Nokian Tyres (TYRES.HE) has presented its Q1 2024 results, highlighting a steady performance with net sales and operating profit matching the previous year's figures. Despite facing production and shipping disruptions due to political strikes and the Red Sea (NYSE:SE) crisis, which had a €20-25 million impact on sales, the company maintains its guidance for significant growth in net sales and operating profit for 2024.
The earnings call also marked the announcement of the company's new zero CO2 emission tire factory in Romania and the completion of the U.S. investment phase at their Oradea factory. Nokian Tyres is gearing up to celebrate the 90th anniversary of their key innovation, the winter tire, and is committed to sustainability with a goal of 50% recycled and renewable materials in their tires by 2030.
Key Takeaways
- Nokian Tyres reported stable net sales and operating profit, maintaining previous year's levels.
- Political strikes and the Red Sea crisis impacted EBITDA by approximately €20 million.
- The company is focused on sustainability, aiming for 50% recycled and renewable raw materials by 2030.
- A new zero CO2 emission tire factory has begun production in Romania.
- Nokian Tyres expects significant growth in net sales and operating profit for 2024.
- Passenger car tire segment saw increased net sales due to higher volumes and lower costs.
- Heavy tires segment was affected by a weak market, but above-market growth is anticipated.
- The company aims to reach €2 billion in net sales through increased market penetration and capacity.
Company Outlook
- Nokian Tyres is optimistic about the second half of the year, expecting improved performance.
- They plan to increase market penetration and introduce new products, targeting growth to start in 2026.
- The company is evaluating potential ownership changes for their Spanish Test Center.
Bearish Highlights
- Strikes led to production and shipping challenges, resulting in a €20-25 million sales impact.
- The heavy tires segment is currently experiencing market weakness.
Bullish Highlights
- The company has launched a zero CO2 emission tire factory, aligning with their sustainability goals.
- Growth in the passenger car tire segment was driven by higher volumes and lower costs.
- Nokian Tyres has a strong distribution network in the Nordics.
Misses
- Some product shipments to Europe were delayed, but the company believes this is a temporary setback.
- Low raw material inventory and high finished goods inventory due to inability to ship products for four weeks.
Q&A highlights
- The company addressed the EU cartel investigation, inflation and cost impacts, and pricing assumptions.
- They discussed improvements in activity levels expected in Q2 and the potential shift of some sales to other quarters.
- Nokian Tyres is seeking subsidies from the Romanian government to reduce capital expenditures, which are expected to be around €350 million.
Nokian Tyres remained focused on their growth strategy and operational efficiency during the earnings call. The company's commitment to sustainability and innovation, along with their strategic moves in production and market penetration, set the stage for their targeted growth despite current market challenges. With their eyes set on a €2 billion revenue goal and significant developments in their production capabilities, Nokian Tyres is steering towards a future that upholds their legacy in tire innovation while adapting to the evolving demands of the global market.
Full transcript - None (NKRKF) Q1 2024:
Paivi Antola: Good afternoon from Helsinki and welcome to Nokian Tires' Q1 2024 Results Conference Call. My name is Paivi Antola, I am heading the Investor Relations in Nokian Tires. And in the call, I have the President and CEO, Jukka Moisio, and Niko Haavisto, the CFO of Nokian Tires. As usual, we will go through the results and talk about some other topicals as well. Romania, for example, of course will be covered in the presentation and other highlights that will be coming through the year. And next, then, of course, we have our Q&A call. But let's start with the prepared notes. And Jukka, please start.
