Nokia Corporation

Good morning, ladies and gentlemen, and welcome to Nokia's fourth quarter 2021 results call. I'm David Mulholland, head of Nokia Investor Relations, and today with me is Pekka Lundmark, our president and CEO, along with Marco Viren, our CFO. Before we get started, a quick disclaimer. During this call, we'll be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the risk factor section of our annual report on Form 20F, which is available on our investor relations website. Within today's presentation, references to growth rates will mostly be on a constant currency growth rate basis, and margins will be on our comparable reporting. Please note that our Q4 report and this presentation are published on our website, and both reported and comparable results and reconciliation between the two are available there. In terms of the agenda for today, Pekka will give a quick overview of our financial and strategic progress throughout 2021 before explaining the new long term targets that we've introduced. Marko will then go into a bit more detail of some of the key factors impacting our financial and cash flow performance before explaining how we see the business outlook for 2022. And then we'll go to Q&A. With that, let me hand over to Pekka.

Thank you very much, David. Hello, everyone, and thank you for joining the call today. Q4 ended a year which was truly transformational for Nokia in many ways. I would like to start with growth. As you remember, we have said throughout the year that this year would be different in terms of seasonality. And that's exactly what happened. We had 3% top line growth overall in the year, 22.2 billion euro sales. Q4, pretty much as expected, was 5% down year on year, 6.4 billion euros, because we had this year in a way much more balanced seasonality compared to where we have typically been. Q4 top line highlight was clearly network infrastructure, 10% growth. So overall, good year from a top line point of view, pretty much as expected when it comes to seasonality. So now let's look at operating margin. We had a strong Q4, 14.2% comparable operating margin. But again, because we had more stable seasonality this year, it was 190 basis points lower than the extremely high and strong Q4 that we had last year. But overall for the full year, 12.5%. comparable operating margin. It's a 300 basis point improvement over 2020. I'm extremely happy and proud of this achievement that our team has delivered. Why do I say that it was a transformational year? Well, this graph helps me to explain that. Here you see First of all, net sales constant currency growth each quarter. This was 2020 growth in each quarter. And here you can see the corresponding growth in 2021. Very different picture between those two years. But yes, different sessionality Q4 being relatively weaker as expected. And then... Here you see the significant margin improvement that we delivered. Here is 12 month rolling comparable operating margin starting from Q1 2020 and then developing all the way to the Q4 and to the 12.5 margin that we had. So overall, great performance in margin execution. And this has now, together with very good working capital efficiency, helped us to deliver a strong cash flow, 2.4 billion euros free cash flow for the year, which means that we now have at the end of the year a 4.6 billion euro net cash position on our balance sheet. In simple terms, this means that we now have a possibility to resume shareholder distributions. Board is proposing to shareholder meeting, annual shareholder meeting, that we will start dividend payments. And board is also initiating a share buyback program. And Marko will actually talk more about this in his part. But now I would like to move on and make a few comments on each of our businesses. And I start with mobile networks, which had, if I say for the group that we had a transformational year, that definitely applies to mobile networks. 9.7 billion sales, that's down 5% year over year, pretty much as we expected because of lower market share in North America, because of the decisions our customers made. made in 2020. But what is remarkable is that despite this 5% decline in sales in constant currency, we had through our improved technology position, we had 150 basis points improvement in gross margin, and we had stable comparable operating margin. That's really strong execution from mobile networks. That is further confirmed by the KPI development. Here you see the KPI that we've been reporting for quite some time, which is the Reeveshark share of all deliveries. In Q4, 68%, and in December, already 76%. So this is pretty much, or actually even slightly higher than what we told that we would be at the end of the year. I think our guidance was 70%. percent for the end of the year. So we are strongly on track to meet the target to have pretty much all our deliveries in Reeveshack based by the end of this year. And then the other important indicator that we've been reporting is is our combined 4G, 5G market share outside of China. No, sorry, not market share. That we are also reporting. That was 26%. But this graph here is talking about conversion rate, 4G, 5G conversion rate, which has now stabilized on about... 90% level. And now when we have in a way stabilized the situation in mobile networks, now of course the only acceptable goal going forward is to then start gaining market share. And I think we have every possibility to do that because we have so much stronger technology position now compared to where we were about a year ago. In the middle of this year, we launched the new generation of airscale products, both Baseband and new Massimimal radios. Largely, we can now say, and this has been confirmed by multiple customers, that we have closed the gap to competition in 5G. We are already shipping the new airscale Baseband. We have already shipments to over 150 customers with excellent feedback. One extremely important feature of the new generation of the products is 75 percent improvement in baseband energy efficiency. And one additional highlight that I would like to mention, which we achieved recently, was a new benchmark of almost three gigabits per second radio performance in 5G standalone downlink throughput using carrier aggregation with AirScale on a live CSP network, three gigabits per second. Then on to network infrastructure. a real stellar year, and here you can see, first of all, how the top line developed in the four divisions inside network infrastructure. As you can see, all businesses had top line growth, but of course, two really, really fantastic divisions, fixed networks, 35% growth in the year, and then submarine networks, 33% growth. We have clearly taken market share in this business. Service provider routing. This is actually market share development going all the way to the third quarter 2017. And this is third quarter 2021 on a rolling 12-month basis, which is which is the last available market share from Deloro at the moment. 