Nokian Tyres Plc Unsp/Adr

Good afternoon from Helsinki and welcome to Nokian Tire's third quarter result conference call. My name is Saivi Antola and together with me I have in the call the President and CEO Jukka Moisio and Niko Haavisto, the CFO. And as usual, we have some prepared notes and then after that there's a Q&A. So Jukka, please go ahead.

Thank you Päivi and welcome on my behalf and indeed we have some prepared notes and we have a presentation with the page one heading is mortgage against driving sales growth in a weak market and Romanian factory progressing on schedule and I move to page two which is then Q3 Net sales and segments operating profit increased. That's the heading. So our net sales were 314 million, which is about 14% higher in comparable currencies. We had market share gains, which were driven by the improved passage of car tire availability. Geographically, the strongest growth in the quarter were Central Europe and the Nordics. segments have been down at 58.8 million versus 46 million the prior year and margin percentage 18.8 versus 16.7 segments operating profit in the quarter at 30.4 million versus 19.6 a year ago and 9.7 margin main driver for the profitability improvement is higher sales and lower raw material cost also over overall statement of the quarter is that car and tire market is weak and it's difficult to estimate market and consumer behavior going forward i may move to page three some of the key figures and first of all to to say that the investment phase approaching its end and therefore the net debt in 2024 is speaking, and from 2024 onwards, the net debt is expected to go down and the cash flow is turning positive. We've had a negative, strongly negative cash flow in 23 and 24, based on the investment requirements and the build of Romanian factory, as well as the completion of date on investment, and at the same time, having shortage of, big availability of tires because we lack the production capability. I call out some key numbers on page three. One is the capital expenditure. So in the quarter, we spent 101 million, mostly in Romanian factory. And year to date, nine months, 260 million versus 157 million a year ago. Also, net sales after nine months, 875 million versus 805, and segments EBITDA at 13.5% versus 12.2 in 23. Return on capital employed at this moment, 12-month rolling is 4.2%, equity ratio 49.6% versus 6.1%, and indeed gearing at 64%. and interest rate net debt at 800 million this is the highest number we will see from this moment onwards this number will go down and I now hand over to Niko to talk about financial numbers Niko please go ahead thank you Jukka I will go through the segment numbers so on page four

In the passenger car tire segment, we had higher sales and improved profitability, and this was driven especially by our central Europe. And the average selling prices with comparable currencies, however, decreased. Profitability, we improved there due to the higher volumes and lower material costs. I need to point out that in our Q3 numbers, the non-IFRS exclusions included the inventory write downs of the contract manufacturing. And as we've said earlier in the year, these are the products that came in late and we wanted to sell these contract manufacturing summer products during the Q3 now. We tried that earlier in the summer or in the season, didn't manage to do that as they came in late, but did that now in Q3. In the table there below, you can see the segments operating profit landed at 34.4 million euros and with operating profit percentage of 16.4 compared to last year's 11.1. On the page five, we have the passenger car tire business bridge. So first, there is the net sales bridge, and there you see the volumes impacted heavily. Then on the price side, price and mix, it was a negative minus 18 million, as well as the currency still had headwind there, minus 2 million euros on the sales level, and landed at 210 million euros in terms of net sales. On the operating profit table, there on the low bottom on that page, we see that once again the volume gain on the profit was 26 million euros, price a mix, the 18 million euros, and then the rest netted roughly 8 million euros, and we landed with 34 million euros in terms of segments operating profit in Q3. Then a little bit split year on year, the passenger car tires, still the quarterly change is there. You see that the sales volume gained 35.4%, so clear increase. And the trend there is what we want to see as well. And then in terms of price and mix, you see there minus 10.5%. But without this exclusion with the write-down, it would be on the level of 3% in terms of price and mix. And that would come mainly from the mix. Then the currency is, of course, still headwind, but on a much more moderate level than in the prior year. On the page 7, when we go to our heavy tire segment, There, the story continues. The net sales are decreasing, and that's mainly due to the weak OEM market. I think we have visibility, but it doesn't look too promising when we are looking towards the year end. Profitability, I think that is on the level that we can be proud of. The 12.9% is actually better than what we had. did last year, so this tells that we have the costs in control. And we had the production temporarily adapted during the summer break to meet the demand in the market. And then finally the last segment, the Vianor, there we see that the sales are at the last year's level, or slightly increased compared to last year. But what we are facing is the negative segments operating profit, and this is mainly due to the inflation, which we've said earlier, and also we are facing quite a weak business-to-business market there. Of course, now when the Q4 comes and really the season kicks in, we believe that we are in a well position there going into the Q4. then uh the final the guidance uh for for this year we've said that it's it's unchanged ie that our net sales with the comparable currencies and the segments operating profit are expected to grow significantly compared to last year and with that i hand back to you thank you nico some of the uh

