Nokian Tyres Plc (NKRKF) CEO Jukka Moisio On Q3 2021 Results - Earnings Call Transcript

Nokian Tyres Plc (OTCPK:NKRKF) Q3 2021 Earnings Conference Call November 2, 2021 9:00 AM ET

Company Participants

Paivi Antola - IR

Jukka Moisio - President and CEO

Teemu Kangas - CFO

Conference Call Participants

Akshat Kacker - JPMorgan

Thomas Besson - Kepler Cheuvreux

Michael Jacks - Bank of America

Gabriel Adler - Citigroup

Panu Laitinmaki - Danske Bank

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

Operator

00:02 Welcome to the Nokian Renkaat Q3 twenty twenty one Interim Report. Throughout the call, all participants will be in listen-only mode. So there's no need to mute your individual lines. Afterwards, there'll be a question-and-answer session. Just to remind you, this conference is being recorded.

00:19 Today, I am pleased to present Paivi Antola. Please go ahead with your meeting.

Paivi Antola

00:26 Good afternoon from Helsinki, and welcome to Nokian Tyres Q3 Results Conference Call. My name is Paivi Antola, and I'm 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 Kangas-Karki, 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.

01:03 So Jukka, please go ahead.

Jukka Moisio

01:05 Thank you, Paivi. Good afternoon, and welcome on behalf as well. I'll go through -- I'll start going through the prepared notes, a PowerPoint presentation and as on the cover mentioned, we had a strong volume and profit growth in the third quarter.

01:21 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 strategies that we have an ambition to become two billion euro company mid-term. Mid-term, meaning three to five years. And that will happen by growing Heavy Tyres by fifty percent from twelve month rolling basis ending June twenty twenty one, also growing in North America by hundred percent, Central Europe by fifty percent, maintaining and strengthening the number one position in Russia and also strengthening number one position in Nordics and Vianor.

02:05 Our financial key targets are twenty percent operating profit and twenty percent return on capital employed. So those are the highlights of our mid-term targets, which we announced as mentioned in the middle of September.

02:22 I go to page five, which is our Q3 highlights. Net sales at four hundred and forty three million euro, up from three hundred and fifty million euro or twenty five percent -- approximately twenty five percent 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 sixty nine million euro to ninety seven million euro in the quarter and that was driven by -- especially by increased sales volume. We also made price increases to combat inflation that led to higher ASP. We also continued prudent cost control, especially to ensure that the price -- the cost inflation is also controlled internally.

03:18 I move to page six, and I call out some key numbers in our P&L. First of all, the segment operating profit percentage is twenty one point eight percent in the quarter compared to nineteen point eight percent one year ago. Year-to-date our segment operating profit is at nineteen point seven percent in twenty twenty one versus twelve point two percent in twenty twenty.

03:46 Cash flow in the quarter minus eighty one million euro, this was 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 twenty twenty level. Also in year-to-date, we have invested in year-to-date about sixty million euro versus one hundred and nineteen million euro a year ago.

04:17 Equity ratio at the end of the quarter at sixty six percent versus fifty seven percent, and gearing at sixteen percent versus eighteen percent 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.

Teemu Kangas

04:40 Thank you, Jukka. Starting with the passenger car tires, we had strong volume growth in our market, especially in Russia, but it's visible in our numbers. The growth rate for the third quarter was close to thirty percent and in absolute terms, net sales reached the level of three hundred and thirty million euro. The segment operating profit for the passenger car tires in the third quarter was on the level of ninety seven million euro plus.

05:21 We have been increasing the additional shifts in US and in Finnish factories in order to match that growing demand. All in all, if we move to the next page where we see the breakdown of our net sales, you can see that in the third quarter, our price mix was positive about one point four percent, of which the price component was clearly above six percent. So here you can see that we have been increasing prices as anticipated.

06:10 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 full capacity, we can see that positive development in the supply chain basket.

06:47 The net we are on a level of ninety seven million euro and in this quarter currency didn't play any significant growth. In terms of net ASP, we can say that our price increases have offset negative mix impact when that share of the Russian business is growing stronger than in other markets.

07:21 If we then move to 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 thirty six percent, net sales on a level of sixty nine million euro and segment operating profit for the quarter close to twelve million euro. And the growth was driven by new product launches as we have been discussing earlier that we have a strong NPV pipeline coming and that is affecting positively to our top line and customers strong production levels are still early timing of delivery still to reach the top line. In terms of inventories, we can clearly say that those are on a low level, as also in the passenger car tire business.

08:28 And then moving to [BNR] (ph). There the performance has been on a good level in all countries, the net sales growth was on a level of four percent in reporting reported numbers in absolute terms on a level of seventy million euro and then segment operating loss was around four million euro. And as we all remember, BNR 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.

