Nokian Tyres Plc Unsp/Adr

Good afternoon from Helsinki, and welcome to Nokian Tires Q1 results conference call. My name is Taivi Antola, and I'm the head of investor relations in Nokian Tires. And together with me in the call, I have Jukka Moisio, the president and CEO, and Teemu Kangaskärki, the CFO. As usual, we will start the call with a brief. introduction into the results and that will be then followed by your Q&A. So Jukka please go ahead.

Thank you Päivi and welcome on my behalf as well. I move directly to page two on the presentation heading says net sales and operating profit increased significantly Net sales was in the first quarter 341.8 million. That's a 28.5% increase in comparable currencies. All-time high first quarter volumes in passenger car tires as well as in heavy tires. We also saw that the demand recovered in all markets significantly. Most important recovery was in Russia and then weakest recovery in terms of percentages was in Nordics which was a single digit. All the other markets with the exception of Nordics recovered and grew by double digit numbers. Important to mention that heavy tires achieved all-time high quarterly net sales and segment operating profit in the first quarter. Segments operating profit was 50.3 million versus 16.3 a year ago. Most important factor to improve the profitability was increased volume. We also recorded a negative impact on currencies, which was in about 10 million euro negative impact. I move to page two. some of the highlights in the financial key numbers, starting with the capital expenditure, 17.1 million in the quarter versus 50.9 a year ago. You may remember that a year ago, we still had the investment in Dayton Factory, as well as a significant part of the investment in Spanish Test Track going on in 2020, while These items were pretty much completed by the end of 2020. Small items related to Spanish test track was recorded in the first quarter of 2021. Net debt at the end of March was 31 million versus 121 million a year ago. And cash flow from operating activities, not including the investments, was minus 24 million in 2021. 39 million in 2020. In addition, the operating profit percentage was 14.7, and that compares strongly versus 2020 operating profit, segment operating profit at 5.8%, and segment EPS was 29 cents versus 9 cents a year ago. Gearing is 1.9% and our balance sheet remains strong, as has been mentioned in the heading of the slides. And now I hand over to Teemu Kangaskärki to talk about the segment performance, business area performance, sorry. Teemu, please go ahead.

Thank you Jukka. Let's start with the passenger car tire business unit. Our net sales reached the level of 246 million euros. Our segment operating profit was on a level of 53 million. Net sales increased in all main markets led by strong volume growth in Russia. Our average sales price declined, and the main reasons behind that is naturally the weak Russian ruble that we have been highlighting in our previous course, as well as the high share of volume in Russia and the strong summer and all-season tire sales from the product mix point of view. As we have communicated, we have started recruitment in in finland and in u.s in order to increase the production in both two locations then moving to the passenger car tire net says breakdown here we can see that the volume was up close to 40 percent our price mix was negative about one percent And as I have been commenting in the previous course, in the price mix, we have also the country mix impact, and because of high share of Russia, the impact of that is about minus 3% negative in the first quarter. Then the currency impact or the headwind was about 9%, and here we can see that the weekly ruble starting to impact our numbers in the second half of last year. In the first quarter this year, we also got headwind from USD and Canadian dollar, among others. Then moving to our bridges, net sales and segment operating profit in euros. Here we can see that in euro terms, the net sales, Edwin, from currency was about 18 million. And in the segment operating profit, it was on a level of 10 million as anticipated in the previous call after Q4. Then the biggest contributor to profit improvement is naturally the sales volume up by 35 million, and here we can see also the positive development in materials for the first quarter, and as we have been estimating, we will have a headwind from the raw materials for the full year, meaning that that in the second half the impact is is significant currently our estimate for the headwind for the full year is about close to nine percent then moving to to heavy tires excellent start for the for the year all-time high net sales and and segment operating profit Net sales was on a level of 57 million and the segment operating profit close to 13 million with good profitability. The demand was strong in agriculture segment as well as in mining and truck tires. We had some softness in the forestry segment because of their issues in their production. The profitability was positively impacted by the improved productivity that we have been doing in the factory and that paid off in the first quarter. Generally, the inventories are at the low level at the moment. Then moving to the last business unit, which is the VNR. had also a good performance in in the first quarter which is which is seasonally low and uh looking that the net sales grow on on reported numbers six point eight percent growth and the segment operating profit or loss close to minus 10 million improvement in the in the operating profit due to the fact that we have been able to manage our cost really well and that is something that that we have learned from the from the covet times that we can improve the cost levels really well also in the coming quarters and years to come with that i will add over back to you

