Nokian Renkaat Oyj (TYRES) Earnings Call Transcript & Summary

Good day, and welcome to today's Nokian Tyres Second Quarter 2023 Conference Call. This meeting is being recorded. At this time, I'd like to hand the call over to Paivi Antola. Please go ahead.

Good afternoon from Helsinki, and welcome to Nokian Tyres' Q2 '23 Results Conference Call. My name is Paivi Antola from Nokian Tyres, Investor Relations. 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. And in this call, we will go through the Q2 results and how we are proceeding with building the new Nokian Tyres. But now I'm handing over to Jukka and Teemu. Please go ahead.

Thank you, Paivi. Jukka Moisio here. So welcome on my behalf. And indeed, we have the presentation there, the heading is, "Building the new Nokian Tyres is on track." And so I move on that presentation to Page 2 and talk quickly about the strategic projects, they are proceeding as planned. First of all, we have the Romanian factory. So building work is underway. And we had the groundbreaking in May 2023. We got building permit on the same day. And so we are very much progressing on the building. Main equipment. As you may remember, we ordered already in 2022, so that we secured the availability and delivery times. Our time line is such that first tires are expected in the second half of 2024 and the commercial production will start in 2025. Application for the investment subsidiary of up to EUR 99.5 million is under EU review, so that they accrue the state aid as proposed by the Romanian government. Another project in Finland, so we have the Passenger Car Tyres capacity increase and in use as we speak. In the U.S., the ramp-up of the factory is proceeding. So we've hired additional employees to the production and the equipment installations are ongoing. New production lines have been studied sequentially in this very moment. And towards the end of Q3, we expect that they all are installed and then we start them step by step by the end of the year. On the manufacturing volume of 1.5 million tires have been secured for 2023. So first winter and all-season tires to the Central European market will be in the second half of 2023. No significant minor volumes, only of the contract manufacturing has been delivered in the first 6 months of the year. So most of this 1.5 million secured volume will be benefiting top line and the company in the second half of 2023. I move to Page 3, about the profitability. So these numbers in Q2 are excluding Russia. So first of all, the segments net sales at EUR 293 million versus EUR 332 million in '22. This is a 12% reported decline, but if we exclude the currency impact, so 7.3% decline in constant currencies. Main reasons, there were lower Passenger Car Tyres supply volumes. This is a reflection that we did not have the full capability to deliver in the early part of the year. We get additional tires, additional volume in the second half, and that will help our top line. Also, the car and tire market environment [ reported ] for the replacement tires were quite demanding, including also the currency headwinds, which we experienced mostly versus the euro in the Nordic markets. So Norway and Sweden, Norway being the most or the biggest headwind in terms of currency conversion. Segment operating profit at EUR 15.2 million versus EUR 0.9 million in '22, price increases to combat cost inflation led to higher ASP. Segments EBITDA was EUR 41.3 million versus EUR 25.9 million in '22, so we reported 14.1% segments EBITDA versus 7.8% in '22 in the corresponding quarter. Move to Page 4. Here are some of the key financial numbers. I call out some key numbers that I didn't mention earlier. So segments operating profit at 5.2%, segments EBITDA at 14.1% and a small earnings per share of EUR 0.05 per share in the quarter. And if you look at the capital expenditure, we spent EUR 53 million in the quarter versus EUR 19 million in the prior year. And cash flow from operating activities was minus EUR 67 million versus EUR 109 million a year ago. In the first 6 months, if you look at the top line. So all in all, we had a reporting change of minus 19%. So EUR 529 million in '23 versus EUR 655 million in '22. In constant currency, the change was minus 16%. Segment EBITDA for the first 6 months in '23 was 9.9% versus 13% in '22. And as mentioned in our guidance that the segments operating profit was up EUR 1 million, and we said that the profitability and profit of '23 will be generated in the second half of the year. However, we are at EUR 1.1 million, slightly positive in the first half, and that compares to EUR 35.5 million in '22. In terms of equity ratio, we are still at high level, 60%, gearing at 16.2% and net interest-bearing net debt at EUR 220 million, out of this EUR 130 million of IFRS 16 leases. And capital expenditure in the first half EUR 87 million versus EUR 33 million in the prior year, and cash flow from operating activities in the first 6 months, EUR 124 million negative. Again, we experienced a strong seasonality explained by the fact that most of our products sold and our top line will be consisting of winter tires. And with that, I hand over to Teemu to talk about the financials. Teemu, please go ahead.

