Nokian Tyres plc
OMXH:TYRES
Earnings Call Analysis
Q2-2023 Analysis
Nokian Tyres plc
Nokian Tyres is setting the stage for future growth through strategic expansion efforts. The company has broken ground on its new Romanian factory, with the building work progressing well - a pivotal step in their growth plan. A substantial order for equipment made in 2022 addresses concerns about availability and lead times. Investors can expect the production of the first tires in the latter half of 2024, indicating an acceleration towards the start of commercial production in 2025. An application for a €99.5 million investment subsidy is under EU review which, if approved, would propel the project forward and potentially enhance financials.
Despite facing headwinds - especially currency challenges in Nordic markets, Nokian Tyres' replacement tires segment recorded an impressive rise in operating profit to €50.2 million from a meager €0.9 million the previous year. This was bolstered by price increases outpacing cost inflation, resulting in a higher average selling price and driving the segment's EBITDA up to €41.3 million compared to €25.9 million in the prior year, marking a solid growth of 14.1% for the segment's EBITDA.
Nokian's performance exhibits strong seasonal cycles, often leading to a negative free cash flow in the first half of the year, as was the case with the €124 million reported. This is primarily because their product lineup is weighted towards winter tires, which has its primary sales cycle in the latter half of the year. The company anticipates a more robust second half, consistent with historical trends, thus keeping an eye on the higher revenue in these upcoming months could be critical for investors.
Nokian is not only focused on financial growth but also on sustainability, aiming for a Net-Zero Standard by 2050. This ambition is underscored by a Platinum Medal from EcoVadis, placing Nokian among the top 1 percentile for sustainability performance - a testament to their commitment to environmental stewardship.
The company maintains its 2023 guidance with net sales expected between €1.3 billion to €1.5 billion and a segment operating profit percentage of net sales projected at 6% to 8%. Investors should note the anticipated profitability will be generated in the second half of the year due to the seasonal nature of the business. Furthermore, Nokian aims for a long-term EBITDA of 24% to 25%, indicating a strategy geared towards increased efficiency and profitability that may reshape the balance sheet in the years to come.
Nokian is augmenting its production capacities and improving operational efficiencies in preparation for heightened demand, especially in the second half of the year. The ramp-up includes hiring additional staff and starting up new equipment, which will contribute to the company's profitability. While heavy tires faced demand fluctuations, the segment is expected to stabilize, potentially reaching a 15% operating profit longer-term. Market conditions suggest that pricing is stable, with no significant price increases anticipated by the company. Overall, Nokian is poised to focus more directly on their core operations, having completed its exit from the Russian market, which could lead to reduced excess costs and enhance their ability to achieve their financial targets.
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I'd like to hand the call over to Paivi Antola. Please go ahead.
Good afternoon from Helsinki, and welcome to Nokian Tyres Q2 '23 Results Conference Call. My name is Paivi Antola from Nokian Tyres Investor Relations. And together with me in the call, I have Jukka Moisio, the President and CEO of the company; and Teemu Kangas-Karki, the CFO of Nokian Tyres. And in this call, we will go through the Q2 results and how we are proceeding with building the new Nokian Tyres.
But now I'm handing over to Jukka and Teemu. Please go ahead.
Thank you, Paivi. Jukka Moisio here. So welcome on my behalf. And indeed, we have the presentation there, the heading is, BUILDING THE NEW NOKIAN TYRES ON TRACK.
And so I move on that presentation to Page 2 and talk quickly about the strategic growth checks, they are proceeding as planned. First of all, we have the Romanian factory. So building work is underway. And we have the count breaking in May 2023. We got building permit on the same day. And so we are very much progressing on the building.
Main equipment, as you may remember, the order already in 2022, so that we secure the availability and delivery times. Our time line is such that first tires are expected in the second half of 2024 and the commercial production will start in 2025. Application for the investment subsidiary of up to € €99.5 million €is under EU review so that they accrue the state aid as proposed by the communion government.
Another project in Finland, so we have a passenger car tire capacity increase and in use as we speak. In the U.S., the ramp-up of the factor is proceeding. So we've hired additional employees to the production and the equipment installations are ongoing. New production line started sequentially in this particular moment. And towards the end of Q3, we expect that they all are installed and then we start them step by step by the end of the year.
Under manufacturing volume of 1.5 million tires have been secured for 2023. So first in the nonseason tires, the Central European market will be in the second half of 2023. No significant minor volumes only of the contract manufacturing has been delivered in the first 6 months of the year. So most of this 1.5 million secured volume will be benefiting top line and the company in the second half of 2023.