Jukka Moisio: Thank you, Paivi. And welcome on my behalf and I’ll go through the prepared notes and presentation which is heading the [indiscernible] Nokian Tires contract in a challenging environment. And I'll move to Page 2, some of the important milestones we aim to achieve in 2024. Of course, our key innovation winter tire, we’ll celebrate its 90th anniversary this year. Our new and world's first zero CO2 emission tire factory in Romania will start production; I'll talk more about that later. U.S. investment phase in Oradea factory will be completed and the factory will be fully invested to achieve its targets. And we keep on launching new innovative products because the rebuilding of Nokian Tyres building the company is based on organic growth; so it requires and we want to introduce and sell our innovative, successful and competitive products, and then build the production capability behind those products. So, therefore innovation in products are key element in achieving the new Nokian Tyres. I move to Page 3; and this is a highlight and update of the Romanian factory. It's on the picture; on the left hand side, you'll see the new mixing building which is very much in progress and the equipment installations will begin in the end of April. In the middle, you will see the production building; so finishing work is continuing and equipment installations are progressing as we speak. And on the right hand side, you'll see finished goods warehouse, where we are paving the loading docks and outdoor area. But very much on-track and the recruitments of the team are progressing, and in fact, we have the launch team in training in Nokian as we speak, and they will be returning to Romania for the summer and be prepared for the manufacturing start. First tires will be produced in the second half of 2024. And as mentioned, according to our schedule, the commercial production will start in 2025. And we are on-time and we are on-budget or maybe even below budget. On Page 4, we take steps -- we've taken steps forward in sustainability. Some of the examples of achievement in the first quarter; factory -- CO2 emission factory, first zero CO2 emission tire factory is ongoing. We had a minor score from carbon disclosure project or actions aiming at reducing the greenhouse gas emissions. We also made a long-term purchase agreement and commitment for recovered carbon black with the tire recycling joint venture. This is one-step on our way to ensure that by 2030 we have 50% -- at least 50% of recycled and renewable raw materials in our tires. And we also published our sustainability report for 2023. I move -- turn to Page 5, and we start with the financial part; net sales and operating profit at previous year level. Net sales at €236 million and last year also €236 million. Segments EBITDA in the first quarter at €12.5 million, and last year €11.2 million. We of course, had an impact of the political strikes in Finland, as well as the Red Sea crisis, approximately the amount to €20 million at the EBITDA level; more than half of this is in the first quarter. Segments operating profit, minus €15.1 million in the quarter and last year, minus €14 million. If we look at the top line number without the impact of -- or neutralizing the impact of the political strikes, as well as the Red Sea crisis, we would have been in the range of €260 million in net sales, and approximately 9% to 10% of EBITDA, which would have been about doubling our €12.5 million EBITDA in the quarter. These impacts of political strikes and Red Sea crisis consists of loss of revenue, this is of course timing issue that some of the products that were on the ship on the way to Europe, for offtake did not land on time. However, we believe that the we will, and we can sell the products in the coming months and quarters. We have done lack of production in Nokian in passenger car tires, about 20 days, and heavy tires about five days; heavy tires is fully in the Q1, passenger car production about nine days, or 30 days or three weeks is in the second quarter. With the strikes, we needed to stop the production due to fact that we couldn't ship any products from Finland, and we had all our warehouses full and consequently, we couldn’t keep on producing any more. In addition, we add these extra costs which are related to warehouse, logistics and similar things; re-routing and there is other topics. But all in all, as said, impact for the company in the first half is more than €20 million -- is about €20 million, more than half of that in quarter one in the EBITDA. I move to Page 6; still we have a strong balance sheet. Despite the lower than expected profitability in the quarter we have a strong balance sheet; 58% of equity ratio, with gearing at 30%, net interest-bearing independent debt at €395 million, capital expenditure, we kept on investing in Romania, as to have a finalizing date [ph] then about €70 million, net cash flow from operating activities minus €87 million. And then, I will hand over to Niko to talk about the segments and other topics. Please, Niko -- please go ahead.
