Nokian Tyres plc
OMXH:TYRES
Earnings Call Analysis
Q4-2023 Analysis
Nokian Tyres plc
The main message from the quarterly earnings call is one of optimism and growth expectation. The company's top line for 2023 hit EUR 1.17 billion, and they have set an ambitious goal to reach EUR 2 billion in the coming years. The anticipated growth hinges on increased sales volume and stable average sales prices. Additionally, they emphasized the significance of a resilient and adaptable team to navigate economic changes, reinforcing their mission to reinforce the 'new Nokian Tyres'.
Nokian Tyres is in an investment phase slated to last from 2023 to 2025, with strategic expansions in Romania and Dayton and increased capacity in Finland. These developments are crucial to improving sales and supporting the expected growth phase beginning in 2026. By the end of 2023, the Romanian factory should be ready to commence commercial production, setting the stage for robust growth in the following years.
For the year 2024, Nokian Tyres expects significant growth in net sales and operating profit, with improvements in profitability margins. Contributing to this outlook is an anticipated ease in raw material prices, initially high in early 2023, but expected to decrease throughout the year. The company has also outlined financial targets including achieving EUR 2 billion in net sales, an EBITDA margin of around 25%, and a segments operating profit level of 15%.
The company is prepared for changes in the demand landscape, including an OE (Original Equipment) market that is softening and a normalized aftermarket demand. Inventory levels at the end of 2023 were a bit higher, attributed to preparing for the 2024 seasons. However, they expect sell-in to improve due to a projected increase in dealer sell-out, normalizing inventory pipelines.
In terms of capital expenditure, the main focus will be the construction of the Romanian factory, with the expectation that it will range from EUR 330 million to EUR 360 million for the full year. Interest and tax rates are predicted to stay consistent with the previous year's levels, and the company plans longer-term debt maturity strategies moving forward.
Nokian Tyres intends to have a more balanced product mix in 2024, with an increase in summer and all-season tires, despite the strong recovery in winter tire contributions to around 63% in the prior year. Still, tire volumes in all categories are expected to rise. Moreover, they are aiming for a contract manufacturing level of about 3 million units as they pivot towards this more all-seasonal mix.
Despite inflationary pressures on costs like transport, energy, and labor, these are not seen as major issues at the moment, though they do necessitate attentive monitoring. The company plans to manage these costs through pricing and product mix strategies to ensure profitability margins improve as anticipated in 2024.
Ramp-up expenses in Romania and the U.S. are estimated to be around EUR 20 million each. They expect U.S.-related ramp-up costs to cease by the end of the first half of the year, thus not incurring these expenses in the second half, aiding profitability improvement efforts.
The company is addressing external operational challenges such as strikes in Finland that affected production days, proposing a trial period to maintain manufacturing momentum until summer '24. Additionally, when considering the U.S. factory, the investment completion is in its final stages and full production is expected in the second half, aligning with the phase-out of ramp-up costs.
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Good afternoon from Helsinki, and welcome to Nokian Tyres Full Year 2023 Results Conference Call.My name is Paivi Antola, heading the Investor Relations in Nokian Tyres, and together with me in the call, I have Jukka Moisio, the President and CEO of the company; and Niko Haavisto, CFO of Nokian Tyres.In this call, we will go through Q4 and full year results and how we are proceeding with our growth strategy announced last year. And this will be presented by Jukka and Niko, then followed by Q&A.So, Jukka, welcome and please go ahead.