Thank you, Teemu. To recap some of the priorities for coming quarters, I think that it's clear that driving growth and recovery, benefiting from the recovery is quite important. We have new product launchings and those will help. The most important one, as we discussed already in February, full year 2020 result, presentation is of course Hapapelita 10, which will be coming to market for the latter part of 2021, but many other product launches are also happening and in the pipeline. Protecting cash flow, prioritizing investments is another important topic. As we indicated in our guidance, the capex expected to be lower than 2020 in 2021 and in the first quarter, clearly lower. Of course, the reason there is that a year ago, 2020, we still had important investments in Dayton and Spanish Test Track taking place. Brand expertise, enhanced production capacity, more shifts and so on, help us to capture the volume and recovery in coming months and quarters. Some of the assumptions for 2021 guidance, we expect that demand for replacement car tires is expected to increase and stronger demand, but also increasing new car sales as the year goes along. Demand for Nokian heavy tires core products is estimated to increase. Uncertainties are related to COVID pandemic and Russian ruble. Just to recap the value of ruble, euro ruble exchange rate. So in 2019, we had 72.5 rubles one euro. In 2020, 82.7 and 90.6 in January 2021 and 89.7 rubles one euro in January, March 2021. a visible difference in the exchange rate and beating of the ruble between 2019 to January, March 2021. As Teemu was saying, raw material unit costs are estimated to increase and have a significant impact on the second half. And based on that, of course, there are price increases in the implementation. Guidance for 2021 is unchanged. We expect that net sales with comparable carriers as a segment operating profit are expected to grow significantly. However, carrier value demand is expected to pick up, but COVID will continue to cause uncertainties for the development. And our guidance for 2021 is unchanged after the first quarter. And this is the end of our prepared presentation part and I'll hand over back to Taivi and we go into questions.

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

Thank you. If you wish to ask an audio question please press 01 on your telephone keypad. If you wish to withdraw from your question you may do so by pressing 02 to cancel. Once again please press 01 on your telephone keypad if you wish to ask an audio question. Our first question comes from Askya Pekar from JP Morgan.

Please go ahead. Thank you, Akshat, from JP Morgan. Three from my side, please. The first one in production capacity. With the strong recovery that you're now seeing in the global markets and also in the US, is there a case to ramp up US capacity quicker than what was earlier planned? Just trying to understand if there is some restriction in terms of the units that you can produce going forward. Are you also planning to increase production capacity in Russia? That's the first one. The second one is on the winter tire share. Obviously, in Q1, you had a disproportionately high summer tire sales in Russia. But given the low winter tire inventories in the channel and the new product launch in the fall, should we expect a winter share higher in 2021 versus 2020? And the last one is on the U.S. state and ramp-up costs. They came in lower in the first quarter year-on-year. Just interested in hearing your thoughts for the full year in terms of total ramp-up costs. Thank you.

Thank you. So, the capacity availability and ramp-up. Yes, first of all, we do as quick as we can in terms of adding shifts and so on. Obviously, if we can do it faster and have a high quality, we'll do it, because obviously there's a case that demand is good and the recovery is good. In terms of Russia, capacity was in full use in the latter part of the year and also in the early part of 2020 and also right now. and we look if there are any opportunities to de-bottleneck and so on, but there's no immediate relief in that. So that's why we've added the shift in Nokia, and that's why we can flex the capacity if needed more in Nokia. But then these decisions have not been made. So the case for North America is understood, and we do as quickly as we can, but it's important to maintain the quality as well. Winter share, yes, indeed, the proportionately high summer tyres in the first quarter, and that's probably historical in the sense that this is the highest share of summer tyres we've ever had, and so therefore clearly reflects the demand. Yes, the winter tyre, we hope that Hakka Pelitta, and we are convinced that Hakka Pelitta 10 will do well, but that remains to be seen in the latter part of 2021. but our expectation is that it's a great tire and it performs well. And the last question was... The last question was related to... Dayton ramp-up course for the full year. Yeah, ramp-up course of Dayton, full year expectation.

