Welcome to the Nokian Renkaat Q3 2021 interim report. Throughout the call, all participants will be in listen-only mode, so there's no need to mute your own individual lines. Afterwards, there'll be a question and answer session. Just to remind you, this conference is being recorded. Today, I am pleased to present Päivi Antola. Please go ahead with your meeting.
Good afternoon from Helsinki and welcome to Nokian Tyres Q3 results conference call. My name is Päivi Antola, and I am the head of investor relations in Nokian Tyres, and together with me in this call, I have Jukka Moisio, the President and CEO of the company, and Teemu Kangas-Kärki, the CFO of Nokian Tyres. As usual, we will start the call with Jukka and Teemu going through the Q3 results, and then that will be followed by a Q&A. Jukka, please go ahead.
Thank you, Päivi. Good afternoon, and welcome on my behalf as well. I'll start going through the prepared notes, a PowerPoint presentation, and as on the cover mentioned, we had a strong volume and profit growth in the third quarter. Before going into financial details of the quarter, just remind you that we announced our revised growth strategy in September in our Capital Markets Day. Some of the highlights of that strategy is that we have an ambition to become a EUR 2 billion company midterm meaning 3-5 years. That will happen by growing Heavy Tyres by 50% from 12-month rolling basis ending June 2021.
Also growing in North America by 100%, Central Europe by 50%, maintaining and strengthening the number one position in Russia and also strengthening number one position in Nordics and Vianor. Our financial key targets are 20% operating profit and 20% return on capital employed. Those are the highlights of our midterm targets, which we announced, as mentioned, in the middle of September. I go to page 5, which is our Q3 highlights. Net sales at EUR 443 million, up from EUR 350 million, approximately 35% in comparable currencies. All-time high third quarter, both in the Passenger Car Tires as well as in Heavy Tires. We had strong demand for our products in all markets.
Operating profit increased from EUR 69 million to EUR 97 million in the quarter, and that was driven by, especially by increased sales volume. We also made price increases to combat inflation that led to higher ASP. We also continued prudent cost control, especially to ensure that the cost inflation is also controlled internally. I move to page six, and I call out some key numbers in our P&L. First of all, the segment operating profit percentage 21.8% in the quarter compared to 19.8% one year ago. Year to date, our segment's operating profit is at 19.7% in 2021 versus 12.2% in 2020. Cash flow in the quarter minus EUR 81 million. This is driven by increased working capital, both inventories and also receivables.
On the other hand, we also had increased payables, which helped a little bit the cash flow. Capital expenditure remains below 2020 level. Also year to date, we have invested about EUR 60 million versus EUR 119 million a year ago. Equity ratio at the end of the quarter at 66% versus 57%, and gearing at 16% versus 18% a year ago. Those are some of the financial highlights, and now I hand over to Teemu to talk about the Passenger Car Tyres and financial details. Teemu, please go ahead.
Thank you. Starting with the Passenger Car Tyres, we had a strong volume growth in all markets, especially in Russia, that is visible in our numbers. The growth rate for the third quarter was close to 30%, and in absolute terms, net sales reached the level of EUR 330 million. The segment operating profit for the Passenger Car Tyres in the third quarter was on a level of EUR 97 million plus. We have been increasing the additional shifts in U.S. and in Finnish factories in order to match the growing demand.
All in all, if we move to the next page where we see the breakdown of our net sales, you can see that in the third quarter, our price mix was positive about 1.4%, of which the price component was clearly above 6%. Here you can see that we have been increasing prices as anticipated. Moving to the breakdown of our segment operating profit. Here, volume is the biggest driver to boost the profit. As discussed earlier, several times, we have a significant headwind coming from the materials. When the factories are running with full capacity, we can see the positive development in the supply chain basket.
The net, we are on a level of EUR 97 million, and in this quarter, currency didn't play any significant role. In terms of net ASP, we can see that our price increases have offset the negative BA mix impact when the share of Russian businesses is growing stronger than in other markets. If we then move to Heavy Tyres, there we can see the all-time high third quarter net sales and operating profit with comparable currencies. The growth rate was on a level of 36%, net sales on a level of EUR 69 million, and the segment operating profit for the quarter close to EUR 12 million.
