Nokian Renkaat Oyj (TYRES) Earnings Call Transcript & Summary

Good afternoon from Helsinki, and welcome to Nokian Tyres Q2 '24 Results Conference Call. My name is Paivi Antola. I'm heading the Investor Relations in Nokian Tyres. And in this call, I have Jukka Moisio, the President and CEO of the company; and Niko Haavisto, CFO. As usual, in this call, we will go through the results and talk about some other topicals as well, and these will be presented by Jukka and Niko followed by a Q&A. So Jukka, the floor is yours.

Thank you, Paivi. Welcome on my behalf and indeed, we'll talk about the results and some of the recent highlights that have happened in the company, but we will go through the presentation and I'll go through the presentation called Improved tire availability driving sales growth in a challenging environment dated on July 19, and I move to Page 1, which is the Romanian factory progress. And we reported on July 1 that the first tier was manufactured at Oradea factory in Romania. I want to remind that the commercial production is expected to start in early 2025; however, the 60-member launch team has been trained in Finland, and they are now ready to start the preparations for the commercial production. And we are also saying that the investment is in budget and on schedule. And indeed, this is the first zero CO2 emission tire factory in the world. And so in that sense, we are making history. And you see the team, and you see also the first tire making in Romania on Page 2. And then I'll move to Page 3, which is just an aerial picture of the Romanian factory, the site in June 2024. And on the left-hand side, you see the mixing building, which is being prepared right now. You see in the middle, the production building and also on the right-hand side, the small office, which is part of the production building. And then on the right-hand side, finished goods warehouse. And as you see at the end of June, the site has been prepared. The buildings are being prepared, and we are very much on schedule to have the ribbon-cutting in September and then to have the full commercial production in early 2025. Then I move to Page 4, which is a similar aerial picture of our factory in the U.S., Dayton, and we have now completed the investments in Dayton. So all the hardware, all the investments have been done and also the finished goods warehouse, which can house up to 600,000 tires have been opened during the month of June. And indeed, now the site is complete in terms of capability to produce. And we will produce there all-season tires and all weather car tires for North American markets. And also, we started the light truck tire production this year. The plan was originally when this factory was decided in 2017 that some of the light truck tire production would have been in Russia and then they would have supported the North American market ramp-up and so on. However, as you all know, who have been following the company for some time that indeed we needed to sell the Russian factory in 2022, and we made a change in the production schedule in Dayton factory, and this change has now been completed and is coming to the market during the course of 2024. So this says that the investment phase has been completed in the U.S. and the aerial picture compared to Romania, they look very similar in terms of layout and in terms of aerial footprint. I move to Page 5, and that is progress in the renewable material, which can potentially replace carbon black in tires. So we made the first ever concept tire with the renewable lignin-based material made by United Paper Mills, a Finnish biomaterials company. It's called UBM BioMotion RFF trademark, and that is a product that United Paper Mills will be making in the factory in Germany. It has a potential to replace significant part of a carbon black and reduces the need for fossil materials and lowers the carbon emissions in tire itself and in tire manufacturing. And as a reminder, our target is to increase the share of recycled or renewable materials in tires to 50% by 2030. And this, again, is one step on that way. You may remember that earlier this year, we also made an agreement to buy recycled carbon black that can be used in tires. So 2 ways to improve the sustainability of tires and tire making. And now I'll move to Page 6, which is the net sales and segments operating profit in quarter 2. Net sales increased by 11.2% with comparable currencies and that was driven by the improved tire availability and in especially Central Europe, which was the biggest growth area, strongest growth area, and that was achieved by better availability, especially with the offtake tires. Our segment's EBITDA at EUR 46.8 million versus EUR 41.3 million in 2023, there was an improvement there. Obviously, we had the issue of political strikes in Finland in the first half of 2024, and we have already earlier said that the impact is roughly about EUR 20 million in EBITDA, out of which more than half was in quarter 1 and then less than half in quarter 2. We started the quarter 2 in the month of April. The first 8 days were impacted by political strike so that we couldn't produce anything in Nokian and neither could we ship anything in the first 8 days. Segment's operating profit at EUR 20.1 million versus EUR 15.2 million in 2023 and higher sales and lower raw material costs helped our profitability improved. I move to Page 7, which is reminding that we have a strong balance sheet despite the fact that we are investing heavily. So our capital expenditure is EUR 159 million in the first 6 months. Lion's share, a clear majority of those investments, are related to Dayton warehouse, Dayton factory completion as well as, of course, the Oradea factory build up. And that number, EUR 159 million is clearly higher than EUR 87 million that we invested in capital expenditure in 2023. This is also the time in our interest-bearing net debt is at its highest because we are investing significantly, and our generation of EBITDA is still not at the level where we aim for. And the reason being that the factories that we are building are not yet delivering any EBITDA. And first 6 months sales, EUR 561 million versus EUR 529.5 million in 2023. And as just a reminder, EUR 20 million impact from the political strikes in the first half on our EBITDA. And then I will hand over to Niko to talk about the profitabilities in more detail. Niko, please go ahead.

