Review date: October 30, 2024
All numbers on the charts are in millions of EUR, except when stated otherwise.
Verdict:
We think Nokian will be able to exceed pre-war (2021) sales and produce the same earnings in 2.5 years. As a result, shares could return to 2021 levels in spring 2027, bringing a 300% upside.
Pros:
- fast sales growth;
- dominating winter tyre brand in the main market;
- 60% of the turnaround is finished with all milestones achieved on time and within the budget.
Cons:
- tire market is weak in 2024;
- new tire factory could have lower margins than the old one;
- Nokian had to sacrifice its market share in Central Europe and now has to catch up.
Nokian manufactured the first winter tire 90 years ago and remains the market leader in Scandinavia due to its high quality.
Winter tires for passenger cars and trucks are the main product, Nokian also makes summer and all-season tires. Almost all sales come from the replacement market (drivers replacing tires on their cars), and only a small amount – from tires installed by car manufacturers.
Geographically the company sells its tires in Scandinavia and Iceland (Nordics), Canada and Northern US states (North America), and Central Europe (Other Europe). The total market share is approximately 2% in these markets. The company focuses on niche segments with high margins.
Nokian produces its tires in three plants: Nokia (Finland), Dayton (Tennessee, USA), and Oradea (Romania).
- The turnaround.
- The current state of the tires market.
- Financial situation.
- Summary
The turnaround
2.5 years have passed since Nokian launched its 5-year transformation plan. So far the company hit all milestones
In March 2022 Nokian decided to close its biggest plant located in Russia, as the full-scale Russo-Ukraine war started. This facility had three advantages: cheap energy, cheap labor, and proximity to the head office in Finland.
As a result, quarterly sales were down 37.5% after the company sold off the remaining tires in mid-2022 and Nokian’s share price plunged 80% from the pre-war level.
Sales are in million EUR, 4Q moving average:
The company made three big decisions.
1. Added manufacturing facilities:
expanded plant in Finland in 2023;
expanded plant in the USA in 2024, full capacity from 2025;
built a new zero CO2 plant in Romania. The first tire was produced in July 2024, production at scale will begin in early 2025, with full capacity from late 2026.
So far, everything has been finished on time and within the budget.
2. Signed contract manufacturers from China to fill in the temporary gap. The tires are made according to Nokian specifications and sold under the Nokian brand. The company made this arrangement permanent with more contract tires during peak demand periods and fewer during a downturn, with stable manufacturing at its own facilities.
The operating profit margin suffered heavily, as these tires cost more (chart is in % of sales):
3. Maintained sales in Nordics and North America, sacrificing market share in Central Europe. Sales in Russia were stopped after the remaining inventory was depleted.
Numbers are in million EUR, 4Q moving average:
Nokian plans to achieve the following targets:
Target | 2027 | 2021 |
Sales, bln EUR | 2.0 | 1.7 |
Operating margin | 15.0% | 15.6% |
Tires produced, millions | 15.0* | 19.0 |
Net debt / Ebitda ratio | 1.0-2.0 | -0.2 |
* in addition Nokian plans to sell tires from contract manufacturers.
The company is going to sell higher-priced tires with a bit lower operating margin in 2027. We expect the same net profit because of higher debt and lower operating margin.
Main factors, impacting operating margin:
Positive:
- Romania factory will employ 650 workers vs 1100 in Russia;
- SUV and EV sales increase demand for more expensive tires;
- the first zero CO2 tire factory opens the market of climate-conscious buyers
Negative:
- higher energy costs in Romania;
- a higher share of all-season and summer tires (they are cheaper than winter tires).
Explanation of Nokian transformation from their 2023 Annual report:
The current state of the tires market
sales continue to grow strongly in the main Nokian niche markets
Overall tire sales are expected to be flat in the target regions. Nokian 2023 annual report:
According to Global Data, the demand for tires will grow moderately in Nokian Tyres’ primary markets during 2024–2027. The yearly growth rate is estimated to be approximately 2 percent in the Nordic countries and North America and approximately 1 percent in Central Europe.
The main reason is lower new car sales. As Nokian operates in the replacement market, it is positioned much better to tackle this weakness: drivers will continue replacing old tires. Only the first-year winter tire sales will suffer (new cars are usually equipped with summer tires in the target regions).
Michelin’s Q3 2024 financial information confirms this point:
Competition intensifies as Chinese manufacturers flood European and American markets with cheap tires. But Nokian produces premium tires, not affected by competition from China yet.
Climate change in Central Europe and North America poses a significant threat to Nokian: more people buy all-season tires as winters become milder. Still, many governments demand that cars be equipped with winter tires from November till March. Also, drivers don’t have much choice in Nordics, Canada, and mountain regions: even if heavy snow and frost happen only 4-8 weeks per year, they need proper winter tires to handle it.
In addition, Nokian will further increase the production of all-season and summer tires. But it doesn’t have such a strong brand and pricing power in these segments.
The heavy tires market “doesn’t look too promising when we are looking towards the year-end”, according to Nokian’s CFO. Still, Nokian sales in this segment were down only 3.0% YoY in Q3 2024, compared with a 10.8% YoY decline a quarter earlier. This segment represents 18.5% of the total Nokian sales.
Michelin’s earnings showed a similar YoY picture in truck tires: -4.6% sales and -5.5% volume for 9M 2024. Market data from Michelin’s Q3 2024 earnings:
Despite the overall weakness, premium tires continue to show strong growth. Michelin plans that 18”+ tires market will have a 12% Cagr in 2023-28. Pirelli estimates that 18”+ tire replacement market grew 8.8% YoY in H1 2024, compared with a 0.2% growth for ≤17” replacement tires.
This is the result of higher sales of sport utility vehicles (SUVs) and electric vehicles (EVs). SUVs usually have bigger wheels than sedans or wagons and EVs and hybrids are significantly heavier than petrol or diesel (ICE) cars, increasing demand for larger size and more expensive tires.
Even though EV sales are lower this year, they still replace old ICE cars. So the total number of EVs on the roads continues to rise significantly.
The new zero CO2 tire factory in Romania is the world-first and allows Nokian to enter a niche of climate-conscious buyers. Nokian has already signed an agreement with Polestar (Volvo’s sister company) to create a climate-neutral car by 2030.
Nokian will manufacture almost all US tires in the US factory: potential US import tariffs won’t impact the company.