Thank you, Paivi. Welcome on my behalf, and indeed, let's go through the Q4 and full year 2023 highlights of Nokian Tyres. I will go through prepared notes, based on the presentation, building on the new Nokian Tyres on track.I go to Page 2, which is reflecting that in 2023, we had steadily improving performance and volume delivery throughout the year. You may remember that we started the year with lack of good product portfolio following the exit from Russian operations and not having a full capacity available in '23 and not being able to bring all the offtake products to the market in the beginning of the year. But throughout the year, we steadily improved our performance and volume delivery.We had a good progress in strategic investments to add capacity, including contract manufacturing, and we saw in the final quarter already some good signs of the contract manufacturing of [ tape ] products in the market for the winter tires.We had a competitive and continuously evolving product portfolio. We announced and launched a number of new products during the course of the year. Of course, we continue supplying our high-performing winter tires, ‎Hakkapeliitta 10, as well as R5 friction tire for this winter season of '23-'24.Achievement, we also made the achievements in sustainability, and we were moving towards net-zero emissions. And indeed, when we look into 2024, there are important milestones to be reached in that year.If I move to next page, on Page 3, one of the key successes or anniversaries will be the 90 years of reinventing safety, namely the first winter tire. So the first winter tire was actually invented in 1934 by Nokian Tyres. And so, in 2024, we have the honor and opportunity to celebrate 90 years celebration anniversary of that product.We also will start early production steps in world's first zero CO2 emission tire factory in Romania, remembering the our plan is to start to produce the first tires in 2024 in anticipation to start the commercial production full time in Romania in the beginning of 2025. We will, of course, use this opportunity to have an anniversary stamp of the 90-year-old winter tire throughout the year. And the stamp is visible here on this Page #3.I'll move to Page 4. And mention that the Romania factory is proceeding on schedule. And again, to remind that the first tires will be produced in the first half of 2024, and the commercial production expected to start in the beginning of 2025.Right now, interior construction work continues and machine installations have started in January. So they are very much ongoing right now. Outer shell of the finished goods warehouse is almost closed and building permits for the mixing building has been received and construction foundations and the frames ongoing right now.We have also active recruitment schedule and our anticipation is that we will hire up to 350 employees during 2024 and they will join the launch team coming from our Nokian factory in Romania. And together with the Nokian launch team, the new recruitments will be trained and will be starting the machines and make the ramp-up of the machines in late '24, towards the beginning of commercial production in '25. And production ramp-up plans are being prepared as we speak.I move to Page 5, you see some pictures of the completion at this moment. So on the top left-hand side, you'll see the production building and also the annex of the offices.Then on that right-hand corner of the -- that smaller picture, you see the warehouse. So this warehouse being constructed, almost complete in the roofing area. And below on the left-hand side, you see the mixing department, mixing building first steps. And on the right-hand side, you'll see in the aerial picture of the production building.If I move to Page 6 and just to reflect the operating performance of the company in quarter 4. Net sales were EUR 368 million versus EUR 362 million in 2022 in quarter 4, and this means a 6.3% growth in comparable currencies. In reported currencies, you will see that the growth is 1.7%. But in comparable currency, 6.3%.Segment's EBITDA at EUR 71.9 million versus EUR 26.4 million in 2022, and that represents 19.5% margin in this year in '23, and that is a clear improvement of 7.3% that was achieved in prior year.Segment operating profit at EUR 44.5 million versus EUR 0.2 million in '22, a clear profitability in the segment operating profit, and that was driven predominantly by Passenger Car Tyres.However, in the final quarter also, Heavy Tyres as well as Vianor reported higher segment operating profit compared to '22 numbers.I move to Page 7 to reflect the full year 2023. Performance was in line with the plans. Net sales at EUR 1.174 million versus EUR 1.35 million. So it's about minus 9% development in comparable currencies. Demanding market environment and dealers focusing on inventory reductions, drove lower demand. We also had a EUR 52 million negative impact from currencies. And on the other hand, on the positive side, we had market share gains in premium winter tires.Segments operating profit in the year was EUR 65.1 million versus EUR 17.8 million in '22 full year. Price increases were implemented to combat cost inflation, leading to higher average selling price. In the comparison period, logistic cost, they're quite high because we had the extraordinary measures to secure tires supply. We also had a pretty high cost inflation in late '22.In the -- at the meeting today, the Board decided to propose a dividend payment of EUR 0.55 per share, and that will be paid in 2 instalments in the -- during the course of '24. This is, of course, proposal to the AGM.I move to Page 8. We have a strong balance sheet after '23. So equity ratio at 58% versus 65% at the end of '22 and gearing at 16.6% versus 9.8% in '22. Interest-bearing net debt at EUR 224 million was EUR 141 million a year ago.And indeed, the difference in the net interest-bearing net debt was mostly driven by the higher capital expenditure that we did in '23. This was in line with our plans, because we are building the factory in Romania as well as completing the investments steps in Dayton to have a full production capability in Dayton.Cash flow from operating activities in the full year, EUR 82 million, and in the quarter, about EUR 298 million.Other highlights of the quarter, mostly discussed. The full year EBITDA is 14.5% versus 8.8% in '22 and the full year segments operating profit 5.5% versus 1.3% in 2022. So those are the highlights from the strong balance sheet. And I also want to take the opportunity to talk about the steps in sustainability.We are -- so we are constructing the first zero CO2 emission tire factor in Romania that started in the year. We also had a target to reduce our factory CO2 emissions by 52% from 2015 base year until 2030. However, this target was already achieved in 2023 and factory CO2 emissions are at industry-leading level.We joined Polestar in 0 -- Polestar 0 in a project that aims to create a climate neutral car by 2030. That was announced during the year.And finally, also important to mention that, again, we were included in the Dow Jones Sustainability Europe Index, being among the most sustainable listed companies in Europe and highly scored in the automotive segment of the industry in -- of all industries.So with those, I hand over to Niko to talk about the financial performance of the segments and the highlights of financial performance. Niko, please go ahead.