There we are going slightly above the original thinking earlier because now we are ramping ramping up a bit faster than a year ago, we estimated, so we are recruiting more people and there we will have some additional costs because of the accelerated ramp-up of the Stage 2.

Understood. Thank you very much.

Thank you. Our next question comes from Gabriel Adler from Citi. Please go ahead.

Hi, thanks for taking my questions. My first is on the raw materials headwind that you've kind of brought in the second half. How much of that 9% headwind do you think will be able to offset to price increases, particularly given the price mix today remains negative? My second question would be on Russia and the market share gains in the first quarter. Maybe you could just provide a bit more colour on what you think those market share gains and how sustainable you think they are. And then my third and final question is on the CapEx. at about 17 million, it looks to be quite significantly below DNA. What is the reason for this drop-off in capex other than the obvious lower investment in bacon? And should we expect that capex to ramp up back towards DNA in the coming quarter? Would you plan to operate capex below DNA going forward? Thank you.

So if I start with the uh with the raw material cost headwind and the price increases so we are in the in the plan to offset the raw material prices in in local currencies uh having said that good to remember that if you look our net asp on the annual level in in euro terms this year we will have a higher share in coming from from russia and depreciated ruble having an impact. So in net, in Euro terms, there will be a headwind, but in local currencies, we plan to offset the raw material increases.

The next one was about the Russian market share. So, of course, the market recovered, but we gained more volume and higher share than in previous year. And we expect that to continue in this year. We will, of course, see how the competition will work and what kind of imports to Russia will happen. But at this point of time, our share is clearly higher than in 2020. And finally, question about the CAPEX. Can you take that one?

For the full year? Yeah. So as we have anticipated for the full year, the overall CAPEX is clearly below the last year level, which was on a level of 150. And let's see what is the level where we end up at the end of this year, but really lower than last year.

Okay, thank you.

Thank you. Our next question comes from Thomas Benson from Kepler-Chevreux. Please go ahead.

Thank you very much. It's Thomas from Kepler-Chevreux. I have three questions as well. First, on the guidance. I know it's probably an intention, but the guidance remains unchanged and vague. Is there a way for you to position your guidance, maybe versus 2019, or to clearly produce better results than we were expecting? Is there anything else you can say about the guidance, or are we going to remain on this wording? The second question is on inventories. You had clearly lowered inventory substantially in the second half of last year. Can you comment on inventory's role in the massive volume jump you've reported in Q1 2021? Do you still have room to effectively exceed sellout with your sell-in in the coming quarters or have you done everything in the first quarter? And lastly, Can you remind us the timing of your new key product launches? Have they already hit markets or are they hitting markets in coming quarters?

Okay, so we start with the guidance. I think that the wording remains the same. and obviously what you will see in and you if you remember 2020 and I'm sure you remember that the second quarter was quite weak in 2020 so in terms of comparables 2020 the second quarter will be pretty easy to exceed and then when we go to the second half then we will need to see how the recovery takes place but I believe that the more precise guidance can be visited after the second quarter when we go to the second half and we see that how the raw material evolution takes place and what kind of trading environment we have in the second half. Right now it looks quite strong recovery but obviously there are a number of uncertainties still in in the air but this of course compared to second quarter last year then the momentum is quite good. Inventories, Teemu would you want to take the inventories?

So both in terms of our own inventories they are on a low level because the demand is strong and we don't see in the channel any Any issues in terms of high inventories? Quite the opposite at the moment.

