Nokian 1Q sales down 13%, operating profit down 20%
Despite significant drops in first quarter sales and profitability, Nokian used the publication of its latest financial results as an opportunity to rebuff negativity relating to its exposure to the Russian market. In the first quarter of 2013 Nokian Tyres Group’s net sales decreased by 13.3 per cent to 333.1 million euros (1Q 2012: 384.3 million euros). Operating profit fell even more sharply, dropping 27 per cent to 76.3 million (1Q 2012: 105 million euros).
The tyre manufacturer blamed historically low levels of tyre demand in Europe, but also presented the case that demand for replacement car tyres in 2013 will be on previous year’s level in Nordic countries even if it does remain weak in Europe.
Finnish manufacturers defends Russian approach
In Russia demand is estimated to show growth in winter tyres but be flat for summer tyres. And while company representatives concede that the 2013 pricing environment is challenging across all segments, Nokian’s strategy will reportedly be supported by easing of raw material costs (€/kg) by approximately 6 per cent in 2013. But this doesn’t fix the demand problem. And to this end Nokian admitted sales are expected to show “flat to some growth during 2013.” Sales in Russia and North America are, however, expected to grow. But sales in Nordic countries and Central Europe are expected to be flat as well.
All this adds up to some 2013 “growth in net sales and operating profit compared to 2012” although on the back of the first quarter results, first half net sales and operating profit are still going to be weaker than in 2012. The danger for Nokian is that the less than spectacular results for the company to be more reliant on its Russia strategy, but with Bridgestone (itself a 15 per cent shareholder in Nokian) announcing plans for its own Russian factory during the first quarter, this is a strategy that has come under intense scrutiny. The answer? A restatement of the Russian strategy in the present market context from Nokian president and CEO, Kim Gran:
“Our strong market leader position in the core markets in Russia and Nordic countries is intact and helped us to book reasonable first quarter results. Headwind was heavy with the European economy, car sales and replacement tyre market demand being clearly down. We do not foresee any major improvement in the market for 2013 but target to grow and excel on the back of our renewed winter tyre range, expanding distribution and our strong industrial structure.
“In the first quarter our strongest card was, once again, Russia. A significant increase in winter tyre sales and market share brought us most of our profits. We expect the good performance to continue with our new winter tyres spearheaded by Hakkapeliitta 8 coming on stream from the second quarter onwards. The Russian tyre market is growing modestly in 2013 but offer still further growth opportunities in replacement winter tyres. The Central European market was as bad as expected in the first quarter with a clear drop in demand. Sales in all Europe suffered from a prolonged winter, which for both Nokian and Vianor caused most of the consumer summer tyre sales and profit to shift to the second quarter.”
Russia ‘still going strong’
Despite questions from market analysts following the Bridgestone announcement, Nokian has maintained its position in relation to the Russian market. The company’s thesis is that GDP growth in the first quarter was approximately 1 per cent in Russia with full year growth estimated at 2.7 per cent. And while this is nothing to write home about taken in isolation, compared with Nordic countries, where full year 2013 GDP growth is estimated to be 1 per cent and large parts of Europe that remain in recession or close to it, this is a good prospect.
The argument is supported by external signs of improvement such as new car sales. In the first quarter of 2013 Russian new car sales totalled 616,700 units, the same level as the comparable period last year. However, while new car sales are estimated to be flat in the first half of 2013, Nokian expects the stagnation to turn to growth in the second half with full-year sales of 3.1 million, up 2-5 per cent versus 2012. As a result of this and growing consumer confidence, 2013 demand for tyres is expected to exceed 40 million units and to grow 2-5 per cent with majority of growth being generated by winter tyre sales. Russia tyre pricing has reportedly remained stable across all segments. Compare this with Europe where in the first quarter of 2013 new cars sales dropped by 9.8 per cent and replacement car tyre sales decreased 13 per cent (although the UK is notable exception here), with winter tyre sell-in tumbling 33 per cent.
The signs are said to be even clearer in the Russian truck tyre segment. In Europe demand for premium truck tyres was down 1 per cent and it was down 17 per cent in the Nordic countries but in Russia demand increased by 25 per cent. At the same time new truck winter tyre legislation in Sweden came into effect in the beginning of 2013, which increased the public awareness throughout Europe on tyres and winter safety.
First quarter miss
While Nokian focussed its efforts on stating the case for Russia, financial analysts were somewhat more sceptical, with Morgan Stanley for example asking if the first quarter 2013 results were “prelude to a year of falling consensus?” The analysts conclusions appears to have been coloured by the fact that the drops in Nokian’s first quarter sales and profitability meant the firm missed consensus expectations by 9 per cent. Drops of 5 per cent had been expected, but the reality was closer to triple this. Pre-tax profits (EBIT) were described as “relatively more resilient” inasmuch as they were just 7 per cent lighter than consensus, but the rancour could have stemmed from the fact that they were a 20 per cent first quarter miss compared with Morgan Stanley’s own estimates.
On the subject of Russia, the analysts’ line was that there are still questions to ask about Russian pricing and answers needed about why the decent Russian car markets didn’t help Nokian to surprise in its first quarter financials. So, while Nokian is pointing to Russia as its saving grace and while the fact that Russian and CIS consolidated sales grew 3.2 per cent, the fact that they formed 51.8 per cent (1Q 2013: 44 per cent) of the group’s total sales could also be seen as the company’s Achilles heel. And with the goal to increase production output 50 per cent by 2014, discerning which way it will go is central to the company’s future success.
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