Nokian Tyres Plc

Good afternoon from Helsinki and welcome to Nokian Tyres full year 2023 results conference call. My name is Päivi Antola, heading the industrial relations in Nokian Tyres and together with me in the call I have Jukka Moisio, the president and CEO of the company and Niko Haavisto, the CFO of Nokian Tyres. In this call we will go through Q4 and full year results. and how we are proceeding with our growth strategy announced last year. And this will be presented by Jukka and Niko, then followed by a Q&A. So, Jukka, welcome, and please go ahead.

Thank you, Päivi. Welcome on my behalf. And indeed, let's go through the Q4 and full year 2023 highlights of Nokian Tyres. I will go through prepared notes based on the presentation building of the new Nokian tires on track. I go to page two, which is reflecting that in 2023 we had a steadily improving performance and volume delivery throughout the year. You may remember that we started the year with a lack of a good product portfolio following the exit from Russian operations and not having full capacity available in 2023 and not being able to bring all the off-take products to the market in the beginning of the year. But throughout the year we steadily improved our performance and volume delivery. We had a good progress in strategic investment to add capacity including contract manufacturing and we saw in the final quarter already some good signs of the contract manufacturing of tape products in the market for the winter tires. We had a competitive and continuously evolving product portfolio. We announced and launched a number of new products during the course of the year. Of course, we continued supplying our high-performing winter tires, so our Capelita 10 as well as R5 friction tire for the winter season of 23-24. Achievement, we also made achievements in sustainability, and we were moving towards net zero emissions. And indeed, when we look into 2024, there are important milestones to be reached in that year. If I move to the next page, on page three, one of the key... successes or anniversaries will be the 90 years of reinventing safety namely the first winter tire so the first winter tire was actually invented in 1934 by nokia tires and so in 2024 we have the honor and opportunity to celebrate 90 years celebration anniversary of that product We also will start early production steps in the world's first zero CO2 emission tire factory in Romania, remembering that our plan is to start to produce the first tires in 2024 in anticipation to start the commercial production full-time in Romania in the beginning of 2025. We will, of course, use this opportunity to have an anniversary stamp of 2020 of 90-year-old winter tire throughout the year, and the stamp is visible here on this page, number three. I move to page four and mention that Romania is actually proceeding on schedule, and again, to remind that the first tires will be produced in the first half of 2024, and the commercial production expected to start in the beginning of 2025. Right now, interior construction work continues, and machine installations have started in January, so they are very much ongoing right now. Outer shell of the finished goods warehouse is almost closed, and building permit for the mixing building has been received, and construction foundations and the frame is ongoing right now. We have also an active recruitment schedule and our anticipation is that we will hire up to 350 employees during 2024 and they will join the launch team coming from our Nokia factory in Romania and together with the Nokia launch team the new recruitments will be trained and We'll be starting the machines and make the ramp-up of the machines in day 24 towards the beginning of commercial production in 25. And production ramp-up plans are being prepared as we speak. I move to page 5. You see some pictures of the completion at this moment. So on the top left-hand side, you'll see the production building and also the annex of... offices. Then on that right-hand corner of that smaller picture, you see the warehouse, so Finnish school warehouse being constructed almost complete in the roofing area. Below, on the left-hand side, you see the mixing department, mixing building, first steps and on the right hand side you'll see an interior picture of the production building. If I move to page 6 and just reflect the operating performance of the company in quarter 4, net sales were 368 million euro versus 362 in 2022 in quarter 4 and this means 6.3% sales growth in comparable currencies. In reported currencies, you see that the growth is 1.7%, but in comparable currencies, 6.3%. Segments EBITDA at 71.9 million versus 26.4 in 2022, and that represents 19.5% margin in this year in 2023, and that is a clear improvement over 7.3% that was achieved in prior year. Segment operating profit at 