Nokian Tyres Plc

Good afternoon from Helsinki and welcome to Nokian Tires Q1 24 results conference call. My name is Paivi Antola. I'm heading the industrial relations in Nokian Tires. And in the call, I have the president and CEO Jukka Moisio and Niko Haavisto, the CFO of Nokian Tires. As usual, we will go through the results. and talk about some other topicals as well. Romania, for example, of course, will be covered in the presentation and other highlights that will be coming during the year. Then, of course, we have a Q&A at the end of the call, but let's start with the prepared notes. Jukka, would you start?

Thank you, Päivi, and welcome on my behalf. I'll go through the prepared notes and presentation, which is heading to building the new Enochian tires contract in a challenging environment. And I move to page two, some of the important milestones we aim to achieve in 2024. Of course, our key innovation with the tire, they'll celebrate its 90th anniversary this year. Our new And world's first zero CO2 emission tire factory in Romania will start production. I'll talk more about that later. U.S. investment phase in Dayton factory will be completed and the factory will be fully invested to achieve its targets. And we keep on launching new innovative products because the rebuilding of Nokia tires and building the company is based on organic growth. So it requires and we want to introduce and sell innovative, successful and competitive products and then build the production capability behind those products. So therefore innovation, new products are key element in achieving the new Nokia tires. I move to page three and this is a highlight and update of the Romanian factory. It's on the picture on the left hand side you'll see the new mixing building which is very much in progress and the equipment installations there will begin in the end of April. In the middle you will see the production building so finishing work is continuing and equipment installations are progressing as we speak. And on the right hand side you see finished goods warehouse where we are paving the loading docks and outdoor area. but very much on track and the recruitment of the team are progressing and in fact we have the launch team in training in Nokia as we speak and they'll be returning to Romania for the summer and be prepared for the manufacturing start. First tires will be produced in the second half of 2024 and as mentioned According to our schedule, the commercial production will start in 2025. We are on time and we are on budget or maybe even below budget. On page four, we've taken steps forward in sustainability, some of the examples of achievement in the first quarter. We had a minor score from a carbon disclosure project for actions aiming at reducing the greenhouse gas emissions. We also made a long-term purchase agreement and commitment for recovered carbon plaque. with the tire recycling joint venture. This is one step on our way to ensure that by 2030, we have at least 50% of recycled and renewable raw materials in our tires. And we also published our sustainability report for 2023. I move then to page five, and we start with the financial part. It says an operating profit at previous year level. Net sales are 2.36 and last year also 2.36 million euro. Segment EBITDA in the first quarter 12.5 and last year 11.2. We of course had an impact of the political strikes in Finland as well as the Red Sea crisis. Approximately they amount to euro 20 million at the EBITDA level and more than half of this is in the first quarter. last year minus 14. If we look at the top line number without the impact of or neutralizing the impact of the political strikes as well as the Red Sea crisis we would have been in the range of 260 million in net sales and approximately 9 to 10 percent of EBITDA which would have been about doubling out of 0.5 million EBITDA in the quarter. This impact of the political strikes and Red Sea crisis consist of loss of revenue. It is of course a timing issue that some of the products that were on the ship on the way to Europe for our offtake did not land on time. However, we believe that we will and we can sell the products in the coming months and quarters. We had a lack of production in Nokia in passage of car tires about 20 days and Heavy tires about five days. Heavy tires is fully in the Q1. Passenger car production about nine days of the 20 days or three weeks is in the second quarter. We needed to stop the production due to the fact that we couldn't ship any products from Finland and we had all our warehouses full and consequently we couldn't keep on producing any more. In addition, we had these extra costs which are related to their various other topics. But all in all, as said, impact for the company in the first half is about €20 million, more than half of that in the quarter one in the EBITDA. I move to page six. Still, we have a strong balance sheet. Despite the lower than expected profitability in the quarter, we have a strong balance sheet. 