, Jukka. Thank you, Teemu. Before going to the questions from the audience, Jukka mentioned Capital Markets Day in '21. And then there is a question about the next Capital Markets Day, as announced earlier, that will be arranged once the Russia exit has been finalized and as said, the process is ongoing. And now, operator, we will be ready for the questions from the audience, please.

[Operator Instructions] The first question comes from the line of Michael Jacks from Bank of America.

I have 3. First of all, thank you for providing more specific guidance ranges on revenue and EBIT. But could you please also provide some steer on the building blocks for cash flow in 2023. I think the dividend sends a somewhat confident message in this regard, but just want to understand the moving parts to that. Secondly, on Heavy Tyres, your guidance flags risks from general economic developments. Just curious, is this based on trends that you are currently observing? Or are you taking a view on the macro development for the year? And then, finally, with reference to your restated segment operating profit figures, what are the main reasons for the wide margin gap between the 2021 ex-Russia margin of 15% and your 2023 guide of 6% to 8%.

So Teemu if you take the cash flow building blocks, please go ahead.

As you stated, the dividend proposal to the AGM should send a clear signal to the investors, how we see our cash flow developing not only in year '23, but also in the coming years. Good to remember that we have now a heavy investment program in the coming years and the first 2 years are the biggest in terms of investments. And as we have stated that the investment in Romania is some EUR 650 million. So if you divide that by 2, taking into account that we have maintenance CapEx of some EUR 100 million; so that might be a good proxy for year '23, so, dividing EUR 650 million by 2. Meaning that, the Romania investment is not yet completed in 2 years it goes into 3 years, but then taken into account the maintenance CapEx on a level of some -- close to EUR 100 million. Then in terms of working capital changes, most likely no major changes there in this year.

And then if you look at the net debt EBITDA ratios, you see that we are comfortably clear the situation in 2024-'25 and not having too high leverage based on net debt to EBITDA despite these investments. Heavy Tyres, we basically talk about the Heavy Tyres. With that, what we see right now, obviously, the general economic situation is a concern and we need to pay attention. But right now, of course, the -- as Teemu was saying that inventories and pipeline is filled up before and we see a current situation, which appears to be softer. However, that may change, of course, depending on how the economic momentum evolves over the year and the restatement then. And the question was about the rates?

Yes. I just want to understand the main reasons for the difference in the margin between the 2021 ex-Russian margin of 15% and the guide for between 6% and 8% for 2022, given that, that one is also excluding Russia.

So if we start with '22, and as I said, we should bear in mind that there we have this headwind from logistic, warehouse and custom duties some EUR 60 million. So on the EUR 80 million you can put that on top. And then if you look to '21, there we should remember that we get the benefit of lower production costs in Russia. So if we take that into account, then, we come closer to the guidance of '23, indicating the range of 6% to 8%.

The next question comes from the line of Akshat Kacker from JPMorgan.

Akshat from JPMorgan, 3 questions from my side, as well. The first one on the deal with Tatneft on the Russian plant. Obviously, you mentioned that the process is still ongoing. Is it possible to give us some more clarity in terms of the timeline or the next steps in this process please? And how have things really evolved in the last 3 months from when this was announced? I'll ask the 2 later.

As we stated already in -- was it in late October when we announced the deal that the Russian exit has substantial uncertainties related to timing, terms and conditions and the closing of the transaction. And the situation definitely has not -- got any better. So it is a demanding topic and environment. And therefore, I would love to give you more clarity, but I don't have that either. So therefore, I cannot comment on that, unfortunately.

But maybe if I just add something which you didn't ask, but nevertheless, I add. So despite the ongoing Russian process, the rebuild of the company in terms of building the new factory in Romania and advancing with the capacity rebuild is not dependent on the Russian exit, so that these are 2 separate things. Russian exit is one. It's a process in its own. And then the other part is that we build new Nokian Tyres independently how it goes and when it comes to conclusion. So therefore, these 2 things are not dependent just as an addition to your question.

And if I build on that, if I build on that, of the team, Nokian Tyres' team, 99.9% are focusing to the future, building the new Nokian Tyres. Myself and few, my team members are the ones who are only focusing closing the deal in Russia. This is necessarily from the company point of view that we move on, we built a new company. At the same time, we value and pay attention to that, of course, that we do in the best professional way the process in Russian exit.

