Nokian Tyres Plc Unsp/Adr

Good afternoon from Helsinki, and welcome to Nokian Tyres Q3 results conference call. My name is Taivi Antola, and I am the Head of Investor Relations in Nokian Tyres, and together with me in this call I have Jukka Moisio, the President and CEO of the company, and Teemu Kangaskarki, the CFO of Nokian Tyres. As usual, we will start the call with Jukka and Teemu going through the Q3 results, and then that will be followed by a Q&A. So, Jukka, please go ahead.

Thank you, Päivi. Good afternoon and welcome on my behalf as well. I start going through the prepared notes, a PowerPoint presentation, and as Konto Kaur mentioned, we had a strong volume and profit growth in the third quarter. But before going into financial details of the quarter, just remind you that we announced our revised growth strategy in September, in our Capital Markets Day. Some of the highlights of that strategy is that we have an ambition to become a 2 billion euro company. Midterm, meaning three to five years. And that will happen by growing heavy tires by 50% from 12-month rolling basis ending June 21. Also growing in North America by 100%, Central Europe by 50%, maintaining and strengthening the number one position in Russia and also strengthening number one position in Nordics and Vianore. Our financial key targets are 20% operating profit and 20% return on capital employed. So those are the highlights of our mid-term targets, which we announced, as mentioned, in the middle of September. I go to page 5, which is our Q3 highlights. Net sales at 443 million euro, up from 350 million or 25 approximately 25 with comparable currencies all-time high third quarter both in the passenger car tires as well as in heavy tires and we had strong demand for our products in all markets operating profit increased from 69 million to 97 million in the quarter and that was driven especially by increased sales volume. We also made price increases to combat inflation that led to higher ASP. We also continued the prudent cost control, especially to ensure that the cost inflation is also controlled internally. I move to page six, and I call out some key numbers in our P&L. First of all, the segment operating profit percentage at 21.8% in the quarter compared to 19.8% one year ago. Year-to-date, our segment operating profit is at 19.7% in 2021 versus 12.2% in 2020. Cash flow in the quarter, minus 81 million. This is driven by increased working capital, both inventories and also receivables. And on the other hand, we also had increased payables, which helped with the cash flow. Capital expenditure remains below 2020 level. Also in year-to-date, we have invested in year-to-date about 60 million euros versus 119 million euros a year ago. equity ratio at the end of the quarter at 66% versus 57% and gearing at 16% versus 18% a year ago. Those are some of the financial highlights and now I hand over to Teemu to talk about passenger car tires and financial details. Teemu, please go ahead.

Thank you. Starting with the passenger car tires, we had a strong Volume growth in all markets, especially in Russia, that is visible in our numbers. The growth rate for the third quarter was close to 30%, and in absolute terms, net sales reached the level of $330 million. The segment operating profit for the passenger car tires in the third quarter was on a level of $90 million. seven million plus. We have been increasing the additional shifts in US and in Finnish factories in order to match the growing demand. All in all, if we move to the next page where we see the The breakdown of our net sales, you can see that in the third quarter, our price mix was positive about 1.4%, of which the price component was clearly about 6%. So here you can see that we have been increasing prices as anticipated. Then moving to the breakdown of our segment operating profit. Here volume is the biggest driver to boost the profit, and as discussed earlier several times, we have a significant headwind coming from the materials. and then when the factories are running with the full capacity we can see that the positive development in the supply chain basket and the net we are on a level of 97 million and in this quarter currency didn't play any significant role in terms of net asp we can see that that our flight increases have offset the negative BA mix impact when the share of Russian businesses is growing stronger than in other markets. If we then move to heavy tires, there we can see the all-time high third quarter. Net sales and operating profit with comparable currencies, The growth rate was on a level of 36%. Net sales on a level of 69 million. And the segment operating profit for the quarter, close to 12 million. And the growth was driven by new product launches, as we have been discussing earlier, that we have a strong NPD pipeline coming, and that is affecting positively to our top line and the customers strong production levels as the early timing of deliveries helped to reach the top line in terms of inventories we can clearly see that those are on a low level as also in the passenger car tire business and then moving to To VNR, the performance has been on a good level in all countries. The net sales growth was on a level of 4% in reported numbers, in absolute terms on a level of 70 million, and then the segment operating loss was around 4 million, and as we all remember, we are now two main seasons are Q2 and Q4, and therefore we are now in the middle of the main season in order to generate the profits. And maybe as a final comment of the Q3 and the second half, We clearly saw that the Q3 was stronger than we anticipated because of the lack of tires, but then in terms of our view on the second half, there hasn't been any significant changes as we see today.