Thank you, Jukka. I will go through the segments a little bit in more deep. So in the Passenger Car Tire segment, we had higher sales and improved our profitability and especially the sales increase was driven by the Central Europe. And in total, the net sales being EUR 189 million, there is a growth of a little bit more than 24% in comparable variances. Also, the ASP with comparable currencies increased slightly. So there is a better mix and -- price mix and lower cost as well. The segment's operating profit was in Q2 EUR 7.1 million. In Page 9, there is the passenger car tires bridge. There you see that the volume growth is the plus 22%, EUR 33 million. Price and mix, positive EUR 4 million. And the currency is not playing that big of a role in Q2. In the segment's operating bridge, I would like to highlight there, the supply chain cost, so it was increased largely due to the offtake imports as well as, as Jukka pointed out, the resi crisis as well as the political strikes here in Finland. On the Page 10, in the middle column there, the price and mix, so both were slightly positive in terms of development there. So the 2.4%, this will moderate towards or during the H2 when we have more products and sales volume in the Central Europe. Of course, the winter tires will flatten that a little bit as well, but especially the Central Europe now being playing a bigger role, it will moderate going forward. Page 11 on the heavy tire segment, the market demand, especially in the OE was weak, as we said already in Q1 that we saw that during the H1, it will be a weak demand in the OE. Yet we had the sales of EUR 60 million, so there was a decrease of some 10%, but at the same time, I'm proud that we were able to keep the segment's operating profit at around 13% level. So that is a good achievement in that business and in this market environment. And then finally, our Vianor business. So in terms of sales, we were at the last year's level. The operating profit decreased by EUR 2 million. And there, we continue to say that the inflation to put that fully into the pricing, we have some difficulties there, but we are doing our best as we speak. And in terms of guidance, we get that unchanged, i.e., that our net sales and segments operating profit is expected to grow significantly compared to last year. And there, the current premises as well that we see that the raw material costs are expected to start gradually increase during the second half of this year. And with that, I hand back to Jukka to wrap it up.

Thank you, Niko. So we continue our journey towards EUR 2 billion net sales and strong profits. We are on the investment phase, we are halfway, so we started at the 2023 and we complete at the end of 2025. We've done the capacity increase in Finland. We've completed now the U.S. factory and our operational focus is in Dayton. So throughput-based reduction, higher volume, all that, but no investment requirements anymore, as we completed the warehouse. New factory in Romania, the first tire has been produced; however, we keep on installing and making sure that the equipment are fully available and fully capable and we have ribbon-cutting in September. Then we make the products for testing and then we are ready for the commercial production in early 2025. And upgrowing contract manufacturing, so compared to 2023, our contract manufacturing volumes that have helped us to achieve higher volume in Nordics as well as especially in Central Europe are there, and they help us to ensure that market position net sales developed favorably. And they will be then part of our long-term future as well. Then in -- we move to growth phase 2026-'27, and then we have a look for the increasing market penetration built on new products, increased capacity and improved and enhanced operational capabilities. In heavy tires, we expect to continue to grow above market level. And then in Vianor, we have the distribution excellence in the Nordics, and we target to have EUR 2 billion of net sales, and this is our journey. At this point of time, we are halfway in the investment phase; however, we can report positive things in terms of completing the U.S. factory investment also that we are very much on schedule and under budget in Romania and -- or in budget in Romania, even slightly below budget, and then we look forward to start the production in 2025. So this is where we are. So I hand over back to Paivi for questions and answers.

Thank you, Jukka. Thank you, Niko. So it's time for the Q&A. Before that, maybe in order to say one question from the audience, a couple of words about the European Commission's ongoing antitrust inspections in tire companies initiated in January. Nokian Tyres doesn't have any new information on the outcome of the inspection and we can't comment on an ongoing investigation. Nokian Tyres is fully cooperating with the authorities. And now we are ready for the questions, please.