Yes, that is very clear, and I agree with that, that the balance sheet still is in a strong position. The second question was on the 2023 guidance and the implied passenger car margin. So you're talking about a 6% to 8% segment operating profit margin. So firstly, in terms of your disclosure, what will be the difference between segment operating profit and operating profit in 2023? Just probably a list of items that you will still, be adjusting for in 2023? Is it still the date and ramp-up expenses or maybe some more ramp-up expenses in Romania, so some kind of details on those adjustments will be helpful? And secondly, within that group margin, can you also guide us to what kind of passenger car margins are you looking for in 2023? Because your Q4 passenger car tire margin was in the negative territory.

If I start with the PCT guidance, our passenger car tire guidance, we have been guiding on a group level and we stick with that approach. Then, in terms of the profitability guidance between 6% and 8% and there -- as you said, the exclusions are not included and the exclusions in year '23 are, as you said, the date on ramp up until we reach the EUR 3 million level as we have been communicating. And then on top of that, we exclude now the Russian business. And that's the reason why we introduced the segment's net sales because as long as they have some business there, we will report the net sales and operating profit as non-IFRS exclusion.

So the new item in '23 in exclusions will be Russia if the process is concluded.

Sure, understood. And for the underlying passenger car margins, like just in terms of Q4 was a negative number and what are we building for 2023? I did hear the comment in terms of the second half weighted profitability. But just in terms of how the passenger car profitability is panning out with the 2 underlying plants that you have today?

As I said in our Q3 call that you shouldn't overanalyze our Q4 results, because of several activities happening in passenger car tires business. And therefore, I just reiterate the same comment that don't overanalyze the Q4. Please look our guidance for '23 and our comments regarding the seasonality. And maybe this is a good point to give you some color. You might take a look what kind of business we had for the type of -- in year 2000 before we started the Russia era. There you get some flavor how the seasonality was between the quarters and what kind of profitability we recorded in those quarters.

Next question comes from the line of Thomas Besson from Kepler Cheuvreux.

Maybe I'll be a bit blunt. You had EUR 337 million exclusions in '22, EUR 57 million in '21. Should we expect you to be closer to '21 or '22 levels of exclusions in '23, assuming the process of your Russian disposal goes broadly as you imagine. So I assume sometimes in H1.

So the date and part is on the same part market that it has been, and then the Russia is the big question mark that nobody hasn't crystal ball at the moment. But as you can see from our numbers, from last year, we recorded EUR 300 million, impairment related to Russia that is in the exclusions. And we made the conclusion that the impairment is still valid at the year-end with the information that we had at the year-end. However, let's see what is the end result when this saga ends.

Okay. Second question, please. You present adjusted figures that you call excluding Russia. So I just want to clarify because for me maybe on a chart, but I'm not sure I understand what you mean. Are you talking about without Russian sales, you removed the Russian revenues as a destination, right? Would it not have made more sense to present an adjusted set of figures without Russia as a production center on top of the sales? We are completely unable to look at what your underlying performance as long as you still assume that Russian production center was still there. I just want to make sure I understand that the exclusion is just Russia as a destination, right?

No, it’s Russia excluded completely, including all the top-line, all the manufacturing, everything. And then that is segment net sales and segment operating profit, excluding Russia. So there is no Russian impact at all in those numbers. And in the guidance -- so may I continue. So, yes, EUR 1.3 billion to EUR 1.5 billion net sales is completed without Russia and also 6% to 8% segment operating profit is completed without Russia. No manufacturing, no net sales, none, whatsoever.

Okay. But do you mean that the '22 adjusted figure of EUR 1.3 billion excludes the production of tires in Russia as well? So that's only what you have built in Finland and Dayton that has been recorded in EUR 1.3 million sales for 2022. You have no tires produced in H1 in Russia in that?

As I tried to comment earlier, when we are looking the year '22, there, we had impact from Russia for the sales that we generated outside Russia because we produced those tires in Russia. And then maybe it's more clear in the year '21, if we look our segment's operating profit, EUR 210 million. That contains the cost of tires produced in Russia with a lower production cost.

Okay. And I have 2 other quick questions.

So again, the guidance for '23 is completely without Russia, no Russia in there.