26% is the latest figure that we have in service provider routing. And then the most important focus segment for us in fixed networks, this is not the only business, of course, we also have Copper and we have optical network terminals and fixed wireless access. But if I focus on OLT's optical line terminals, which is the most important stronghold that we have in this business, we have there now a growing market share and a very high market share of 41%. And when you look at the market development forecasts for this business going forward, it's actually pretty promising when you look at what the what the market research agencies are expecting about the continuous fiber rollout. There are still several countries, for example in Europe, large countries, where the fiber penetration or actually homes passed by fiber has not even reached 50 percent yet. Optical network market share has been fairly stable, 16 percent. Here we have very important new product generation now in early deliveries we are strengthening our position in this business as well so overall we continue to have great momentum to build on our technology leadership in network infrastructure Then on to cloud and network services. As you may remember, we've been talking about rebalancing of the product portfolio because there is a very, very wide range of products available in that business. We have decided to focus on six segments, 5G core, analytics and AI, private wireless, digital operations, monetization and security. We believe that these are those sweet spots in the CNS business where the best growth and the best profitability can be achieved going forward. And I'm pleased to report that if we take those six focus areas that I just mentioned, our year-on-year growth was 13%, overall CNS was 1%, but growth in these focus areas was 13%. And then in other than these focus areas, the top line development was minus 8%. So this just seems to confirm that we have made the right choices when deciding on the focus areas. Then Nokia Technologies delivered another strong year, 8% top line growth, excellent profitability continued. And of course, patent portfolio development being an extremely important KPI of the outlook of this business. During the year, we reached the very important milestone of 4,000 patent families declared as essential for 5G standards. So overall strong execution, including, and this is important, including new engagements in automotive and consumer electronics, as we do want to grow into new areas in this business. Then a couple of comments on enterprise, which is of course not a business group of its own. These numbers are embedded in the numbers of several businesses, but we are tracking them separately because we have a very strong ambition to grow beyond our traditional customer base of service providers. And we do believe that the enterprise business offers significant growth opportunities going forward. The 1% net sales growth that we had in 2021 did not meet our expectations. That's the bad news. But the good news is that we had extremely strong order intake, especially in the second half of the year. That means that we now have a strong foundation for growth for this business for 2022. One important, not the only one, but one important focus area in our enterprise business is private wireless. And as you can see, this development continues in a very promising manner. We currently have 420 private wireless customers. Private wireless has two sub-segments. One is wide area networks, for example, for authorities and railways and utilities. But the other one, which will be a fast growth segment going forward, is campus wireless. 14 million industrial campuses in the world. A significant part of them will one way or another invest in new generation of networking in the coming years. We have decided to double down our investment in campus wireless. We are expanding and increasing our R&D investment in campus wireless to build on top of the already strong initial position that we have in that. And then, of course, very importantly, the sales and distribution and the distribution partner network that is needed to reach out to those 14 million composites is another significant part of the investment. And then one additional important thing in the enterprise business is increasing engagements with web scalers, who of course can be extremely important partners in many parts of that business. So, as you remember, when we presented at our Capital Market Day, we we launched a three-step concept in our strategy execution, reset, accelerate and scale. And now I'm pleased to confirm that we have completed our reset phase. First of all, strategy. We refocused on R&D to make sure that we strive for technology leadership in all the segments where we compete. We changed our focus from end to end to best of breed Definitely we are delivering complete networks also and engaging in network architecture discussions with customers, but we do not want to mix that with the extreme importance of each business group head being responsible for achieving technology leadership in their own segment. Then on the product side, as I already mentioned, mobile networks secured full portfolio competitiveness, largely caught up competition in 5G. We have stepped up R&D while improving gross margin, as I already earlier said, by 150 basis points. Profitability, yes, 300 basis points improvement in