NKRKF - Nokian Renkaat Oyj (NKRKF) Q3 2023 Earnings Call Transcript
2023-10-31 13:21:06 ET
Nokian Renkaat Oyj (NKRKF)
Q3 2023 Results Conference Call
October 31, 2023 09:00 AM ET
Company Participants
Paivi Antola - Investor Relations
Jukka Moisio - President and CEO
Niko Haavisto - CFO
Adrian Kaczmarczyk - Senior Vice President of Supply Operations
Conference Call Participants
Giulio Pescatore - BNP Paribas
Christoph Laskawi - Deutsche Bank
Miika Ihamaki - DNB Markets
Rauli Juva - Inderes
Mika Karppinen - Danske Bank
Artem Beletski - SEB
Presentation
Operator
Hello, and welcome to the Nokian Tyres Third Quarter 2023 Conference Call. Please note this conference is being recorded and for the duration of call, your lines will be on listen-only [Operator Instructions]. I will now hand you over to your host, Paivi Antola, to begin today's conference. Thank you.
Paivi Antola
Good afternoon from Helsinki and welcome to Nokian Tyres Q3 '23 results conference call. My name is Paivi Antola. I am from Nokian Tyres Investor Relations. And together with me in this call, I have Jukka Moisio, the President and CEO of the company. And Niko Haavisto, Nokian Tyres's CFO, who joined the company in the beginning of October. So welcome to Nokian Tyres, Niko.
Niko Haavisto
Thank you, Paivi. Pleased to be here.
Paivi Antola
And we also have Adrian Kaczmarczyk, Senior Vice President of Supply Operations, who will give an update on how the expansion of Nokian Tyres Manufacturing footprint and rebuilding capacity is proceeding. And that is the topic we will be starting this call with, so Adrian, welcome. And please go ahead.
Adrian Kaczmarczyk
Thank you, Paivi. Welcome to our call today. Good morning, good afternoon to everybody. It's a babysit. My name is Adrian Kaczmarczyk, and I will be talking about the expansion and the rebuilding of the Nokian Tyres capacity, and the progress as such. When we start with the Arabia project, we have basically started the project, the Romanian factory project in May. This year was a great groundbreaking event. And since then, the progress has been quite substantial. So we have really completed the site cleaning and the site preparation work, and the main utility building and the main production building has progressed according to plan. So we are currently -- and you will see it also on some pictures later, well into, 85% of the completion rate at this point of time. And as we speak now, the contractors are really continuing also with the fit out of the building inside, pouring concrete and doing all the preparation where needed to start the machine installation as planned beginning or early 2024. So the main equipment, obviously, is now being built and everything has been ordered. And as said, we are planning to start the installation of our first equipment in the first quarter next year. The recruitment process has started. We kicked off the recruiting process, which basically will ramp-up in the fourth quarter and reach its peak in the first half of next year when then we plan and target to produce our first tire in the second half. And then during the second half of next year, we will commercialize and qualify all needed production and products to be ready to start producing and commercializing our production in beginning of 2025. In addition, obviously, we also applied for investment subsidy of €99.5 million, which basically has been financed through the Romanian government and it’s currently under review and under investigation by the EU Commission.
On the next slide, you will see the pictures on the left hand side. The production building set, which is almost 80% finished. You see on the right hand side how it looks like inside. And obviously, first aid and also roofing has been almost concluded and completed. So overall, I have to say that despite all those challenges those projects bring along we have been able to maintain our very tight timeline up till now. Next, please. On the overall capacity, looking past capacity, I can only say that we have been successfully concluded our capacity expansion in Nokia Finland for our passenger car tire production and we are currently finalizing the installation in our Dayton, Tennessee facility, and currently commissioning the equipments so installations are finalizing as we speak. And the ramp-up of the equipment is planned in parallel with the new product introductions we are currently doing in the first half of next year. And then Dayton will operate at a full capacity in the second half of 2024 where we will then finally conclude the expansion and have also our full product portfolio ready for the North American market. On the contract manufacturing side, we have been able to secure approximately 1.5 million of tires for mainly the Central European market and they are split between two families, mainly winter and all season and will be followed by summer products beginning next year. If you look at our footprint and this is the final stage as it will look like. As you can see, we will continue with contract manufacturing as part of our portfolio, so we call it virtual factory. But we will operate three factories, Dayton and Tennessee, US. As I said, finalizing the expansion in the first half next year with the complete portfolio being available for the North American market. Nokia, Finland currently operating at its capacity and Romania, Oradea new factory [well] in schedule to be ready to produce first tire in the second half of 2024.
