Nokian Tyres Plc

Hello, and welcome to the Nokian REN-CAD Q1 interim report 2020. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Today, I'm pleased to present Paivi Antola. Please go ahead with your meeting.

Good afternoon from Helsinki, and welcome to Nokian TIRE's January-March 2020 results conference call. My name is Päivi Antola, and I am the head of Investor Relations in Nokian Tyres. And together with me in the call, I have Hille Korhonen, the president and CEO of the company, and Teemu Kangaskärki, the CFO of Nokian Tyres. We will start the call as usual with a brief presentation by Hille and Teemu, and then continue with a Q&A. So, Hille, please go ahead.

Thank you, Päivi, and good afternoon, everybody. Thank you for for joining us today, and I hope you are all safe and healthy, and so are we. There are two topics I want to focus today. Overall, business performance during the first quarter in 2020, including our actions in Russia and what has been the impact on the first quarter results. And then of course the corona pandemic, what are the measures we have taken and how it has been impacting our business during the first quarter and also how we are moving ahead towards the end of the year as a company. So let's start from the corona. and the measures we have taken immediately when it was realized that the pandemic situation will be spreading to Europe and North America as well as to Russia. So first of all, the top priority for us is to take care of our people. and also to make sure that we can continue the business in a safe way and continue to support our customers. We have been taking immediate actions to ban travel and start remote working. Fortunately, we have global IT systems in place so that almost everybody has been working remotely since mid-March and we don't see any direct impact on our business. And even customer meetings have been taking place through the video. There are then also additional operational measures that we have taken to secure our business. First and most important thing is to managed our production capacity according to demand that we are tracking twice a week and we have also taken enhanced actions to monitor the customer payments in order to make sure that we have the financing position in place and securing the cash flow. Cost reductions have been planned already during the first quarter, and the biggest impact of those actions will be visible in the second quarter. We have been implementing temporary layoffs for both production personnel in Finland and in Russia, as well as temporary layoffs for white-collar workers so-called Kurzarbeit in Central Europe for the white-collar workers. And the aim is, of course, to reduce the cost and also to make sure that we are working efficiently throughout the year. We have been suspended production temporarily in Russia, Finland and in the US. and this has been mainly driven by the local coronavirus restrictions. And now at the moment, all the factories are in a mode of up and running, except for the Russian factory, which is due to Russian national holiday, but otherwise we have the preparedness to run the production and having safety measures in place. Regarding the financial situation, our board of directors proposed the AGM to divide our dividend into two halves and the first half Euro 0.79 per share has been paid already and for the rest the board has authorization to decide additional payment and timing until the next AGM. We have also carefully reviewed our CAPEX plan for this year. It was already on a much lower level compared to previous year and we have taken down the capex down to 170 million. Unfortunately, the majority of that is already being spent during the first half, and they are mainly related to completing our strategic investments in Dayton and regarding the Spanish test track. and we continue to look at all the capex spent in a very careful manner. We have taken actions to further strengthen our liquidity position, and it's also important at this time to have the strong balance sheet which is supporting us through these challenging and difficult times. Then going to the first quarter performance. It's clear that we are suffering from low volume in passenger car tyres, which is impacting our net sales and operating profit. And the three key drivers behind are thruster, coronavirus and winter. In Russia, this is resulting from the actions we have taken to reduce our channel inventory in distribution, and this is according to what we have been announcing already in February. So we are reducing the sell-in and taking actions to improve the sell-out support to our customers in order to take the inventory levels to a normal level. And this is mainly related to the winter tire inventories and they're in the B segment. And regarding the winter, it's clear that None of our key markets had proper winter. And usually in the first quarter in Nordics and Central Europe, we are selling the winter volumes, which are being replenished directly to the retail. And usually in the first quarter, we start the Russian deliveries to the channels. Then what comes to the segment operating profit, it's clearly lower compared to what we have been expecting. And the main impact is coming from Russia, 20 million. And coronavirus is the thing that we were not planning in a way, which is 10 million. And of course, when we have... lower volume our whole supply chain is geared towards the higher capacity utilization and therefore we have a lot of extra cost which is not absorbed by the volume. We will have positive raw material effect as we go ahead and it was already visible in the first quarter. Regarding the guidance, it was already withdrawn in March, as we saw that there is increased uncertainty in the market due to coronavirus. Then let's take a look at the different markets. I start from the Nordics. In Nordics, our volume