The growth was driven by new product launches, as we have been discussing earlier, that we have a strong NPD pipeline coming and that is affecting positively to our top line and the customers' strong production levels as the early timing of deliveries helped to reach the top line. In terms of inventories, we can clearly see that those are on a low level, as also in the Passenger Car Tyre business. Moving to Vianor, there the performance has been on a good level in all countries. The net sales growth was on a level of 4% in reported numbers in absolute terms on a level of EUR 70 million, and then the segment operating loss was around EUR 4 million.
As we all remember, Vianor two main seasons are Q2 and Q4, and therefore we are now in the middle of the main season in order to generate the profits. Maybe as a final comment of the Q3 and the second half, we clearly saw that the Q3 was stronger than we anticipated because of the lack of tires. In terms of our view on the second half, there hasn't been any significant changes as we see that today.
Thank you, Teemu, and I continue with the presentation. First of all, to revisit our Hakkapeliitta 10, which is our major launch this autumn. Again, it's a four-time test winner in Finland, Sweden, Russia, and it comes with 140 different SKUs and is really good winter tire. On the next page on twelve, Hakkapeliitta 10 EV, which is a tailored model for electric vehicles and hybrids. There are certain expectations and parameters in EV version that are important. First of all, the EV vehicles are heavier, so therefore, there is a higher load capacity in the tire, as well as the higher torque in EVs, and therefore it needs to have a higher grip for high torque.
It's made from sustainable materials, so this is in line with our sustainability targets, and we include more and more renewable and recyclable material in our tires. Hakkapeliitta 10 EV also comes with lower noise, and that allows a higher driving comfort for EVs and hybrids. Finally, what is important for the improved battery range and sustainability matter as well, there's also low rolling resistance in this winter tire. This is our highlight and our key product in this season. On page 13, just to recap that sustainability is important, firmly rooted in all what we do, including our midterm financial targets, non-financial targets. We had also introduced those in September. We want to bring new environmental and safety innovations to our products.
Our ambition is to have 50% of the tire made from renewable or recyclable materials. We also aim to reduce our CO2 emissions in line with the Science-Based Targets, which were approved in 2020. We further want to improve our workplace safety, and we keep on monitoring and improving the monitoring of the sustainability of our suppliers. We have published our Sustainable Natural Rubber Policy in September. Also, we announced that we've made a ten-year agreement to have renewable wind energy for electricity in Finnish factory and Vianor. Also in June, we announced that we've installed a solar power plant on top of our Finnish logistics center in Nokia. Our guidance on page 14 is unchanged.
We expect that in comparable currencies, the segment's operating profit and net sales are expected to grow significantly. Recapping our prepared notes, with our revised growth strategy, we have an ambitious leap forward. We aim to be a EUR 2 billion company in midterm and growing in Heavy Tyres by 50% from rolling 12 months ending at June 2021. Growing North America by 100%, Central Europe by 50%, and strengthening number one position in Russia and also strengthening number one position in Nordics and Vianor. Our 12-month rolling sales at the end of June 2021, we are EUR 1.52 billion, and now at the end of September, our 12-month rolling sales are EUR 1.615 billion, which is all-time high rolling 12-month revenue of the company.
With that, I end my prepared notes, and I open for questions. Päivi, please go ahead.
Thank you, Jukka. Thank you, Teemu. Now, operator, as Jukka said, we would be ready for the questions from the audience, please.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Akshat Kacker of JP Morgan. Please go ahead. Your line is open.
Thank you. Akshat Kacker from JP Morgan. Three from my side, please. The first one on pricing, obviously it was a very strong quarter with a 6.6% increase, I think somewhat offset by the Russian mix. It would be really helpful if you could give us a broad summary of the price actions that you've taken in your key markets. Just trying to understand if there are more price increases with the new product range that will come through in Q4, helping price mix into year-end. If you still think that pricing can offset the different cost inflation headwinds that you will see across 2021 and 2022. That's the first one, please.
If I start with the comment that we have made several times in our earlier course that we anticipate to offset the cost inflation with our price increases in all markets. We are looking carefully where the raw material development is going and in line with our view, we will then further implement price increases as we go further. Regarding the price increases in different markets, they vary, so there are no one-size-fits-all solution for different markets.
Jukka, can you comment something about the new products and their impact on prices?