I move to Page 3, about the profitability. So these numbers in Q2 are excluding Russia. So first of all, the segment's net sales at €293 million versus €332 million in '22. This is a 12% reported decline. But if we exclude the currency impact, so 7.3% decline in constant currencies
Main reasons there were lower passenger car higher supply volumes. This is a reflection that we did not have the full capability to deliver in the early part of the year. We get additional tires, additional volume in the second half, and that will help our top line.
Also, the car and tire market environment, the quarter replacement tires were quite demanding, including also the currency headwinds, which we experienced mostly versus the euro in the Nordic markets. So Norway and Sweden. Norway being the most or the biggest headwind in terms of currency conversion.
Segment operating profit at €50.2 million versus €0.9 million in '22. Price increases compared to cost inflation led to higher ASP. Segment's EBITDA was €41.3 million versus €25.9 million in '22, so we reported 14.1% segment's EBITDA versus 7.8% in '22 in the corresponding quarter.
Move to Page 4. Here are some of the key financial numbers. I call out some key numbers that I didn't mention earlier. So segment's operating profit at 5.2%, segment EBITDA at €14.1 million and a small earnings per share of $0.05 per share in the quarter.
And if you look at the capital expenditure, we spent €3 million in the quarter versus €19 million the prior year, and cash flow from operating activities was minus €67 million versus €109 million a year ago.
In the first 6 months, if you look at the top line. So all in all, we had a reported change of minus 19%. So €529 million in '23 versus €655 million in '22. In constant currency, the change was minus 16%. Segment EBITDA for the first six months in '23 was 9.9% versus 13% in '22. And as mentioned in our guidance that the segment's operating profit was up €1 million, and we said that the profitability and profit of '23 will be generated in the second half of the year
However, we are at €1.1 million, slightly positive in the first half and that compares to €35.5 million in '22. In terms of equity ratio, we are still at high level, 60% gearing at €16.2 million and net interest-bearing net debt at €220 million out of this €130 million of IFRS 16 leases.
And capital expenditure in the first half €87 million versus €33 million in the prior year, and cash flow from operating activities in the first six months, €124 million negative. Again, we experienced a strong seasonality explained by the fact that most of our products sold and our top line will be consisting of winter tires.
And with that, I hand over to Teemu to talk about the financials. Teemu, please go ahead.
Thank you, Jukka.
Moving to the Page number 5. And here, we are talking about our diversified debt portfolio that we discussed at the end of April in our CMD. And as we speak, we are in a good position in order to secure the funding for our investment phase. And just to call out some of the activities that we have taken in recent months, we - in May, we saw €300 million long-term bilateral credit facilities. And then in June, we issued €100 million sustainability-linked five year bond issue.
So from here on, we are in a structured way, building the debt portfolio with a balanced maturity as we go to the next quarters and years. And as I said, we are in a good position today. And then if you talk about our cash flow, as you all recall, it is our normal facing how the cash flow is going. So in the first half, we are tying capital in our working capital. And then in the second half, we are then releasing it when we get payments in from our - especially from our winter tire sales. So we are expecting to have a positive cash flow from our operating activities in the second half.
Then moving to the Page number 6, talking about the passenger car tire performance, there, our net sales in the quarter was on a level of €153 million, and our segment operating profit was on a breakeven level top line change with comparable currencies was on a level of minus 14%. And as we have been discussing earlier, the top line development is lack of supply volumes. And at the same time, we have been increasing our prices, net ASP strongly during the past quarters starting already at the end of '21.
Then moving to the next slide, where you can see the passenger car tire bridges, looking first, the net sales. Here, you can see that our price mix development in the quarter also. In absolute terms, €29 million, almost 15% in relative terms. And then if you look our segment operating profit development, naturally decline in sales volume, but then the price mix have been more than offsetting - the declines in volume.
Then moving to Page 8 about heavy tires. There, the net sales was impacted by soft aftermarket - our net sales in absolute terms in the second quarter was on a level of €67 million in comparable currencies, a decline of about 6%. And then our segment operating profit was on a level of €9 million decline from the comparison period, which was a €16 million. And as I said earlier, the net sales decrease was due to the inventory levels in the aftermarket distribution.
They are doing the destocking activities and that - had an impact now of net sales, but as for last two segment operating profit, and because of the softness in the market, we temporarily adapted the production during the summer rate. Then the Vianor business performance that was stable in overall since our net sales was on a level of €94 million. With comparable currencies, there was an increase of more than 3% and our segment operating profit remained on the same level and in comparison period.
