Nokian Tyres Plc Unsp/Adr

Good afternoon from Helsinki and welcome to Nokian Tires Q1 2022 results conference call. My name is Saivi Antola and I am the Head of Investor Relations in Nokian Tires and together with me in this call I have Jukka Moisio, the President and CEO of the company and Teemu Kangaskärki, the CFO. In this call we will go through the Q1 results and the impact of the war in Ukraine and the resulting sanctions on Nokian tires. This all will be presented by the CEO and CFO, followed by Q&A. So, Jukka, please go ahead.

Thank you, Paivi. Welcome on my behalf. And I will go through the prepared notes in the presentation, starting on the cover page that the war in Ukraine overshadowed Q1. Our operating environment is highly uncertain, but nevertheless, the tire demand in the global markets was good in the first quarter. I moved to phase two in terms of our net sales. They increased by about 22% in comparable currencies. That meant that the year began with good demand in all markets, and in late February, the war in Ukraine started to impact the operating environment. As our supply chain is quite long, so it means that the first quarter's tires mostly were made already in 2021 in the final quarter. And indeed, the strong momentum of the tire demand already in 2021 continued to 2022 in the first quarter. Our segment operating profit was 66.5 million up from 50.3 million a year ago. price increases were made to combat the cost inflation and that led to higher average selling price. Teemu will talk about that a little bit later. And also important to mention that our heavy tires business had all time high first quarter in operating profit. I move to page three, which is financial highlights. Again, the Profitability in terms of operating profit margin, 16% in the first quarter versus 14.7 a year ago. Equity is 70% of our balance sheet versus 68% at the end of financial year 2021. Cash flow from operating activities was negative, mostly because we tied money into receivables and inventory. and then gearing at 3.1%, net debt 53 million, and capital expenditure in the first quarter was 14.1 million, down from 17 million in 2021. We expect that the capital expenditure will remain at 100 to 120 million. On ongoing operations, we will not invest in production in Russia, However, we have activated and started to speed up the investment in new capacity in Eastern Europe and also look at the other options to improve our supply capability outside Russia. That includes, of course, building and continuing to build the capacity in Nokia, as well as ramping up our Dayton factory and investing there, as well as also increasing capacity in heavy tires in Nokia. and the capital expenditure most likely will be uh mostly focused on the final quarter last two quarters of 2022 and there we see and we'll most likely see an acceleration of capital expenditure and now i hand over to demo to talk about the uh probabilities of businesses and also a little bit more granularity in the financial performance then please go ahead

Thank you, and let's start with the passenger car tire business unit. The demand continued on a high level in the first quarter. Our net sales reached 350 million and segment operating profit on a level of 74. The top line growth was on a level of 28%, no major difference between reported and comparable currency change. The net sales was increasing all main markets and all season tires was the main driver for increasing volumes. We were able to increase our average sales prices in all markets. in order to offset the higher raw material and cost inflation. And when we started the year, our forecast for the full year in terms of raw material headwind was on a level of 20%, and now we see that it will be more than 30% because the cost inflation continues to rise in the second half this year. If we then move to the next page where we can see the breakdown of our net sales by quarters, here you can see that the volume component was up by 9% and our price mix on a level of 19%. Here you can see a strong development in the price mix as we have been discussing in the past quarters. We have increased prices and continue to do that in all markets and now in the first quarter we were able to see a strong momentum there. Currency, the aggregate impact was flat due to the fact that all other currencies except Russian ruble strengthened and therefore the net was close to zero. Then moving to the bridges, here we can see that on net sales level, the volume contributed to the top line around 22 million and the price mix was on a level of 47 million. Then moving to the segment operating profit and and if you look at the price mix 47 compared to the material deadwind minus or negative development of 28 million here we can see the positive delta between the price mix and material headwind then moving to the heavy tires business unit In the first quarter, we recorded all-time high segment operating profit for heavy tires. Top line was on a level of 66%, growth with comparable currencies almost 15%, and segment operating profit on a level of almost 13 million. same level than in prior year then if you look at relative profitability there it it was slightly lower than in comparison period in heavy tires the strong demand continued in in all product segments as we have been discussing in earlier quarters and naturally in heavy tires we have increased also safe prices and continue to do so in the coming orders and maybe the final comment from heavy tires is that the strong development in safety we have recorded over two years without lost time injuries which is a excellent achievement and lastly looking the vnr business unit performance the start for the year was low low in the first quarter which is not the main season as as we have been discussing the two main seasons are q2 and q4 in indiana the net sales was on a level of 57 million