[Operator Instructions] The next question comes from Michael Jacks from Bank of America. Your line is now unmuted, please go ahead. The next question comes from Miika Ihamaki from DNB Markets.

This is Miika from DNB. You're expecting raw materials to increase in the second half of the year. Can you quantify in absolute basis, how much higher this would be year-over-year? And then secondly, do you expect to offset these costs with higher prices?

Yes. We are not quantifying that, but we are saying expecting to moderate. But of course, there is a lot of fluctuation currently with the raw material prices, but I don't think we see the similar type of kind of the price decreases that what we've seen. So the expectation is that they will moderate going forward.

And second question, if I may, with now U.S. facility fully ramped up. What is your capacity utilization at the moment out of the roughly EUR 4 million nominal? And is it right to assume that there will be no further ramp-up related costs from the U.S.

Yes. So we've said that the ramp-up is done there, we are meaning that all the equipment and the facilities are done, i.e., the warehouse being the final one. There will be still during this year some exclusions. And those are related to those products that we are still running kind of as a first time products there. And we will have the full capacity available going to 2025.

The next question comes from Boleslaw Lasocki from Thomson Reuters.

My question would be about the recent concerns over the tariffs on Chinese electric vehicles. What I'm wondering about is whether -- what kind of impact, if at all, that could have on Nokian Tyres? Do you expect the tariffs to affect somehow your production? Or on the other hand, do you expect any actions from China that could hurt the performance of Nokian Tyres?

We don't expect any immediate impacts on our performance as we are in the replacement tire market. But obviously, we need to pay attention on what is happening in the political and the legislation so that there are future decisions or impacts that will come our way. But at this moment, we don't see any that will influence us or impact us.

The next question comes from Thomas Besson from Kepler Cheuvreux.

It's Thomas from Kepler Cheuvreux. I have a few questions, please. I'll ask them one by one, if that's okay. Firstly, can you give us broad indication, not a precise number on the amount of contract manufacturing volumes you are projecting now for 2024, 2025, given the state of the markets you're operating in? And is there any risk that your contract manufacturing volumes may be eventually impacted by some changes in import duties. That's the first question.

So we said initially that when we went in contract manufacturing that it were somewhere up to 3 million tires and we are somewhere between 2 million and 3 million at this moment. So depending, of course, that how the market and how the demand will evolve, we have -- either we are at the higher end or we are at the mid-range of those contract manufacturing. So -- and then when we go into '25, obviously, we expect that our volumes go up. And so part of that will come from what are the commercial production, and then we will see, which part and how much will come from the contract manufacturing, but it's clear that this virtual factory contract manufacturing will remain part of our future strategy. And also, just to remind that in the heavy tires, we also rely on contract manufacturing in bus and truck tires as we don't manufacture them ourselves. So we have the 2 sources -- or 2 revenue plans where we have contract manufacturing helping us.

Second question, can you share with us your latest projection for CapEx in '24 and in '25, which you're slightly above the half mark for EUR 300 million for the year. How much do you see that for the year and following eventually next year, please?

Yes. The CapEx for this year is roughly EUR 350 million, and we've spent roughly EUR 160 million in H1 so far -- or during the H1. And then it will be a little bit north of EUR 200 million next year to CapEx.

Last question, please. Jukka, you've announced you're going to retire sometime this year. I wanted to know if there was any progress achieved on trying to find a replacement for you at some point in the second half?

Yes, indeed, I've announced that I will retire during the course of this year, but the Board will work on this successful solution and so on. And I've also indicated that I am, of course, taking care of and in the position until a succession plan has been announced. So obviously, there will be no gap between my plans and what the Board will announce.

Okay. So for the time being, no progress to talk about?

The Board has not announced anything. So that's all I can say.

The next question comes from Rauli Juva from Inderes.

Rauli from Inderes here. I would like to follow up on the U.S. factory. Could you say that are you ramping up the production kind of as fast as you can at the moment towards the EUR 4 million next year? Or is the limiting factor more for the supply or the demand, if you put it that way?

It's basically such that we have a new equipment, and we have a little bit new production plan because as I mentioned in the earlier part of the presentation that early on, we had the plan to do certain tires in Russia and then support U.S. markets, but now we've changed that and we've installed in capability in the U.S., and we are ramping up those equipment. So we will be actually focusing on operations only. So all the equipment are installed and they are bolted on the floor. So it's all about capability to produce and efficiency and scrap reduction and all that. And we are basically able to sell everything we produce in Dayton. So it's really up to us to make sure that the throughput and the productivity improves. We expect that we are on full speed at the end of the year.