And with that, I will thank you, and we will hand over back to Paivi.
Paivi Antola
Thank you, Adrian. And for the audience, Adrian will be on the line the whole call, so he will be available for your questions at the end of this call. But then we will continue to the actual results. So Jukka, please go ahead.
Jukka Moisio
Thank you, Paivi. And welcome on my behalf as well and thank you, Adrian, to take us through the capacity development stages. One year ago, pretty much we signed the agreement to divest our Russian factory to Tatneft and also about 12 year ago we announced our decision to invest in Oradea. So quite a milestone one year ago and we have come a long way, and we are actually closer to starting the factory in Oradea and actually, it’s a longer time from the [decision]. So we are more than halfway on our way to rebuilding Nokian Tyres. We started it about 19 million tires in 2021 when Russia was at full speed and then in '22, we had eventful year, war in Ukraine and then various steps and we are heading towards 15 million-plus capacity, even investments have been complete plus the virtual factory between 1 million and 3 million. So all-in-all that rebuild journey is continuing and step-by-step we will achieve our milestones. But let's move to quarter three and this now comparable numbers. So this means that Russia activity has been classified as discontinued operations, and so therefore, like-for-like is the comparison.
Profitability improved. Net sales were €276 million versus €333 million in '22 and this is a decline of 12.7% in comparable currencies. We had a demand in market environment and inventories and the distribution were on a high level. And of course, our main product offering for 2023 was really winter tires. Obviously, we had a certain number of tires from off take and so on but mostly, we had a own manufactured winter tires. €15 million negative impact from currencies. Market share gains, we have seen market share gains in premium winter tires and this is based on the feedback from our customers. Our segment EBITDA at €46 million versus €7.4 million last year. This means margin of 16.7% versus 2.2% of segment’s net sales compared to 2022. So here improvement in margin and in absolute EBITDA. Segment operating profit at the €90.6 million versus minus €17.9 a year ago. Again, there is a clear movement and that's driven by passenger car tires. We also announced last week that the second dividend installment of €0.20 per share will be paid in December.
I move to Page 7. And just to reflect that we have some balance sheet, I call out, some key numbers in the balance sheet. First of all, let's start with the capital expenditure. In the quarter, we spent about €70 million, 9.5 versus about €27 million a year ago. Year-to-date, our capital expenditure is in the range of €157 million. And last year, '22, we spent about €60 million in capital expenditure. To have a forward looking assessment of the capital expenditure this year, we expect that we land somewhere in the range €250 million for the full year. So about €100 million more in the final quarter. Segment's EPS earnings per share was €0.09 in the quarter versus €0.25 a year ago. This €0.25 include the discontinued operations of Russia. In the nine months, our segment's EBITDA was 12.2% and that's improvement over 9.3% a year ago. Also in absolute euros, the EBITDA improved. The segment's operating profit at €12.7 million in the first nine months versus €17.6 million a year ago. And as you see, almost all of the segment’s operating profit in the first nine months were delivered in the third quarter. Our equity ratio remains good 60.1%, gearing is 28.2% and it’s parent net debt at the end of September was €386 million. And as you remember, our cash flow profile is such that we collect a significant cash inflow in the final quarter.
And with that, I hand over to Niko, our new CFO, and Niko come and from my behalf. And please, it's all yours for the first quarterly results.