44.5 million versus 0.2 in 32, a clear probability in the segment operating profit, and that was driven predominantly by passenger car tires. However, in the final quarter, also heavy tires as well as VNR reported higher segment operating profit compared to 22 numbers. I move to page 7 to reflect the full year 2023. Performance was in line with the plans. Net sales at 1.174 million euro versus 1.35 billion. So it's about minus 9% development in comparable currencies. Demanding market environment and dealers focusing on inventory reductions. We also had a 52 million negative impact from currencies. And on the other hand, on the positive side, we had market share gains in premium winter tires. Segment operating profit in the year was 65.1 million versus 17.8 in 22 full year. Price increases were implemented to combat cost inflation, leading to higher average selling price. In the comparison period, logistic costs were quite high because we had the extraordinary measures to secure tire supply. We also had a pretty high cost in place in late 2022. At the meeting today, the board decided to propose a dividend payment of 55 cents per share, and that will be paid into installments during the course of 2024. This is, of course, a proposal to the AGN. I multiply 8. We have a strong balance sheet after 23. So equity ratio at 58% versus 65% at the end of 22. And gearing at 16.6% versus 9.8% in 22. Interest per net debt at $224 million versus $141 million. a year ago and indeed the difference in the net debt was mostly driven by the higher capital expenditure that we did in 23. This was in line with our plans because we are building the factory in Romania as well as completing the investment steps in Dayton to have a full production capability in Dayton. cash flow from operating activities in the full year, 82 million, and in the quarter, about 298 million. Other highlights of the quarter, mostly discussed, the full year EBITDA is 14.5% versus 8.8% in 2022, and the full year segments operating profit, 5.5% versus 1.3% in 2022. So those are the highlights from the strong balance sheet, and I I also want to take the opportunity to talk about the steps in sustainability. We are constructing the first zero CO2 emission dye factory in Romania that started in the year. We also had a target to reduce our factory CO2 emissions by 52% from 2015 base year until 2030. However, this target was already achieved in 2023, and factory CO2 emissions are at industry-leading level. We joined Polestar Zero in a project that aims to create a climate-neutral car by 2030. That was announced during the year. And finally, also important to mention that, again, we were included in the Dow Jones Sustainability Europe Index, being among the most sustainable listed companies in Europe and highly scored in the automotive segment of the industry, of all industries. So with those, I hand over to Niko to talk about the financial performance of the segments and the highlights of financial performance. Niko, please go ahead. Thank you, Jukka. So, yeah, as you can see, I'll go a bit more in detail in our segments and Q4 specific. In the passenger car tires, we had the clear profitability improvement. It came both from the higher volumes and lower costs. The Q4 net sales were 198 million compared to 286 million euro last 22. And that's in comparable currencies, that's an increase of 10.6%. Also, the segments operating profit in Q4 was clear improvement there with the 22 million euro level compared to previous year, i.e., Q4 22 minus 27 million euro. And the operating profit was at the level of 11.1%. Fully year numbers you see there, you comment them through as well, and in terms of segments operating profit in the PCT, we were at the level of 5.6%. On the following couple of slides, I have some bridges. So, page 11, I think... We can say here that in Q4, the kind of price and mix were neutral. The sales volume, as said, was up by some 11.3%, and then the currency was still negative in our figures with an amount of 4.5%. And below that, there is this segment operating profit bridge, and there you can see the same items, i.e. the sales volume up, material expenses were down. Also, we had a much lower supply chain and logistics costs there, namely the warehousing and the logistics, and then also SG&A was better compared to 22 Q4 and then we landed at the level of 22 million euro in terms of BCT segments operating profit. On slide 12 there is quarterly changes in our net sales and there you can see that in terms of sales we've been increasing quarter by quarter when it comes to the volumes. And in terms of price and mix, we said that last year average sales prices increased strongly throughout the year. Now it's flattening in Q4. And then the currency, it has been for the past three quarters, including this Q4 last year. at a fairly stable