Nokian Tyres Plc

I'd like to hand the call over to Kaivi Antola. Please go ahead.

Good afternoon from Helsinki and welcome to Nokian Tyres Q2-23 results conference call. My name is Kaivi Antola from Nokian Tyres Industrial Relations and together with me in the call I have Jukka Moisio, the President and CEO of the company and Teemu Kangaskarki, 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 tires. But now I'm handing over to Jukka and Teemu, please go ahead.

Thank you, Päivi. Jukka Moisio here. So welcome on my behalf. And indeed, we have a presentation there that heading is building new Nokian tires is on track. And so I move on that presentation to page two 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, were ordered already in 2022, so that we secure the availability and delivery times. Our timeline is such that first buyers are expected in the second half of 2024, and the commercial production will start in 2025. Application for the investment subsidiary of up to 99.5 million is under EU review, so that they will approve the state aid as proposed by the Romanian government. Another project in Finland, so we have the passage of car tire capacity increased and in use as we speak. In the US, 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 are being started sequentially at this very moment and towards the end of Q3, we expect that they all are installed and then we start of the year. Contract manufacturing volume of 1.5 million tires have been secured for 2023, so first internal season tires to 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 six months of the year. secured volume will be benefiting top line and the company in the second half of 2023. I move to page three about the profitability. So these numbers in Q2 are excluding Russia. So first of all, the segments net sales at 293 million versus 332 million in 22. This is a 12% reported decline, but if we exclude the currency, Plain reasons, there were lower passenger car tire 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 and additional volume in the second half, and that will help our top line. Also, the car and tire market environment for the replacement tires were quite demanding, Nordic markets, so Norway and Sweden, Norway being the most or the biggest headwind in terms of currency conversion. Segment operating profit at 15.2 million versus 0.9 million in 22. Price increases to combat cost inflation led to higher ASP. Segment EBITDA was 41.3 million versus 25.9 in 22, so we Move to page four. Here are some of the key financial numbers. I call out some key numbers that I didn't mention earlier. So segments operated profit at 5.2%, segments EBITDA at 14.1, and small earnings per share for 5 cents per share in the quarter. And if you look at the capital expenditure, we spent 3 million in the quarter, versus 19 million a prior year, and cash flow from operating activities was minus 67 million versus 109 million a year ago. In the first six months, if you look at the top line, so all in all, we had a reported change over minus 19%, so 529 in 23 versus 655 in 22 in constant current, Segments EBITDA for the first six months in 23 was 9.9% versus 13% in 22. And as mentioned in our guidance, the segments operating profit was 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 1.1 million, slightly positive in the first half. and that compares to 35.5 million in 2022. In terms of equity ratio, we are still at the high level, 60%, gearing at 16.2, and interest rate and net debt at 220 million, out of which 130 million are IFRS 16 leases. And capital expenditure in the first half, 87 million versus 33 million in the prior year, and cash flow from operating activities in the first six months, 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 financials. Teemu, please go ahead.

Thank you, Jukka. Moving to the page number five. 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, in May, for 300 million long-term bilateral credit facilities. And then in June, we issued 100 million sustainability linked five years on issue. So from here on, we are in a structured way building the debt portfolio with 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 facing 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 that. 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 number six, talking about the passenger car tire performance. There our net sales in the quarter was on a level of 153 million. and our segment operating profit was on a break-even 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 2021. Then moving to the next slide where you can see the passenger car tire bridges, looking at the net sales, you can see that our price makes development in the quarter was, in absolute terms, 29 million, almost 15% in relative terms. And then if you look at our segment-operated profit development, naturally declining in sales volume, but then the price mix has been more than offsetting the decline in volume. Then moving to page eight about heavy tires, there the net sales was impacted by soft aftermarket. Our net sales in absolute terms in the second quarter was on a level of 67 million with comparable currencies, a decline of about 6%, and then our segment operating profit was on a level of 9 million. decline from the comparison period, which was 60 million. And as said earlier, the net sales decreased due to the inventory levels in the aftermarket distribution. They are doing the destocking activities, and that had an impact. 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 Vienna business performance, that was stable in overall sense. Our net sales was on a level of 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, yeah, you can see that there was a significant headwind from the currencies, both in the passenger car tire business unit as in VNR. business unit. And 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 a science-based commitment to achieve net zero standard by 2050 to reduce greenhouse gas emissions further. In May, we were awarded the Platinum Medal for EcoBuddies for our sustainability performance, which then places us on top one percentile of the companies assessed. And in June, we issued this 100 million sustainability fund, which Teemu was talking about, based on following greenhouse gas emission reduction targets. First of all, we used the scope 102 by intensity by 65%. 2030. then i move on page to page 11 so 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's assessing, that is there going to be a soft landing or some kind of a recessionary situation or what will happen, so that may have an impact that needs to be assessed once we go on in the second half. And then changes in 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 US 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 way, they may have a further negative effect in the second half. Our guidance for 2023 is unchanged, so we expect that the net sales will be between 1.3 to 1.5 billion, and the segment 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 six months, 1 million euros. and then in the second quarter we already had a stronger performance compared to the first sequence 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 nokia tires underlying business performance just as a reminder and finally we are building the new nokia tires together so we have an ambition to go back to 2 billion in net sales. We have two different time horizons. One is to rebuild in 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 net sales in 2 billion, segments operating profit at 15% level, and as a new target, net debt segments EBITDA between one and two terms, 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 500 to 1 billion depending on our EBITDA and net sales. Our EBITDA target long term is on the range of 24 to 25%. And these are our key messages, so building new Nokian tires progresses on track. Second quarter clearly better than the first quarter, and we expect that the profit of the year will be generated in the second half. Heidi, over to you.