Niko Haavisto
Thank you, Jukka. I will go through the Q3 segment numbers a little bit more in detail. I am on Page 8 now. And as you noticed in the release that we do have lower sales compared to last year, some minus 16.6% in comparable currencies but our margins are on a good level and the ASP with comparable currencies increased slightly. You have also [noted] when we released last week the profit [warning] guidance that we said there that the inventories at the distribution are on the high level. So that's what we are facing. But on the other hand, we see a clear profitability improvement and our margins are also supported by lower costs. On this page, I would like to point out the segment operating profit of to €19 million and at the level of 11.1%. But if you move to next page, Page 9, there is the PCT bridge, which you can see that starting from Q3 last year, roughly €40 million was lower of the volumes. Price mix, we gained a €4 million and that -- those two elements, we were at the level of €180 million in terms of sales. But we also had the negative effect from the currencies of some €10 million. And with that, we landed with the segment’s sales of €170 million. Operating profit bridge there for the PCT Q3 we -- started from the low minus €18 million level. They are the same elements by the sales volume, of course, hitting at price mix, we got the gain there and the material prices are in our favor as well. And then there was this big element of supply chain of €40 million and then the sales and general [admin] there will also save some €6 million. That comes excluding the FX at the level of €21 million as an operating profit. And then when you deduct the negative FX or currency impact there, we land at €19 million at the PCT segment.
On Page 10, you can see that kind of the trends we were in Q1 minus 63% in terms of volumes, then Q2 minus 30% and now we are at the level of minus 18%. Price mix, there as said, we had both in Q1 and Q2, i.e, H1 this year, good development. Now that development is more or their favorable development is more or less kind of as seen. So we were having some 1.7% it’s there in terms of net sales gain. And then the currency in that right hand column, you see that in all quarters that has been negative for the PCT segment. Then briefly Page 11. Heavy tires, there we see that the net sales decreased mainly due to [stock] aftermarket and also see the same emerging that the inventory levels in the aftermarket distribution are on the high side. Operating profit was lower due to the fact that the volumes were a bit down as well as the currency in this segment as well. And then during the summer, we had the temporary adoption to our production, which reflected the lower demand in this segment. But also there if you look at the segment’s operating profit percentage, 12.1%, was the number for Q3 '23. Page 12, Vianor there clearly see also the headwind from the currencies from some 4.2% negative and of course this Q3 is seasonally a low quarter for us. And therefore, for the sales and in terms of operating profit, they were lower than previous year and then the coming quarter as well. And then last was the guidance that we updated a week ago. I am on 24 that night and we were saying that we expect net sales to -- segment’s net sales between €1.15 billion to €1.2 billion and operating profit between 5.5% to 6% approximately of the net sales.
And with that, I hand over back to you for the final conclusion.
Jukka Moisio
Thank you, Niko, and thank you for taking us through the financial summary. So keep on building the new Nokian Tyres. We have the long term targets where we want to go back to €2 billion in net sales and achieve segment operating profit at 15% and also have the balance sheet leverage at net debt-to-EBITDA between 1 and 2, and underlying there is the EBITDA target that our segment's EBITDA long term will be in the range of 23% to 25%. And you remember that in the third quarter we had 16.7% and had a sequential improvement in 2023 until third quarter, and we expect also similar sequential improvement in the fourth quarter compared to third quarter in EBITDA margin. We have five cornerstones: safe tires, responsible and effective supply chain, consumer trusted premium brand, leader in sustainability, we make good progress in sustainability. I will come back later to that one, and Nokian Tyres team. Obviously, lots of things have happened since the announcement of the divestment of a Russian factory to Tatneft. Final conclusion of the deal in March this year and then continued building of new Nokian Tyres and especially investing for Oradea and many other things happening simultaneously. So this is Nokian Tyres in summary. This is the quarter three and the building of the company continues. Over to you Paivi.