uh minus close to two percent and our segment operating profit was on a level of minus 12 million that was all from the business users thank you demo i move on to page nine about the operating environment which was severely impacted by the war in ukraine and we took several measures to address that matter. If you look at health and safety, the top priority is to ensure the safety of our employees and colleagues in Ukraine, but also to give support to all, not the entire employees, independently where they are. Constant communication, we establish constant communication about the situation in the organization, so we have weekly calls of the situation and address and respond to questions that people in our organization have. We've also provided donations internally, externally to help the humanitarian efforts in Ukraine. Operational measures, most important thing is to comply with the applicable sanctions. Also, we've established a crisis management team. We meet frequently, daily or every second day, and we've established and activated contingency plans and they are ongoing. take care of our personnel and management in Ukraine and Russia, want to secure the control of our factory in Russia. We've stopped investments into Russian production. We have also stopped the sales and distribution of heavy tires to Russia. And we have initiated actions to diversify our manufacturing footprint, and we've also done cost reductions. In terms of financial actions, The board made a proposal to change from dividend to €1.32 to €0.55 and that reserves about €106 million for investments to new capacity in Europe. We've also taken measures to secure the company liquidity and we have a strong balance sheet. As mentioned, 70% of the balance sheet is equity. That will then support the company through this difficult time. On page 10, as mentioned, the preparation for new supply capabilities started. We are evaluating all options. Some of them are shorter-term and some of them are mid-term and longer-term. Obviously, we look at the old Greenfield opportunity, also the joint venture opportunities with other tire companies and then contract manufacturing. So these plans have all been evaluated and we are working on those and we've started to expedite the plans to invest in new production capacity in Europe. And as mentioned, the dividend proposal cut funds this activity by 106 million euro already in 2022. And at the same time, as we have initiated already in 2021, the increase of capacity in Nokia Finland by adding shifts and also investing in equipment that will help 2022 volumes, but also 2023 capability from Nokia. Also, the ongoing heavy tire investment will help heavy tire expansion plans in 2023 and 2024. as well as the Dayton plan where we have ordered in 2021 invested or ordered equipment and they will then come progressively during the course of this year and early next year to help the capacity build up in Dayton to 4 million buyers. Our priorities in coming quarters is to adapt to the fast changing and highly uncertain operating environment. We want to comply with the applicable sanctions, so this is priority number one. also protecting the safety of our team. We want to maintain the control of our factories in Russia. We want to protect our cash flow. And the board is evaluating long-term strategic paths. And this work is ongoing right now. And as soon as there are decisions taken, we will communicate them promptly from the point of view that we have strong products, we have a good portfolio, and although there will be difficulties in short term in terms of capacity and capability, we will do our utmost to ensure that our products are supplied to customers, and at the same time, because we have strong products, we want to establish a more diversified and improved supply capability to meet the expectations of our customers and consumers in years to come. and this work is very much ongoing. As I said, the board is evaluating the long-term strategic paths and as soon as the decisions are taken, we will communicate them properly. I move to page 12, assumptions for this year. War in Ukraine and resulting sanctions are impacting our operating environment and causing uncertainty. There will be restrictions in manufacturing and also supply capability from Russia and to Russia, particularly that will be visible in H2 2022. And raw material logistic costs are expected to increase significantly. However, the demand for Nokia and heavy guys products are estimated to continue strong. Therefore, the guidance for 2022, which is on page 13, will be as follows. The war in Ukraine and the resulting sanctions caused significant uncertainty in Nokian Tire's operating environment. Nokian Tire's net sales and segment operating profit in 2022 are expected to decrease significantly compared to year 2021. Those are the prepared comments. Daivi, I'll hand over back to you.

