Nokian Renkaat Oyj (TYRES) Earnings Call Transcript & Summary

Hello, and welcome to the Nokian Tyres Third Quarter 2023 Conference Call. Please note, this conference is being recorded. [Operator Instructions]. I will now hand you over to your host, Paivi Antola, to begin today's conference. Thank you.

Good afternoon from Helsinki, and welcome to Nokian Tyres Q3, '23 Results Conference Call. My name is Paivi Antola. I am from Nokian Tyres Investor Relations. And together with me in this call, I have Jukka Moisio, the President and CEO of the company; and Niko Haavisto, Nokian Tyres CFO, who joined the company in the beginning of October. So welcome to Nokian Tyres Niko.

Thank you, Paivi. Pleased to be here.

And we also have Adrian Kaczmarczyk, Senior Vice President supply operations, who will give an update on how the expansion of Nokian Tyres manufacturing footprint and rebuilding capacity is proceeding. And that is the topic we will be starting this call with. So, Adrian, welcome and please. Go ahead.

Thank you, Paivi. Welcome to our call today. Good morning, good afternoon to everybody. As Paivi said, my name is Adrian Kaczmarczyk, and I will be talking about the expansion and the rebuilding of the Nokian Tyres capacity and the progress as such. When we start with the Oradea project, we have basically started the project -- the Romania factory project in May this year with a great groundbreaking event. And since then, the progress has been quite substantial. So we have really completed the site cleaning and the site preparation work and the main utility building and the main production building is -- has progressed according to plan. So we are currently -- and you will see it also on some pictures later. Well into 85% of the completion rate at this point of time. And as we speak now, the contractors are really continuing also with the fit out of the building inside pouring concrete and doing all the preparation work needed to start the machine installation as planned, beginning or early 2024. So the main equipment, obviously, is now being built and everything has been ordered. And as said, we are planning to start the installation of our first equipment in the first quarter next year. The recruitment process has started. We kicked off the recruiting process, which basically will ramp up in the fourth quarter and reach its peak in the first half of next year. When -- then -- where we plan and target to produce our first tire in the second half and then during the second half of next year, we will commercialize and qualify all needed production, and products to be ready to start producing and commercializing our production in beginning of 2025. In addition, obviously, we also applied for investment subsidy of EUR 99.5 million, which basically has been filed through the Romanian government and is currently under review and under investigation by the EU commission. On the next slide, you will see the pictures on the left-hand side, the production building, as I said, which is almost 80% finished. You see on the right-hand side how it looks like inside and obviously facade and also roofing has been almost concluded and completed. So overall, I have to say that despite all those challenges, those projects bring along we have been able to maintain our very tight time line up till now. Next, please. On the overall capacity, Nokian Tyres capacity, I can only say that we have been successfully concluded our capacity expansion in Nokian, Finland for passenger car tire production. And we are currently finalizing the installation in our Dayton, Tennessee facility and are currently commissioning the equipment. So installations are finalizing as we speak. And the ramp-up of the equipment is planned in parallel with the new product introductions we are currently doing in the first half of next year and then Dayton will operate at its full capacity in the second half of 2024. Where we will then finally conclude the expansion and have also our full product portfolio ready for the North American market. On the contract manufacturing side, we've been able to secure approximately 1.5 million tires for mainly the Central European market, and they are split between 2 families, mainly winter and all-season and will be followed by summer products beginning next year. If you look at our footprint, and this is the final stage, as it will look like. As you can see, we will continue with contract manufacturing as part of our portfolio, we call it virtual factory, but we'll operate 3 factories, Dayton in Tennessee, U.S.. As I said, finalizing the expansion in the first half next year with the complete portfolio being available for the North American market. Nokia, Finland currently operating at its capacity and Romania or idea, new factory well in schedule to be ready to produce first tire in the second half of 2024. And with that, I will thank you, and we'll hand over back to Paivi.

Thank you, Adrian. And for the audience, Adrian will be on the line, the whole call, so he will be available for your questions at the end of this call. But that then we'll continue to the actual results. So you please go ahead.