So here, you can see that there was a significant headwind from the currencies, both in the passenger car tire business unit as in Vianor business unit.
I'm handing over back to you, Jukka.
Thank you, Teemu.
So on Page 10, just to reflect that we've taken steps forward in sustainability. In March, we made the science-based commitment to achieve Net-Zero Standard by 2050 to reduce greenhouse gas emissions further. In May, we were awarded the Platinum Medal for EcoVadis for our sustainability performance, which then places us on top 1 percentile of the companies assessed.
And in June, we issued this €100 million sustainability bond which Teemu was talking about based on following greenhouse gas emission reduction targets. First of all, reduce the Scope 1 and 2 by intensity by 65% by 2030 from last year's base and also reduce Scope 3 greenhouse gas emissions intensity from product used by 20% from '22 base by 2030.
Then I move on Page 11, so assumptions for 2023. The second half of the year is expected to be supported by the winter tire and all-season tires and contract manufacturing volume. And as mentioned earlier in this presentation, and especially in the first quarter that we were lacking supply and that had an impact on our net sales, top line and profitability.
The general economic development may have a negative impact on demand in the second half. This is something that everybody is assessing that is still going to be a soft landing or some kind of a recessionary situation or what will happen. So that may they have an impact that is to be assessed as we go on in the second half.
And then changes in foreign currencies, and especially, as we mentioned, we had a strong headwind from Nordic currencies, especially Norwegian krona, but also from the Swedish krona as well as the U.S. and Canadian dollars. And they have - had a negative effect on the first half and especially second quarter sales. And then if they keep on trading that way they may have a further negative effect in the second half.
Our guidance for 2023 is unchanged. So, we expect that the net sales to be between €1.3 billion to €1.5 billion and the segment's operating profit percentage of net sales between 6% to 8%. And as mentioned due to seasonality, the operating profit will be generated in the second half of the year. And you recall that the first half, our segment operating profit was the first six months, €1 million.
And then in the second quarter, we already had a stronger performance compared to the first sequentially compared to the first quarter. And as of 2023, segments net sales and segments operating profit exclude Russia and other items, which are not indicative of Nokian Tyres underlying business performance, just as a reminder.
And finally, we are building the new Nokian Tyres together. So we have an ambition to go back to €2 billion in net sales. We have to different time horizons. One is to rebuilding the capacity and the second one is then to benefit and build the market share and the volume once the rebuild and the investment phase is over.
Our financial targets long-term our net sales in €2 billion, segments operating profit at 15% level and as a new target net debt segment's EBITDA between [1 million and 2 million] terms, which means that we will have a longer term different balance sheet compared to our history. We will expect to have net debt in the range of €500 million to €1 billion depending on our EBITDA and net sales.
Our EBITDA target longer term is on the range of 24% to 25%. And these are our key messages, so building new Nokian Tyres progress is on track. Second quarter clearly better than the first quarter, and we expect that profit of the year will be generated in the second half.
Paivi, over to you.
Thank you, Jukka. Thank you, Teemu. And now operator, we would be ready for the questions from the audience, please.
Thank you. [Operator Instructions] Our first question comes from Mika Karppinen from Danske Bank. Please go ahead.
Yes hi, this is Mika from Danske. Could you comment a bit more about the pricing and mix development in terms of product area changes and then rim size changes?
So the price mix development is a function of several factors. First, the real price increases - that we have been executing diligently, as I said, already starting from second half '21. And then on top of that, the mix effect, which is coming from product mix development that has been also positive. As you can see in our release that the share of winter tires has been increasing. And then on top of that, there is a mix in - positive mix impact from geographical point of view when the share of Nordic has been increasing relative to the CE.
And then on top of that, the last mix impact is also the customer mix where we have been discontinuing certain customers in Central Europe in order to focus with those that we want to build longer-term business. So, there are several mix effects, but price impact has been the biggest one.
Is there any change in the rim sizes?
The rim size has been naturally also positive, I forgot to mention that one.
Okay. Thank you very much.
We will now take our next question from Akshat Kacker from JPMorgan. Please go ahead.
Akshat from JPMorgan. Three questions from my side, please. The first one on your full year guidance. Clearly, a lot to do in the second half versus what you have delivered in the first half. Could you just talk about a few drivers behind the improving underlying business profitability as you look into the second half? I know that there are offtake agreements that will kick in, in the second half.
But other than that, we see some negative momentum in heavy tires and the profitability on passenger cars is still breakeven. So could you just talk about some more elements that will help improving profitability in the second half.