comparable operating margin. One driver behind this is that we streamlined SG&A to be able to fund R&D. We had significant increase in our R&D spending, and despite that increase in R&D spending, we had 300 basis points expansion in our comparable operating margin. Then leadership structure and the way how we operate new operating model for BGs, we removed the matrix in our P&L management, new members in a group leadership team, much more straightforward, easier to understand, simple, down to the earth model that maximizes the accountability within the management team. And then last but definitely not least, people. We renewed our purpose during the year and we renewed our ways of working. We launched new cultural essentials, open, fearless and empowered, which is our guiding star in how we continue to develop our corporate culture. So with the reset now behind us, it's time to accelerate. And what does accelerate and then after accelerate scale, What does actually mean? It's actually very simple. Accelerate means exactly what it is. Accelerate, grow and expand margins. We want to now deliver growth across our businesses, and we want to continue to expand our margins. We have renewed mobile networks portfolio, strong network infrastructure technology leadership, growth in CNS focus areas. We have strong momentum in enterprise. grow. That's what we want to do. We will continue to invest. We want to prioritize R&D investments into our core areas to further strengthen technology leadership, including, and this is just two highlights now, which we have perhaps not talked that much about. I already mentioned doubling down in our investments in campus wireless to maintain and extend our lead. But then I would also like to highlight optical networks, We are now delivering our next generation product, PSE5 generation. We are capitalizing momentum created by it, and this is now a good place to increase ambition level in technology leadership also in the optical business. We continue to optimize how we operate, continuous review of business returns to optimize portfolio. There is still a possibility to improve further R&D efficiency, continue to refocus R&D, especially in CNS, towards the growth areas. And very importantly, we continue to invest in the digitalization of our own operations there is still some old tools that we are using in different parts of the company and we target additional productivity improvements through digitalization investments And then the last point, definitely not the least important one, which is innovation going forward. We are building new business models like as a service. CNS has already launched the first as a service offerings. And this is something that we will expand on. We will expand on enterprise, as I said, We continue to build strategic partnerships, including with web scalers. And then we want to utilize long-term innovation capacity, including Nokia Bell Labs, the fantastic research organization that we have there. We believe that there is a case for speeding up the commercialization of the innovation that takes place in Bell Labs. And then NGP, Nokia Growth Partners, the venture capital arm that we have excellent results in 2021. We have just announced their next fund, which Marko will talk more about. So in short, grow, invest, optimize and innovate. And then to finish, let's take a look at our long-term targets, which we have published today. First of all, given the pace of our strategy execution, we feel that now is the right time to introduce new long-term markets. And of course, we aim to deliver continuous improvement each year. First of all, we want to grow faster than the market. Then we target to reach at least 14% comparable operating margin in the next three to five years. And we are targeting 50 to 85% cash conversion from the comparable operating margin. So overall, ladies and gentlemen, we have every reason to be optimistic about the future. I'm so proud of this team who delivered such a transformational year. And with that, I would like to hand over to Marko.

Thank you, Pekka, and hello from my side as well. If we now just look shortly at the financials and a little bit deeper also when it comes to our 2022 guidance, we start with the top line and how that was developed during Q4. If we look here, we can see that our sales declined about 5% in constant currencies, and we have communicated throughout the year as well that we will see a different seasonality that we've seen in the previous years. And also, if you look at the different regions, you can see quite different development, starting with Europe, We're very happy to see that we have a good growth in Europe. And thanks to those wins that we have made in this area, mainly in MN and 5G deployments. Then if we go to Asia Pacific, you can see that we have a decline about 13%. And this is mainly driven by the South Korean market. And we had actually good growth in Japan, but that couldn't offset the whole decline that we had there. And then, of course, I have mentioned North American market as well. As you know, we've been communicating about the negotiations that happened in mobile network side in North American market in 2020. And of course, they had an impact on our net sales here in Q4. I just want to mention also that in NI, network infrastructure side, we actually had a good growth in North America in quarter four, but that couldn't offset the whole decline that we saw on the mobile network side. But worth mentioning also that in North America full year, we still saw about 4% growth. And then if we look what comes to operating margin development, and if we start from 1920, and we had a 9.5% operating margin. And we had the headwinds that we've been communicating as well, just I mentioned on North American market. Those actually played out exactly as expected. Then these were offset by a strong underlying demand, especially in NI and mobile networks. And also on the mobile network side, we had a very good progress on our product cost side. And thanks to these good market wins that we had and own progress on product cost side, we had a good development throughout the year. And also the external market analyst firms upgraded