Other highlights of the quarter, Romania factory first of all progressing in budget and on schedule and we had the first tire manufactured in July and had a grand opening in September. Production will begin with the manufacture of Central European winter and all season tires. Also financially we got 150 million European investment back. loan to finance the factory, and also in August, we got the European Commission approval for Romania's day-to-day measure to be paid, and that to support the establishment of the factory. And as mentioned, this day-to-day has been approved, but hasn't been paid, will be paid progressively in 2025-2026, and some remaining amounts in 2027, based on the completion of the factories. On the page 11, you see the aerial photo of the factory, so 100,000 square meters, about 16 football fields. If you look at the European football field size, about 16 on the roof. And the build-up area consists of a building, mixing building on the left-hand side, production building in the middle, including the office on the right-hand side, not the blue one, but the one which is attached to the production building. and then fits with their house and as mentioned earlier that this footprint land area allows tripling the size of the factory in the future years so the original investment is up to six million tires but you can triple that size in coming years if the investment decisions are being made On page 12, Romanian factory about benchmarking sustainability. So it's going to be a CO2 emission free. That means that all electricity used at the factory is CO2 emission free. Part of the electricity will be generated by on-site solar powers, power units, and the rest will be sourced without CO2 emissions. We have innovative electric boilers, which will then use the CO2 emission-free electricity to generate steam for curing. Energy efficiency. Obviously, the tire manufacturing process is very energy efficient and using the most modern technology and the machinery. On page 13, just to... remind that the birthday product of 2024 is a big tire so it celebrates 90 year anniversary so that's our innovation long time ago still very strong product and as the winter season is coming just reminding everybody that world's first winter tire was invented in 1934 and even today with Hakka Pelitta 10 and Hakka Pelitta R5, number 10 being a studied tire, R5 being a non-studied tire, they are in the podium places in several magazine tests performing extremely well in winter conditions and that will remain also in the future that the key of our innovation will to make sure that we have a tires made for demanding conditions also in the quarter paulo pompeii was appointed the president and ceo of nokia tires and he will start in january 1st 2025 and finalize the presentation prepared comments with our purpose we want to make the world safer by reinventing tires and how they are made over and over again And with that, I hand over back to Päivi. Päivi, please go ahead.

Thank you, Jukka. Thank you, Mikko. Before we go to the questions from the audience, I would actually have two questions for you, Jukka. So we have a new president and CEO starting in January, but you will continue until that.

That is correct. So I will continue until the end of December and then hand over to Paolo. And we have, of course, overlapping transitions during the month of November and December, so that all will be full speed when he starts in January and obviously those takes take places in the budget meetings and various other management team meetings so that indeed it's not so that I leave when he comes but we overlap at this moment and in coming weeks and also month of December.

Very good and another very important question do you already have winter tires in your car?

I have actually in my wife's car we have studded tires, Hakka Pelikka 10, and tomorrow I will change to my car, Hakka Pelikka 10 winter tires. I am a true believer of studded tires. I know that you are a true believer of friction tires, and I know that people are varying between these beliefs, that some people like friction tires, other people like studded tires, and really depends where you drive and how you drive. I go a lot to countryside, and so therefore I rely on studded tires, but I know that you are a city person and you have friction tires.

That is correct. Now, once we have discussed these two very important questions, we would be ready for the questions from the audience, please.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key

six on your telephone keypad the next question comes from akshat kaka from jp morgan please go ahead thank you for taking my question three from my side please the first one on the passenger car profit bridge could you just explain what drives the supply chain improvement year over year the eight million that we see in that bucket And also on the bridge, if you could talk about your assumptions for raw material costs as we think about the next two quarters, that would be helpful. The second question is mainly on working capital. Yes, there's a seasonal pickup in the cash track on the business in the first nine months, but I noticed that the receivables look much higher than what they are usually. So could you talk about your expectations for working capital improvement in the fourth quarter and how should we think about that for the full year as well. And the last one is on the ramp-up in Romania. Could you just talk about your expectations for volumes coming out of that plant for 2025 as of today, please?