Yes, that's clear. And then another question, given your sales, especially in the winter season, fell sort of the kind of the initial expectations, do you have a meaningful amount of winter tires in the inventory that we could actually sell more volumes this year than we are producing?

We have a good availability of tires and, obviously, we've been able to secure offtake tires. Unfortunately, we lost certain days of production in Nordea for tires, so this is something that we need to catch up, but we are quite optimistic about the tire volumes in the second half. And this is, of course, something that is seasonal for us. And at this point of time, we still ask from the season also. But we are in a good position. Unfortunate, this political strike. But other than that we are really fine.

The next question comes from Akshat Kacker from JPMorgan.

The first one, sorry to come back to contract manufacturing. You mentioned you expect 2 million to 3 million tires from contract manufacturing this year. Could you just clarify how much of that was already done in the first half, please?

No, we don't disclose that how they are split between the winter, all-season or summer. But you can assume, of course, that the major part of the Central European growth is based on contract tires. And then to a lesser degree in Nordics, where we have a strong manufacturing premium tires in Nokian and then the contract tires are complementing the premium tires and the category and so. And of course, then we have the whole bus and truck, which is in the heavy tires that comes from contract manufacturing.

Okay. That's helpful. The second one on passenger car tires. You have highlighted very strong growth in Central Europe in the first half of the year. Could you just talk about your expectations around the second half? You mentioned you are optimistic around winter tire sales. If you could just give us some comments around the overall inventory that you see in the market and the sell-out demand that you're seeing in Europe, too.

Yes, we expect that when you look at the market evolution, of course, 2023 was a very soft market and there was, of course, inventory pipeline and all that. So therefore, the sell-in was quite soft on the inventories by the end of the year. And early part of '24, came to a normalized level. And when we look at the demand overall in this year, we see positive numbers in various months. There were maybe 1 or 2 months where they are a little bit on the red side, the replacement tire demand. But overall, we see positive developments, and we expect that to continue. Obviously, from our point of view, what is important is that a year ago, we pretty much had only the winter tires for the offtake. This year, we have, of course, summer tires, all-season and winter tires in addition to increased capability both in Nokian and in Dayton. So obviously, these are the facts that are where we have our optimization based on. But the overall market, we see positive numbers in the demand. Of course, again, when we go into the latter part of the year, let's see how it evolves. But so far, the outlook is positive. Not a significant growth, but clearly positive.

Understood. The very last question on, again, the competitive environment in Europe. If you take a step back, could you just remind us on where we are in terms of competition from imported tires or a cheap imports in Europe? Do you see a trend of those imports now picking up? And if you could just talk about your assumptions on what you are seeing in the market in terms of pricing? Kind of linked, both those questions.

Yes, I think in the pricing kind of I think we've said there that we apply the marketplace-based pricing. In terms of the competition, especially from the Asia, we see that growing, but we are in the premium, premium segment. So we need to take -- keep a good look on that, but we are not too worried at this point as well that we have the tires available in our inventories.

The next question comes from Artem Beletski from SEB.

Actually, I'll ask one by one. And first one is really starting with passenger car tires. And could you maybe provide some type of indication in terms of volume development in second half of this year, putting it into a context of 16% growth in first half. In H1, given the fact that there has been the disruptions related to strikes and Red Sea situation and ramping up production. So could you provide us with some more details on this front?

We can basically say that, obviously, a year ago, when we went into the second half, we did not have offtake on the winter tires and so we didn't have the all-season tires, neither did we have a number of product categories that they're supportive of our premium tires. So clearly, the availability is better and also there are obvious markets or market segments, which we did not address at all or didn't have a chance to do that. So in that sense, we have opportunities, which are based on availability and based on targeting historical volumes that didn't grow. And we see that -- as we said, that the outlook, we reiterated the outlook that we expect that the growth continues. But it's also simply based on the fact that the product availability is much better.

Okay. That's clear. And then maybe one aspect of what you mentioned in Q1 is this Red Sea situation, and it was impacting deliveries of offtake tires. Have those tires basically been delivered to customers or has the situation, so to speak, normalized on that front?

Yes. I think some of them are delivered. But of course, there were also summer tires and those are not delivered to the customers. But I don't see that as a big kind of an issue as right now in terms of our guidance. But clearly, some of them are in our inventories.