New product launches, they happen actually step-by-step throughout the year. I think that we highlight some of the key products, and of course, Aspi historically, and the winter tire company, so we of course talked about Hattakelita then, there are throughout the year new product launches or upgrade of the current product offer. So it's not a particular time when it happens, but it happens throughout the year. So you could expect that in this year, as well as in early 2022, there will be a continuous stream of new products.

Thank you very much.

Thank you. Our next question comes from Artem Belensky from SCB. Please go ahead.

Yes, hi, thank you for taking my questions. Actually, I have three to be asked. Could you maybe comment on profitability by different reasons at the moment? Basically, looking at Russia, so rubble has been very volatile and leaking quite a lot. Could you put that maybe into a context? Then the second question is related to heavy tires. So you made a strong over 20% margin in Q1. Could you maybe talk about margin outlook for the rest of the year? I know that you are ramping up capacity there, the demand is strong, but also raw material prices will be going up quite significantly in the second half. And the last one is related to new product introductions, and especially HACCP Elite 10 that is, I guess, the key launch for the year. Is it fair to assume that we will see impact of it in Q2, as you will see it more in the Russian market and also Nordics?

So if I start with the profitability, and especially you asked about the profitability in Russia, clearly this year the profitability is improving because of the increasing volume Having said that, good to remember that in Euro terms, the net ASP has been in decline because of the ruble impact. And as we have been discussing in the previous course extensively, our raw material input costs are in Euros or in USD. So depending what is the reference here, there is a uh headwind in in russian profitability uh midterm if you look back to beyond 2019. then in in other markets i think in in the nordics we are on a normal healthy level and then then in uh in central europe as an example when the volume is in increase it it will also improve the profitability on there then in terms of the heavy tire margin outlook uh as i stated the q1 was a strong start for the for the year and uh we are having a positive view on both on the development

top line development and that should then benefit the profitability and the profit as well when talking about the product mix towards the year end so we expect of course that the winter tires will become more significant part of our net sales in the coming quarters obviously in the early early part in the first quarter having summer tires as the biggest category and then winter tires and only then or season. I think that that will change and obviously shipments over Hakkapelle to then and the season of the winter tires will be quite important for us. We have high hopes for Hakkapelle to then, but again, early days for the year.

All right, great. Thank you.

Thank you. Our next question comes from Pasi Faisanen from Nordea. Please go ahead.

Thanks. This is Pasi from Nordea. Firstly, to start with, I mean, well, is there something to be worried about regarding the component problem and production cuts in the truck sector? I mean, especially in heavy tires, when looking at Nokia tires segments and registrations in the second quarter. And secondly, just to confirm, did you actually mean that the raw material effect is going to be flat in margin-wise when looking at the second half in this year? And maybe lastly, when looking at the history, I mean, every other quarter has been very strong and every other quarter very weak. So is this pumping demand or inventory effect still going to be there in the second quarter? And then probably would it be so that the second quarter will be for some reason more or less disappointing after the very strong first quarter? But these three issues. Thanks.

Okay. If I start with the raw material, so what I was saying that in local currencies, our ambition is to offset as much as we can the raw material increase, but then if you look at our net DSP in euro terms, we we need to take into account the increasing share of our russian sales as well as the the weaker russian ruble so in in net in euros we are not expecting to offset the impact and you asked about the component shortage in the heavy tires customer

I mean, that is obviously something that continues and will become more difficult. That may be an issue, but at this moment, we don't see significant impact in heavy tires. So we expect a good top line and margin development in heavy tires in 2021. And then strong quarters alternating with weaker quarters. Unfortunately, that's how the business goes and We don't plan that, and we, of course, ship as much as we can and service the customers in the best possible way. Clearly, the year is off to a good start. A big part of that is a recovery effect. The other part is that we gain market share, for example, in Russia. And working on that and improving on that is our ambition. But, of course, as I said, there are a number of uncertainties in the marketplace, and we But as we guide it, we expect that net sales and profitability increase significantly in 2021 versus 2020.