Niko Haavisto: Yes. Thank you, Jukka. I will go through the segment numbers a little bit more in detail and I am in Page 7. So, in the passenger car tire segment, our net sales increased due to the higher volumes and that, of course, was driven by increased product availability. Our average sales prices compared to -- compared with the comparable currencies were at the previous year level. And profitability improved driven by higher volumes and lower costs. Net sales being €143 million compared to €133.3 million in last year same quarter. And then on the operating profit level, at the segment we were at the level of minus €2.8 million compared to €4.6 million last year same quarter. On Page 8, there is a bridge on the passenger car tire segment. And there you see on top, one of the sales breakdown. So the volume up by close to 10%. At the same time, we were able to keep the price and mix at that previous year's level, more or less. And then we had little bit negative headwind from the currency; all in all landed at €143 million. In terms of operating profit, there we see -- especially the material costs were coming down, so we were there gaining some €8 million. But at the same time, the supply chain with the increased logistic costs, warehousing and freight, especially, hit us by €11 million in this segment. Final slide, on the passenger car tire segment. So there you see the volume changes by quarter; so still coming out from fairly okay Q4 into Q1, plus 10% price mix, that was kind of a flat but I think that is a good achievement in the market, and still getting a little bit headwind from the currencies but not so much derail [ph] as it was during most of the last year. On Page 10, with the heavy tires; their weak market is affecting us in terms of sales and profitability. And there especially we see in the weak -- in the Nordics, and also, on the road, heavy tires products that we are having some difficulties; we lost most likely during H1 this year. The net sales is €55 million compared to last year’s €68 million. And then on the operating profit level, we were at the level of close to 12% with the actual numbers of €6.3 million compared to €9.6 million last year. And then, on the Vianor side, there we landed pretty much on the level of last year. In terms of sales, operating profit was minus €16 million compared to minus €13 million. And as last year, and of course, this is a seasonality thing but of course, the inflation is hurting us in this business, and we need to understand better going forward how to put that into our earnings as such. Then, I have the guidance slide -- so Slide 13. And we have kept our guidance unchanged, and we say that this year 2024, our net sales with comparable currencies and segments operating profit are expected to grow significantly compared to that of last year. And by significant, we mean at least double digit growth, and we will be more precise what we mean with that when we go more into year. And with that I hand it back to Jukka.
Jukka Moisio: Thank you, Niko. Just to wrap up the presentation. As we said that the rebuild of new Nokian Tyres is very much focused on the new products; so we have a very good products, and then, Oradea factory goes on-stream, and that will be based on completely new products that are in the pipeline and will be introduced during the course of the remainder of the year. So then we start operations, we have highly competitive products, but also the portfolio right now as you see keeps on evolving continuously. And the rebuild of the company is based on organic growth; so in the heart of that is a good portfolio of new products. I move to Page 15 to wrap up the presentation. Again, we come back to the Capital Markets Day presentation of 2023; then we have the investment phase, and then we have the growth phase. And we see roughly where we are at this point of time in the investment phase, and those activities consist of capacity increase in Finland, we are done. U.S. factory completion about to be done right now. And new capital in Romania; we will be making the first tires in the second half of this year, and we’ll start commercial production in early 2025. And then growing contract manufacturing, which is very much ongoing. So most of the growth in the continental Central Europe is based on contract manufacturing of the products. As we mentioned, unfortunately some of those were in the ship when they were supposed to be landing in Europe. However, we believe that this is only temporary based on Q1 dislocation [ph], but we will be able to sell those products later on. Growth phase, then starting in 2026; increasing market penetration which is built on new products, increased capacity and enhanced operational capabilities. And that way we would be on our way towards €2 billion from passenger car buyers point of view. In heavy tires we expect that despite the weakness of the heavy tires markets, whether it's Nordics or whether it is these Nordic OEM, Finnish OEM; in this particular quarter we will continue to be above market level growth. And in the Vianor, we continue to have the distribution excellence in the Nordics. In combination that will allow us to move towards €2 billion. And with that, I end the presentation of today’s notes and hand over back to Paivi for Q&A. Paivi, please go ahead.
Paivi Antola: Thank you, Jukka. Thank you, Niko. And now we are ready for the questions from the audience, please.
Operator: [Operator Instructions] The next question comes from Michael Jacks from Bank of America (NYSE:BAC). Please go ahead.
Michael Jacks: Hi, good afternoon, Jukka and Niko. Thank you for the presentation. Few short questions from me, please. Firstly, what was the volume contribution from contract manufacturing in Q1? And where do you stand now from a run rate perspective? Secondly, can you just give us a little bit more color on the split between price and mix? I understand that the net amount was negligible in Q1, but just wondering if there was a few moving parts to that between price and mix contributions. And maybe attached to that, where to from here on pricing and mix for the coming quarters? Thank you.
Jukka Moisio: Alright. So the first question is that what's the contribution of the offtake [ph] volumes in the first quarter? It's roughly about 1/3 of the total volume in PCT.
Niko Haavisto: And in terms of price and mix associates, we are fairly okay with what we saw in the Q1. Most likely, we will lose little bit going forward now in this summer season, but then gradually picking up in the end of the -- towards the H2. So, fairly okay situation there.
Michael Jacks: Okay, thank you. And if I could just slip in one follow-up. Just on heavy tires; are there any signs of improvement in activity levels going into Q2?