Thank you. Okay. Yeah, this is Nico. So if I start from the raw material, so we've said that we see that they are moderating the prices. Of course, there is a lot of fluctuation as we speak. And as most of you know, that they are really dependent on the oil price. So there is a big correlation. Going into next year, I think the EUDR and the kind of certified natural wrapper will have an increase in the raw material prices. But at this point, we see that that's quite moderate. Then in terms of the networking capital, yeah, you are correct that there were increase there and the receivables are on the high side. Of course, much of our sales also were tilted towards the end of the quarter. So in that sense, that increased as well. And in Q4, as you know as well, that we are getting most of the accounts receivables paid in the month of December. And as Jukka said in his presentation, that net debt is at its peak as we came out from the q3 so in terms of gas flow we feel that that we we are well uh it's in good good hands also going forward then you had the question about the supply chain so you can believe

take that yeah that was the Romania factory and what do we expect in 2025 so obviously we've said that we start the commercial production in 2025 we start with the winter and all season tires we expect that the volumes are if the installed capacity at this moment is about three million and we keep on investing in equipment throughout or installing new equipment throughout 2025. We will then ramp up towards halfway, more than halfway in 2025 and then of the currently installed and then continue in 2026 with the new installations that we do during the course of 2025. and progressively step by step we ramp up so it's to give an exact number is difficult but then obviously ambitions are that as the equipment are being installed we ramp up them as they come up on stream thank you so much one quick follow-up probably i missed it could you just explain the eight million positive on the profit which that comes from the supply chain on a year on your basis

There we have quite a few positive things. One is, of course, that we've been able to lower the external warehouses that we have been heavily involved with, especially now that we have the Finnish goods warehouse in our Dayton factory as well. We see the full impact going towards the year end. I think those are the main drivers there.

Thank you.

The next question comes from Artem Beletsky from SEB. Please go ahead.

Yes, hi. First of all, I would like to wish you all the best, Jukka. Years at Nokia and tyres have been definitely pretty challenging with first COVID and then war in Ukraine, but you navigated well through these exceptional conditions and the reposition of the company. But maybe then go into a couple of questions what I had on my mind. So first one is in general, what comes to winter thai season, could you maybe provide some comments, how it actually has started, what comes to Europe and also North America. And then maybe one question relating to the guidance, which was kept unchanged. There has been some expectations that maybe it could be detailed. Could you provide some parameters what comes to, for example, Q4? What should we expect in terms of PCT volume growth? How do you see the outlook? Is, for example, Q3 a good proxy for it? And maybe some commentary in terms of price development. Thank you.

So first of all, thank you, Artem. Thank you for your kind words and so on. We obviously have been through a difficult time and demanding time for Nokian Tyres. We have repositioned and not me, it's the team. And I have to say that the resilience of the team has been remarkable given that we faced some unusual times, not only us, but many other companies having been active in Russia and facing the situation that happened in 2022. However, we are now in front of something new because things are going well and new things are happening in terms of innovation and capability and so on. But let's go to the situation of the winter tires. So obviously we see winter tire season about to start. You look outside and you see the sun is shining. However, the forecast is that things will change. We see a relatively good momentum in winter tires in Nordics. We see a good momentum in North America, especially in Canada. The U.S. is more weather-related, and you see that it's quite warm in the North American side. We had good pre-orders for the season, but, of course, the season to materialize required that all those pre-orders to materialize, we need that the weather season starts and the weather changes but when going into the season it looked quite strong in terms of pre-orders what can we expect in terms of volume development compared to q3 Perhaps you see somewhere between Q2, Q3 type of a volume development, maybe not as strong as in Q3, but nevertheless a progress in terms of where we are going. And this is in line with our ambition for 2024, when we said that with better availability, with more tires, we aim to gain market share. This is what we have been doing, and we try to continue to do that till the end of the year. Guidance is that we continue with the significant top line improvement expectation as well as significant segment operating profit improvement expectation.

All right. Excellent. Thank you, Jukka, and all the best. Thank you.

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

Yes, a couple from my side. So first, in Americas, you delivered flat year-over-year growth, which should imply that there is some fixed cost under absorption as you have increased your capacity there recently. At the same time, you had this overall positive supply chain impact in the passenger car tire EBIT bridge. I'm just wondering what explains this. You mentioned the positives, but can you explain, did you actually experience a lot of cost under absorption in North America due to this? And you could perhaps a little bit give color on the North American replacement and your expectations.

Yeah, if I start with North America. So there, yeah, it's true that our volumes are picking up in terms of the own production. At the same time, though, I need to say that, as I think we've discussed in these calls as well, that it seems that consumers are moving towards the kind of the tier three and four brands as well. So that's clearly seen in the market environment. And also kind of the pricing element that has been there is a thing that we need to be really careful, i.e. that we are able to keep the prices going forward in the North American market as well.