Thank you, Paivi, and welcome on my behalf as well. And thank you, Adrian to take us through the capacity development stages. One year ago, pretty much we signed the agreement to divest our Russian factory to Tatneft. And also about one year ago, we announced our decision to invest in Oradea. So quite a milestone 1 year ago, and we've come a long way, and we are actually closer to starting the factory in Oradea. And actually, it's a long time from the decision. So we are more than halfway on our way to rebuilding Nokian tires. We started with about 19 million tires in 2021 when Russia was at full speed. And then in '22, we had an eventful year with war in Ukraine and then various steps, and we are heading towards [ 50-plus million ] capacity, even investments have been completed, plus the virtual factory between 1 million and 3 million. So all in all, that prebuild journey is continuing and step-by-step, we'll achieve our milestones. But let's move to quarter 3. And this is now comparable numbers. So this means that Russia activity has been classified as discontinued operations. And so therefore, like-for-like is the comparison. Profitability improved. Net sales were EUR 276 million versus EUR 333 million in '22. And this is a decline of 12.7% in comparable currencies. We had a demanding market environment and inventory, the distribution were on a high level. And of course, our main product offering for 2023 was really winter tires. Obviously, we had a certain number of tires from offtake and so on. But mostly, we had own manufactured winter tires. EUR 15 million negative impact from currencies. Market share gains, we have seen market share gains in premium winter tires, and this is based on the feedback from our customers. Our segment's EBITDA at EUR 46 million versus EUR 7.4 million last year. This means margin of 16.7% Versus 2.2% in all segments net sales compared to 2022. So clear improvement in margin and in absolute EBITDA. Segments operating profit at EUR 19.6 million versus minus EUR 17.9 million a year ago. Again, there is an improvement, and that's driven by passenger car tires. We also announced last week that the second dividend installment of EUR 0.20 per share will be paid in December. I move to Page 7. And just to reflect that we have some balance sheet, I call out some key numbers in the balance sheet. First of all, let's start with the capital expenditure. In the quarter, we spent about EUR 70 million, EUR 69.5 million, versus EUR 27 million a year ago. Year-to-date, our capital expenditure is in the range of EUR 157 million. And last year, '22, we spent about EUR 60 million in capital expenditure. To have a forward-looking assessment of the capital expenditure this year, we expect that we land somewhere in the range of EUR 250 million for the full year. So about EUR 100 million more in the final quarter. Segment EPS earnings per share was EUR 0.09 in the quarter versus EUR 0.25 a year ago. This EUR 0.25 include the discontinued operations of Russia. In the 9 months, our segment's EBITDA was 12.2%, that's an improvement of 9.3% a year ago. Also in absolute euros, the EBITDA improved. Segments operating profit at EUR 20.7 million in the first 9 months versus EUR 17.6 million a year ago. And as you see, almost all of the segment's operating profit in the first 9 months were delivered in the third quarter. Our equity ratio remains good, 60.1%, gearing is 28.2% and interest-bearing net debt at the end of September was EUR 386 million. And as you remember, our cash flow profile is such that we collect a significant cash inflow in the final quarter. And with that, I hand over to Niko, our new CFO, Niko welcome and on my behalf -- and please it's all yours for the first quarterly results.

Thank you, Jukka. And I will go through the Q3 segment numbers a little bit more in the -- I'm on Page 8 now. And -- as you noticed in the release that we do have lower sales compared to last year, some minus 16.6% in comparable currencies, but our margins are on a good level, and the ASP with comparable currencies increased slightly. You have also noted when we released last week, the profit warning guidance that we said there that the inventories at the distribution are on the high level. So that's what we are facing. But on the other hand, we see a clear profitability improvement and our margins also supported by lower costs. On this page, still, I would like to point out the segment operating profit of close to EUR 19 million and at the level of 11.1%. If you move to next page, Page 9, there is the PCT bridge, which you can see that starting from the Q3 last year, roughly EUR 40 million was lower of the volumes. Price mix, we gained EUR 4 million. And that with those 2 elements, we were at the level of EUR 180 million in terms of sales, but we also had the [ net sales FX ] effect from the currencies of some EUR 10 million. And with that, we land in the segments sales of EUR 170 million. Operating profit bridge there for the PCT, Q3, we started from the low minus EUR 18 million level. They are the same elements by the sales volume, of course, [ hitting us ] price mix, [ we take a ] gain there and the material prices are in our favor as well. And then there was a big element of supply chain of EUR 40 million and then the sales and general admin, there we also saved some EUR 6 million. That comes excluding the FX at the level of EUR 21 million as an operating profit. And then when you deduct the negative FX or currency impact there, we land at EUR 19 million at the PCT segment. On Page 10, you can see the current trends we were in Q1, minus 63% in terms of volumes. Then Q2, minus 30%, and now we are at the level of minus 18%. Price/mix there, as I said, we have both in Q1 and Q2, i.e., H1 this year, good development. Now that development is more -- or that favorable development is more or less achieved. So we were having some 1.7 percentage there in terms of net sales gain. And then the currency in that right-hand column, you see that in all quarters, that has been negative for the PCT segment. Then briefly, Page 11, heavy tires. And there, we see that the net sales decreased mainly due to the soft aftermarket and also see the same simulating that the inventory levels in the aftermarket are in the -- aftermarket distribution are on the high side. Operating profit was lower due to the fact that the volumes were a bit down as well as the currency [ EC ] segment as well. And then during the summer, we had the temporary adoption to our production, which reflected the lower demand in this segment. But also there, if you look at the segments operating profit percentage 12.1% was the number for Q3 '23. Page 12, on or her clearly also the headwind from the currencies, some 4.2% negative. And of course, this Q3 is a seasonally low quarter for us. And therefore, both the sales and in terms of operating profit, they were lower than previous years and then the coming quarter as well. And then last was the guidance that we updated a week ago, i.e., on the 24th, that night. And we are saying that we expect net sales to -- segment net sales between EUR 1.15 billion to EUR 1.2 billion and operating profit between 5.5% to 6% approximately of the net sales. And with that, I hand over back to Jukka for the final conclusion.