58% of equity ratio keep gearing at 30% and net interest and independent debt at 395 million capital expenditure. We kept on investing in Romania as well finalizing Dayton about 70 million and cash flow from operating activities minus 87 million. And then I would hand over to Niko to talk about the segment of segments and Nico, please go ahead. Thank you, Jukka. I will go through the segment numbers a little bit more in detail. I'm in page seven. In the passenger car tire segment, our net sales increased due to the higher volumes, and that, of course, was driven by increased product availability. Our average sales prices compared with the comparable currencies were at the previous year level. And profitability improved to even higher volumes and lower costs. Net sales being 143 million euro compared to 133.3 in last year's same quarter. And then on the operating profit level at the segment, we were at the level of minus 2.8 million compared to 4.6 million last year, same quarter. On page eight, there is a bridge on the passenger car tire segment. And there you see on top the sales breakdown. So the volume up by close to 10%. At the same time, we were able to keep the price a mix at that previous year's level, more or less. And then we had a little bit negative headwind from the currency. All in all, landed at 143 million euros. In terms of operating profit, there we see especially the material costs were coming down. So we were there gaining some 8 million euros there. but at the same time the supply chain with the increased logistic costs warehousing and freight especially hit us by by 11 million euro in this segment uh final slide on the on the passenger car tire segment so there you see the the volume changes by by quarter So, still coming out from a fairly okay Q4 into Q1, plus 10% price and mix. That was kind of a flat, but I think that is a good achievement in the market and still getting a little bit headwind from the currencies, but not so much as it was during most of the last year. Then with the heavy tires, their weak market is affecting us in terms of sales and profitability. And there especially we see in the Nordics and also on the road heavy tires products that we are having some difficulties. We last most likely during H1 this year. Net sales 55 million euro compared to last year's 68 million euro and then on the operating profit level we were at the level of close to 12% with the actual numbers of 6.3 million compared to 9.6 million euro last year. And then on the Vianor side there We landed pretty much on the level of last year in terms of sales. Operating profit was minus 16 million euros compared to minus 13 and half last year. And of course, this is a seasonality thing. But of course, the inflation is hurting us in this business. And we need to understand better going forward how to how to put that into our earnings as such. Then I have the guidance slide, so slide 13, and we have kept our guidance unchanged, and we say that this year 24, our net sales with comparable currencies and segments operating profit are expected to grow significantly compared to that of last year. And by significant, we mean at least a double-digit growth. And we will be more precise what we mean with that when we go more into that year. And with that, I hand it back to you. Thank you, Nico, just to wrap up. and tires is very much focused on the new products so we have a very good product for products and then all of their factory goes on stream that will be based on completing new products that are in the pipeline and will be introduced during the course of so that when we start operations, we have highly competitive new products. But also the portfolio right now, as you see, keeps on evolving continuously. And the review of the company is based on organic growth, so in the heart of that is a good portfolio of new products. I move to page 15 to wrap up the presentation. Again, we come back to the capital market state presentation of 2023. We have the investment phase and then we have the growth phase and you see roughly where we are at this point of time in the investment phase. Those activities consist of capacity increase in Finland done, US factory completion about to be done right now, new factory in Romania. We'll be making the first tires in the second half of this year and will start commercial production in early 2025 and then growing contract manufacturing which is very much on in the ship when they were supposed to be landing in Europe. However, we believe that this is only temporary based on Q1 dislocation, but we will be able to sell those products later on. Growth phase then starting in 2026, increasing market penetration, which is built on new products, increased capacity and enhanced operational capabilities. And that way we would be on our way towards 2 billion from passenger car tires point of view in heavy tires weeks heavy target markets, whether it's Nordics or whether it's a Finnish Nordic OEM, Finnish OEM, in this particular quarter, we will continue to, at the above market level growth, and in the VNO, we continue to have the distribution excellence in the Nordics. In combination, that will allow us to move towards 2 billion. And with that, I end the presentation of prepared notes and head over back to Taivi for Q&A. Taivi, please go ahead.

Thank you, Yuka. Thank you, Nico. And now, as Yuka said, we will be ready for the questions from the audience, please.

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 Bank of America. Please go ahead.