09:14 And maybe as a final comment of the of the Q3 and the second half, we clearly saw that Q3 was stronger than we anticipated, because of lack of tires, but in terms of our view on the second half, there hasn't been any significant changes as we see that today.

Jukka Moisio

09:49 Thank you, Teemu. And I continue with the presentation. So first of all, to revisit our [indiscernible] ten, which is our major launch this autumn, again, it's a four time testing in Finland, Sweden, Russia and it comes with one hundred and forty different SKUs and is really good winter tire.

10:16 On the next page, on twelve. [indiscernible] EV which is a tailored model for electric vehicles and hybrids. There are certain expectations or 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 or 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. [indiscernible] EV also comes with lower noise and that allows higher driving comfort for EVs and hybrids. And finally, what is important for the improved battery range and sustainability as well. There is also low rolling resistance in this winter tire so there is our highlight and our key product in the season.

11:19 On page thirteen just to recap that sustainability is important, thay may rooted in all what we do, including our 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. We ambition is to have fifty percent 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 twenty twenty.

11:54 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 they've made a ten year agreement to have renewables wind energy for electricity in Finnish factory and Vianor and also in June will be announced that they will start a solar power plant on top of our Finnish logistics center in Nokia.

12:30 Our guidance on page fourteen is unchanged. We expect that in comparable currencies the segment's operating profit and net sales are expected to grow significantly. I'm recapping prepared notes with our revised growth strategy, we have been ambitiously onward we end to be a two billion euro company in mid-term, and growing in heavy tires by fifty percent from rolling twelve months ending twenty one growing North America by one one hundred percent Central Europe by fifty percent and strengthening number one position in Russia and also strengthening number one position in Nordics and Vianor.

13:16 And our twelve month rolling sales at the end of June, twenty twenty one were one point fifty two billion euro and now at the end of September our twelve month rolling sales are one point six one five billion euro, which is all-time high rolling twelve month revenue of the company.

13:36 With that, I end my prepared notes and I open for questions. Paivi, Please go ahead.

Paivi Antola

13:42 Thank you, Jukka. Thank you, Teemu. And now, operator, we would be ready for the questions from the audience, please.

Question-and-Answer Session

Operator

13:48 Thank you. [Operator Instructions] And our first question comes from the line of Akshat Kacker of JP Morgan. Please go ahead, your line is open.

Akshat Kacker

14:09 Thank you. Akshat from JP Morgan. Three, from my side, please. The first one on pricing, obviously, it was a very strong quarter with six point six percent increase. I think somewhat offset by the Russian mix, but it will 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 twenty twenty one and twenty twenty two. That's the first one, please.

Teemu Kangas

14:47 So if I, if I start with them with the comment that we have made several times in our earlier calls that we anticipate to offset the cost inflation with our price increases in all markets. And we are 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 people further. And regarding the price increases in different markets. They vary, so there are no one fits all solution for different markets.

Paivi Antola

15:40 And Jukka, can you comment something about the new products and their impact on prices.

Jukka Moisio

15:45 Yes, new products are, of course, an important driver and they allow us to have new price points. And so therefore, obviously, they have a big -- major contribution too going forward and allowing us to improve the mix. And so therefore, for example, [indiscernible] in various markets, and EV verson, for example, comments a price with a price screaming versus normal offering. And we hope to continue that by launching -- part of our strategy by launching new products continuously. We’ve had a record number of new products launch in the past couple of years and we aim to continue that.

Akshat Kacker

16:24 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?

Teemu Kangas

16:50 As you stated, it has been visible in out communication already for a long time that such – the product mix has some negative headwind in terms of net ASP or the profitability development. Having said that, what we also been now working to improve 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 quarters and years to come.

Akshat Kacker

17:42 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 Q2 million level at Dayton and the five million dollars in Finland on an annual basis?

Jukka Moisio

18:03 Yes, we said it as part of our Capital Markets Day that ambition that we growth towards five million in Finland, so that's the capacity that is available and also that we've authorized the investments and steps to go all the way to four 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 the end the quarter, we are basically on track to make that progress.

Akshat Kacker

18:34 Thank you.

Operator

18:37 Thank you. Our next question comes from the line of Thomas Besson of Kepler Cheuvreux. Please go ahead, your line is open.

Kepler Cheuvreux

18:45 Thank you very much. It’s Kepler Cheuvreux from Kepler Cheuvreux. I have 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. I mean, it’s been the main driver of your revenue 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 and twenty twenty two or whether it's still early to talk about that now? That's the first question.

Jukka Moisio

19:27 Okay. So thank you for the question related to Russia. First of all, actually we ended last year, all the inventories were normalized level. And so therefore, this year the selling has been different compared to twenty twenty and driven [indiscernible] 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 -- certain product allocations by competition has not taken place, so therefore there is higher demand for tires for those suppliers as well. Operating [indiscernible] 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 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 more level in Russia.