Paivi Antola
Thank you, Jukka. Thank you, Niko. And now, operator, we would be ready for the questions from the audience, please.
Question-And-Answer Session
Operator
Thank you [Operator Instructions]. Our first question comes from the line of Giulio Pescatore from BNP Paribas. Please go ahead.
Giulio Pescatore
Thanks for taking my question, and thanks for sharing the update on the construction of the Romania plant. Can you just remind us on that of how much of the €650 million you target to spend that you already spent this year? And of the phasing in the coming years, if there has been any update on that? Then the second one on the winter tire. You said the inventories are still elevated. Is that still the case today or that was more the situation in Q3? And maybe a more high-level question on this. Are you seeing customers moving away from winter tyres, because this is the third winter season that is described as being weak by pretty much all players. So is there any structural changes especially in central Europe that you're aware of? And what actions are you taking to make sure that the market continues to grow for you? And then the last question on the raw material cost that turned into a tailwind. Any impact on pricing, are you seeing any of your peers starting to give back of some of the pricing that was taken in the last few years that raw material cost become a tailwind? Thank you.
Paivi Antola
If we start with the CapEx question that goes to Adrian and then maybe Jukka continues.
Adrian Kaczmarczyk
The project basically is phased over the next year. So we started last year in ‘22 with down payments of around €50 million and some preparation work. We expect to spend €100 million to €120 million in ‘23, reaching its peak in ‘24 around €300 million and then coming down around €200 million, €180 million in 2025.
Jukka Moisio
And then to support -- to expect the subsidy of about $100 million to help our investment decision and investment process. So winter tires inventories, yes, we saw the inventories in the third quarter and obviously, the sellout is something that is expected to happen right now in the Nordic countries. The sellout is happening as we speak, because the winter has come and it's getting cold and it's getting snowy and icy. And so therefore we see that the sellout happening as we speak. And we -- based on our Vianor chain, we see relatively good sellout in the winter tires. Then in Canada, North America still -- winter is coming right now, so the sellout is about to happen in the coming weeks and in the month of November. And there we see that the inventory reductions will happen when the sellout takes place. But in Central Europe, Eastern Europe, Central Europe winter is yet to come. So the inventories at this point of time are relatively full but then obviously we expect that the step by step that happens. You asked that whether are people moving away from winter tires. I think that in the geographies where you clearly have icy and snowy conditions, you don't see that happening. Of course, you have the selection that people may take instead of study winter tires, they take friction tires or all bigger tires if you go to North America. While of course in some of the central European markets, it's clear that the all season taking market share from winter tires as well as from summer tires and then they're being used throughout the year in the cars. Most of the new cars come with the summer tires and so on. In North America, new cars are coming fitted with -- a lot of them are coming with all season tires. So clearly see that all season is a winning concept in the North American markets. But in the areas where you have a clear winter like Canada, Northern parts of the US, you clearly have winter tire requirements. And so structural change is stepwise happening with the all season and therefore, of course, it's important for us that we have all season product offering, and this is going to be one important element of our product portfolio. Unfortunately, this year, because of the loss of Russian factory, we just did not have very good selection of all-season tires. So therefore, they're highly dependent on the winter this year. But obviously, in '24, '25 the off take in new factory and new capability, we will have a much better product selection. And raw material, yes, we see a tailwind in raw material. No, we don't see price point changes yet. We see, of course, that there may be promotions here and there and so on. But across the board price changes, we don't see at this point of time.
Operator
Our next question comes from the line of Christoph Laskawi from Deutsche Bank.
Christoph Laskawi
A bit of a follow-up to Giulio’s question, just on the heavy tire aftermarket inventory. Could you comment on when you see that easing a bit as well? And then second look of questions would be on the ramp-up of volumes into Q4 and '24. Could you just comment again on how the contract manufacturing is ramping up? And in case there would be elevated dealer inventory still towards '24 mid-24, how flexible are those contract manufacturing volumes, do you have fixed volume contracts and expect to sell anything that you get anyways, or would it be flexible in terms of volatility in the market?