Hi, good afternoon, Yuka and Nico. Thank you for the presentation. A few short questions from me, please. Firstly, what was the volume contribution from contract manufacturing in Q1 and where do you stand now from a run rate perspective? Secondly, can you just Give us a little bit more color on the split between price and mix. I understand that the net amount was negligible in Q1, but just wondering if there was a few moving parts to that between price and mix contributions. And maybe attached to that, where to from here on pricing and mix for the coming quarters? Thank you.

That's a good question. All right, so the first question is that what's the contribution of the offtake volumes in the first quarter? It's roughly about one-third of the total volume in PCT. Yes. And in terms of price and mix, as I said, we are fairly okay with what we saw in the Q1. Most likely we will lose a little bit going forward now this summer season, but then gradually picking up towards the H2. So fairly okay situation there.

Very clear, thank you. And if I could just slip in one follow-up, just on heavy tires, are there any signs of improvement in activity levels going into Q2?

Of course, the OEM, especially in Finland, the OEM was impacted by the political strikes because, like us, they were not able to ship their products. However, of course, if you think about the strong goods prices and so on are going up, so obviously there will be more activity and more interest in that particular segment, and that combined with the expected lower interest rates, so we think that there is clearly a positive opportunity going forward. In the aftermarket, we would expect that the aftermarket will also be stronger this year because the pipeline is relatively empty now compared to prior years, and so therefore there are positive developments expected. So especially in the second half, we can see a much stronger performance.

Very clear. Thank you.

The next question comes from Samu Wilhelmsen from Nordia Markets. Please go ahead.

Hello and thank you for taking my question. In two parts I could start first of all about the effects of the Red Sea and the Finnish strikes. You stated that it had the effect of 20 million euros on the EBDA but can you disclose how much was it on sales and to what extent these sales could be shifted to another quarter?

You said that the sales dislocation was about 25 million euro level. For the most part, that can be kicked forward, but obviously the loss of production where we actually lost the volumes with the downtime, that is difficult to catch back.

All right. Thank you. And then how about your guidance for this year going forward, given that there was some limited growth in Q1? So I would presume that these shift sales probably aren't a game changer. So will you be projecting most of the growth to be tilted to the second half of this year or how would you see it?

Yeah, that's how we see we are. This is the seasonality business in that meaning. So it's more towards the age two of the year that we see the growth. And just to add that the political strikes continued until 8th or 9th of April and we actually did not produce in BCT in the ship until the 9th of April so obviously if you look at the quarter unfortunately there are limited number of days in the quarter so 10% of the days were lost in the beginning of the quarter 90 days and 9 out of those were lost out of the gate unfortunately but we believe that the strong momentum will then start from there.

Okay thank you for the clarification.

The next question comes from Mika Ihemaki from DNB Markets. Please go ahead.

Thanks for taking my question. It's Mika from DNB. Passenger car tires still on the mix, just slightly down, where you reported flat average sales price at comparable currencies. However, at the same time, sales to Europe increased significantly. And then you mentioned that you had quite a bit share of off-tech in the mix. So could you still open up on the mix performance and how do you see this developing forward? What are the drivers?

Yeah, the mix was mostly what we were losing were actually summer tires and such, we were able to secure winter tires and early volumes for those. And we were able to secure a good volume of all season tires. And we were also able to secure good availability in the Nordics. So that in combination, that helped us to have a good price mix. And of course, the North American sales were very much on it. partially into the winter but also we start to see already also that the mixing data is improving so that there is more LT and such that helps the price mix.

Okay so you see that the mix should hold up fairly well going towards the end of the year?

The mix is very much to our liking so that we actually have been achieving a good mix that what we wanted to deliver. But clearly more winter tires will come in the second half and into the winter season. So we are quite positive about how the mix looks going into the second half.

Okay, then just one, if I may, just on the offtake. So can you please open up in a rough ballpark that what's the margin profile? Is it closer to 10, closer to five, just to get an idea?