the market expectations a couple of times throughout the year. And with together the one-offs that we had, we landed at 12.5. So very proud of this progress that we've seen throughout the year. And then when it comes to cash performance, we had a good cash performance throughout the year and also in the Q4. And gross cash landed at $9.3 billion and the net cash at $4.6 billion. So within the quarter, we actually had a very good profit generation and growth. That was taken down, actually, mainly by the net broking capital development, where we saw receivables increasing, slightly offset by inventories, which were a little bit down. So all in all, 300 million increase in our net cash during the quarter. What comes to free cash flow, that landed at about 400 million in the quarter, and the full year was about 2.4 billion. And at the same time as we were actually continuing to reducing the level of receivables. And then what comes to how we're using the cash. I think we have a quite clear capital allocation policy. Our first priority is investing in R&D. And we believe that this will give good returns to shareholders. And the second priority is shareholder distributions. And if we look at the R&D investments, why do we do that? Just securing that we have a technology leadership. Not only today, but also longer term, why we invest more in Bell Labs and also the NGP, our venture fund that Pekka just mentioned. And in both of these areas, we also have business incubations. When it comes to NGP, we just announced today a new fund, Fund 5, and that's about a 400 million USD fund that we will invest in the next coming years in areas that are strategically relevant to Nokia. And if you look, the track record of NGP has been very good. So far, they have had about 15 to 20 percent IOR at maturity. In addition to that, of course, the good financial position that we have, we have to secure that we can fulfill those commitments we have towards our customers. And that's why we will intelligently think how to increase the inventory levels that we have, especially in these situations where we see that there's supply chain constraints. And if you look at our working capital rotation days, we've seen a pretty good development in the past two years' time, and also the inventory rotation days have been declining in a nice way. And I'm not worried about if we increase inventory levels as such, because that will definitely benefit our top line and margins. You see a slight increase in accounts receivables towards the end of the year. And I would say that this is mainly because we reduced the sale of receivables. So the underlying development is very good. And what comes to the distribution to our shareholders, thanks to the strong liquidity position that we have, actually, the board of directors have today proposed to the AGM $0.08 of dividend for results of 2021. And this will be paid on a quarterly basis. Also, to manage our capital structure and excess cash, the board of directors will initiate now a share buyback program with the intention of repurchasing up to 600 million over the next coming two years. And let's go over to 22 outlook and giving some more details of each of these three different areas. And just stating the outlook itself on the net sales side, 22.6 to 23.8 billion and the comparable operating margin between 11 and 13.5. Free cash flow, we actually have changed how we guide that in the future. So now it's a conversion from comparable operating profit to cash flow. And we believe that in 2022, that will be between 25% to 55%. And let's look into each of these in a little bit more detail, what is the background and support for these, starting with the top line. If we look at the addressable market, we see that it's growing about 3% on constant currencies. And we see growth across all businesses. In mobile networks, the driver is 5G deployments. In network infrastructure, it is connectivity, investments in national broadband initiatives, and also the fixed wireless. And what comes to cloud and network services, we see continued growth in the enterprise sector, especially in private wireless, but also web scale like Edge Compute. And regionally, I would say that we see growth in all regions, especially in North America, Europe and Asia Pacific. And of course, without the constraints that we see in the supply chain, I think we would see higher growth than this as well. Just a couple of words about mobile networks as well. This is now excluding China, and network infrastructure is excluding the submarine business. And mobile networks growth of 3%, I would say that if we compare with external analyst firms like Delora, This is pretty much aligned with their expectations as well. This is now in constant currencies in euros while they usually have USD. And also the perimeter is a little bit different. They only look at the REN while we have a little bit wider perimeter. And if we look at operating margin, we can see that starting from 2021 and excluding the one-offs, about 150 basis points, we land at 11. And we see that sales growth and operational improvements will be the main driver of the margin improvements during this year. Of course, tempered by the impact from supply chain costs, general cost inflation, and also on investments for the future. So 2022 will be a continuation of the path towards our long-term targets. And then finally, when it comes to cash flow guidance, in 2021, we had a very strong cash conversion, almost 90%. And in 2022, most of these factors will be similar to 21. But we assume increased outflow of networking capital as we build more inventory. And I believe also we will have more normal customer payments. When it comes to Nokia tech, we're going to have about $450 million impact from the prepayments that we have received in earlier years. And this together will lead to a cash conversion between 25% to 55%. And the long term, when we see more normal networking capital development, we believe that cash conversion should be between 55 and 85. But also, if you take 2021 and 22 together, we will actually be already around that area that we see in a longer term. So thank you for my insight. I'm back to you, David.