minus 4% level. Slide 13, you have heavy tires. I think, as we say there, it was a really, really solid performance in terms of Q4. We did adapt our production during the Christmas breaks And that is to reflect the lower demand in the market segments. Net sales were 62 million compared to 65 million in 2022 Q4. And in comparable currencies, they were slightly below that of 2022, i.e. with 2.6%. Operating profit, 7.3 million euros. and operating profit 11.8%. I think there is also room to improve in this segment going forward. And then finally, the last of our segments is the Vianor. It improved its profitability. It has headwind from the currencies, but all in all, I think it was successful was okay performance and in a low margin business. So I think as you look at the numbers in segments operating profit, 9.6% for Q4 23 is a good achievement as such. And all in all, the full year operating profit was a positive of 3.4 million euros roughly on the same level as 22. Then I have our guidance and the kind of assumptions behind that. So in 2024, Nokian Tire's net sales with comparable currencies and segments operating profit are expected to grow significantly compared to previous year. And there you can see kind of what is kind of driving our guidance and the assumptions. So we see that or expect that the selling replacement market is growing this year, 24. However, the weak development in our economic development in our main markets is expected to continue. which together with the lower consumer confidence may have negative impact on tire demand as such. OEM demand for the heavy tires may decrease due to high interest rates, which have a negative impact on machinery investments. And then finally, after peaking in early 2023, the raw material costs are expected to moderate during this year, 24. Our long-term financial targets are kept as they've been, i.e. the growth. We are targeting 2 billion net sales in terms of profitability, segments EBITDA at around 25%, and segments operating profit at the level of 15%. And then in terms of our capital structure, net debt to segments between one and two. And there we are at the level of 1.3 at the year end. And the dividend policy is there to divide at least 50% of the net earnings. And with that, back to you. Thank you, Nico. Just to recap. We have key fundamentals for growth, we have a clear strategy what we need to do, and obviously we are in the implementation phase of the new capacity of products. Given that our top line is 1.17 billion in 2023, ambition is 2 billion, so we need to and want to drive the top line, and the margin improvement is coming from the fact that sales volume will increase, and the average sales price remains at a good level. Strong deep team is also important and instrumental in implementing the strategic actions, so building capacity and bringing that successfully to the marketplace. It's also clear that the environment over time, if you look into the past, has changed quite dramatically in the past years. We expect that the changes and all kinds of economic dislocations or disruptions, if you want, may happen, so therefore it's important we have an agile and resilient team that can work in the changing environment. The most important thing is that we continue to work together to build the new Nokian tires, and that is our commitment. Just to remind you that we have a journey which consists of two things. One is the investment phase and the other one is the growth phase. In the investment phase, which we expect to last from 2023 to 2025, we now spent the year 2023 and we are very much on track. So in terms of building the capacity and capability in Romania. completing the investments in Dayton, and then we already have increased capacity in DCT Finland, and all those are happening, as well as the growing contract manufacturing that can help us to improve the net sales and top line. We still have two more years to go in the investment phase, so very much by the end of this year, we will have the Romanian factory ready, and then we start the commercial production in the final year of the investment phase of 2025, and then ramp it up so that we move into growth phase in 26 and 27. And the ultimate target is to have a net sales of 2 billion euros. And in heavy tires, we have the expectation that the sales growth will continue above the market level growth in years to come in order to deliver what we have been delivering the past six years. And we know it will help us to have the distribution excellence in the Nordics. So this is very much our journey. We've now taken one year and we've delivered more or less as we expected by the end of the year, and we will then continue with a good exit momentum from 23 into 24. And with these words, I complete our prepared notes, and then I hand over back to Paivi. Paivi, please go ahead.