Jukka Moisio
So I'll take the heavy tires and Adrian will talk about the contract manufacturing. So heavy tires [in BP] saw a significantly high inventories in the early part of the year. And clearly, the deliveries to distribution were on a low level, while at the same time in the early part of the year, we had early good demand of OE. And so therefore, what we did over the summer is that we extended shut in our factory in Nokian and that they managed our own inventories down. And then also the aftermarket inventories and heavy tires started to come down in the first half of the year. And now when we go into second half, we can run quite hard in our manufacturing, because the inventories and the demand in inventories are lower and the aftermarket deliveries are better. At the same time, of course, because of the higher interest rate and situations in the economy, a number of OE customers when they purchase expensive equipment are considering that whether they purchase or not. And so therefore, the OE demand is getting softer and perhaps into '24, we need to wait and see how that full year will develop but clearly, the high interest rates have an impact. But overall, on balance, we see relatively good run rate for heavy ties in the final quarter and that our inventories are well under control, and it's driven by aftermarket and be relatively flat in the OE. But over to you, Adrian, in terms of off take.
Adrian Kaczmarczyk
Yes, on the off take side, as also shown on the virtual factory, we have purposely built sufficient flexibility in the contracts, which allow us to respond to market demand variations. So we have started the contracting with a volume of roughly €1.5 million for winter and all season will be followed by summer and the range we are expecting to source from contract manufacturing will be between €1.5 million and €3 million, and this really depends on the demand development. So we have sufficient flexibility to respond to the market demand based on rolling forecast we are providing to our contract manufacturing partners.
Operator
Our next question comes from the line of Miika Ihamaki from DNB Markets.
Miika Ihamaki
So you mentioned that based on customer feedback, you've maintained or further improved your market share in premium winter tires. And is it still fair to assume that there was still considerable down trading to lower tier winter tires this year, meaning that as aggregate you lost market share against lower tier players. And if yes, can you a little bit help us to understand how much of that sales decline in passenger car tires was driven by high inventory situation in distribution and how much due to actual down trading?
Jukka Moisio
That particular balance is difficult to say, but it is clear that what happened is, especially, for example, the Nordics is that based on our own manufacturing, we had a good availability of premium winter tires. And clearly, because of the lack of capacity, we had less available fee category and so on. What happened was that for example now Vianor were able to secure third party offering to our operations. And therefore, obviously, Vianor top line is -- the sell out is continuing at a good level -- at a stable level and the mix is then consisting of course of premium tires but also at the same time from purchased or outsourced tires to ensure that the outlets have a good selection -- a good portfolio for all the customers. How much that it’s difficult to say. What we can say is that when we look at the premium winter tires our feedback is that we've gained share, but then obviously, the lack of products in the fee category of our own making have been then supported by other suppliers.
Operator
Our next question comes from the line of Rauli Juva from Inderes.
Rauli Juva
I have two questions. I will take them one by one, and first is on your production. So now when the demand obviously was weaker than you anticipated in the winter tires, how have you reacted in terms of production for that? Are you now able to produce more summer tires for next year or have you taken down to production levels, or what's happening there?
Jukka Moisio
It would mean the passenger car, the tires, we have not taken any downtime. So we actually allocated production to different products, because obviously, as mentioned earlier, that [DSV] had a good selection of the premium tires and then we had no capacity for the summer tires or all season tires. So we actually changed the direction of the production, there’s no need to take downtime. Obviously, in heavy tires, we did over the summer period so we took some time to manage the inventory. But in PCT, this is not needed. Obviously, we will have a normal maintenance shutdown at the end of the year but this is scheduled and it's normal.
Rauli Juva
And then secondly, you mentioned that you are planning to finish the ramp-up of the US factory next year. So could you talk a bit kind of how you are planning to utilize all that capacity given the weak markets, I guess, the expanded product range versus this year is one factor, but is there something else?