Thank you, Niko, and thank you for taking us towards the financial summary. So keep on building the new Nokian Tyres , we help the long-term targets where we want to go back to EUR 2 billion in net sales and achieve segment operating profit at 15% and also have the balance sheet leverage at net debt to EBITDA between 1% and 2%. And underlying there is the EBITDA target that our segment EBITDA long term will be in the range of 23% to 25%. And you remember that in the third quarter, we had 16.7% and had a sequential improvement in 2023 until the third quarter, and we expect also a similar sequential improvement in the fourth quarter compared to third quarter in EBITDA margin. We have 5 cornerstones. Safe tires, responsive and effective supply chain, consumer-trusted premium brand, leader in sustainability. We made good progress in sustainability, [ come back paper to that one ] and Nokian Tyres team. Obviously, lots of things have happened since the announcement of the divestment of the Russian factory to Tatneft. Final conclusion of the deal in March this year and then continued building of new Nokian Tyres and especially investing Oradea, and many other things happening simultaneously. So this is Nokian Tyres in summary. This is quarter 3 and the building of the company continues. Over to you, Paivi.

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

[Operator Instructions] Our first question comes from the line of Giulio Pescatore from BNP Paribas.

Thanks for sharing the update on the construction of the Romania plant. Can you just remind us on that of how much of the EUR 650 million your target to spend that you have already spent this year and of the phasing in the coming years, if there has been any update on that? Then the second one on the winter tire, you said the inventories are still elevated. Is that still the case today? Or that was more the situation in Q3? And maybe a more high-level question on this. Are you seeing customers moving away from winter tires because this is the third winter season that is described as being weak by pretty much all players. So is there any structural changes, especially in Central Europe that you are aware of? And what are -- what actions are you taking to make sure that the market continues to grow for you? And then the last question on the raw material cost that turned into a tailwind, any impact on pricing? Are you seeing any of your peers starting to give back of some of the pricing that was taken in the last few years as raw material costs become a tailwind?

Okay. If we start with the CapEx question, that goes to Adrian and then maybe you can continue.

Yes. The project basically is phased over the next year. So we started last year in '22 with down payments of around EUR 50 million and some preparation work. We expect to spend EUR 100 million to EUR 120 million in '23, reaching its peak in '24, around EUR 300 million and then coming down around 200 -- EUR 180 million in 2025.