20:40 And so, therefore, when we go into twenty twenty two, we don't see any overhang of excess inventory. And on the other hand, there's is no significant upside potential in the retail pipeline in Russia, So we see quite the normalized situation right now. Teemu, you should talk about the currencies and –

Teemu Kangas

20:59 In terms of Russian ruble, if we compare that to Q3 this year and last year, they are roughly on a same level, what is difference within the quarter was that, last year in the beginning of third quarter it started to depreciate, this year -- this quarter it has started to appreciate. So currently Russian ruble is around eighty two against euro [indiscernible] for the quarter is somewhere around eighty six, eighty seven. So now looking -- hopefully, Russian ruble stays on this level or strengthens, let’s see.

Thomas Besson

21:55 Thank you When I look at your -- at your mixed – I mean, the summer and [indiscernible] have been higher winter. The weather is still mind this year, do you expect the full year -- the full year mix to get closer to the previous year? Or do you believe that we're going to see a further revision of the winter share?

Jukka Moisio

22:23 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 [indiscernible] season share will be growing in our total mix. And in the summer, this year particularly, summer was quite strong in early part of the year and then when we go into twenty twenty two we’ll then see how this turns out. But obviously, the absolute number of winter tires is important driver for us and that will be growing. But all season is very, very strong, of course.

Thomas Besson

23:07 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 an indication, where you happy with -- notably in the Russian and North American business. And you talked about a substantial mix situation, but with the market environment normalizing, currencies improving, Russia contribution should improve as well, and I assume that the North American business is very supported by newly strong pricing environment. Is that fair?

Teemu Kangas

23:49 So as a qualitative comments. Naturally which is visible is our numbers that all business areas are improving their profit and profitability and if you look at geographical net sales development, Russian is been the main driver, of course, the impact is also very significance.

Thomas Besson

24:19 Okay. Any comment on the North American margin development?

Jukka Moisio

24:26 As I said, all business areas are developing to the right direction comparing last year.

Thomas Besson

24:32 Okay. Thank you very much.

Operator

24:36 Thank you. And our next question comes from the line of Michael Jacks at Bank of America. Please go ahead, your line is open.

Michael Jacks

24:43 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?

Jukka Moisio

24:58 It's difficult to quantify the impact, but essentially what we saw is -- qualitatively describe, what this always that certain markets there was worry with the distributors, that is, are there enough tires in the market? So they actually called in deliveries early in order to ensure that they have products for the winter season and that is the driver. Will there be any reverse? 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 have in the quarter three, but for half year we expect a similar trading as we head in -- when we went into the second half in August.

Michael Jacks

25:50 Clear. And then could you please give us a sense for what your exposure is to see freight? And what proportion of the contracts are annually negotiations?

Jukka Moisio

26:06 So, sea freights is especially important for -- as we speak, for our North American business. At the moment we ship majority of our tires to North America. So we can see that there is a headwind in the see freight. And also in our materials unit costing in general is impacted by the sea freight as well.

Michael Jacks

26:38 All right. Thanks. And the last question, Are you starting to experience any significant wage inflation in your operations? And how is this developing regionally?

Jukka Moisio

26:48 Yes. This is part of the cost inflation environment as we see [indiscernible] transportation logistics and also we see that there's 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 continues, so this is part of our expectation that -- and it's part of our price increase and cost actions that we see what we can do about this cost in place. Yes, we do see, yes.

Michael Jacks

27:28 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, 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 try to get -- 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?

Jukka Moisio

27:56 Yes, I think that -- maybe if I respond qualitatively again that we try to ensure that our price increases offset these inflationary environment impacts. And so we act on those accordingly.

Michael Jacks

28:12 All right. Thank you very much.

Operator

28:15 Thank you. Our next question comes from the line of Julia [indiscernible] of Exane. Please go ahead, your line is open.

Unidentified Analyst

28:23 Hi thanks taking my question. The first one is on mix, can you help us understand the drivers -- the components of the negative mix headwinds within the product costs and maybe regional costs and all the other, just maybe trying to understand what goes -- what was the strongest component and which one will actually reverse in the next quarter?

Teemu Kangas

28:47 As we have been discussing also the previous calls, this year, one of the biggest negative mix component is coming from the business area mix when the Russian share is increasing faster than other markets. And that then implies that 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.

Jukka Moisio

29:29 Then you saw that -- we discussed earlier in this call that obviously our product mix especially the early part of the year, big part of the summer tires and we usually have an 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 season will be higher, although the absolute of winter tires will also be higher.

Unidentified Analyst

30:03 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 [indiscernible]

Jukka Moisio

30:13 Indeed. And as we have discussed many times when we launched new products, so that allows -- so the new product in price points, but those are behind that product and repricing the other product offering so that we have a right kind of price points in various categories. And this is visible now in this year as well.