Thank you, Jukko. So, yes, as Jukko, I'll go bit more in detail in our segments and Q4 specific. In the Passenger Car Tyres, we had a clear profitability improvement. It came both from the higher volumes and lower costs. The Q4 net sales were EUR 198 million compared to EUR 186 million last '22. And that's -- in comparable currencies, that's an increase of 10.6%.Also, the segment's operating profit in Q4 was clear improvement there with EUR 22 million level compared to previous year, i.e., Q4 '22 minus EUR 27 million. And the operating profit was at the level of 11.1%.Full year numbers, you see there. Jukka went them through as well. And in terms of segment's operating profit in the PCT, we were at the level of 5.6%.On the following couple of slides, I have some bridges. So Page 11, I think we can say here that in Q4, the product price and mix were neutral. The sales volume, as said, was up by some 11.3% and then the currency was still negative in our figures with an amount of 4.5%.And below that, there is this segment's operating profit bridge. And there you can see the same items, i.e., the sales volume up, material expenses were down. Also, we had a much lower supply chain and logistics costs there, namely the warehousing and the logistics. And then also SG&A was better compared to '22 Q4, and then we landed at the level of EUR 22 million in terms of PCT segment's operating profit.On Slide 12, there is quarterly changes in our net sales. And there, you can see that in terms of sales, we've been increasing quarter-by-quarter when it comes to the volumes. And in terms of price and mix, we said that last year average sales prices increased strongly throughout the year. Now it's flattening in Q4. And then the currency, it has been for the past 3 quarters, including this Q4 last year, at a fairly stable minus 4% level.Slide 13, we have Heavy Tyres. I think as we say there, it was really solid performance in terms of Q4. We did adapt our production during the Christmas breaks and that is to reflect the lower demand in the market. Segment's net sales were EUR 62 million compared to EUR 65 million in '22 Q4. And in comparable currencies, they were slightly below that of '22, i.e. with 2.6%.Operating profit, EUR 7.3 million and operating profit 11.8%. I think there is also room to improve in this segment going forward.And then finally, last of our segments is the Vianor. It improved its profitability. It has a headwind from the currencies. But all in all, I think it was okay performance in a low margin business. So I think, as you look at the numbers in segment's operating profit, 9.6% for Q4 '23 is a good achievement as such. And all in all, the full year operating profit was a positive of EUR 3.4 million, roughly on the same level as '22.Then I have our guidance and the kind of the assumptions behind that. So in 2024, Nokian Tyres net sales with comparable currencies and segment's operating profit are expected to grow significantly compared to previous year. And there, you can see kind of what is kind of driving our guidance and assumptions. So, we see that -- or expect that -- the sell-in replacement market is growing this year, '24. However, the big development in our economic development in our main markets is expected to continue, which, together with the lower consumer confidence may have negative impact on tire demand as such.OEM demand for the Heavy Tyres may decrease due to the high interest rates, which have a negative impact on machinery investments. And then finally, after peaking in early '23, the raw material costs are expected to moderate during this year '24.Our long-term financial targets are kept as they've been, i.e., the growth. We are targeting EUR 2 billion net sales. In terms of profitability, segments EBITDA at around 25% and segments operating profit at the level of 15%. And then in terms of our capital structure, net debt to segments EBITDA between 1 and 2. And there, we are at the level of 1.3 at the year-end. And the dividend policy is there to divide at least 50% of the net earnings.And with that, I hand back to you at Jukka.