And then to expect the subsidy of EUR 100 million to help our investment decision investment process. Okay. So winter tires, inventories, as we saw the inventories in the third quarter. And obviously, the sell-out is something that is expected to happen right now. In the Nordic countries, the sell-out is happening as we speak because the winter has come and it's getting cold and it's getting snowy and icy. So therefore, we see that sellout happening as we speak. And we -- based on our Vianor chain, we see relatively good sell-out in the winter tires. Then in Canada, North America, still winter is coming right now. So the sellout is about to happen in the coming weeks and in the month of November. And there, we see that the inventory reductions will happen when the sell-out takes place. But in Central Europe, Eastern Europe, Central Europe, winter is yet to come. So the inventories at this point of time are relatively cool, but then obviously, we expect that step-by-step that happens. You asked that whether there's -- are people moving away from winter tires. I think that in the geographies where you clearly have icy and snowy conditions, you don't see that happening. Of course, you have the selection that people may take instead of studded winter tires, they take friction tires or all-weather tires if you go to North America. While, of course, in some of the Central European markets, it's clear that the whole season is taking market share from winter tires as well as from summer tires and then they are being used throughout the year in the cars. Most of the new cars are being used throughout the year in the cars. Most of the new cars come with the summer tires and so on. In North America, new cars are coming fitted with -- a lot of them are coming with all-season tires. So clearly, see that the all-season is a winning concept in the North American markets. But in the areas where you have a clear winter like Canada and northern parts of the U.S., you clearly have a winter tire requirements. And so structural change is step-wise happening with the all-season, and therefore, of course, it's important for us that we have all-season product offering, and this is going to be one important element of our product portfolio. Unfortunately, this year, because of the loss of Russian factory, we just did not have a very good selection of all-season tires. So therefore, they're highly dependent on the winter this year. But obviously, in '24, '25 to take a new factory, a new capability, we will have a much better product selection. And raw material, yes, we see a tailwind in raw material. No, we don't see price point changes yet. We see, of course, that there may be promotions here and there and so on. But across the board price changes, we don't see at this point of time.

Our next question comes from the line of Christoph Laskawi from Deutsche Bank.

A bit of a follow-up to Giulio's question, just on the heavy tire aftermarket inventory. Could you comment on when you see that easing a bit as well? And then second [ group ] of questions would be on the ramp-up of volumes into Q4 and '24. Could you just comment again on how the contract manufacturing is ramping up. And in case there would be elevated dealer inventory still towards '24 and mid '24, how flexible are those contract manufacturing volumes. Do you have fixed volume contracts and expect to sell anything that you get anyways? Or would it be flexible in terms of volatility in the market?

All right. So I'll take the heavy tires and Adrian will talk about the contract manufacturing. So heavy tires in BP saw a significantly high inventories in the early part of the year. And clearly, the deliveries to distribution were on a low level, while at the same time, in the early part of the year, we had early good demand of OE. And so therefore, what we did over the summer is that we do extended shut in our factory in Nokian and that they managed our own inventories down. And then also the aftermarket inventories and heavy tires started to come down in the first half of the year. And now when we go into second half, we can run quite hard in our manufacturing because the inventories and the demand -- inventories are lower and the aftermarket deliveries are better. At the same time, of course, because of the higher interest rate and situations in the economy, a number of OE customers when they purchase expensive equipment are considering whether they purchase or not. And so therefore, the OE demand is getting softer and perhaps into '24, we need to wait and see how that full year will develop. But clearly, the high interest rates have an impact. But overall, on balance, we see relatively good run rate for heavy tires in the final quarter and that our inventories are well under control, and it's driven by aftermarket and be relatively flat in the OE. But over to you, Adrian, in terms of offtake.

Yes, on the offtake side as also shown on the virtual factory, we have purposely built sufficient flexibility in the contracts, which allow us to respond to market demand variations. So we have started the contracting with a volume of roughly 1.5 million for winter and all-season will be followed by summer and the range we are expecting source from contract manufacturing will be between 1.5 million and 3 million, and this really depends on the demand development. So we have sufficient flexibility to respond to the market demand based on rolling forecast we are providing to our contract manufacturing partners.

Our next question comes from the line of Miika Ihamaki from DNB Markets.

So you mentioned that based on customer feedback, you've maintained or further improved your market share in premium winter tires. It is still fair to -- is it still fair to assume that there was still considerable down-trading to lower tier winter tires this year, meaning that as aggregate, you lost market share against lower tier players. And if yes, can you a little bit help us to understand how much of that sales decline in passenger car tires was driven by high inventory situation in distribution? And how much due to actual down trading?

That particular balance is difficult to say, but it is clear that what happened is, especially, for example, the Nordics is that based on our own manufacturing, we had a good availability of premium in the tires. And clearly, because of the lack of capacity, we had less available category and so on. What happened was that for example now were able to secure third-party offering to our operations. And therefore, obviously, Vianor top line is -- the sell-out is continuing at a good level at a stable level and the mix is then consisting of course, of our premium tires but also at the same time from purchased or outsourced tires to ensure that the outlets have a good selection -- a good portfolio for all the customers. How much, that is difficult to say. What we can say is that when we look at the premium into tires we -- our feedback is that we've gained share, but then obviously, the lack of products in the B category of our own making have been then supported by other suppliers.