Great, thanks. I hear you. That was all from my side.

Thanks. Our next question comes from Michael Jacks from Bank of America. Please go ahead.

Hi, good afternoon, and thanks for taking my questions. I just have two, which are follow-ups from the prior ones, and please forgive me for re-asking on the raw material impact. But I just want to make sure that I clarify or just get clear on what you were saying earlier. In the presentation, you mentioned an impact of around 9% from raw materials. Are we talking a 9% increase in raw material expenses on like-for-like volumes? Or are we talking about the EBIT impact there that you expect for the year? And my second question is, I know you've discussed pricing already, but how should we think about your ability to offset these raw material increases with price increases this year? Do you think you'll be able to get full offset or perhaps something less? Thank you.

So the 9% guidance was the raw material input cost like for like. So that is the That is the guidance that we have stated. And then in terms of the price of offsetting that, as stated, we are planning to offset as much as we can in local currencies. But the net ASP development for this year is expected to be negative in euros because of increasing share of Russia sales and weaker Russian ruble.

Thanks. It's very clear. If I can just sneak in one more question, please. You commented that winter tires played a smaller role in Q1. And I guess this was despite the fact that there was higher snowfall towards the end of the quarter. versus prior years. Can you maybe just give us some color on how the winter tire markets developed over the last couple of months, please?

In the last couple of months, I think that pretty much as in 2020, so not really a significant difference.

Thank you. I would say that on an annual level, we are expecting to see a good winter set as well and as we have been commenting in the earlier goals there are shifts between the quarters within the year and therefore you shouldn't draw any major conclusions based on one quarter I think that this is post 2021 season and now we are looking ahead to 2021-22 season which is ahead of us rather than behind

Thank you. Just as a reminder, if you wish to ask an audio question, please press 01 on your telephone keypad. Once again, that's 01 on your telephone keypad if you wish to ask an audio question. Our next question comes from Victoria Greer from Morgan Stanley. Please go ahead.

Afternoon 3 from me, please. I wanted first to come back to the sell-in versus sell-out question. Vinor plus 8% year-over-year, excluding FX, excluding the US disposal. Is that kind of a fair guide for where you think sell-out is trending across your markets? Yeah, I guess another way of asking, how much of the restock do you think is already complete now? The second question is around adding the shift in Finland. You obviously understand the need to produce as much as possible at the moment, and also that, yeah, you want to ramp up in the US in a sustainable way, but there have been sensitivities around moving the passenger tire production away from Finland in the past. Would you expect to continue to have that shift in Finland, or would you think about it more as a temporary measure? And then the third one on Vianor, could you comment at all on your cost control expectations for the full year? Obviously, a bit of an improvement in the Q1. Could you think about that sort of, yeah, I guess, two million or so improvement continuing at that level for the rest of the year. Thanks.

Okay. So if you take the VNO and you talk about VNO sell out and the top line and that is related to Nordics, right? And so yeah, we saw the Nordics selling also at about 7% improvement year on year. And I think that that is reflecting what the Nordic markets trades at this moment. The other markets actually had the double-digit recovery and growth, while the Nordics was about 7-8%. And then the question about moving the tyre production from Finland to other places, I don't see that being a major issue, because what we are doing in Nokia is that we are continuously expanding the heavy tyre capacity and making investments, so therefore Nokia factory is increasing its output and so on. We said a year ago already that important thing is to run Russia pool, ramp up Dayton and achieve the targets that we set out to ourselves in Dayton and then use Nokia as a swing capacity now the swing capacity usage in nokia came faster than anticipated and so therefore we added a shift in nokia announced that shift in nokia in 2021 because this is the swing opportunity we have um then you have the question regarding that the cost uh in vienna and this is a

ongoing activity within the dnr that we we manage the costs as effectively in every quarter and and as stated uh vianor is a seasonal business and the main seasons are in the second and fourth quarter when we are making the result and and especially in the in the first and third quarter we need to to be actively managing the cost in order to minimize the losses.

