Nokian Q1 shows strong growth with Ukraine war effects set to bite in Q2

The effects of the Ukraine war are not present in Nokian’s first quarter reporting, published on 28 April. The company has seen good levels of Q1 growth versus 2021, especially in its car tyre sales, but also in its commercial tyre business. However, with the manufacturer highly leveraged on Russian manufacturing and European sanctions against the country ramping up, it has announced to investors that all bets are off regarding its 2022 forecasts. The negative effects are largely related to passenger car tyre sales – Nokian explains that its “Heavy Tyres” are produced in Finland. It adds that while it has stopped the distribution of these products in Russia, “Nokian Tyres has never sold tyres to the Russian army, and the Russian Federation is not a customer of Nokian Tyres.”

On the face of it, Nokian’s start to 2022 has been positive, with strong year-on-year gains over the Covid-affected first quarter of 2021. Overall, sales were up 21.9 per cent in this period – +28.1 per cent in passenger car tyres and +16.4 per cent in commercial vehicle tyres (“Heavy Tyres” is Nokian’s term). But with the fifth package of EU sanctions ruling out tyre exports to the trading bloc in force since mid-April, Nokian’s St Petersburg plant has lost access to its largest market. The plant is feeling up-stream pressure too, with raw materials usually acquired from the EU now cut off. Clearly, this situation means uncertainty prevails in the immediate future.

Jukka Moisio, president and CEO of Nokian Tyres (Photo: Nokian Tyres)

Jukka Moisio, president and CEO of Nokian Tyres, said that the company is focusing on “maintaining control of our operations in Russia and securing cash flow” in the short-term. Looking further forward, Nokian wants to accelerate “plans to diversify the production base through investments in new production capacities in Europe and a further increase in passenger tyre capacities in the factories in Finland and the USA”. No details have been released about any plans to construct a new tyre factory in Europe.

Moisio prefaced his comments with Nokian’s unequivocal condemnation of the war, emphasising the “unspeakable suffering” it has caused.

Nokian summarises Ukraine actions

Alongside its financial reporting, Nokian detailed its response to the situation in Ukraine and Russia, saying that the 24 February invasion has “caused high uncertainty related to Nokian Tyres’ operating environment and manufacturing capacity.” The 8 April round of EU sanctions against Russia impact Nokian’s business, specifically its “ability to manufacture tyres in Russia, and ability to sell tyres both in Russia and in the EU, specifically in Central Europe.”

Nokian’s statement continues:

“In 2021, Russia represented approximately 20 per cent of Nokian Tyres’ net sales, and approximately 80 per cent of Nokian Tyres passenger car tyres were produced in Russia. Of raw materials for tyres produced in Russia, approximately half came from outside of Russia. Raw material availability and its logistics will have a significant impact on the company’s capability to continue production in Russia.

“Nokian Tyres is expediting its plans to invest in new production capacity in Europe, and continues to increase production capacity at its factories in Nokia, Finland and Dayton, US. According to the plan, in the future all tyres sold in the Nordic countries will be produced in Nokia, and all tyres sold in North America will be produced in Dayton and in Nokia.

“The Heavy Tyres business of Nokian Tyres plc is not impacted by the ban to import tyres from Russia to the EU, as all Nokian Tyres’ heavy tyres are produced in Finland. Sales and distribution of heavy tyres to Russia were stopped due to the war. Nokian Tyres has never sold tyres to the Russian army, and the Russian Federation is not a customer of Nokian Tyres.”

Nokian detailed the active measures it has taken to manage the impact of the war on its personnel and business:

Health and safety actions

• Continuously communicating about the situation in the organization and providing support to Nokian Tyres’ employees
• Being in daily contact with the Ukrainian colleagues to help them and their families stay safe
• Donating to humanitarian efforts in Ukraine

Nokian’s plant near St Petersburg, Russia (Photo: Nokian)

Operational response actions

• Ensuring compliance with applicable sanctions regime
• Establishing a crisis management team and activating contingency plans to limit the operational and financial impacts, including shipping tyres closer to customers, securing the raw material supply to the factories, and transferring production of selected key product lines from Russia to Finland and the US
• Taking care of the personnel and management in Ukraine and Russia
• Securing control of the asset base in Russia (March 31, 2022: EUR 476.1 million)
• Stopping investments into the Russian production, and stopping all heavy tyre sales and distribution to Russia
• Expediting plans to diversify manufacturing footprint by investing in new production capacity in Europe and continuing to increase passenger car tyre capacity in the Finnish and US factories
• Implementing cost measures by cutting and delaying activities and reducing discretionary spending

Financial response actions

• On March 30, the Board of Directors decided to change its dividend proposal to the Annual General Meeting to be held on April 28, 2022 from EUR 1.32/share to EUR 0.55/share (2021: EUR 1.20). The new dividend proposal cuts the total dividend payable to shareholders by EUR 106 million to fund the new capacity in Europe
• Taking measures to secure the company’s liquidity and financial flexibility
• Leveraging the strong balance sheet to support the company in difficult times

President and CEO’s statement

Jukka Moisio’s full statement on the situation in Ukraine and Russia, and how this relates to Nokian Tyres, reads:

“For the past two months, we have witnessed shocking events in Ukraine. We have followed the situation with great sadness and we, along with the whole international community, unequivocally condemn the war, which has caused unspeakable suffering to so many.

“The war in Ukraine started to impact our operating environment in late February. However, the year began with good tyre demand and in January−March, our net sales with comparable currencies increased by 21.9 per cent and segments operating profit improved. The result was driven by price increases that we implemented in a wide range of markets and products to offset high raw material and other cost inflation.

“At these difficult times, our first priority has been to help our Ukrainian colleagues and their families stay safe, and support all Nokian Tyres employees. To secure supply of our products, we immediately activated contingency plans in February, including shipping tyres closer to our customers, securing the raw material supply, and transferring production of selected key product lines from Russia to our other factories. To reduce reliance on the Russian production and to diversify our manufacturing footprint, we have continued to increase capacity at our factories in Finland and in the US, and we are expediting our plans to invest in new capacity in Europe.

“The war in Ukraine will significantly impact our financial results in 2022, especially starting from the third quarter. Due to high uncertainty and dynamic environment, it is impossible to estimate the ultimate impact on our overall performance at the moment. The sanctions have a significant impact on our ability to manufacture tyres in Russia, and thus our ability to sell tyres in Russia and in Central Europe.

“Our short-term focus will be on adapting to the fast-changing, highly uncertain operating environment, maintaining control of our operations in Russia and securing cash flow. We have a strong product portfolio, and although there will be difficulties in the short term, we will do our utmost to ensure supply of our products to customers. In the mid-term, adding new supply capability to Europe will be one of our key priorities. At the same time, the Board is evaluating long-term strategic paths in the changing operating environment.

“I would especially like to thank all Nokian Tyres employees for their perseverance and resilience during this difficult time.”