Thank you Teemu and I continue with the presentation. So first of all to revisit our Hakka Pelitta 10 which is our major launch this autumn. Again it's a four-time test winner in Finland, Sweden, Russia and it comes with 140 different SKUs and is a really good winter tire. On the next page, on 12, Hakkapelitta 10 EV, which is a tailored model for electric vehicles and hybrids. There are certain expectations and parameters in EV version that are important. First of all, the EV vehicles are heavier, so therefore there is a higher load capacity in the tire, as well as the higher torque in EVs, and therefore it needs to have a higher grip for high torque. It's made from sustainable materials so this is in line with our sustainability targets and we include more and more renewable and recyclable material in our tires. Hackability in EV also comes with lower noise and that allows a higher driving comfort for EVs and hybrids. And finally what is important for the improved battery range and sustainability matter as well, there's ultra low rolling resistance in this winter tire. So this is our highlight and our key product in this season. On page 13, just to recap that sustainability is important, totally rooted in all what we do. including now mid-term financial targets, non-financial targets. We had also introduced those in September. So we want to bring new environmental and safety innovations to our products. Our ambition is to have 50% of the tire made from renewable or recyclable materials. We also aim to reduce our CO2 emissions in line with the science-based targets, which were approved in 2020. We further want to improve our workplace safety, and we keep on monitoring and improving the monitoring of the sustainability of our suppliers. We have published our sustainable natural rubber policy in September. Also, we announced that we've made a 10-year agreement to have renewable wind energy for electricity in Finnish factory and Vianor. and also in June we announced that we've installed a solar power plant on top of our Finnish logistics center in Nokia. Our guidance on page 14 is unchanged. We expect that in comparable currencies, the segments operating profit and net sales are expected to grow significantly. And recapping our prepared notes with our revised growth strategy, we have an ambitious leap forward. We aim to be a 2 billion euro company in mid-term and growing in heavy tires by 50% from rolling 12 months ending June 21. uh growing north america by 100 percent central europe by 50 percent and strengthening number one position in russia and also strengthening number one position in nordics and vienna and our tellman rolling sales at the end of june uh 21 1.52 billion and now at the end of september our 12-month rolling sales are 1.61 5 billion which is all-time high rolling 12-month revenue of the company With that, I end my prepared notes and I open for questions. Please go ahead.

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

Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's returned to speak, you can dial 02 to cancel. Our first question comes from the line of Akshat Kakkar of JP Morgan. Please go ahead, your line is open.

Thank you, Akshat from JP Morgan. Three from my side, please. The first one on pricing. Obviously, it was a very strong quarter with a 6.6% increase. I think somewhat offset by the Russian mix. But it would be really helpful if you could give us a broad summary of the price actions that you've taken in your key markets. Just trying to understand if there are more price increases with the new product range that will come through in Q4, helping price mix into year-end. and if you still think that pricing can offset the different cost inflation headwinds that you will see across 2021 and 2022. That's the first one, please.

So, if I start with the comment that we have made several times in our earlier course, that we anticipate to offset the cost inflation with our price increases in all markets. And And we are looking carefully where the raw material development is going, and in line with our view, we will then further implement price increases as we go further. And regarding the price increases in different markets, they vary, so there are no one fits all solution for different markets.

Juukka, can you comment something about the new products and their impact on prices?

Yeah, new products are of course an important driver and they allow us to have new price points and so therefore obviously they major contribution to going forward and allowing us to improve the mix. And so therefore, for example, Hakka Pelita 10 in various markets and EV version, for example, common surprise premium versus normal offering. And we hope to continue that by launching as part of our strategy, by launching new products continuously. We've had a record number of new products launched in the past couple of years and we aim to continue that.