Okay, so an ongoing project to manage the V&R costs, but you don't want to commit to a certain level of improvement there for now?

No, as we have been saying that V&R is an important asset in our passenger car tire business in general and the profitability is on a retail profitability level.

Okay, thank you.

Thank you. Our next question comes from Eduardo Espinia from Fitch SVC.

Please go ahead. Good afternoon, Teck. I have two questions. One on the network development. If you can comment on the plans for growth, where do you plan to grow the network distribution? And we can see over the last few years that there's been a shift from V&R partners to Noxian authorized dealers with no growth for the entire I was curious to understand how this impacts your pricing and maybe cost as a not-young group and how you plan to grow from here. And the second question is more on Asia, especially on China. I was wondering if you think that you need local production in order to exploit the market better or if you actually invest in marketing or further network expansion to see how you're growing those markets, especially considering, I think, very good relationship between Finland and China. Thank you.

Maybe if I start with the China question, this is of course related to larger strategy development. And as we said, that we are working on the strategy right now. We will have the capital markets date that has been announced already. Yes.

9th of September.

9th of September. So we come back to the China questions that how and what we think that is appropriate to do in China. Right now, as you correctly pointed out, we are on an export basis in China at this moment. Vienna stores growth into end buyers.

I think it's good to separate that when we are talking about our own run Vienna stores that we have in the Nordics, they are vital in order to have a good market position in the Nordics as a whole. And then outside the Nordics we don't have our own V&R stores. We have in Russia our partners who use the V&R brand and Entire and other branded stores.

So they are all franchise bases outside the Nordics. Now we have divested the North American operations, 11 outlets in 2020.

Thank you. Our next question comes from Sasha Gorma from Jefferies. Please go ahead.

Yes, good afternoon. Good morning, everyone. Thanks for taking my questions. I have a few follow-ups. The first one would be on the pricing offset that you've been talking about. Have you already implemented your price increases to fully offset your anticipated raw material headwinds? Or is this still something that needs to come in the coming months? My second question would be on the car tire sell-in you're showing in your slide deck, which looks quite weak in the Nordics, minus two. I was just wondering if you can share some insights why the Nordics, unlike the rest of the region, is not recovering yet. And then my last question would be on the potential structural shift away from winter tires to all-season tires in some not strong winter markets, like in Central Europe, for instance. Is that something you observe as well, that customers opt more for all-season tires versus winter tires, or is that not something you're seeing right now?

Thank you. Okay, so starting with the pricing. So the pricing is in implementation, as I mentioned, and obviously we keep an eye on the raw material development. Our anticipation is, as Tim was saying, about 9% like-for-like increase, but we follow that and we do the pricing decisions seasonally and step-by-step, but obviously they are in implementation right now. Away from winter tyres, That is something that we have seen and we think that especially the all-season tires are something that consumers choose for their, for example, for the second car of the family and so on. There was actually a recent study that we showed some information about that. We did a study in continental Europe about that. or season tires that when and how people use them and why do they like them and so on. We believe that winter tires very much have their role, especially in the markets where the winter is coming as normal. So typically Nordics, Russia and Canada and northern states of the U.S. And then friction tires are somewhere there in between to help people to be prepared for harsh winters and snow and so on, but still not having studied the products. So all of these people are choosing depending on their own priorities and so on, but we clearly want to gain more volume and opportunity in all seasons, so this is something that We are launching new products, and we want to achieve more volume in that particular segment. But this is not so that we would see that the winter tire opportunity would be less. It's only that we complement our product range and are more competitive across these key categories, summer, all-season, winter. Nordic Minus 2, that's something that is really related to imports, less imports to Nordic markets. I think the established players pretty much saw the volumes grow in the range that we were trading in growth in the Nordics, while the decline is mostly related to imported products to the market.

Thank you.

Thank you. There appears to be no further questions registered, so I'll hand back to the speakers.

Thank you. If there are no additional questions, then this ends today's conference call. Thank you all for participating and have a nice day.

Thank you.