Thank you, Niko. Just to recap, we have key fundamentals for growth, we have a clear strategy what we need to do, and obviously, we are in the implementation phase of the new capacity of products.It's given that -- as well top line is EUR 1.17 billion in 2023, ambition is EUR 2 billion. So we need to and want to drive the top line. And the margin improvement is coming from the fact that the sales volume will increase and sales price, average sales price remain at a good level.Strong team is also important and instrumental in implementing the strategic actions. So building capacity and bringing that successfully to the marketplace. It's also clear that the environment over time has -- if you look into past, has changed quite dramatically in the past years.We expect that the changes and all kinds of economic dislocations or disruptions, if you want, may happen. So therefore, it's important we have an agile and resilient team that can work in the changing environment. The most important thing is that we continue to work together to build the new Nokian Tyres, and that is our commitment.Move to Page 19, just to remind you that we have a journey which consists of 2 things. One is the investment phase and the other one is the growth phase. In the investment phase, which we expect to last from '23 to '25, we now spend year '23, and we are very much on track.So in terms of building the capacity and capability in Romania, completing the investments in Dayton and then we already have increased capacity in PCT Finland. And all those are happening, as well as the growing contract manufacturing that can help us to improve the net sales and top line.We still have 2 more years to go in the investment phase. So very much by the end of this year, we will have the Romanian factory ready and then we start the commercial production in the final year of the investment phase of '25 and then ramp it up so that we move into growth phase in '26 and '27.And the ultimate target is to have a net sales of EUR 2 billion. And in Heavy Tyres, we have the expectation that the sales growth will continue above the market level growth in years to come in order to deliver what we have been delivering in the past 6 years. And Vianor will help us to have the distribution excellence in the Nordics. So this is very much our journey. We've now taken one year and we've delivered more or less as we expected by the end of the year, and we will then continue with a good exit momentum from '23 into '24.And with these words, I complete our prepared notes. And then I hand over back to Paivi. Paivi, please go ahead.
Thank you, Jukka, thank you, Niko. Now we would be ready for questions from the audience. And in the Q&A, we will focus on the company results for the quarter and for the full year. We will not make any remarks concerning the European Commission's ongoing anti-trust inspections in tire companies, which were initiated last week.Nokian Tyres does not have information on the outcome of the inspection, and we cannot comment on the ongoing investigation. Nokian Tyres is fully cooperating with the authorities.So in the Q&A, we are only talking about the fourth quarter and about 2023. And with these words, let's take the first question from the line.
[Operator Instructions] The next question comes from Michael Jacks from BoFA Securities.
My first one is just with regards to your expectations around product mix in 2024 between winter, summer and all-season tires. We saw a strong recovery in in winter contribution to around 63%. Is that representative of what we should expect for '24 as well?Secondly, thank you for your guide on raw material tailwinds. But what are your expectations for the other cost buckets, such as transport, energy and labor? And then perhaps added to that, I assume that you're going to say these are inflationary. And if that's the case, do you potentially have any price mix offsets in mind for 2024 to help cover this?And then one final question, if I may. Could you please give us an update on toll production in terms of what the contribution was in Q4 and what we should expect for '24?
So about the product mix, so let's start with that one. Thank you for the question, by the way. The product mix, of course, in '23 was quite skewed to winter tires for the simple reason. We started the year without summer tires. We didn't have the ability to produce a lot of summer tires because we lost the Russian capacity in late or, say, after the summer of '22, and we didn't have an ability to make summer tires.So, therefore, what you're going to expect in '24 product mix is that we have a growing number of winter tires, but we have even a bigger number of summer tires and all-season, so that the mix will be more all-seasonal, more summer tires and less winter tires. But overall, of course, the absolute number of tires will go up in all these categories. So that's what you can expect.