Yeah. New products are, of course, an important driver, and they allow us to have new price points and so therefore obviously they have a big major contribution to going forward and allowing us to improve the mix. For example, Hakkapeliitta then in various markets, an EV version, for example, commands a price premium versus a normal offering. We hope to continue that by launching new products as part of our strategy continuously. We've had a record number of new products launched in the past couple of years, and we aim to continue that.
Understood. Talking about mix, I want to go back to one of Teemu's slides from the CMD on category margin, where you showed that all-season tire margins are lower than summer tires. Can you tell us what actions are you taking there and by when you expect to improve the margin profile of that business, at least above the summer tire business?
As you stated, it has been visible in our communication already for a long time that the product mix has some negative headwind in terms of net ASP or the profitability development. Having said that, what we are also working to improve the mix or the profitability impact is the rim size development. That is one example of the actions to mitigate the headwind coming from the product mix development in the coming quarters and years to come.
Understood. The last one is on passenger car production capacity in Dayton and Finland, please. Can you talk about the current annualized production run rate as of, and when do you plan to hit the 2 million level at Dayton and the 5 million in Finland on an annual basis?
Yeah. We said, as part of our Capital Markets Day, that ambition is that we go towards 5 million in Finland. That's the capacity that is available and also that we've authorized investments and steps to go all the way to 4 million in Dayton and pretty much making the progress as anticipated so that we expect that in midterm we will hit those numbers. Looking at the quarter, we are basically on track to make that progress.
Thank you.
Thank you. Our next question comes from the line of Thomas Besson of Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you very much. It's Thomas Besson of Kepler Cheuvreux. I have a few questions as well, please. Firstly, could you talk about the development in Russia in terms of both demand and the level of dealer inventories? I mean, it's been the main driver of your revenue bit over in the quarter. Clearly, currencies and oil prices suggest an improvement there. But could you discuss whether you effectively expect a substantial improvement in market conditions in Russia in Q4 in 2022, or whether it's still too early to talk about that now? That was the first question.
Okay. Thank you for the question related to Russia. First of all, as we ended last year, the inventories were normalized level, and therefore this year the selling has been different compared to 2020 and driven by, of course, the demand in Russia. What we see is that the demand is essentially growing, but our selling has been growing faster for the reason that surely certain product allocations by competition has not taken place, so therefore there is higher demand for tires for those suppliers who are operating and allocating capacity in Russia. Inventory levels at this point of time are relatively normalized, so we don't see any extra inventory anywhere.
Obviously, it's subject to the winter season, which has started in part of Russia, continues right now, and we will see how the season will end up when we go into full November and early December. Our anticipation is that the inventories are at normalized level in Russia. Therefore, when we go into 2022, we don't see any overhang or excess inventory, and on the other hand, there's not a significant upside potential in filling the pipeline in Russia. We see quite a normalized situation right now. If you talk about the currencies and
In terms of Russian ruble, if we compare the Q3 this year and last year, they are roughly on the same level. The difference within the quarter was that last year in the beginning of third quarter, it started to depreciate. This year, this quarter, it has started to appreciate. Currently, the Russian ruble is around 82 against the euro, whereas for the quarter it is somewhere around 86-87. Now knock on wood, hopefully the Russian ruble stays on this level or strengthens. Let's see.
Thank you. When I look at your mix, I mean, the summer and autumn shares have been higher, winter lower. I mean, the weather is still mild this year. Do you expect the full year mix to get closer to previous years, or do you believe that we're going to see a further erosion of the winter share?
I think that what you will see is that absolute number of winter tires and so on will remain at good level and even grow. However, it's clear that the all-season is growing in Europe and also North America for us, so that all-season share will be growing in our total mix. Then the summer this year particularly, summer was quite strong in early part of the year. Then when we go into 2022, we will then see how this turns out. Obviously the absolute number of winter tires is important driver for us, and that will be growing. All season is very, very strong, of course.
Thank you. Last question. Could you give us some qualitative comments on the evolution of profitability by region? I know you don't disclose that, but just as an indication, whether you're happy with the development notably in the Russian and North American business. You talk about a substantial mix deterioration, but with the market environment normalizing, currencies improving, et cetera, Russia contribution should improve as well. I assume that the North American business is very much supported by an unusually strong pricing environment. Is that fair?