Having said that, you asked about the volume development and so on, but every week we see an improvement in data volume, so the latest week was the highest ever volume, so of course the progress happens, but we still have a lot of work to be done in order to make sure that the throughput gets to where we want it to be, as well as the efficiency and all that. This work is very much going on, so we have all the focus on that work. But no new investments are needed or anything like that, so it's more work on a daily basis to improve the efficiency throughput and so on. But so far, so good. Things are going forward.

thank you and then just follow up on the raw material cost so i kind of read from q2 that you expected the raw material cost to turn into headwind during the h2 however now we saw that you benefited actually from lower raw material costs at the same time you removed the cost outlook assumption so how should we read into this you mentioned that there should be modest increase into next year but How about on the underlying costs for passenger car tire especially?

For the rest of the year, I think it's quite moderate that what we see there and in terms of this year's kind of the profitability, what I'm seeing more and discussing now is the 25 and what we see there in terms of raw material. Yet, I need to say at the same time that, of course, we are hedging part of the raw material purchases, but it's fluctuating a lot at this point.

How should we think about that passenger cars are marching into Q4 now at sort of a stronger level, much stronger level year on year, but should we think that there are now some temporary benefits that won't support you in Q4?

we expect that the mix should be quite favorable in q4 and therefore the margins should be at a good level but uh obviously raw material has has a slight impact either depending really on oil prices and the shorter fluctuations but mix wise we expect that the q4 is quite beneficial to us okay that's all from my side thank you so much and all the best

The next question comes from Thomas Besson from Kepler Tuvriux. Please go ahead.

Good afternoon, it's Thomas at Kepler Tuvriux. I have three questions as well, please. Firstly, on contract manufacturing, I'd just like to clarify completely what you've said. Could you confirm exactly how much has been written down? I think it's 10, 15 million. And just tell us exactly what happened, who was supplier, when the products arrived, if some of them can be sold or not, and whether contract manufacturing is still part of the plan while your Romanian plant warms up. That's question one. Question two is a lot easier. North American volumes, can you just remind us how much of what you sell in the U.S. is built in the U.S. and how much is imported from Europe? And lastly, debt may be peaking, but it's quite high, 800 million. Can you remind us your available liquidity and your 2025 CapEx plan? Please, thank you very much. And Jukka, best wishes as well for the next part of your life.

I'll start with the liquidity. So, we have the 300 million RCF revolving credit facilities on tap. So, that is available, the 300 million euros in terms of cash available on top of what we have in the bank accounts. Then on the write-down of the inventory, so that was roughly 11 million that related directly to the inventory write-down, and that was due to the Red Sea crisis and for the summer products arriving more or less after the summer. And Jukka, you'll take the North America question.

Yeah, so the North America, it's pretty much the same mix. So we sell studded winter tires, friction tires out of Nokia to North America, so predominantly Canada, northern part of the U.S. All the rest in the market, all season, all weather, light truck, et cetera, is made in Dayton, Florida.

uh and sold in north america and there are no products made in date that come to europe yeah thank you thank you can i follow up nico with the uh 25 capex plan please can you repeat the the your final question what what is your estimated 2025 capex at this plant

Yeah, I don't think we haven't disclosed that yet, but my understanding at this moment is roughly 200 million euros. Okay.

Significantly down because essentially it's new equipment that are TVMs or type building machines and similar in Oradea. And those are the commitments that we made when we built the factory. But beyond that, the capital outlay is relatively modest.

Yes. Great. Thank you, both of you, and again, best wishes, Jukka.

Thank you, Tomas.

The next question comes from Mika Karpenen from Danske Bank. Please go ahead.

Hi, this is Mika from Danske. You saw quite a lot of summer tires during Q3 compared to typical Q3 quarters. Could you elaborate a bit the sort of inventory level development and distribution, especially in Central Europe next season in 2025?

our understanding is right now that when we look at the inventory levels whether it's about winter tires or season and so on that they are becoming normalized so obviously now just ahead of the winter season which is about to happen so the winter tire inventories are higher but otherwise they are approaching the normalization This is our understanding at this moment. Obviously, if you look at the overall demand in Europe compared to the years prior to Ukraine war or COVID, then we are still below in terms of overall demand. But inventories are normalizing.

Also in summer tires?

Also in summer tires.

Okay, good. Thank you and good luck.

Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers.

If there are no additional questions, then it's time to finish the call. Thank you all for participating and joining. And thank you, Mikko. Thank you, Jukka.

Thank you, Päivi. All the best. Thank you.

Thank you.

Bye. Bye-bye.