Thank you, Jukka. Thank you, Niko. Now we will be ready for questions from the audience and in the Q&A we will focus on the company results for the quarter and for the full year. We will not make any remarks concerning the European Commission's ongoing antitrust inspections in tyre companies which were initiated last week. Nokian Tyres does not have information on the outcome of the inspection. And we cannot comment on the ongoing investigation. Nokian Tires is fully cooperating with the authorities. So in the Q&A, we are only talking about the fourth quarter and about 2023. And with these words, let's take the first question from the line.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Michael Jacks from Bofe Securities. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. My first one is just with regards to your expectations around product mix in 2024 between winter, summer, and all season ties. We saw a strong recovery in winter contribution to around 63%. Is that representative of what we should expect for 2024 as well? Secondly, thank you for your guide on raw material tailwinds, but what are your expectations for the other cost buckets such as transport, energy, and labor? And then perhaps added to that, I assume that you're going to say these are inflationary. And if that's the case, do you potentially have any price mix offsets in mind for 2024 to help cover this? And then one final question, if I may, could you please give us an update on toll production in terms of what the contribution was in Q4 and what we should expect for 24? Thank you. Okay, so.

So about the product mix, so let's start with that one. Thank you for the question, by the way. The product mix, of course, in 23 was quite skewed to winter tires for the simple reason we started the year without summer tires. We didn't have the ability to produce a lot of summer tires because we lost the Russian capacity in late or, say, after the summer of 22, and we didn't have ability to make summer tires. So, therefore, what you can expect in 24 product mix is that the We have a growing number of winter tires, but we have an even bigger number of summer tires and all-season, so that the mix will be more all-season, more summer tires and less winter tires. But overall, of course, the absolute number of tires will go up in all these categories. So that's what you can expect. Yeah, and in terms of raw materials, I said that we think that they are moderating, i.e. that in the beginning of 23, it was a peak there, and now we see that they are, you know, going even a bit down, so I think that that will, of course, help us. In terms of transport, energy, and labor, of course, those are in inflation, inflated as such, but We feel that it's not an issue at this point, but we need to monitor it closely that how it will be in terms in our prices going forward. And when it comes to off-take products, their contribution to our top line, so clearly the final quarter, what you see in the central European sales are mostly based on off-take products and then some complementary products in the Nordics area to complement our premium winter tires, also off-take. But clearly more to come in off-take products contribution in the course of 2024.

Great, thank you for the information.

The next question comes from Thomas Besson from Kepler-Chevreux. Please go ahead.

Thank you. Hi, it's Thomas Besson at Kepler-Chevreux. I have a few questions that, if possible, I'd like to ask one by one. I'd like to just follow up on... Michael's question on contract manufacturing. Is it possible to have a figure in terms of units that were effectively contributing to your 23 volumes and what you're planning for 2024? So is it a few hundred thousand units? Do you expect two, three, four million in 2024? That's the first question.

Okay, so you can expect that the contract manufacturing is somewhere around 3 million units in 2024, or we are aiming towards that number. And then in 2023, slightly shy of 1 million was the contract manufacturing contribution in 2023.

Thank you. Can I ask another very simple question? Could you give us some indications in 2024 on the trends for CAPEX?

tax and interest please so capex we expect that the major capital call to Romanian factory build and we expect that capital outlay full year is somewhere in the range of 300 30 to 360 million euro full year. And most of that goes to Romanian factory built. And then tax and interest, Thomas. Niko. Yeah. So the interests are at a similar level or the financial items at a similar level that they were on 23, I think, more or less kind of that. what we had there at the year end will be similar in terms of maturity and at the level. And in terms of taxes, it will be around similar type of tax rates that we have had previous years.

Thank you. Looking at your maturities, your debt maturities, you have relatively heavy concentration in the very short term. Could you talk about your plans in terms of refinancing and explain why the net interest isn't expected to increase?

Yeah, I think that the kind of the dead maturity as such reflects the situation the company was back in in 22 when the when the Russian invasion to Ukraine happened, and we were in a place that we needed to arrange the financing fairly quickly. So I think that's a reflection of that, that there is quite a lot of, one could call, type of a short-term financing. We have plans to be... more kind of a longer term in terms of debt maturing going forward and we do see that the interest rates are actually and the yields are going down as we speak compared to last year and the situation that the company was in.

Understood. Can I ask you to make a few comments about what your view is or the visibility is on the heavy tar business? I mean, there were some desirations in the summer and on Christmas. What do you anticipate for 2024 overall directionally for volumes?

Yeah, 2024. we clearly saw that the inventory pipeline was quite full and so therefore the summer shot was extended because we wanted to take down the inventory in our own system but also reflect that the aftermarket demand was quite low in the early part of 23. OED demand actually in the early part of 23 continued quite strong. These have been reversed since we have come from the summer towards the year end and starting this year that the OE outlook is softer because the heavy equipment investments based on the higher interest rates and so on are a little bit weaker and softer and so therefore the OE demand It's a little bit softer in 24 versus 23, while the aftermarket, we see that the inventory pipeline is normalized, and so therefore we expect a normalized demand. In terms of our manufacturing, as we've taken two extended shots in the summer and then one in the Christmas time, so we can run hard until the summer of 24. Now, what happens in Finland, I don't know if you are aware of the particular Finland situation, that there are strikes in Finland right now. And so those are hitting industrial companies, including ourselves. And, for example, in the month of February, we are losing five production days because of the strikes. And those obviously are not needed at this point because we would love to run the manufacturing harder. And this is, of course, an unfortunate situation. But it is what it is.

Understood. I have one last question, if I may. Could you comment on your level of inventories at the end of 2023? I think it was a bit high at the end of 2022, but also comment on the level of dealer inventories at the end of 2023. Do you expect your production and demand to be aligned or some potential restocking, or do you still see some further destocking?