Jukka Moisio
So first of all, the technical part and how we ramp up and so on and Adrian will address, but basically, the product selection is, of course, all season all weather and then we go into light truck. So we start the light truck production. But technically, how does it go on, Adrian, most of that will happen this year and then the remainder will be in the early part of next year.
Adrian Kaczmarczyk
So technically, the technical capabilities and equipment will be the installation and commissioning will be finalized this year and then we will need the time next year to utilize the equipment with the new portfolio and new product introductions to then fully utilize the factory in the second half of 2024.
Jukka Moisio
And just an anecdote, or not anecdote but just an observation about the product portfolio in Dayton was that originally when we invested in Dayton, we had an idea that we would be supporting Dayton North American market with certain productions from Russia. And obviously, when the Russia is not anymore so we have a little bit a change in the production portfolio there and then need to have a virtual factory way of supporting our North American product selection over time.
Operator
Our next question comes from the line of Mika Karppinen from Danske Bank.
Mika Karppinen
Could you comment on the Central European market? Have you lost any distribution those market areas, assets are lost Russian products or was it just the availability of [Indiscernible] for the season?
Jukka Moisio
No, we haven't -- I mean we did what we did a year ago is that we actually reduced the team quite significantly, and we also look at the markets where we don't have any product to sell, which is basically summer markets. And so therefore, we get the distribution and distribution network in the areas where we have winter tire, all season and summer tire in combination. Now we haven't lost anything but we -- and we've gained market share in the premium winter tire sell in but this is all we had. So no availability issues, simply high inventories and slow start into the winter season.
Operator
[Operator Instructions] Our next question comes from the line of Artem Beletski from SEB.
Artem Beletski
Maybe I can start with downgraded the outlook for this year and I think you mentioned that you didn't take any downtime in terms of plastic care type of manufacturing this year. So volume outlook should be unchanged. Is it really price mix pictures that has changed to weaker versus your initial expectations or are you planning to have a bit high inventories, for example, by the end of this year.
Jukka Moisio
I think that right now, the production actually focuses on next year already. So obviously, what will happen is the dependent when the deliveries will happen, whether they have late this year or early next year, so that will dictate a little bit the inventory. What dictates maybe most of the inventory change at this point of time is the contract manufacturing that when they come in and how they are being supplied to customers. And most of -- and those products are mostly now when we look at the coming season, they will be summer '24 or as well as fall season '24. In raw materials, the inventories have come down. So we are actually quite at a good level in terms of raw materials.
Artem Beletski
And maybe two shorter questions from my side. Could you maybe comment on start-up related costs, what comes to next year? I think you had some costs already relating to Romania also in this quarter. And also the second one is on CapEx for next year. I appreciate comments what you made relating to Romania. Could you make some indication what will be the level for next year on the group level?
Jukka Moisio
The startup ramp-up costs, difficult to anticipate at this point of time. We still are in the budgeting season and so on. Obviously, we’ve said about the data that once we hit the equivalent €3 million then we will eliminate that. But of course when we go into Romania, so we'll have certain items there, but we don't know yet how much that will be, so we'll have a look. And we'll get back to that in connection of the fourth quarter and starting of the next year in order to anticipate what they might be. But Niko?
Niko Haavisto
In terms of CapEx, we are anticipating somewhere around €350 million next year. And then we are expecting at least part of the Romania government subsidy of the €99 million to land next year. So if you net that against the €350 million, you land somewhere around €300 million is the best guess.
Jukka Moisio
And if you remember, our ambition is that we expect that the EBITDA of €23 million, €24 million, €25 million ought to be covering the investment of those three years.
Operator
There are no further questions. So I will hand you back to your host to conclude today's conference.
Paivi Antola
Thank you. There are no additional questions that means that we will be ending the call. Thank you for participating, and have a good day.
Jukka Moisio
Thank you.
Niko Haavisto
Thank you.
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Nokian Renkaat Oyj (NKRKF) Q3 2023 Earnings Call Transcript