Nokian Tyres Plc

Hello and welcome to the Enoch and Tyers third quarter 2023 conference call. Please note this conference is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand you over to your host, Teivi Antola, to begin today's conference. Thank you.

Good afternoon from Helsinki, and welcome to Nokia Antalya's Q3 2023 results conference call. My name is Teivi Antola. I am from Nokia Antalya's Investor Relations, and together with me in this call, I have Jukka Moise, the President and CEO of the company, and Niko Haavisto, Nokia Antalya's CFO. who joined the company in the beginning of October. So welcome to Nokian Tyres, Mikko.

Thank you, Patti. 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, Pevi. Welcome to our call today. Good morning, good afternoon to everybody. As Pevi said, my name is Arne Kacvacik, and I will be talking about the expansion and the rebuilding of the Nukin Tyres capacity and the progress as such. When we start with the Orodea project, we have basically started the project, the Romania Factory project in May. This year was a great groundbreaking event and since then the progress has been quite substantial. We have really completed the site cleaning and the site preparation work and the main utility building and the main production building 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's been ordered. And that said, we are planning to start the installation of our first equipment in the first quarter next year. The recruiting 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 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 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 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've been able to maintain our very tight timeline up till now. Next, please. On the overall capacity, Nokian Tires capacity, I can only say that we have been successfully concluded our capacity expansion in Nokia Finland for our passenger car tire production. And we are currently finalizing the installation in our Dayton, Tennessee facility. and 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 a 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 two 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, continue with contract manufacturing as part of our portfolio. We call it virtual factory, but we'll operate three factories, Dayton, in Tennessee, US. 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 Oradea new factory were 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 Peli.

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

Thank you, Päivi, 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 one year ago, and we've come a long way, and we're actually closer to starting the factory in Oradea. And actually, it's a longer 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 2022, we had an eventual year of war in Ukraine. And then there are steps, and we are heading towards 2021. 50 plus million capacity when investments have been completed plus the virtual factory between one and three million. So all in all that rebuild journey is continuing and step by step we'll achieve our milestones. But let's move to quarter three and this is now a comparable number 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 276 million versus 333 million in 22, and this is a decline of 12.7% in comparable currencies. We had a demanding market environment, and inventory distribution were on a high level. And, of course, our main product offering for 2023 was freely winter tires. Obviously, we had a certain number of tires from off-take and so on, but mostly we had a home-manufactured winter tires. 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 segments EBITDA at 46 million versus 7.4 million last year. This means margin of 16.7% versus 2.2% of segments net sales compared to 2022. So, clear improvement in margin and in absolute EBITDA. Segments operating profit at 19.6 million versus minus 17.9 a year ago. Again, there is a and that's driven by passenger car tires. We also announced last week that the second dividend installment of 20 cents per share will be paid in December. I'm going to pay seven. 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 70 million, 69.5 versus about 27 million a year ago. Year-to-date, our capital expenditure is in the range of 157 million. And last year, 22, we spent about 60 million in capital expenditure. To have a forward-looking picture, Assessment of the capital expenditure this year, we expect that we land somewhere in the range of $250 million for the full year. So about $100 million more in the final quarter. Segment EPS earnings per share was $0.09 in the quarter versus $0.25 a year ago. This $0.25 includes the discontinued operations of Russia. In the nine months, our segments EBITDA was 12.2%, and that's an improvement over 9.3% a year ago. Also, in absolute euros, the EBITDA improved. The segments operating profit at 20.7 million in the first nine months versus 17.6 a year ago. And as you see, almost all of the segments operating profit in the first nine months were delivered in the third quarter. Our equity ratio remains good, 60.1%. Hearing is 28.2%. And its fair net debt at the end of September was $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 on my behalf. And please, it's all yours for the first quarterly results. Yeah. Thank you, Jukka. I will go through the Q3 segment numbers a little bit more in the – I'm on page eight 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 noticed 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 are so supported by lower costs. On this page still, I would like to point out the segment operating profit of close to 19 million euro and at the level of 11.1%. If you move to next page, page nine, there is the PCP bridge, which you can see that starting from the Q Last year, roughly 40 million was lower of the volumes. Price mix, we gained 4 million euros. And with those two elements, we were at the level of 180 million euros in terms of sales. But we also had the negative effect from the currency of some 10 million euros. And with that, we landed with the segment sales of 170 million euros. Operating profit bridge there for the BCC Q3, we started from the low minus 18 million level. They're the same elements, i.e. the sales volume, of course, hitting us. Price mix, we got the gain there, and the material prices are increasing. And then there was this big element of supply chain of 40 million. And then the sales and general anatomy, there we also saved some 6 million euros. That comes excluding the events at the level of 21 million euro as an operating profit. And then when you deduct the negative effects or currency impact there, we land at the 19 million euros at the BCT segment. On page 10, you can see that kind of the 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 kind of 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 this BCT segment. Then briefly, base 11, heavy tires. There we see that the net sales decreased mainly due to the soft aftermarket and also see the same thing that the inventory levels in the aftermarket are in the optimum distribution are on the high side there. Operating profit was lower due to the fact that the volumes were bit down as well as the currency in this 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. Phase 12, B&R, there we see also the headwind from the currencies, some 4.2% negative, and of course this Q3 is seasonally a low quarter for us. And therefore, all the sales and in terms of operating profit, they were lower than previous year and then the coming quarter as well. And then last was the guidance that we updated a week ago. I am on the 24th that night and we are saying that we expect the net sales to segment, net sales between 1.15 to 1.2 billion and operating profit between 5.5 to 6% approximately of the net sales. And with that, I hand over back to you for the final conclusions. Thank you, Nico, and thank you for taking us through the financial summary. So keep on building the new Nokia tires. We have the long-term targets. We want to go back to 2 billion in net sales and achieve segment operating profit at 15% and also have And underlined 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 sequence of improvements. but also similar sequential improvement in the fourth quarter compared to the third quarter in EBITDA margin. We have five cornerstones, safe tires, responsible and effective supply chain, consumer trust in premium brand, leader in sustainability, we make good progress in sustainability, come back later to that one, and Nokia tires team. Obviously, lots of things have happened since the announcement of the divestment of the Russian factory to Tagnet, final conclusion of the deal in March this year, and then continued building of new Nokian tires, and especially investing in Foradea and many other things happening simultaneously. So this is Nokian tires in summary. This is the quarter three, and the building of the company continues. Over to you, Baby.