Understood. Talking about mix, I want to go back to one of Teemu's slides from the CMD on category margin, where you showed that all-season tire margins are lower than summer tires. Can you tell us what actions are you taking there, and by when do you expect to improve the margin profile of that business, at least above the summer tire business?

As you stated, it has been... visible in our communication already for a long time that the product mix has some negative headwind in terms of net ASP or the profitability development. Having said that, what we also then are working to improve the The mix or the profitability impact is the rim size development. And that is one example of the actions to mitigate the headwind coming from the product mix development in the coming years to come.

Understood. The last one is on passenger car production capacity in Dayton and Finland, please. Can you talk about the current annualized production run rate as of today? And when do you plan to hit the 2 million level at Dayton and the 5 million in Finland on an annual basis?

Yeah, we said as part of our capital markets day that the ambition is that we go towards 5 million in Finland. So that's the capacity that is available and also that we've authorized investments and steps to go all the way to 4 million in Dayton and pretty much making the progress as anticipated so that we expect that in midterm we will hit those numbers and look at then the quarter we are basically on track to make that progress.

Thank you.

Thank you. Our next question comes from the line of Tomatesson of Kepler Chevro. Please go ahead, your line is open.

Thank you very much. I have a few questions as well, please. Firstly, could you talk about the development in Russia in terms of both demand and the level of dealer inventories? It's been the main driver of your rubber new bit in the quarter. Clearly, currencies and oil prices suggest an improvement there, but could you discuss whether you effectively expect a substantial improvement in market conditions in Russia in Q4 in 2022 or whether it's still too early to talk about that now. That's the first question.

Okay, so thank you for the question related to Russia. First of all, as we ended last year, so the inventories were normalized level and so therefore this year the selling has been different compared to 2020 and driven by, of course, the demand in Russia. What we see is that the demand is essentially growing, but our selling has been growing faster for the reason that surely certain product allocations by competition has not taken place, so therefore there is higher demand for tires for those suppliers who are operating and allocating capacity in Russia. Inventory levels at this point of time are relatively normalized, so we don't see any extra inventory anywhere. Obviously, it's a subject to the winter season, which has started in part of Russia, continues right now, and then we will see how the season will end up when we go into full November and early December. But our anticipation is that the inventories are at normalized level in in Russia and so therefore when we go into 2022 we don't see any overhang of excess inventory and we on the other hand there is not a significant upside potential in filling the pipeline in Russia so we see quite a normalized situation right now. Teemu if you talk about the currencies.

And in terms of a Russian ruble if we compare the Q3 this year and last year they are uh roughly on a on a same level uh what what is difference within the quarter was that last year in the beginning of third quarter it started to to depreciate this year this quarter it has started to appreciate so currently the russian ruble is some around 82 against euro when the quarter is for the quarter is somewhere around 86, 87. So now, knocking the wood, hopefully the Russian ruble stays on this level of strength. Let's see.

Thank you. When I look at your mix, the summer and all-season shares have been higher, winter lower. I mean, the weather is still mild this year. Do you expect the full year or the full year mix to get closer to previous years or do you believe that we're going to see further erosion of the winter share?

I think that what you will see is that absolute number of winter tires and so on will remain at good level and even grow. However, it's clear that the all-season is growing in Europe and also in North America for us, so that all-season share will be growing in our total mix. And then the summer, this year particularly, summer was quite strong in the early part of the year. And then when we go into 2022, we will then see how this turns out. But obviously, the absolute number of winter tires is an important driver for us, and that will be growing. But all season is very, very strong, of course.

Thank you. Last question. Could you give us some qualitative comments on the evolution of profitability by region? I know you don't disclose that, but just as an indication, whether you're happy with the development, notably in the Russian and North American business. You talk about a substantial mixed deterioration. But with the market environment normalizing, currencies improving, etc., Russia's contribution should improve as well. And I assume that the North American business is very much supported by an unusually strong pricing environment. Is that fair?

So, as a qualitative comment, naturally, it is visible in our numbers that all business areas are improving their profit and profitability, and if you look at the geographical net sales development, Russian being the main driver, of course, then the impact is also there, significant.