Thank you, Jukka. Thank you, Teemu. Maybe before we go to the questions from the audience, a couple of questions which certainly are in the minds of people listening to us. First one to Jukka, to you. When will there be more information on the future plans regarding Russia?

Yes, thank you, Päivi. That is an obvious question on everybody's mind and our minds as well. And therefore we are working, as I mentioned, the board is evaluating strategic path and evaluating various options and what to decide. And I believe that this work is very much progressing quickly now. And so once the decisions are taken, we will communicate them promptly. But we will look at various options and this work is ongoing right now.

With the new EU sanctions that were announced a couple of weeks ago, can the production in Russia still continue?

Production in Russia can continue, but there are multiple difficulties. They become increasingly more difficult as we go day by day. One is the transport capability take raw materials to Russia. Over 50% of our raw materials in Russia are coming from outside. It's also equally difficult to transport products from Russia to European Union or any other countries. So that will be a difficult one. And also the support to our Russian factory. And the visibility is getting weaker towards the second quarter. And then when we work with the second quarter, we have more understanding that what will happen takes me back to the board evaluation of the strategic paths that what are the next steps taken. And as I said, as soon as we have decisions and this is taken, we will communicate them promptly.

And how important or why is it important to keep the factory operational?

It's important to keep the factory operational for the reason to protect our people in Russia, our teams in Russia. It's also important that the factory is not in the wrong hands because this is how important target that it would not go to the wrong hands. And finally, if the factory is there, perhaps the equipment or any parts of the equipment can be used somewhere else if nothing else. So therefore, there are multiple reasons, but the most important ones are the safety of our team and also to ensure that the factory is not in the wrong hands.

And there is a big question about the strategy going forward. You talked a little bit in your opening words about the short-term priorities, but what is really the strategy going forward? Or too early to say anything.

The strategy going forward, we can talk about the matters that are cornerstones that are important and untouched and will continue to help our company and also serve our customers. One is that we keep on building the Nokia capacity, so the new shifts, more tires, also new equipment coming in, so a productivity deep bottlenecking of the passenger car tire part of Nokia is very important, it's ongoing. That will help, and as we said, our ambition is to supply Nordic markets from Nokia, and also then use the Nokia capacity to ensure that we get the right winter products and our products to North America. And that is one key target. The other key target is to ensure that we increase the capacity and ramp up the capacity in Dayton. We achieved the first milestone, which is 4 million tires, and at the same time. And that is, again, part of the report. strategic path assessment that how do we add more capacity to date and beyond the 4 million, how and when that can happen. Then heavy tires investments which are ongoing in Nokia and taking heavy tires from 20, 21, 250 million euro net sales to 300 million are very much ongoing. Those we expect to benefit us all the time. And then the strategic options can be implemented when we have a strong liquidity as we secure that and also that we have a strong balance sheet and so therefore allow the freedom to decide which is the most important strategic path for the company in late 2022 and in 2023 and 2024 and beyond. Having said that, we will not be successful without strong products and good innovations. I just want to come back to the fact that our winter tyre, Accapelita 10, is a great product and has been performing extremely well. Also, we will launch to the markets and new friction tires are fine, which comes in the autumn. Those are both very, very strong products and we work our utmost to ensure that there's availability to customers and consumers of those tires. And also that we will continue our innovation work because despite this current uncertainty and demanding time for the company and also war in Ukraine, which impacts all of us, there will be a future for the company that will be built on new products and our strong team capability. And as we have the financial muscle and we have the strong balance sheet, we will then rebuild this company in a different way into the future. And more of that once the board has decided and worked on the strategic path and those are ready to be announced.

Very good, thank you. And now, operator, we would be ready for the questions from the audience, please.

Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. Our first question comes from the line of Giulio Pescatori of BNP. Please go ahead.