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

Thank you. As a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. If you change your mind and want to withdraw your question, please press star 2. Please ensure your lines are unmuted locally as you'll be prompted when to ask your question. Our first question comes from the line of Giulio Pescatori from EMP Paribas. Please go ahead.

Thanks for taking my question and thanks for sharing the update on the construction of the Romania plant. Can you just remind us on that of how much of the 650 million you target to spend that you 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 actions are you taking to make sure that the market continues to grow for you? And then the last question on raw material costs. They 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 that raw material costs become a tailwind? Thank you.

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

Yeah, the project basically is phased over the next year. So we started last year in 2022 with down payments of around $50 million and some preparation work. We expect to spend $100 million to $120 million in 2023, reaching its peak in 2024 around $300 million and then coming down around $180 million in 2025.

and then to expect a subsidy of about 100 million to help our investment decision and investment process. Okay, so winter tires, inventories. Yes, we saw inventories in the third quarter, and obviously the sellout is something that is expected to happen right now. In the Nordic countries, the sellout is happening as we speak because the winter has come, and it's getting cold, and it's getting snowy and icy, and so therefore we see that – sellout happening as we speak and we based on our V&O chain we see relatively good sellout 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 sellout takes place but in Central Europe Eastern Europe, Central Europe, the winter is yet to come, so the inventories at this point of time are relatively full, but then obviously we expect that step by step that happens. You asked that whether there 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 Instead of studied winter tires, they take friction tires or weather tires if you go to North America. While, of course, in some of the Central European markets, it's clear that the all-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 come with 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 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 winter tire requirements. And so structural change is – stepwise 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 Also, custom 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 2024-2025 they'll take a new factory and 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.

Okay, thank you very much. You're welcome. Our next question comes from the line of Christoph Laskawi from Deutsche Bank. Please go ahead.

Good afternoon. Thank you for taking my questions as well. A bit of a follow-up to Julia'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 block of questions would be on the ramp up of volumes into Q4 and 24, which is common again on how the contract manufacturing is ramping up. And in case there would be elevated dealer inventory still towards 24, 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 productivity in the market? Thank you.

All right. So I'll take the heavy tires, and then we'll talk about the contract manufacturing. So heavy tires, indeed, we saw a significantly high inventory 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 a a good demand of all E. And so therefore, what we did over the summer is that we took extended shot in our factory in Nokia and that they managed our own inventories down. And then also the automotive 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 higher. getting softer and perhaps into 2024. 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 a 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. Over to you, Adrian, in terms of offtake.

Yeah, on the offtake side, it's 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 to source from contract manufacturing will be between 1.5 and 3 million. And this really depends on the demand development. So we have sufficient flexibility to respond to the market demand based on the rolling forecast we are providing to our contract manufacturing partners.

Thank you.

Our next question comes from the line of Mika Ihamaki from DNP Markets. Please go ahead.

Hello, thanks for taking my question. So you mentioned that based on customer feedback, you've maintained or further improved your market share in premium winter tires. Is it still fair to assume that there was still considerable downtrading 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 and distribution, and how much due to actual downtrading?

That particular balance is difficult to say, but it's clear that what happened, especially, for example, the Nordics, is that based on our own manufacturing, we had a good availability of premium winter tires. And clearly, because of the lack of capacity, we had lesser available P category and so on. What happened was that, for example, now we are able to secure third-party offering to our customers. operations and therefore obviously we are not top line the sell out is continuing at the good level or 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 and 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 winter tires, 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.