In terms of inventories, I think at the end of last year, 2023, they were a bit on the high side due to the offtake tires that we had to warehouse to prepare us for the seasons now in 2024. Let's see what happens with the de-stocking, but that is our understanding, that the kind of the sell-out from the dealers will increase, and i.e. the sell-in to there will be better than it was in 2023. And the raw materials are at a relatively good level. They are on a safe level, so to say.

Understood.

Thank you very much. That's it for me.

The next question comes from Artem Beletsky from SEB. Please go ahead.

Thank you for taking my questions. I actually have two to be asked. So the first one is relating to ramp up costs. And what is your outlook for this year? I think in Q4 the number was some 11 million euros relating predominantly to the US. And then just looking at your guidance, so as you're talking about significant growth, what comes to sales and also segment operating profit, should we also implicitly naturally expect that profitability will be improving this year compared to last year?

Yeah. I can start with the significant growth, and you asked that the absolute numbers, we expect the significant growth. Do we expect also that the margin, profitability margins are improving, and we expect that we target that the margins would improve? And then the ramp-up need for... Yeah, the ramp-up expenses, we had some... idea of thinking that they would be at the level of some 20 million both in Romania and the US. That is our best estimate at the moment.

And maybe just a follow-up on that one. Is it basically 20 million for Romania and 20 million for the US? And if it's so, when do you anticipate U.S.-related ramp-up costs to go to zero?

Our anticipation is that they will end by the end of H1. So in H2, there should not be such expenses anymore.

Okay. This is very clear. Thank you.

The next question comes from Bernd Ehrenruth from Barry Stain's Linoleum Oy. Please go ahead.

Yes, thank you very much for the interesting presentation. My question is, or question circulates a little bit around the U.S. factory in Dayton. You mentioned a lot, we got a lot of information about the Romanian factory, but what is the current

status of the factory in the u.s uh how how near completion is it and and uh what is the production level and and and stock level etc thank you thank you for the question i think that we will not uh talk about the production level or stock level and so but i can say that the investments are essential in final stages and as nico was saying that we expect that the

exclusions will end h1 which means that we are in a full production in h2 okay thank you as a reminder if you wish to ask a question please dial pound key 5 on your telephone keypad The next question comes from Thomas Besson from Kepler Chew Reacts. Please go ahead.

Thank you. It's Thomas again. I'm surprised I'm already back, but I just wanted to understand how your guidance compares with pre-release consensus expectations. So you say you expect significant increase in and margins to improve, but do you feel your VARA consensus data to be at an appropriate level, excessive level? So what kind of visibility do you have and what would you comment on these figures, please?

Essentially, the guidance says that we make progress year on year towards our targets. And obviously, the continuous improvement from 23 into 24 and 25 will continue. I cannot be more specific at this point of time. Obviously, when we go into the year, we see quarter by quarter how the year results will improve. Then we give a more precise guidance as the year continues. At this point of time, this is where we are in terms of overall guidance.

Understood. Thank you.

The next question comes from Mika from Ehimaki. Please go ahead.

Hi, it's Mika from D&D Markets. Previously, you have said that you had an application for an investment subsidy, and now currently under EU's review. What's the status with that, please?

Yeah, nothing has changed in that. We will have the application for that subsidy, and it's a Romanian government subsidy which EU needs to approve, but nothing that we know of has affected that process as such.

Excellent.

The next question comes from Rauli Juva from Indears. Please go ahead.

Hi, Rauli from Indears here. Just wanted to come back on the, you mentioned the product mix will be back more towards summer and all season this year, but can you give an idea of the seasonality between the quarters will we be basically back in in the similar kind of seasonality we saw so pre recovery years for example or is it still more weighted towards the the end of the year and the winter player sales still skewed towards the end of the year more because our own capacity is uh

Still this year, in the early part, heavily dependent on Nokia, and therefore winter tire production will be important for us. But obviously at the same time, when Dayton is ramping up and achieving its full, we will have more all-season as the American production is mostly all-season. Some of those are all-weather and similar closer to winter, but basically practically all-season. So therefore, you can expect that the... seasonality is still not the same as it used to be. It's more somewhere between what we had in 23 and something what we had in 21. So we are moving towards that old seasonality, but today we still have very much the extraordinary, which is related to the fact that the capacity that we have available is mostly in winter tires. But not so strongly as in 23 when we actually lacked the summer tires in Central Europe.

Yep, that's very clear.

Thank you.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

If there are no additional questions, it's time to finish the call. Thank you all for participating and have a good day.

Thank you. Thank you.