We have always said that the offtake for us is an important way to stay relevant in the market and also obviously make money. So one thing European markets, and we will not shift them so that we lose money. So all of them are expected to make money. Some of the all-season make more money. Summer is relatively modest in terms of profitability, and winter is strongly in profitability. But we haven't opened up the offtake, and we will not do it here either.

Okay, thanks very much.

The next question comes from Ankorinen from Reuters. Please go ahead.

Hi. Hello, can you hear me?

Yes, we can. Go ahead.

Okay, thank you. Thank you for the presentation. I wanted to ask if you could provide any update on the EU cartel investigation Has Nokian Tyres been involved in any CARTA-like activities that would justify the investigation for your part? Thank you.

Thank you. First of all, we are fully cooperating with the authorities in this investigation, but as this is an ongoing investigation, we cannot comment on it more than that.

Okay. Thank you.

The next question comes from Akshat Kakkar from JP Morgan. Please go ahead.

Thank you for getting my question. Hi, Yukar. Hi, Niko. Three questions from my side, please. The first one on inflation and the different cost pockets. Could you just help us understand the puts and takes in terms of the impact on the P&L on a full year basis? if it's possible to quantify your assumptions for raw material tailwinds and how much of that is offset by labor, trade, or supply chain challenges that you see on the course of the full year, 2024. The second question is on pricing. Just in terms of pricing alone, in terms of your different geographies, could you talk about your assumptions for the rest of the year? That would be very helpful. And the last one is on your assumptions for working capital and capex. Could you just confirm, do you still expect working capital tailwinds in 2024 and the capex amount net of the subsidies that you expect in Romania? Thank you so much.

Yeah, I'll take the first one, and it was about inflation. And of course, we are getting some help from, as you saw in the presentation, from the raw material prices. So there have been decreasing as such, and we see that now they are more stabilizing on that level. Of course, we have some of our our agreements are based, especially in the heavy tire, that the buyer gets part of those savings as well. In terms of labor, I think we disclosed that at some point as well. We are talking about roughly 5% increase all in all within all our geographical sections that we see increasing in the labor. And of course, we are trying to to have that either through efficiencies or with the pricings embedded into the sales as such. Then Jukka, if you take the second one. So you asked about the pricing, so obviously the pricing environment is relatively flat because the raw materials are given a little bit of tailwind, but the inflation with nothing environment is there. We will follow the market-based pricing, so that depending on the product and the innovation and the novelty value of the product, we will follow the market-based. In terms of working capital, obviously, we were in Finland, which is our main factory, we were four weeks without being able to ship any products. We produce as much as we could and everything, all the inventories and warehouses are full. So new products or let's say finished goods, while we exhausted most of our raw material inventory, so we are low on raw material, we are high on the finished goods and then we stop the production because there was no. and this is across all of the subsidies and the subsidy decisions when it comes and when it helps us, we will report that. But obviously, you remember that we are seeking to have up to 99 million of European Commission-approved subsidies made by the Romanian government for our investment in Romania. If that happens, then we talk about the investment level, which is then... that until we have the decision.

Understood. 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 Rauli Juva from Indears. Please go ahead.

Yeah, one question for me. You mentioned in the report that you are evaluating the ownership of the Spanish test center. I guess that means partial or full divestment of that. So can you elaborate a bit on that? What's the reason for that potential timetable for this?

Yeah, you are correct. We had that text there in the report. So we are looking a possibility to have ownership changes there. And of course, we continue to test or guarantee us a spot there to continue our testing at that track. But we are trying to find the owner who could develop that area and have even more potential out of it while guaranteeing our own test capacity at the same time so it's part of this balance sheet monetarization kind of program that we've been discussing during the last past past half a year okay thanks and any any comment on the potential timetable of something actually happening so so so of course uh it it's it's it's difficult to say but hopefully we have something there to to tell you you during during these years still okay thank you that's all for me thanks there are no more questions at this time so i hand the conference back to the speakers

Thank you. If there are no additional questions, then it's time to finish the call. Tomorrow is, of course, an important day. We have the annual general meeting, so it's going to be nice to meet shareholders face to face. But for you on the line, thank you for joining the call and have a good day. Thank you.

Thank you. Thank you.