decreased. but the positive thing was that our market share increased in winter, and also in large ring sizes in summer and winter. So, we have been keeping our high profitability in the market, and we even had some price increases for the summer tires for the first quarter due to currency. The new car sales have been down, and the biggest decline we have seen in Norway, which is due to a very high comparison base. And that has been also impacting our winter tire sales in the car dealer channel. In the Nordics, the tire shops have been kept open, and while the shopkeepers have been taking virus safety measures very seriously. It means that also the capacity of the tire shocks is lower due to that. So that has been impacting the sell-out volume. In Central Europe, the volume has declined, and at this point, Our volume decline was mainly related to lack of winter. So our winter tire sale in was about 50% lower compared to previous first quarter. And we have been actually increasing market share in summer tires and in all season tires. And the volume has been close to previous. year level, which is, I think in this situation, very, very good achievement as the market has been declining by 19%. And in many countries, the tire shops have been closed and lockdowns have been preventing people to go out and sell out from retail has been declining even up to 70% during end of March. We have seen geographically biggest volume decline in Italy and France and Spain. And anyway, the positive thing is that these have not been our focus countries. So our focus has been in the DAH area and in Eastern Europe. As we move forward, it's very important for us to stay in very close contact and collaboration with our customers. We have been restarting our sell-out support campaigns with the customers who have been now opening their doors, and we are focusing on supporting the DAH and Eastern Europe and of course not neglecting the southern European countries when they start to ramp up their businesses. Now in the second quarter it will be important for us to start collecting the winter season pre-orders and we will make sure that we have availability for those products. In Russia, as I was explaining, we had significant decline in our sell-in during the first quarter, which was over 40%. And this was in our plans in order to make sure that we are reducing the winter tire inventory levels towards year end. we are selling in the winter tires during the first half and the actual impact will be visible then towards the year end. So the second quarter will be similar to the first quarter when we are talking about sell-in in Russia compared to previous year. As we all know, coronavirus did not have any business impact on Russia during the first quarter and we have seen the lockdown activities and other restrictions only starting in the second quarter. The new car sales have been increasing especially in March and this was mainly due to the fact that people wanted to buy cars before price increases due to weakening ruble. And our estimate for the full year new car sales is roughly minus 20%, down to 1.4 million cars sold this year. And as we are already starting from a very low level. Then when we look at the coronavirus impact further at the moment in Russia, they are changing summer tires and the season for summer tire sales has been extending because the big cities, they are basically in lockdown, including Moscow. and it means that only online business can be conducted, and this is, of course, taking also the capacity down. So all in all, Russia and the coronavirus impact on the economical situation together with the oil price changes is still a question mark, and that's why the visibility to the Russian forecast is still quite weak. Then when we take a look at North America, our sales increased in USA and decreased in Canada. And in Canada, the strict measures taken due to corona closed many of the tire shops fully for a certain period of time. And when talking with our key customers, their capacity has been down even up to 70% due to safety reasons. In U.S., in the market, the sell-in to replacement market declined over 10%, and the biggest decline took place in March. we have been increasing our market share by having growth in the quarter. Sell-out has been very much dependent on the state and restrictions taken in each of them. And what we have seen is that the value and economic segments have been gaining some market share. in the sale out. But very much it's regionally dependent. In general, when I look at the markets, one note is related with the pricing. So pricing environment has been surprisingly stable. We have been, and also I know many competitors, have been adjusting the back-end programs according to declining volumes, but no major changes in pricing environment. And also it seems that the retail and wholesale sell-in has been lower compared to sell-out in many markets. And it's clear that in this kind of situation, all the customers want to be very careful with their inventories. And I think this will help everybody when the markets start to come back to normal and we will see some replenishment of the inventories. We have been also taking actions to manage our mix very carefully. So when we saw that the winter tire market has been going down, we have been increasing our share of summer tires and having sell-out programs. We have been increasing the share of premium and also share of bigger sizes. Then when we take a look at heavy tires, the market have been still quite stable, the replacement market in the first quarter, and the order stock has been on a good level. What has been impacting us mostly has been due to our OE customers having shortage of components and production stops, and this will continue to impact us during the second quarter. So let's then hand over to Seemu to take a look at the numbers and the preaches.