Thank you.

Our next question comes from a line of Rauli Juba from Inderes. Please go ahead.

Yes, hi, Rauli from Inderes here. I have two questions. I can take them one by one. And first is on your production. So now when the demand obviously was weaker than you anticipated in the winter tires, how have you reacted in terms of production? For that, are you now able to produce more summer tires for next year, or have you taken down the production levels, or what's happening there?

Yeah, if you mean the passenger car tires, we have not taken any downtime, so we actually allocate the production to different products, because obviously, as mentioned earlier, that yes, we had a good selection of the premium tires, and then we had no capacity for the summer tires or all-season tires, so we actually changed the direction of the production. There's no need to take downtime. Obviously, heavy tires, we did over the summer period, so we took downtime to manage the inventories, but in PCP, this is not needed. Obviously, we will have a normal maintenance shutdown at the end of the year, but this is scheduled and it's normal.

Yeah, that's very clear. And then secondly, you mentioned that you are planning to finish the ramp up of the u.s uh factory next year so could you talk a bit about kind of how how you are able planning to utilize all that capacity given the given the weak market so i guess the expanded product range versus this year is one factor is there some something else yeah

So, first of all, the technical part and how we ramp up the zone, Adrian will address that. Basically, the product selection is, of course, all season, all weather, and then we go into light truck, so we start the light truck production. Yeah. But technically, how does it go, Adrian? Most of that will happen this year. Yeah.

Then the remainder will be in the early part of next year. Yeah. So, technically, the technical capabilities and equipment will be the installation and commissioning will be finalized this year, then you will need the time next year to utilize the equipment with the new portfolio and new product introductions to then fully utilize the factory in the second half of 2024.

Maybe just an anecdote, or not an anecdote, but just an observation about the product portfolio in Dayton was that originally when we invested in Dayton we had an idea that we would be supporting Dayton North American market with certain productions from Russia. Now we see that Russia is not there anymore so we have a little bit of a change in the production portfolio there and then need to have a virtual factory way of supporting our North American product selection all the time.

Okay, thank you. Thank you.

Our next question comes from the line of Mika Kapinen from Danske Bank. Please go ahead.

Hi, this is Mika from Danske. Could you comment on the central European market? Have you lost any distribution in those market areas after the lost Russian production, or was it just the availability of Russian products for the season?

No, we haven't. I mean, what we did a year ago is that we actually reduced the team quite significantly, and we also looked at the markets where we don't have any product to sell, which is basically summer markets. And so, therefore, we get the distribution and distribution network in the air. That's where we have winter tire all season and summer tire in combination. Now, we haven't lost anything, and we've gained market share in the premium winter tire selling, but this is all we had. So, no availability issues, simply high inventories and slow start into the winter season.

Okay, good. Thank you. Before we proceed to the next question, a final reminder. If you would like to ask a question, please press star 1. Our next question comes from the line of Artem Beletsky from SEB. Please go ahead.

Yes, good afternoon, and thank you for taking my questions. Maybe I can start this downgraded outlook for this year. And I think you mentioned that you didn't take any downtime in terms of passenger car type manufacturing this year, so some volume outlook should be unchanged. Is it really price mix picture that has changed to weaker outlook? versus your initial expectations? So are you planning to have a big high inventories, for example, by the end of this year? I think that right now the production actually focuses on next year already. So obviously what will happen is the dependent plan, the deliveries will happen whether they have an late this year or early next year, so that will dictate a little bit the inventory. What dictates maybe most of the inventory change at this point in time is the contract manufacturing, when they come in and how they are being supplied to customers. And those products are mostly now, when we look at the coming season, they will be summer 24 as well as all season 24. In raw materials, the inventories have come down, so we are actually quite... at a good level in terms of raw materials. Okay. This is very clear. And maybe two shorter questions from my side. Could you maybe comment on startup-related costs, what comes the next year? I think you have some costs already relating to Romania also in this quarter. And also the second one is on CapEx for next year. I appreciate comments what you made relating to Romania. Could you make some indication what will be the level for next year on the group level? The startup ramp-up costs are difficult to anticipate at this point in time. We still are in the budgeting season and so on. Obviously, we've said about the data that once we hit the equivalent 3 million, then we will – eliminate that but of course when we go into Romania so we'll have certain items there but we don't know yet how much that will be so we'll have a look and we'll get back to that in connection of the fourth quarter and starting of the next year in order to anticipate what they might be but Yeah, in terms of CAPEX, we are anticipating somewhere around 350 million euros next year. And then we are expecting at least part of the Romanian government subsidy of the 99 million euros to land next year as well. So if you net that against the 350, you land. I need to remember our ambition is that we expect that the EBITDA of 2023, 2024, 2025 ought to be a sovereign investment of those three years. Yeah, that's very good to keep in mind. But yeah, thank you for those answers.

There are no further questions, so I will hand you back to your host to conclude today's conference.

Thank you. If there are no additional questions, that means that we will be ending the call. Thank you for