As a qualitative comment, so naturally, which is visible in our numbers that all business areas are improving, their profit and profitability. If you look the geographical net sales development, Russian being the main driver, of course then the impact is also there, significant.
Okay. Any comment on the North American margin development?
As I said, all business areas are developing to the right direction comparing last year.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Michael Jacks at Bank of America. Please go ahead, your line is open.
Hi, good afternoon. Thanks for taking my questions. My first one relates to the early deliveries. Are you perhaps able to quantify the impact of this in Q3 revenues, and should there be any reversal in Q4?
It's difficult to quantify the impact, but essentially what we saw, if I try to qualitatively describe what we saw is that certain markets, there was a worry with the distributors that, are there enough tires in the market? They actually called in deliveries early in order to ensure that they have products for the winter season and that is the driver. Will there be any reversal? We don't think so. As Teemu was saying that our expectation for the second half is pretty much unchanged, so that the early deliveries obviously is something that we have in the quarter three, but the full half year we expect similar trading as we had in when we went into the second half in August.
Clear. Thank you. Could you please give us a sense for what your exposure is to sea freight and what proportion of your contracts are annually negotiated?
Sea freight is especially important, as we speak, for our North American business as we at the moment ship majority of our tires to North America, so we can see that there is a headwind in the sea freight. Also in our material unit cost in general is impacted by the sea freight as well.
All right. Thanks. Last question. Are you starting to experience any significant wage inflation in your operations, and how is this developing regionally?
Yes. This is part of the cost inflation and inflationary environment that we see from materials, transportation, logistics, and also we see that there's growth in the wages and salary costs locally in various markets. This is also part of our inflation as we said that the cost inflation will continue. This is part of our expectation that this and it's part of our price increase and cost mitigation actions that we see what we can do about this cost inflation. Yes, we do see. Yes.
Thanks. Maybe just following up on that. Sorry. Just trying to get a sense for what the level of incremental inflation is that we should expect. I mean, a lot of the sort of inflation items that we saw in Q3 started to rise towards the end of the quarter, and I would imagine that you got price increases already towards the beginning of the quarter. Trying to get a sense for what proportion of inflation is yet to reflect in the cost base, maybe perhaps looking into Q4 and Q1 next year.
Yeah. I think that, maybe if I respond qualitatively again, that we try to ensure that our price increase is offset these inflationary environment impacts, and so we act on those accordingly.
All right. Thank you very much.
Thank you. Our next question comes from the line of Giulio Pescatore of Exane. Please go ahead, your line is open.
Hi. Thanks for taking my question. The first one is on mix. Can you help us understand the drivers, so the components of the negative mix headwinds, I mean, between product costs and maybe regional costs and all the others, and just maybe trying to understand what was the strongest component and which one might actually will reverse in the next quarters?
As we have been discussing also in the previous calls, this year one of the biggest negative mix component is coming from the business area mix, when the Russian share is increasing faster than other markets. That then implies that the net ASP in euros are below the average. In this quarter, we were able to offset more than the headwind coming from the negative BA mix. You saw that and we discussed it earlier in this call that obviously our product mix, especially in the early part of the year, bigger part of the summer tires than we usually have and also all season growing. However, of course in quarter three, winter tires were the main deliveries.
Overall in the year, the share of summer and all season will be higher, although the absolute number of winter tires will also be higher.
Okay. Thank you. Biggest impact from regional mix and product mix, and I guess there was also some positive impact from the new product launches for mix within winter.
Indeed. As we have discussed that many times when we launch new products so that allows for the new product, new price points, but also behind that product and repricing the other product offerings so that we have a right kind of a price points in various categories. This is visible now in this year as well.
Okay. Thank you. The second question on Russia, I mean, are you worried at all about the COVID situation in the market? Do you foresee, you know, the risk of any lockdown or are you seeing any risk of that? Are you taking any preventive actions to potentially offset the lockdown of your factory in St. Petersburg?
Yes, we of course follow the COVID situation quite carefully, and so far our factory has been operating well. We have had cases like everybody probably operating in Russia, but we've been able to take mitigating actions and continue operating with good efficiency. We don't expect that to change significantly. Always we are careful, and we take care of the safety of our employees all the time.
Thank you. Maybe just one last one on the U.S. front part. I mean, you reiterated the target of 1 million units this year. Is there any scope to do better than that?
