Nokian Renkaat Oyj

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, the 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 Nico, 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 fully year 2023 highlights of Nokian Tyres.

I will go through prepared notes based on the presentation building off the new Nokian Tyres on track. I'll go to Page 2, which is reflecting that in 2023 we had steadily improving performance and volume delivery throughout the year.

If you may remember that we started the year with lack of good product portfolio following the exit from Russian operations and not having had full capacity available in 2003 and not being able to bring all the off take 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 the 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 continued supplying our high performing winter tires, so Hakkapeliitta 10 as well as R5 friction tire for the winter season over 2023-24.

Achievements, we also made 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 that 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 90-year-old winter tire throughout the year and the stamp is visible here on this Page Number 3.

If I move to Page 4 and mention that the Romanian factory 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 is 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 we'll be starting the machines and make the ramp up of the machines in late 2024, towards the beginning of commercial production in 2025 and production ramp up plans are being prepared as we speak.

I'll move to Page 5, you'll 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 offices. Then on that right hand corner of that smaller picture you'll see the warehouse, so this good warehouse being constructed, almost complete in the roofing area.

And below on the left hand side you'll see the mixing department, mixing building first steps and on the right hand side you'll see an interior picture of the production building. Then I'll move to Page 6 and just to reflect the operating performance of the company in quarter four, net sales were €368 million versus €362 million in 2022 in this Q4 and this means 6.3% growth in comparable currencies.

In reported currencies you'll see that the growth is 1.7%, but in comparable currencies 6.3%. Segments EBITDA at €71.9 million versus €26.4 in 2022 and that represents 19.5% margin in this year in 2023 and that is a clear improvement over 7.3% that was achieved in prior year.

Segment operating profit at €44.5 million versus 0.2 in 2022, clear profitability in the segment operating profit and that was driven predominantly by passenger car tires. However, in the final quarter also heavy tires as well as we have now reported higher segment operating profit compared to 2022 numbers.

I'll move to Page 7, reflect the full year 2023 and performance was in line with the plans. Net sales at €1.174 million versus €1.35 million, so it's about minus 9% development in comparable currencies, demand in market environment and dealers focusing on inventory reductions drove lower demand.

We also had a €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 €65.1 million versus €17.8 in 2022. Full year price increases were implemented to combat cost inflation, leading to higher average selling price.

In the comparison period, logistic costs were quite high because we had the extraordinary measures to secure tire supply. We also had a pretty high cost inflation in late 2022.

At the meeting today, the Board decided to propose a dividend payment of €0.55 per share and that to be paid in two instalments during the course of 2024. This is of course proposal to the AGM [ph].

I'll move to Page 8. We have a strong balance sheet after 2023, so equity ratio at 58% versus 65% at the end of 2022 and year end at 16.6% versus 9.8% in 2022.

Interest per net debt at €224 million versus €141 million a year ago and indeed difference in the net interest bearing net debt was mostly driven by the higher capital expenditure that we did in 2023. This was in line with our plans because we are building the factory in Romania as well as completing the investment steps in Dayton to have a full production capability in Dayton.

Cash flow from operating activities in the full year €82 million and in the quarter about €298 million. Other highlights of the quarter mostly discussed.

The full year EBITDA is 14.5% versus 8.8% in 2022 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. So we are constructing the first zero CO2 emission tire factory 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 Zero, Polestar Zero 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 all industries.

So with those, I hand over to Niko to talk about the financial performance of the segments and other highlights of financial performance. Niko, please go ahead.

Thank you, Jukka. So yes, as Jukka, I'll quote a bit more in detail, in our segments and Q4 specific.

In the passenger car tires, we had the clear profitability improvement. It came both from the higher volumes and lower costs.

The Q4 net sales were €198 million compared to €286 million last 2022 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 €22 million level compared to previous year i.e.

Q4 2022 minus €27 million and the operating profit was at the level of 11.1%. Full year numbers you see there, you go into them through as well and in terms of segments operating profit in the PCT we were at the level of 5.6%.

On the following couple of slides I have some bridges [ph]. So Page 11, I think we can say here that in Q4 the counter price and mix were neutral.

The sales volume asset was up by some 11.3% and then the currency was still negative in our figures with an amount of 4.5%. 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 cost there, namely the warehousing and the logistics.

And then also SG&A was better compared to 2022 Q4 and then we landed at the level of €22 million in terms of PCT segments 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 three quarters, including this Q4 last year at a fairly stable minus 4% level.

Slide 13, we have heavy tires, 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 segments. Net sales were €62 million compared to €65 million in 2022 Q4 and in comparable currencies they were slightly below that of 2022 i.e.

with 2.6%. Operating profit €7.3 million and an 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 headwind from the currencies, but all-in-all I think it was okay performance and in a low margin business.

So I think as you look at the numbers in segment's operating profit 9.6% for Q4 2023 is a good achievement as such. And all-in-all, the full year operating profit was positive of €3.4 million, roughly on the same level as 2022.

Then I have our guidance and the kind of the assumptions behind that. So in 2024, Nokian Tyres net sales with comparable currencies and segments operating profit are expected to grow significantly compared to previous year.

There you can see kind of what is kind of driving our guidance and assumptions. So we see I expect that the selling replacement market is growing this year 2024.

However, the weak 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 tires may decrease due to the high interest rates which have a negative impact on machinery investments.

And then finally, after peaking in early 2023, the raw material costs are expected to moderate during this year 2024. Long-term, financial targets as stated i.e.

the growth, we are targeting €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 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 sharp top line is €1.17 billion in 2023, ambition is €2 billion, so we need to and want to drive the top line and the margin improvement is coming from the fact that sales volume will increase and sales price, average sales price remain at good level.