Unidentified Analyst

30:36 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 lock down or are you seeing any risk of that? And are you taking any preventive actions to potentially offset lockdown of your factoring in [indiscernible]?

Jukka Moisio

30:53 Yes. We, of course, follow the 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 mitigating actions and continue operating in a – with good efficiency. We don't expect that to change significantly, but always-always we are careful and we’ll take care of the safety of our employees all the time.

Unidentified Analyst

31:26 Thank you. Maybe just one last one on the U.S. ramp up. I mean, you reiterated the target of one million units this year. Is there any scope to do better than that?

Jukka Moisio

31:35 We basically are running towards our four million euro target and we are on track and even when we can achieve higher, so the year is not yet full, so we will see. But clearly, we are making good progress.

Unidentified Analyst

31:50 Okay. Thank you

Operator

31:54 Thank you. Our next question comes from the line of Citi, please go ahead Line is open.

Gabriel Adler

32:01 Hi. Thank you for taking my questions. I just have two, the first is on the [indiscernible] supply chain market and the bridge. Could you elaborate a little bit on what was driving the strong reversal of positive impact. And then my second question is on the guidance, you maintains [indiscernible] significant growth despite only having a few months left in the year now. Would you like to -- opportunity maybe to clarify the guidance on the call print? Thank you.

Teemu Kangas

32:33 I’ll start with the supply chain bridge. And there, it's good to remember that last year we had a significant negative impact and now this positive is the reversal of last year negative. So that's the reason. Now the factories are running a full capacity as we speak and therefore it is a positive thing for our profitability compared to last year.

Jukka Moisio

33:09 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.

Gabriel Adler

33:21 Okay. Could I maybe follow-up on the supply chain bucket point? Because I think the negative last year around nine million. So it will be interesting to understand if there's anything else within that portion of the bridge that you're including, I know you mentioned the cost reduction measures [indiscernible] granular detail and what go it between seventeen this year and the minus -- negative last year?

Jukka Moisio

33:46 The main reason that development year on year is fixed cost structure. And last year, we didn’t have impact the full fixed option because the volumes been on that long. Now we have the full fixed cost and then they are some other items, but that are not a significant as absorption difference year over year.

Gabriel Adler

34:12 Okay. Thank you very much.

Operator

34:15 Thank you. And our next question comes from the line of Panu Laitinmaki of Danske Bank. Please go ahead, yout line is open.

Panu Laitinmaki

34:22 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 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 cost and have this view changed from what you do at the time of Q2 report? Thanks.

Teemu Kangas

34:57 So if I start with cost inflation of the raw material headwind, it has gradually increased slightly faster. We are already on a high level as we have been speaking earlier. So there will be a significantly in the second half as as communicated earlier. No major change from that significance.

Jukka Moisio

35:26 Following that and talking about the expectations for the second half, when we went into the second half in August our view from that hasn't changed significantly. Obviously, we're are very happy about quarter three volumes and we will see then how the final quarter will turn out to be, but we have no change of expectations.

Panu Laitinmaki

35:49 Alright. Thank you.

Operator

35:55 Thank you. And our next comes the line of [indiscernible] of Stifel. Please go ahead, your line is open.

Unidentified Analyst

36:04 Sure. Good morning. Sorry, Good afternoon to you. Two question, I guess, I'll go over what have been raised. Regarding the raw material price increases. Is it still valid that you expect to fully offset the cost only by the first half of twenty twenty two. It will be the first question, please.

Teemu Kangas

36:33 So what we have discussing is that, on a rolling basis we will offset the cost inflation, not giving any specific timeframe.

Unidentified Analyst

36:52 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 this second half of twenty twenty one. But given the staggering volume number in the third quarter, do you in a nut shell expect a positive development on the volume side in the fourth quarter of this year? Thank you.

Jukka Moisio

37:20 So we basically at the time when we talk 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 expect -- expected strong volume development and has been – it has materialized partially Q3 due to early deliveries, but we also expected that good volume development continued in the second half of twenty twenty. But we haven't changed that expectation, the expectation as we had it in August is pretty much the same.

Unidentified Analyst

38:07 Okay. So likely positive if I understand you correctly in the fourth quarter of twenty twenty one.

Jukka Moisio

38:14 It can be interpreted that way, yes.

Unidentified Analyst

38:17 Okay. Thank you.

Operator

38:21 Thank you. We currently have no further questions in the queue. [Operator Instructions] Okay. As there are no further questions coming through, I'll hand back to our speakers for the closing comments.

Paivi Antola

38:44 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.

Jukka Moisio

38:56 Thank you, Paivi. Thank you, Teemu.

Teemu Kangas

38:56 Thank you all.