Hi, thanks for taking my question. appreciate that the environment is very difficult and uh i mean i really appreciate all the effort that you put in place to start the current situation but i would appreciate a bit more color at the same time um with regards to the future of your russian operation so maybe a first a short-term question then a longer term one on the short-term side can you maybe comment on the capacity utilization that you currently have in russia and at what level of production the factory is currently operating and for the future I mean, I do appreciate that your balance sheet is solid, that is strong, you have enough cash, but why not selling the Russian asset? Have you received any interest for potential sales? And maybe perhaps with an option to buy it again at a certain point in the future and using the cash to then accelerate the capacity expansion in Europe and North America. Wouldn't that be the best option in the current state? And then maybe one last question on the VNO network in Russia. Can you maybe update us on the state of those dealers?

Thank you. They want to take the VNR, but I can comment on the RAS and capacity utilization. So it's a declining one, and we will see less and less of the capacity utilized in the quarter. That's our visibility currently. About the future, yes, the option you mentioned is something that the board is taking note of and also using as one option in the forward. Again, as I said, As this is taken, we will come back and communicate.

So the V&R business in Russia, they are independent businesses. And as we have been communicating about the future of the V&R brand in Russia, still valid. So it is continuing with the V&R business in Russia.

Thank you.

Our next question comes from the line of Thomas Besson of Kepler-Chevreau. Please go ahead. Thomas Besson, you may go ahead and ask your question. If you have your line on mute, please unmute.

Sorry for that. Can you hear me now?

Yes, we can. Yes, go ahead.

Okay. Sorry for that. So I have three questions, please. First, I start with a brutal question. Apologies, Yuka. I'd like to understand management's philosophy and ultimately auditor's philosophy on the Russian asset. I don't understand why it's not been at least partly written down. uh and why you talk about controlling the assets uh it needs a philosophy of management but uh you can eventually use it again in six months 18 months three years whatever i'm a bit surprised first question second question i understand the board is looking at various options but can you give us an idea at least of the range uh of uh cost timing uh and uh uh method of implementation for these different solutions because it's very difficult to apprehend how you're going to be able to substitute this factory and third and last questions have you been able to produce in russia and ship the tiles outside of russia before the sanctions sufficiently for the winter season in 2022 so basically is there going to be enough in the Nordics and in Western Europe or not? Those are the three questions.

Thank you. If I start with the asset question and if I answered the question correctly, why we have been commenting the assets. First of all, it is important for us to keep the asset in our hands and in this kind of uncertain environment there is naturally discussion that what is the value of the assets and is there any need for impairment and as we see the situation at the moment we control the assets and we have been doing our impairment test and at this point of time with the information we have available there is no need today to make any impairments and we continue to control our operations in Russia.

about the various options and timing so obviously the question is can we substitute that kind of factory and we will look at the options as said that greenfield investment or joint venture or even subcontracting short term that kind of factory cannot be completely substituted but we can work on a plan to progressively rebuild the company and then rebuild the capacity which is in Russia Can we use the Russian capacity? I think that the question is, can we use the equipment elsewhere? That is maybe also a relevant question. Can that be done? And we don't have an immediate answer on that, but that can be a possibility. Then about the winter tires, we will... make winter tires with Nokia. We try to do our utmost that we service the Nordic markets and North American markets where the studied winter tires as well as the friction tires are needed. We believe that strongly the market will be dependent on Nokia manufacturing and any complementary we can either outsource or do things differently. strongly rely upon relying on a knock-in capacity.

And the last question, if I may follow up on my first question, maybe it wasn't clear. What is your philosophy about this asset today? I mean, at the beginning of the conflict, you were talking about continuing to use this asset, eventually having some clear minuses, but also some pluses. Given the situation today, why are you not clearer on this situation and still talking about controlling an asset? I don't even understand how you can do an impairment test on an asset that you practically cannot use. It's both practical and philosophical, the question. But maybe I missed something.

No, I think that you understand and your question is correct. I believe that, as we said, that we work on the options and once the path has been cleared and decisions are taken, then we communicate and at that point of time, the clarity in terms of what will be done and what can be done will be there. at this point of time it's important for us that the factory is not unintentionally or by accident going to wrong hands but then once the strategic bad decisions are taken then we believe that we can be much clearer but that is something that we are working on together with the board right now okay thank you very much

Our next question comes from the line of Artem Beletsky of SEB. Please go ahead.