Thank you, Jukka. Moving to the Page #5. And here, we are talking about our diversified debt portfolio that we discussed at the end of April in our CMD. And as we speak, we are in a good position in order to secure the funding for our investment phase. And just to call out some of the activities that we have taken in recent months, we -- in May, we drew EUR 300 million long-term bilateral credit facilities. And then in June, we issued EUR 100 million sustainability-linked 5-year bond issue. So from here on, we are in a structured way, building the debt portfolio with a balanced maturity as we go to the next quarters and years. And as I said, we are in a good position today. And then if we talk about our cash flow, as you all recall, it is our normal phasing how the cash flow is going. So in the first half, we are tying capital in our working capital. And then in the second half, we are then releasing it when we get the payments in from our -- especially from our winter tire sales. So we are expecting to have a positive cash flow from our operating activities in the second half. Then moving to Page #6, talking about the Passenger Car Tyres performance. There, our net sales in the quarter was on a level of EUR 153 million, and our segment operating profit was on a breakeven level. The top line change with comparable currencies was on a level of minus 14%. And as we have been discussing earlier, the top line development is lack of supply volumes. And at the same time, we have been increasing our prices, net ASP strongly during the past quarters starting already at the end of '21. Then moving to the next slide, where you can see the Passenger Car Tyres bridge. Looking first, the net sales, here, you can see that our price mix development in the quarter also in absolute terms, so EUR 29 million, almost 15% in relative terms. And then if you look at our segment operating profit development naturally declining in sales volume, but then the price/mix have been more than offsetting the decline in volume. Then moving to Page #8 about Heavy Tyres. There, the net sales was impacted by soft aftermarket. Our net sales in absolute terms in the second quarter was on a level of EUR 67 million with comparable currencies, a decline of about 6%. And then our segment operating profit was on a level of EUR 9 million, declined from the comparison period which was EUR 16 million. And as I said earlier, the net sales decrease was due to the inventory levels in the aftermarket distribution, we are doing the destocking activities and that has an -- that had an impact on our net sales, but as well as to the segment operating profit. And because of the softness in the market, we temporarily adapted the production during the summer break. Then the Vianor business performance, that was stable in overall sales. Our net sales was on a level of EUR 94 million. With comparable currencies, there was an increase of more than 3%, and our segment operating profit remained on the same level in comparison period. So here you can see that there was a significant headwind from the currencies, both in the Passenger Car Tyres business unit as in Vianor business unit. Again handing over back to you, Jukka.

Thank you, Teemu. So on Page 10, just to reflect that we've taken steps forward in sustainability. In March, we made the science-based commitment to achieve Net-Zero Standard by 2050 to reduce greenhouse gas emissions further. In May, we were awarded the Platinum Medal from EcoVadis for our sustainability performance, which then places us on top 1 percentile of the companies assessed. And in June, we issued this EUR 100 million sustainability-linked bond, which Teemu was talking about based on following greenhouse gas emission reduction targets. First of all, reduced the Scope 1, 2 by intensity by 65% by 2030 from last year's base, and also reduced Scope 3 greenhouse gas emissions intensity from product used by 20% from '22 base by 2030. Then I move on to Page 11, assumptions for 2023. The second half of the year is expected to be supported by the winter tire and all-season tires and contract manufacturing volume. And as mentioned earlier in this presentation and especially in the first quarter, that we were lacking supply and that had an impact on our net sales, top line and profitability. The general economic development may have a negative impact on demand in the second half. This is something that everybody is assessing that is still going to be a soft landing or some kind of a recessionary situation or what will happen, so that may have an impact that is to be assessed as we go on in the second half. And then changes in the foreign currencies, and especially, as we mentioned, we had a strong headwind from Nordic currencies, especially Norwegian krona, but also from the Swedish krona as well as the U.S. and Canadian dollars. And they have had a negative effect on the first half and especially second quarter sales. And then if they keep on trading that rate, they may have a further negative effect in the second half. Our guidance for 2023 is unchanged. So we expect that the net sales to be between EUR 1.3 billion to EUR 1.5 billion, and the segments operating profit percentage of net sales between 6% to 8%. And as mentioned to the seasonality, the operating profit will be generated in the second half of the year. And you recall that the first half, our segment operating profit was the first 6 months, EUR 1 million. And then in the second quarter, we already had a stronger performance compared to the first sequencing compared to the first quarter. And as of 2023, segments net sales and segments operating profit exclude Russia and other items, which are not indicative of Nokian Tyres' underlying business performance, just as a reminder. And finally, we are building the new Nokian Tyres together, so we have an ambition to go back to EUR 2 billion in net sales. We have 2 different time horizons. One is to rebuilding the capacity, and the second one is then to benefit and build the market share and the volume once the rebuild and the investment phase is over. Our financial targets long-term, so our net sales EUR 2 billion, segments operating profit at 15% level. And as a new target net debt segments EBITDA between 1 and 2 turns, which means that we will have a longer-term different balance sheet compared to our history. We will expect to have net debt in the range of EUR 500 million to EUR 1 billion depending on our EBITDA and net sales. Our EBITDA target longer term is on the range of 24% to 25%. And these are our key messages, so building new Nokian Tyres progress is on track. Second quarter clearly better than the first quarter, and we expect that profit of the year will be generated in the second half. Paivi, over to you.

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

[Operator Instructions] Our first question comes from Mika Karppinen from Danske Bank.

This is Mika from Danske. Could you comment a bit more about the pricing and mix development in terms of how product area changes and then rim size changes?

So the price/mix development is a function of several factors. First, the real price increase is that we have been executing diligently, as I said, already starting from second half '21. And then on top of that, the mix effect, which is coming from product mix development that has been also positive. As you can see in our release that the share of winter tires has been increasing. And then on top of that, there is a mix -- positive mix impact from geographical point of view, when the share of Nordic had been increasing relative to the CE. And then on top of that, the last mix impact is also the customer mix, where we have been discontinuing certain customers in Central Europe in order to focus with those that we want to build longer-term business. So there are several mix effects, but the price impact has been the biggest one.

Is there any change in the rim sizes?

The rim size has been naturally also positive, I forgot to mention that one.

We will now take our next question from Akshat Kacker from JPMorgan.