Okay, any comment on the North American margin development?

As I said, all business areas are developing to the right direction comparing last year.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Michael Jacks at Bank of America. Please go ahead. Your line is open.

Hi. Good afternoon. Thanks for taking my questions. My first one relates to the early deliveries. Are you perhaps able to quantify the impact of this in Q3 revenues, and should there be any reversal in Q4?

It's difficult to quantify the impact, but essentially what we saw, if I try to qualitatively describe what we saw, is that certain markets, there was a worry with the distributors that are there enough tires in the market. So they actually called in deliveries early in order to ensure that they have products for the market. winter season and that is the driver. Will there be any reversal? We don't think so. But as Teemu was saying that our expectation for the second half is pretty much unchanged. So that the early delivery is obviously something that we are happy in the quarter three. But the full half year we expect similar trading as we had in when we went into the second half in

And then could you please give us a sense for what your exposure is to sea freight and what proportion of the contracts are annually negotiated?

So sea freight is especially important as we speak for our North American business as we As we at the moment shift the majority of our tires to North America, so we can see that there is a headwind in the sea freight. And also in our material unit, cost in general is impacted by the sea freight as well.

All right, thanks. And then last question. Are you starting to experience any significant wage inflation in your operations, and how is this developing regionally?

Yes, this is part of the cost inflation and inflation environment that we see from the transportation logistics and also we see that there is growth in the wages and salary costs locally in various markets and this is also part of our inflation. As we said that the cost inflation will continue so this is part of our expectation and it's part of our our price increase and cost mitigation actions that we see what we can do about this cost inflation. But yes, we do see, yes.

Thanks. Maybe just following up on that, sorry. Just trying to get a sense for what the level of incremental inflation is that we should expect. I mean, a lot of the sort of inflation items that we saw in Q3 started to rise towards the end of the quarter. And I would imagine that you've got price increases already towards the beginning of the quarter. So trying to get a sense for what proportion of inflation is yet to reflect in the cost base. Maybe perhaps looking into Q4 and Q1 next year.

Yeah, I think that maybe if I respond to qualitatively again, that we try to ensure that our price increases offset these inflationary environment impacts. And so we act on those accordingly.

All right. Thank you very much.

Thank you. Our next question comes from the line of Giulio Prescatore of Exxon. Please go ahead, your line is open.

Hi, thanks for taking my question. The first one is on mix. Can you help us understand the drivers, so the components of the negative mix headwinds between the product cost and maybe regional cost and all the others, and just maybe trying to understand what was the strongest component and which one might actually reverse in the next quarters?

As we have been discussing also in the previous course, this year one of the biggest negative mix components is coming from the business area mix, when the Russian share is increasing faster than other markets, and that then implies that the net ASP in euros are below the average. And in this quarter, we were able to offset more than the headwind coming from the negative BA mix.

Then you saw that our, and we discussed that earlier in this call, that obviously our product mix, especially in the early part of the year, a bigger part of the summer tires than we usually have and also all season growing. However, of course, in quarter three winter tires were the main deliveries. But overall in the year, the share of summer and fall season will be higher, although the absolute number of winter tires will also be higher.

Okay, thank you. So biggest impact from regional mix and product mix. And I guess there was also some positive impact from the new product launches, some mix within winter.

Indeed. And as we have discussed many times when we launch new products, that allows us for the new product, new price points, but also behind that product and repricing the other product offering so that we have the right kind of price points in various categories. And this is visible now in this year as well.

Okay, thank you. The second question on Russia, I mean, are you worried at all about the COVID situation in the market? Do you foresee the risk of any lockdown or are you seeing any risk of that? And are you taking any proactive actions to potentially offset the lockdown of your factory in St. Petersburg?

Yes, we of course follow the COVID situation quite carefully and so far our factory has been operating well. We have had cases like everybody probably operating in Russia, but we've been able to take with good efficiency. We don't expect that to change significantly, but always we are careful and we take care of the safety of our employees all the time.

Thank you. Maybe just one last one on the US ramp up. I mean you reiterated the target of one million units this year. Is there any scope to do better than that?

We basically are running towards our four million target and we are on track and if and when we can achieve higher, so the year is not yet full, so we will see. But clearly we are making good progress.