Yes, good afternoon, and thank you for taking my questions. I would have a few ones. So first, starting with the capacity pass when it comes to Nokia and US factor, could you maybe provide an update when you are planning to reach this 6 million tires in Nokia and basically 4 million in US? Do you think that it's possible to be basically the the run run rate for you uh starting from the beginning of next year for example also so that is the first one the second one is related to new clients i fully understand that visibility is extremely poor but could you maybe as before provide a bit more granularity in terms of significant sales and ebit decline what it actually means is basically more than 20 percent And the last one is relating to trade receivables. So I think that the level at the end of Q1 was 430 million euros. How big portion of this was relating to Russia? And could you maybe a bit talk about, so say, payment terms in Russia right now and basically credit-related risks, how you manage those ones at the moment? Thank you.

Thank you. So maybe I start with the capacity in Nokia. So obviously the important thing is to train the shifts and so on. So we've been achieving that and more or less all the shifts have now been trained and the last trainings have been completed. now we have some equipment coming to nokia uh during the course of this year ordered already in 2021 with the ambition that we will increase the capacity believe that our we should be ready with the installments of the lines and so on uh the towards the end of this year and then we ramp up them and achieve as high as possible in 2023 believe that we are somewhere between five and six in 2023 if we are lucky and we are really doing well we can achieve higher and if there are some issues in the startup and so on we can achieve lower but there is the range five to six in Dayton equipment are coming so one line was installed one in March and then latter part of the year more equipment will come and they'll be installed and so ramped up and they'll be moved step by step and we will then complement this with the subcontracting and various other arrangements for 2023 so that and those will be again part of the strategic path decisions that we will then seek to communicate us when the decisions have been taken heavy tires will ramp up some of the equipment during the course of this year, so they should get additional help in 2023. Teemu, please go ahead.

With regards to trade receivables, our trade customers had a strong year last year, so their financial position has been good, and now this year we have been increasing prices in Russia twice, and they have been willing to take tires and pay in advance in order to get the benefit of not paying with the higher prices. So in that sense, the trade receivables and the payment behavior has followed the previous pattern. We don't see short-term any major risks at the moment.

Teemu, there was a question about the guidance and the word significantly. Anything you would like to say about that?

Just to give you some kind of a ballpark number, I think this year most likely be similar like year 2020 when we hit by the COVID. Maybe this year the net sales could be higher and the segment operating profit lower just to give you a flavor.

Okay, very good. Thank you very much.

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

Thank you. Good afternoon. I have three questions. The first one is just going back to capacity utilization in Russia. I appreciate that utilization is on a declining trajectory, but where does the current level of utilization put you in relation to break-evens? And can you please quantify the current level of fixed operating overheads in the region? That's the first question. My second question is, which markets are you currently able to export tires into from Russia? And then my final question is just with regards to the announcement where you mentioned that the export ban would likely to start showing the full impact in Q3. Can you just highlight what's different in Q2, given that the ban already started on the 8th of April? Thank you.

So the capacity utilization, we would not like to comment the current quarter. We only can comment that it's on a declining trend and that is impacted by a number of difficulties I mentioned. And then where can we export today, not basically transition period between announcing the sanctions and then becoming valid is three months. And at this point of time, to the extent that there is transportation, tires can be exported from Russia to the European Union mostly. But that is of course something that is really highly dependent on transportation, which availability is relatively low right now. And that was the final one.

It was about why we say that the impact will be visible starting Q3. And the reason is really the sanctions came into force on April 9th. But with the export of tires, there is a transition period until July 10th.

and also the long supply chain of the products that, as I mentioned in the beginning, that most of the tires that were sold in the first quarter this year were made already in 2021. Now the visibility in the second half will be clearly lower net sales because the supply is not there anymore and the supply is mostly coming from Nokia Dayton heavy tires. And we have no possibility to introduce subcontracting or anything in for the second half of this year.

Understood. Thank you. If I can maybe just ask one quick follow-up. Can you give us some kind of a sense for how Vienor will be impacted by the Russia ban? I mean, it is a business that probably has quite a high fixed cost overhead or footprint. Can you give any sort of detail or sense on that, please?