We basically are running towards our 4 million target, and we are on track. If and when we can achieve higher, so the year is not yet, also we will see. Clearly we are making good progress.
Okay, thank you.
Thank you. Our next question comes from the line of Gabriel Adler at Citi. Please go ahead, your line is open.
Hi, thank you for taking my questions. I just have two. The first is on the bridge, the supply chain bucket. Could you elaborate please a little bit on what was driving the strong reversal and the positive impact there? My second question is on the guidance, because you've maintained, you know, what is quite vague guidance with significant growth, despite only having a few months left in the year now. Would you like to take this opportunity maybe to clarify the guidance at all, on the call following this print? Thank you.
If I start with the supply chain please. There it's good to remember that last year we had a significant negative impact. Now this positive is the reversal of last year negative. That's in its simplicity the reasoning. Now, the factories are running at full capacity as we speak, and therefore it is a positive thing for our profit and flexibility compared to last year.
To guidance, it's unchanged. We made the guidance in February this year, and we are tracking according to that guidance, so no reason to change.
Okay. Could I maybe follow up on the supply chain bucket point? Because I think the negative last year was around EUR 9 million. So it would be interesting to understand if there's anything else within that portion of the bridge that you're including. I know you mentioned sort of cost reduction measures. Maybe you can elaborate on that if that's included or any more detail on what the delta is between the EUR 17 million this year and the EUR 9 million negative last year.
The main reason for that development year-on-year is the fixed cost absorption. Last year we didn't have the full fixed cost absorption because the volumes were on a low level. Now we have the full fixed cost absorption. There are some other items, but that are not as significant as this full cost absorption difference year-on-year.
Okay. Thank you very much.
Thank you. Next question comes from the line of Tanu Rantamäki of Danske Bank. Please go ahead, your line is open.
Yes, thank you. I have two questions. First, just coming back to this, early deliveries and outlook for Q4. Just to clarify to understand, you don't expect a reversal in the early deliveries, but then it sounds that you are more cautious on Q4. How has your view changed on Q4 than what it was when we last spoke? Second, can you provide a number for the expected inflation on raw material costs? Has this view changed from what you thought at the time of Q2 report? Thanks.
If I start with the cost inflation of the raw material headwind, it has gradually increased slightly, but we are already on a high level as we have been speaking earlier. There will be a significant headwind in the second half as communicated earlier, but no major change from the significance.
Following that and, talking about the expectations for the second half, and we went into the second half in, August. Our view from that hasn't changed significantly. Obviously, we are very happy about the quarter three volumes and, we will see then how the final quarter will turn out to be. We have no change of expectations.
All right. Thank you.
Thank you. Our next question comes from the line of Pierre-Yves Quéméner of Stifel. Please go ahead, your line is open.
Sure. Good morning. Sorry. Good afternoon to you. Two questions I guess. I'll go over what has already been raised. Regarding the raw material price increases, is it still valid that you expect to fully offset the cost only by the first half of 2022? Which will be the first question, please.
What we have been discussing is that on a rolling basis, we will offset the cost inflation, not giving any specific timeframe.
Okay. Thanks. Once again, follow up on the volume trend. I'm not sure I totally remember what you said. What were the trends you were expecting for the second half of 2021? Given the staggering volume number in the third quarter, do you, in a nutshell, expect a positive development on the volume side in the fourth quarter of this year? Thank you.
We basically were at the time when we talk about the second half, we were supplying and running flat out. I think that essentially our situation in that sense, when we have been operating in the second half, hasn't changed. We expected strong volume development and it has materialized partially in Q3 due to early deliveries. We also expected that good volume development continued in the second half of 2020. We haven't changed that expectation. The expectation as we had it in August is pretty much the same.
Okay. Likely positive, if I understand you correctly, in the fourth quarter of 2021.
It can be interpreted that way, yes.
Okay. Thank you.
Thank you. We currently have no further questions in the queue. Once again, if there are any final questions, please dial zero one on your telephone keypads now. Okay. No further questions coming through. I'll hand back to our speakers for the closing comments.
Thank you. If there are no additional questions, it's time to finish this call. Thank you, Jukka. Thank you, Teemu. Thank you all for joining, and have a good day.
Thank you, Päivi. Thank you, Teemu. Have a nice day.
Thank you all.