Jukka Moisio: We -- of course, the OEM, especially in Finland, the OEM was impacted by the political strikes because -- like us, they were not able to ship their product. However, of course, you can think about the [indiscernible] equipment segment, for example, which is an important one for us, you will see that the bulk price, that some goods prices and so on are going up; so obviously, there'll be more activity and more interest in that particular segment and that combined with the expected lower interest rates. So, we think that there is clearly a positive opportunity going forward. In the aftermarket, we would expect that aftermarket will also be stronger this year because the pipeline is relatively empty now compared to prior years. So therefore, there are positive developments expected. So especially in the second half, we can see much stronger performance.
Michael Jacks: Very clear. Thank you.
Operator: The next question comes from Sameer [ph] from Nordea Markets. Please go ahead.
Unidentified Analyst: Hello, and thank you for taking my question. In two parts, I could start, first of all, about the effects of the Red Sea and the Finnish strikes. You stated that it had the effect of €20 million on the EBITDA but cannot disclose how much was it on sales and to what extent the sales could be shifted to another quarter?
Jukka Moisio: You say that the sales dislocation was about…
Niko Haavisto: €20 million to €25 million level.
Jukka Moisio: And for most part that can be kicked forward [ph] but obviously, the loss of production where we actually lost the volumes with the downtime, that is difficult to catch back.
Unidentified Analyst: All right, thank you. And then how about your guidance for this year going forward, given that there was some limited growth in Q1? So, I would presume that the shift sales probably aren't the game changer. So, will you be protecting most of the growth [indiscernible] to the second half of this year or how would you see?
Jukka Moisio: Yes, that's how we see. It is the seasonality business in that meaning; so it's more towards the H2 of the year that we see the growth. And just to add, remember that political strikes continued until 8th or 9th of April, and we actually did not produce in PCT in the early days of April. And we were not able to ship until the April 9th. So obviously, if you look at the quarter, unfortunately there are limited number of days in the quarter, and so 10% of the days were lost in the beginning of the quarter in 90 days, and 9 out of those were lost out of the gate, unfortunately. But we believe that the strong momentum building is starting there.
Unidentified Analyst: Okay. Thank you for the clarification.
Operator: The next question comes from Miika Ihamäki from DNB Markets. Please go ahead.
Miika Ihamäki: Thanks for taking my question. It's Miika from DNB. In passenger car tires, still on the mix, just slightly down where you reported some flat average sales price at comparable currencies. However, at the same time business to Europe increased significantly. And then, you mentioned that you had quite a bit share of offtake in the mix. So, could you still open up on the mix performance? And how do you see this development -- developing forward? What are the drivers?
Jukka Moisio: Yes, the mix was mostly what we were losing actually, the summer tires, and as such we were able to secure winter tires and early volumes for those, and we were able to secure good volume on all-season tires. And we were also able to secure good availability in the Nordics; so that -- in combination, that helped us to have a good price mix. And of course, the North American sales were very much on the pre-orders and so on into -- also, partially into the winter. But also we start to see already also that the mixing is improving so that there is more LT and such [ph], that helps the price mix.
Miika Ihamäki: Okay. So you see that that mix should hold up fairly well going forward towards the end of the year?
Jukka Moisio: The mix is very much to our liking, so that we actually have been achieved a good mix; that's what we wanted to deliver. But clearly, more winter tires were coming into second half and into the winter season. So we are quite positive about how the mix looks going into the second half.
Miika Ihamäki: Okay. Then, just one if I may. Just on the offtake, so can you please open up in a rough ballpark that what's the margin profile? Is it closer to 10, closer to five, just to get an idea.
Jukka Moisio: We have always said that the offtake for us is an important way to stay relevant in the market, and also obviously make money. So one thing is that we have the right kind of a selection of winter or season and summer for the Central -- mostly on Central European markets. And we will not ship them, so that we lose money; so all of them are expected to make money. Some of the off-season make more money, some of these is relatively modest in terms of profitability and being very strongly in profitability. But we haven't opened up the offtake and we will not do it here either.
Miika Ihamäki: Okay. Thanks very much.
Operator: The next question comes from Cornyn [ph] from Reuters. Please go ahead.
Unidentified Analyst: Hi. Hello, can you hear me?
Jukka Moisio: Yes, we can. Go ahead.