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

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star 1 on your telephone keypad. Please make sure the function on your phone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. Our first question comes from Mikko Karpinen from Danske Bank. Please go ahead.

Hi, this is Mikko from Danske. Could you comment a bit more about pricing and mixed development? in terms of whole product area changes and then rim size changes?

So, the price mix development is a function of several factors. First, the real price increases that we have been executing diligently, as I said, already starting from second half of 2021. 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 vinted tires has been increasing. And then on top of that, there is a positive mix impact from geographical point of view when the share of Nordic has 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 mixed effects, but the price impact has been the biggest one.

Is there any change in rim sizes?

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

Okay, good. Thank you very much.

We will now take our next question from Akshat. Thakur from JP Morgan, please go ahead.

Thank you. Good afternoon. Akshat from JP Morgan. Three questions from my side, please. The first one on your full year guidance, clearly a lot to do in the second half versus what you have delivered in the first half. Could you just talk about a few drivers behind the improving underlying business profitability as you look into the second half? I know that there are offtake agreements that we kick in. um in the second half but other than that we see some negative momentum in heavy tires and the profitability of passenger cars is still break even so could you just talk about some more elements that will help improving profitability in the second half the second question is kind of linked and on the passenger car business when do you expect the two plants in dayton and nokia to hit peak or optimal profitability or the profitability that you have assumed in your midterm targets? Is it probably in the second half of 2024? And the last question is on the pricing and inventory situation. Just overall, in terms of your markets in Europe and in North America, what are you seeing in terms of pricing trends, not just Nokia, but also competitors? And if you could just talk about channel inventories as well. Thank you.

Thank you so much for your guidance. We already knew late last year, early this year, that the early part of the year will be lacking volume. So you rightly pointed out that help will come from offtake. The other part where we get more volume is that we started higher production or brought the higher production availability in Nokia in the early part of the year. So that will be available in the second half. And also we keep on improving the performance in Dayton. So we hired... additional people and we start more equipment, so that will of course bring benefits. And then finally heavy tires. Yes, we had downtime at quite large inventories in the distribution and so on, therefore we Now, we expect that we are able to run relatively well in the second half, and then let's see what will happen towards the end of the year and what the demand is. But we expect that the heavy tire performance, nevertheless, our 13% segment operating profit, we expect that we are there or move towards longer term to 15%. So we don't see any more negative deviation there. But obviously... It's dependent on the macroeconomic in terms of what will happen in the OE demand and so on. But at this point of time we see a relatively stable development. Obviously in the early part also we had a number of cost items related to Russia exit and all kinds of things that are not on our way when we go forward in the second half. more focus to our team and more capability to deliver the results in the early part. Just remember that we got the final exit from Russia at the end of March, and then the early part of the year included number of cost items and the focus of the team that we needed to work on that one. So we are more focused on building new Nokia tires with the whole team in the second half. So that will also have a benefit and also reduce easily the excess cost and these kind of items. So all in all, that helps now good year guidance. But it was known upfront that the first half of the year will not deliver significant profitability, so that all of that will come with the winter tires and the second half capability to deliver. In Dayton and Nokia, so in isolation, we will not comment these, how they go and how they trade, but we said that the long-term ambition to have a segment operating profit at 50%, We'll be there and we will work step by step towards that. And you can expect that every year, every quarter, we keep on improving. So when we go to the second half of this year, you can expect that our segment operating profit zero will be higher in the second half and also EBITDA will be higher. And then when we move into next year, we will then have a sequentially improved performance step by step. Our ambition is then to hit that 24-25% EBITDA and about 15% segment operating profit. Pricing environment, Teemu, do you want to comment on pricing environment?

I would say that now we have reached the level where the price level has got its peak, so we don't expect that the prices are increasing. In the coming quarters, we also then have the tough comparisons in the second half, so the price mix development doesn't continue like in the first half and then what we see in the markets. It is quite stable in terms that no price increases and not necessarily price decreases on a face value level from our competitors, but some of the competitors are starting to do some promotional activities in a sense that the net real price changes are going down in some markets, but then in other markets like in the Nordics, we still expect some price increases because of the currency.

Great. Thank you for the details. Thank you. As a reminder, to ask a question, please signal by pressing star 1. We'll pause for a moment to allow you to signal. And we have a question from Pierre from . Please go ahead.

Yes, good afternoon, everyone. I would have one question to clarify, if I may. Do you expect a price mix to become negative at some point this year? Because the net price mix minus raw material has been very, very favorable in the first two quarters. Do you expect something to go towards neutrality or even to become negative? And if we can have some idea regarding the phasing of the price mix into the last two quarters. That would be the first question. And the other question I have, maybe I missed that, but have you already provided the pro forma figures for the passenger tires, extra shuffle, Q3, Thank you for both on revenues and on the operating profit for 2022. Thank you.

Yeah, starting with the pro forma, those we delivered in the beginning of February in connection with the Q3 result release. Then going to your first question regarding the price mix development, We don't expect that to be negative on a comparable currency, but this strong momentum that we have seen several quarters is not expected to continue in the second half because of the strong comparisons already recorded in the second half of 2022.

Thanks, Tim. But that will remain a tailwind. That's not going to become a headwind, right? Even if it's a much smaller tailwind.

We are not expecting to see a headwind with comparable currencies.

Okay.

That's very clear. Thank you very much. Thank you. And as a final reminder to ask a question, please signal by pressing star one. We'll pause for just a moment to allow you to signal. And if there are no further questions in the queue, I'd like to hand the call back over to Kaive Antala for any additional or closing remarks.

Thank you. If there are no additional questions, that means that we finish early this time. Thank you all for participating. And from Nokia Antalya, we wish you all a nice summer.

Thank you. Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.