Strong deep team is also important and instrumental in implementing the strategic actions, so building the capacity and bringing that successfully to the marketplace. It's also clear that the environment over time, if you look into the 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 the work together with the new Nokian Tyres and that is our commitment. I'll move to Page 19 just to remind you that we have a journey which consists of two things.

One is the investment phase and the other one is the growth phase. In the investment phase which we expect to last from 2023 to 2025.

We now spent year 2023 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 had 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 two 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 2025 and then ramp it up so that we move in the growth phase in 2026 and 2027. And the ultimate target is to have a net sales over €2 billion and in heavy tires 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 the past six 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 2023 into 2024. 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 antitrust inspections in tire companies which were initiated last week.

NokianTyres does not have information on the outcome of the inspection and we cannot comment on the ongoing investigation. NokianTyres 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.

Hi, good afternoon. Thanks for taking my questions.

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 winter contribution to around 63%. Is that representative of what we should expect for 2024 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 tire production in terms of what the contribution was in Q4 and what we should expect for 2024?

Thank you.

Okay, 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 2003 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 2022, and we didn't have ability to make summer tires.

So therefore, what you can expect in 2024 product mix is that we have a growing number of winter tires, but we have even bigger number of summer tires and all-season, so that the mix will be more all-season, 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 materials, I said that we think that they are moderating, i.e.

that in beginning of 2023 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, 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 off-take 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 off-take products and then some complementary products in the Nordics area to complement our premium with the tires also off-take, but clearly more to come in off-take products contribution in further course of 2024.

Great, thank you for the information.

Thank you. Hi, it's Thomas Besson from Kepler Cheuvreux.

I have a few questions that if possible, I'd like to ask one by one. I'd like to just follow-up on Michael's questions on contract manufacturing.

Is it possible to have a figure in terms of units that were effectively contributing to your 2023 volumes and what you're planning for 2024, like is it call it a few hundreds of units? Do you expect 2 million, 3 million, 4 million in 2024?

That's the first question.

Okay. So you can expect that the contract manufacturing is somewhere around 3 million units in 2024 or we are aiming towards that number.

And then in 2023, slightly shy of 1 million, was the contract manufacturing contribution in 2023.

Thank you. Can I ask another very simple question?

Could you give us some indications in 2024 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 €330 million to €360 million full year. And most of that goes to Romanian factory build 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 2023. I think more or less kind of the debt, what we had there at the yearend will be the similar in terms of maturity and at the level.

And in terms of taxes, it will be around similar type of tax rates that we have had previous years.

Thank you. Looking at your maturities, your 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 natural 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 2022 when the Russian invasion into 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 on the visibility here on the heavy tire business?

I mean, there were some decelerations in the summer and around Christmas. What do you anticipate for 2024 overall directionally for volumes?

The 2023, we clearly saw that the inventory pipeline was quite full and so therefore the summer shot [ph] 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 2023. OE demand actually in early part of 2023 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 weaker and softer. And so therefore the OE demand is a little bit softer.

In 2024 versus 2023, 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 two extended shots in the summer and then one in the Christmas time, so we can run hard until the summer of 2024.

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 five production days because of the strikes.

Those obviously are not needed at this point because we would love to run the manufacturing harder and then this is, of course, 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 will be high at the end of 2022, but also at the end comment on the level of dealer inventories at the end of 2023.

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 2023 they were bit on a high side due to the off-take tires that we had to warehouse to prepare us for the seasons. Now, in 2024, and let's see what happens with the destocking.

But that is our understanding that the kind of the sellout from the dealers will increase and i.e. to sell in to there will be better than it was in 2023.

And the raw materials are at relatively good level?

They are on a safe level, so to say.

Understood. Thank you very much.

That's it from me.

Yes, hi. Thank you for taking my questions.

I actually have two 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 €11 million, relating predominantly to the U.S. And then just looking at your guidance, so as you are talking about significant growth, what 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 ask that the absolute numbers we expect a significant growth. Do we expect also that the margin profitability margins are improving and we expect that we 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 20 million both in Romania and the U.S. That is our best estimate at the moment.

And may be just a follow-up on that one, is it basically 20 million for Romania and 20 million for the U.S.? And if it's so, when do you anticipate U.S.

related ramp up costs to go to zero?

Our anticipation is that they will end by the end of H1. So in H2 there should not be such expenses anymore.

Okay. It's very clear.

Thank you.

Yes, thank you very much for the interesting presentation. My question is or question circulates a little bit around the U.S.

factory. Indeed and you mentioned a lot, we got a lot of information about the Romanian 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.

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 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.

Okay. Thank you.

Thank you. 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 expectations. 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 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 2023 into 2024 and 2025 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.

Then 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.

Understood, thank you.

Hi, it's Miika from DNB markets. Previously you have said that, you had an application for an investment subsidy 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 subsidy which EU needs to approve, but nothing that we know of has affected that process as such.

Thanks.

Hi, Rauli from Inderes here. I just wanted to come back on, 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, therefore winter tire production will be important for us. But obviously at the same time, when Dayton is ramping up and achieving it’s full, we will have more all-season as the America production is mostly all-season.

Some of those are all-weather and similar closer to winter, but basically practically all-season. 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 2023 and something what we had in 2021. So we are moving towards that old seasonality.

But today we still have very much the extraordinary, which is related to the fact that the capacity that we have available is mostly in winter tires, but not so strongly as in 2023 when we actually lack the summer tires in central Europe.

Yes, that's very clear. Thank you.

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.