And if we now talk about the V&R chain in the Nordics, naturally we need to find the right balance, how we allocate our capacity and good to remember that in V&R we are selling other brands than Nokia brands and most likely we are not able to fulfill V&R needs with our own brands, then we will seek volume with Other brands.

We also sell heavy tires in Vienna, so there's a number of products that go through the Vienna outlet.

Understood. Thank you.

Our next question comes from the line of Akshay Kakkar of J.P. Morgan. Please go ahead.

Thank you, Akshay, from J.P. Morgan. A couple of questions are left for me, please. just on the underlying Q1 results, specifically on the ASP of passenger car tires. The price mix breakup, it's very good to see the strong underlying result excluding the crisis. Can you help us understand the drivers of the ASP price versus mix in the plus 20% that you have shown in the quarter? That's the first question. And the second question is on the profit bridge for passenger car tires and the cost structure in Q1. it looked like a very clean profit bridge for passenger car tires with no special freight, energy, logistics, or extra overhead costs. Also, seeing that the ROMAT headwind was lower sequentially despite a stronger US dollar. Can you just help us understand that a bit? Thank you.

The price mix in the first quarter was driven mainly from the price component, so the mix impact was smaller there. We were able to also increase the share of bigger rim sizes, but the majority came from the price component. Then in terms of the material headwind, and you mentioned the energy cost, as our in the first quarter biggest production location was in in russia there the energy was more stable than for example in in finland okay thank you now we are starting to run out of time maybe uh

final questions, if there are any on the line, please.

Okay. Our last question that has come from the line of Christoph Laskawi of Deutsche Bank. Please go ahead.

Christoph Laskawi Hey, thank you for squeezing in the last question. two on the impact of russia as well um so the first one would be is anything stopping you from moving equipment from russia to uh finland for example and uh is that outside of obviously availability of input factors one reason why capacity is on a declining trend in in that production uh facility and then second question would be um you're flagging specifically the impact on central europe and russia obviously not necessarily Western Europe being adversely impacted. Is it fair to assume that you can keep the selling rate in Western Europe up basically in the usual run rate because of the Nokia factory, or is there an adverse impact which is not as strong as the other two regions as well? Thank you.

Thank you. So the equipment moving, this is something that cannot be done right now. But obviously that is one of the, and molds as well cannot be transitioned right now. So our key product, some of the key product molds are in Russia. We cannot move them. So we have actually invested in new ones for Nokia and for Dayton. So this mitigation has taken place. Equipment transition is not possible. However, as I just go back to... Thomas Besson question that why is it important to keep the control of the factory. This is one of the reasons that can and when can we transition the molds and equipment. This is historically something that we've done frequently between the factories and so on. Now it's not possible but perhaps that can be possible at certain point of time and that would help us tremendously and shorten number of things we want to do. However, then the Central Europe

We have been commenting that these sanctions and supply shortage will impact mostly Russia and Central Europe, and Central Europe due to the fact that in the past, majority of the tires have been coming from Russia. And now going forward, we need to find the optimum balance how we distribute the supply that we can get out of the nokian factory and and on top of that other uh means like that offtake short term in order to optimize our profit thank you brief follow-up if i may um just on what is preventing you from with the equipment is this uh related to two sanctions as well it's just no availability of uh transport the key reasons

related to sanctions and counter-sanctions, especially counter-sanctions.

Thank you. Thank you, Teemu. Thank you, Jukka. Thank you for all the questions. These are difficult times and the work continues. As Jukka said, during the call we will publish any decisions as soon as we have anything to announce. Jukka, to finish the call, anything you want to add, maybe come back to the short-term priorities?

Maybe instead I will talk about the opportunity we have, because we have a really good innovation pipeline and new products coming to market. Our biggest and most important job is to ensure that we have a capable or that we have the capacity and capability to supply those products. And that means that we have an accelerated way to look into investing and building the capacity and capability in those factories which are outside Russia, and then find opportunities to outsource and then expedite new capacity build-up, because that way we then build for the future. And I think that would be the most important priority for the company.

Thank you, Jukka. Thank you all. Have a good day.