Okay, thank you.

Thank you. Our next question comes from the line of Gabriel Adler at Citi. Please go ahead, your line is open.

Hi, thank you for taking my questions. I just have two. The first is on the supply chain bucket in the bridge. Could you elaborate, please, a little bit on what was driving the strong reversal and the positive impact there? And then my second question is on the guidance because you've maintained what is quite vague guidance with significant growth despite only having a few months left in the year now. Would you like to take this opportunity maybe to clarify the guidance at all on the call following this print? Thank you.

I'll start with the supply chain. It's good to remember that last year we had a significant negative impact and now this positive is the reversal of last year's negative. That's in its simplicity the reasoning. Now the factories are running at full capacity as we speak and therefore it is a positive thing for our profit and profitability compared to last year.

And to guidance, it's unchanged. We made the guidance in February this year and we are tracking according to that guidance. So no reason to change.

Okay. Can I maybe follow up on the supply chain bucket point? Because I think the negative last year was around 9 million. So it would be interesting to understand if there's anything else within that portion of the bridge that you're including, I know you mentioned sort of cost reduction measures. Maybe you can elaborate on that, if that's also included, or any more detail on what the delta is between the 17 this year and the nine negative last year.

The main reason for that development year on year is the fixed cost absorption. Last year we didn't have the full fixed cost absorption because the volumes were on a low level. Now we have the full fixed cost absorption. And then there are some other items that are not as significant as this full cost absorption difference year on year. Okay.

Thank you very much.

Thank you. Next question comes from the line of Tanu Raitinmaki of Danske Bank. Please go ahead. Your line is open.

Yes, thank you. I have two questions. Firstly, just coming back to this early deliveries and the outlook for Q4, just to clarify, to understand, you don't expect a reversal in the early deliveries, but then it sounds that you are more cautious on Q4. So has your view changed on Q4 than what it was when we last spoke? And then secondly, can you provide a number for the expected inflation on raw material costs and has this view changed from what you thought at the time of Q2 report? Thanks.

So if I start with the cost inflation of the raw material headwind, it has gradually increased slightly, but we are already on a on a high level, as we have been speaking earlier. So there will be a significant headwind in the second half, as communicated earlier. But no major change from that significance.

Following that and talking about the expectations for the second half, we went into the second half in August, August, view from that hasn't changed significantly. Obviously, we are very happy about the quarter three volumes, and we will see then how the final quarter will turn out to be, but we have no change of expectations.

All right, thank you.

Thank you. Our next question comes from the line of Piero Cunemera of Stiesel. Please go ahead, your line is open.

Sure. Good morning. Sorry, good afternoon to you all. Two questions, I guess. I'll go over what has really been raised. Regarding the roadmap price increases, is it still valid that you expect to fully offset the cost only by the first half of 2022? That would be the first question, please.

So what we have been discussing is that on a rolling basis, we will offset the cost inflation, not giving any specific timeframe.

Okay, thanks. And once again, follow up on the volume. I'm not sure I totally remember what you said. What were the trends you were expecting for the second half of 2021? But given the staggering volume number in the third quarter, do you, in a nutshell, expect positive development on the volume side in the fourth quarter of this year? Thank you.

So we basically, at the time when we talked about the second half, we were supplying and running flat out. And I think that essentially our situation in that sense, when we have been operating in the second half, hasn't changed. So we expected strong volume development and it has materialized well. partially due to early deliveries, but we also expected that good volume development continued in the second half of 2020. But we haven't changed that expectation. The expectation as we had it in August is pretty much the same.

Okay, so likely positive, if I understand you correctly, in the fourth quarter of 2021.

It can be interpreted that way, yes.

Okay, thank you. Thank you. We currently have no further questions in the queue. So once again, if there are any final questions, please dial 01 on your telephone keypads now. Okay, so no further questions coming through. I'll hand back to our speakers for the closing comments.

Thank you. So if there are no additional questions, it's time to finish this call. Thank you, Jukka. Thank you, Teemu. And thank you all for joining. And have a good day.

Thank you, Paiwi. Thank you, Teemu. Have a nice day.