Yes. And in terms of raw matter, as I said, that we think that they are moderating, i.e., that in beginning of '23, it was a peak there and now we see that they are going even a bit down. So I think that will, of course, help us.In terms of transport, energy and labor, of course, those are inflated as such. And -- but we feel that it's not an issue at this point, but we need to monitor it closely that how it will be in terms in our prices going forward.
And when it comes to offtake products that their contribution to our top line, so clearly, the final quarter, what you see in the Central European sales are mostly based on offtake products and then some complementary products in the Nordics area to complement our premium winter tires, also offtake. But, clearly, more to come of the products' contribution in -- through the course of 2024.
The next question comes from Thomas Besson from Kepler Cheuvreux.
Its Thomas Besson, Kepler Cheuvreux. I have a few questions, if possible, I'd like to ask one by one. I'd like to just follow up on Michael's question on contract manufacturing. Is it possible to have a figure in terms of units that were effectively contributing to your '23 volumes and what you're planning for 2024? So the -- like is it -- was it a few 100,000 units, do you expect 2 million, 3 million, 4 million in '24? That's the first question.
Okay. So you can expect that the contract manufacturing is somewhere around 3 million units in '24 or we are aiming towards that number. And then in '23, slightly shy of 3 million -- 1 million was the contract manufacturing contribution in '23.
Can I ask another very simple question? Could you give us some indications in '24 on the trends for CapEx, tax and interest, please?
So CapEx, we expect that the major CapEx will go to Romanian factory build. And we expect that capital outlay full year is somewhere in the range of EUR 330 million to EUR 360 million full year. And most of that goes to Romanian factory built. And then tax and interest, Thomas, Niko?
Yes. So the interests are at the similar level or the financial items at the similar level that they were on '23, I think, more or less kind of that. What we had there at the year-end will be similar in terms of maturity at the level. And in terms of taxes, it will be around similar type of tax rates that we have had previous years.
Looking at your maturities, you debt maturities, you have a relatively heavy concentration in the very short term. Could you talk about your plans in terms of refinancing and explain why the net interest isn't expected to increase?
Yes. I think that kind of the debt maturity as such, reflects the situation the company was back in '22 when the Russian invasion to Ukraine happened and we were in a place that we needed to arrange the financing fairly quickly. So I think that's a reflection of that that there is quite a lot of, one could call, type of a short-term financing.We have plans to be more kind of a longer term in terms of debt maturing going forward. And we do see that the interest rates are actually -- and the yields are going down as we speak compared to last year and the situation that the company was in.
Understood. Jukka, can I ask you to make a few comments about what your view is or the visibility is on the Heavy Tyres business? I mean there were some decelerations in the summer and on Christmas. What do you anticipate for '24 overall directionally for volumes?
Yes. The '23, we clearly saw that the inventory pipeline was quite full. And so therefore, the summer chart was extended because we wanted to take down the inventory in our own system, but also reflect that the aftermarket demand was quite low in the early part of '23.OE demand actually in early part of '23 continued quite strong. Now these have been reversed since we have come from the summer towards the year-end. And starting this year that the OE outlook is softer because the heavy equipment investments based on the higher interest rates and so on are a little bit bigger and softer. And so therefore, the OE demand is a little bit softer in '23 versus -- in '24 versus '23, while the aftermarket, we see that the inventory pipeline is normalized. And so therefore, we expect a normalized demand.In terms of our manufacturing, as we've taken 2 extended charts in the summer and then one in the Christmas time, so we can run hard until the summer of '24.Now what happens in Finland, I don't know if you are aware of the particular Finland situation that there are strikes in Finland right now. And so those are hitting industrial companies, including ourselves. And for example, in the month of February, we are losing 5 production days because of the strikes. Those, obviously, are not needed at this point because we would love to run the manufacturing harder. And this is, of course, an unfortunate situation, but it is what it is.
Understood. I have one last question, if I may. Could you comment on your level of inventories at the end of 2023? I think it was a bit higher at the end of 2022. But also at the end, comment on the level of dealer inventories at the end of '23. Do you expect your production and demand to be aligned or some potential restocking? Or do you still see some further destocking?