Unidentified Analyst: Okay, thank you. Thank you for the presentation. I wanted to ask if you could provide any updates on the EU cartel investigation. Has Nokian Tyres been involved in any cartel like activities that would justify the investigation for your part? Thank you.
Paivi Antola: Thank you. We -- well, first of all we are fully cooperating with the authorities in this investigation. But as this is an ongoing investigation, we cannot comment on it more than that.
Unidentified Analyst: Okay. Thank you.
Operator: The next question comes from Akshat [ph] from JPMorgan (NYSE:JPM). Please go ahead.
Unidentified Analyst: Thank you for taking my question. Hi Jukka. Hi Niko. Three questions from my side, please. The first one on inflation and the different cost buckets [ph]. Could you just help us understand the puts and takes in terms of the impact on the P&L on a full year basis? If it's possible to quantify your assumptions for raw material tailwinds and how much of that is offset by labor, trade or supply chain challenges that you see on the course of the full year 2024? The second question is on pricing. Just in terms of pricing alone, in terms of your different geographies, could you talk about your assumptions for the rest of the year? That would be very helpful. And the last one is on your assumptions for working capital and CapEx. Could you just confirm if you still expect working capitalist tailwinds in 2024? And the CapEx amount net of the subsidiaries that you expect in Romania? Thank you so much.
Niko Haavisto: Yes. I’ll take the first one and [indiscernible] in inflation, and of course, we are getting some help from -- as you saw in the presentation, from the raw material prices. So, there have been decreasing as such and we see that now they are more stabilizing on that level. Of course, we have some of our agreements are based, so especially in the heavy tire that the buyer gets bought with those savings as well. In terms of labor, I think we disclosed that at some point as well, we are talking about roughly 5% increase, all in all within all our shared tropical [ph] sections, that we see increasing in the labor. And of course, we are trying to have that either through efficiencies or with the pricings embedded into the -- our sales as such. Then Jukka, if you can take the second one [ph].
Jukka Moisio: So, you asked about the pricing. So, obviously the pricing environment is relatively flat because the raw materials are given with the detailing but the inflation with money environment is there. So, we will follow the market-based pricing, so that’s depending on the product and innovation and the novelty value of the product, we will follow the market base. In terms of working capital, obviously, we were in Finland, which is our main factory; we were four weeks without being able to ship any products. We produced as much as we could and everything or the inventories and warehouses are full; so new products or let's say finished goods -- while we exhausted most of our raw material inventory, so we are low on raw material, we are high on the finished goods. And then, we stopped the production because there was no ability to put any products anywhere. So, this is what happened to the political strikes; so this is the situation. And in terms of capital CapEx, we’re expecting the range of €350 million, and this is across the year subsidies. And for subsidy registrations [ph], when it comes and then it helps us we will report that. But obviously, you will remember that we are seeking to have up to €99 million of European Commission approved subsidies to be made paid by Romanian government for our investment in Romania. If that happens, then we talk about the investment level which is then clearly below €350 million. But it's too early to report that until we have the decision. Thank you.
Unidentified Analyst: Understood. Thank you.
Operator: [Operator Instructions] The next question comes from Rauli Juva from Inderes. Please go ahead.
Rauli Juva: Yes, hi. Rauli from Inderes, one question from me. You mentioned in the report that you are evaluating the ownership of the Spanish Test Center. I guess that means partial or full divestment of that. So can you elaborate a bit on that, what was the reason for that potential timetable for this?
Niko Haavisto: Yes, you are correct. We had that text there in the report. So we are looking at a possibility to have ownership changes there. And of course, we continue to test our -- or guarantee us a spot there to continue our testing at that track. But we are trying to find the owner who could develop that area, and have even more potential out of it while guaranteeing all this capacity at the same time. So it's part of this balance sheet monetization counter-program [ph] that we've been discussing during the last past half a year.
Rauli Juva: Okay, thanks. Any comment on the potential timetable or something happened?
Niko Haavisto: So of course, it's difficult to say but hopefully we have something there to tell you during this year still.
Rauli Juva: Okay. Very good. That’s all for me. Thanks.
Operator: There are no more questions at this time. So, I hand the conference back to the speakers.
Paivi Antola: Thank you. If there are no additional questions, then it's time to finish the call. Tomorrow is of course an important day, we have the Annual General Meeting; so it's going to be nice to meet shareholders face to face. But for you on the line, thank you for joining the call and have a good day. Thank you.
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