The second question is kind of linked and on the passenger car business. When do you expect the two plants in Dayton and Nokian to hit peak or optimal profitability or the profitability that you have assumed in your midterm targets? Is it probably in the second half of 2024. And the last question is on the pricing and inventory situation. Just overall in terms of your markets in Europe and in North America, what are you seeing in terms of pricing trends, not just Nokian, but also competitors. And if you could just talk about channel inventories as well. Thank you.
Thank you. So about the full year guidance. So we already knew late last year, early this year, that the early part of the year will be lacking volume. So you rightly pointed out that help to come from offtake. The other part where we get more volume is that we started a higher production or brought higher production availability in Nokian in the early part of the year. So that will all be fully available in the second half And also, we keep on improving the performance in Dayton so we hired additional people and we start more equipment. So that will, of course, bring benefits.
And then finally, Heavy Tyres, yes, we had a downtime and quite large inventories in the distribution and therefore, the downtime extended in relation to - in connection of the summer shutdown, we expect that we are able to run relatively well in the second half. And then let's see what will happen towards the end of the year and what the demand is. But we expect that the Heavy Tyres performance be nevertheless, our 13% segment operating profit, we expect that we are there or move towards longer term to 15%.
So we don't see any more negative deviation there. But obviously, it's dependent on the economic - macroeconomic in terms of what will happen in the OE demand and so on. But at this point of time, we see a relatively stable development.
Obviously, in the early part also, we had a number of cost items related to Russia exit and all kinds of things that are not on our way when we go forward in the second half. So this will, of course, give more focus to our team and more capability to deliver the results in the early part. You still remember that we got the final exit from Russia at the end of March and then the early part of the year included a number of cost items and the focus of the team that we needed to work on that one.
So we are more focused on building new Nokian tires with the whole team in the second half. So that will also have a benefit and also reduces a little bit the excess cost and these kind of items. So all in all, that helps now full year guidance. But it was known upfront that the first half of the year will not deliver significant profitability so that all of that will come with the winter tires and the second half capability to deliver.
In Dayton and Nokian. So in isolation, we will not comment this how they go, and how they trade. But we said that the long-term ambition to have a segment operating profit at 50% will be there, and we will work step by step towards that. And you can expect that every year, every quarter, we keep on improving.
So when we go to the second half of this year, you can expect that our segment operating profit zero will be higher in the second half and also EBITDA will be higher. And then when we move into next year, we will then have a sequentially improved performance step by step. So - and that - and our ambition is then to hit that 24%, 25% EBITDA and about 15% segment operating profit.
Pricing environment, Teemu, do you want to comment on the pricing environment?
I would say that now we have reached a level where the price level has got its speed. So we don't expect that the prices are increasing in the coming quarters. We also then have the tough comparisons in the second half. So the price/mix development doesn't continue like in the first half and then what we see in the markets. It is quite stable in terms that no price increases and not necessarily price decreases on a face value level from our competitors, but some of the competitors are starting to do some promotion activities in a sense that the net real price changes are going down in some markets. But then in other markets like in the Nordics we still expect some price increases because of the currency.
Great. Thank you for the details.
Thank you. [Operator Instructions] And we have a question from Pierre Quéméner from Stifel. Please go ahead.
Yes. Good Afternoon, everyone. Would have one question to clarify, please, if I may. Do you expect price mix to become negative at some point this year? Because the net price mix minus raw material has been very, very favorable in the first two quarters. So do you expect something to go towards neutrality or even to become negative? And if we can have some idea regarding the phasing of the price mix into the last two quarters. That would be the first question. And the other question I have. Maybe I missed that, but have you already provided the pro forma figures for the passenger tires extra share for Q3 and Q4, both on revenues and on the operating profit for 2022. Thank you.
Yes. Starting with the pro forma. Those we delivered in the beginning of February in connection with the Q3 results release. Then going to your first question regarding the price mix development. We don't expect that to be negative on a comparable currency. So - but the strong momentum that we have seen several quarters is not expected to continue in the second half because of the strong comparisons already recorded in the second half of '22.
Thanks, Teemu. But that will remain a tailwind that's not going to become a headwind, right, even if it's much smaller tailwind?
We are not expecting to see a headwind. It's comparable currency .
Okay. That's very clear. Thank you very much.
Thank you. [Operator Instructions] And as there are no further questions in the queue, I'd like to hand the call back over to Paivi Antola for any additional or closing remarks.
Thank you. If there are no additional questions, that means that we finish early this time. Thank you all for participating. And from Nokian Tyres, we wish you all a nice summer.
Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.