In terms of inventories, I think at the end of last year, i.e. 2023, they were bit on a high side due to the offtake tires that we had to warehouse to prepare us for the seasons now in '24. And let's see what happens with the destocking, but that is our understanding that the kind of the sell-out from the dealers will increase, and i.e., the sell-in to there will be better than it was in '23.
And the raw materials are at relatively good level.
They are on a safe level, so to say.
Understood.
The next question comes from Artem Beletski from SEB.
I actually have 2 to be asked. So the first one is relating to ramp-up costs. And what is your outlook for this year? I think in Q4 the number was some EUR 11 million relating predominantly to the U.S. And then just looking at your guidance, so as you are talking about significant growth when it comes to sales and also segment operating profit, should we also implicitly naturally expect that profitability will be improving this year compared to last year?
Yes. I'll start with the significant growth. And you asked that the absolute numbers, we expect a significant growth, we expect also that the margin -- profitability margins are improving, and we expect that the target that the margins would improve. And then the ramp-up, Niko.
Yes. The ramp-up expenses, we had some idea of thinking that they would be at the level of some EUR 20 million both in Romania and the U.S. That is our best estimate at the moment.
And maybe just a follow-up on that one. Is it basically EUR 20 million for Romania and EUR 20 million for the U.S. And if it's so, when do you anticipate U.S.-related ramp-up costs to go to 0?
Our anticipation is that they will end by the end of H1. So in H2, there should not be such expenses anymore.
Okay. That is very clear.
The next question comes from Bernt Ehrnrooth from Barry Staines Linoleum Oy.
My question is or questions circle a little bit around the U.S. factory in Dayton. You mentioned a lot -- we got a lot of information about the Romania factory, but what is the current status of the factory in the U.S.? How near completion is it? And what is the production level and stock level, et cetera?
Thank you for the question. I think that we will not talk about the production level or stock level. And so -- but I can say that the investments are essential in final stages. And as Niko was saying that we expect that the exclusions will end H1, which means that we are in a full production in H2.
[Operator Instructions]. The next question comes from Thomas Besson from Kepler Cheuvreux.
It's Thomas again. I'm surprised I'm already back. But I just wanted to understand how your guidance compares with pre-release consensus expectation. So you say you expect significant increase in revenues and margins and margins to improve. But do you feel your Vara consensus data to be at an appropriate level, excessive level? So how do you -- what kind of visibility do you have, and what would you comment on these figures, please?
I mean, essentially, the guidance is that we make progress year-on-year towards our targets. And obviously, the continuous improvement from '23 into '24 and '25 will continue. I cannot be more specific at this point of time. Obviously, when we go into the year, we see quarter-by-quarter how the year results will improve, and we give a more precise guidance as the year continues. At this point of time, this is where we are in terms of overall guidance.
The next question comes from Miika Ihamaki.
It's Miika from DNB Markets. Previously, you have said that you had an application for an investment subsidy, something that -- and now currently under EU's review. So what's the status with that, please?
Yes. Nothing has changed in that. We will have the application for that subsidy, and it's a Romanian government's subsidy, which EU needs to approve. But nothing that we know of has affected that process as such.
The next question comes from Rauli Juva from Inderes.
Rauli from Inderes here. Just wanted to come back on the -- you mentioned the product mix will be back more towards summer and all-season this year. But can you give an idea of the seasonality between the quarters? Will we be basically back in the similar kind of seasonality we saw pre-COVID years, for example? Or is it still more weighted towards the end of the year and the winter tire sales?
Still skewed towards the end of the year more because our own capacity is still this year in the early part, heavily dependent on Nokian. And therefore, winter tire production will be important for us. But, obviously, at the same time, and Dayton is ramping up and achieving its full -- we will have more all-season as the American production is mostly all-season. Some of those are all-weather and similar closer to winter, but basically practically all-seasons.So therefore, you can expect that the seasonality is still not the same as it used to be. It's more somewhere between what we had in '23 and something that we had in '21. So we are moving towards that old seasonality. But today, we still have a very much the extraordinary, which is related to the fact that the capacity is -- that we have available is mostly in winter tires. But not so strongly as in '23 when we actually lacked the summer tires in Central Europe.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
If there are no additional questions, it's time to finish the call. Thank you all for participating, and have a good day. Thank you.
Thank you. And have a good day.