Nokian Renkaat Oyj

Okay. Good morning everybody and welcome to Nokian Tyres Second Quarter or First Half 2015 Results Call.

And once again here in Helsinki we have a room full of investor analysts, media people. And behind the lines we have another 200 people of similar professions, also some public people, competitors and other Nokian Tyres personnel.

I will continue the same practice I have had now in the past, so I will be using the materials that has been available in our website from the morning. I’m not to kind of remember every time to say which page.

So, I’m going to go through but it should be straight forward. The presentation will take less than 40 minutes again the rest we will reserve for your questions.

And once again I remind this room to check that your mobiles are on silent mode. Structure of the presentation is the same.

I’ll start with a general overview about where the market has been and how kind of follow our scorecard looks like for the quarter and then going more, deeper into the financial performance and then dive to the business units in Russia and then finishing with the outlook. I’ll use this opportunity also to explain the other announcement that we have today with respect we have been the stock now negotiating the reduction for our Nokian plan.

And once again it was a very eventful quarter and I’ll start from the Russia as that is the maybe the most interesting one. Second quarter was such as clearly worse than the first quarter was.

Overall for us, even though the results such are now better in the second quarter than they were in the first quarter for us, the quarter was not that easier, the first one was, we were planning to catch up more from the first quarter. And I’ll go through the reasons, one of the reasons being the Russian market.

So, GDP decline was more than twice as much as in the first quarter and then this retail slum really started to impact. The inflation has been over 8% now for the beginning of the year.

And even though the Russian ruble at soft state about same throughout the quarter, it has been on the weak level. And it has actually weakened ever since.

The new car sales for the quarter, we were hoping clearly better early sales for the new car sales. And I know the dual figures car saw some hope for the new car sales.

And of course for us, new car sales in Russia, is the one that has a bigger impact to the winter tyre sales than for the summer tyre sales. New car sales ended up being almost 36% about the same as first quarter behind last year so, clearly a disappointment, and now the forecast from the local car industries that the new car sales will be as low as 1.55 million cars this year.

We have always considered that 1.5 million is kind of an absolute minimum nowadays for the Russian markets. So, we are in a very low situation.

The other markets have been of course clearly different GDP growth, about the same everywhere, new car sales quite nicely developing in most of the places. Actually Europe now has been having of course a recovery because of the quality pleasing and the rental pricing helping the economies.

But now of course we end the quarter with at least with the issues with Greece and then constantly bigger concern in all industries facing the Chinese situation. When we look at the tyre markets besides the car, new car sales, in Russia decline has been about 15% to 20% in sell-out which was recent statistics for the sell-out actually has been even worse.

So, sell-out decline has been over 20%. In Europe, very remarkably new tyre sales have been over 2%, so in a way kind of nice growth, small growth.

But inside that growth figure it’s to be noted that there are very big structural changes so the winter tyre sales went down by 11% for the first half. So, clearly there is a shift.

Of course there are some maybe, impact from the inventories but clearly the biggest impact in this figure is that the season is delaying to the second half, closer to the actual consumer season. So, what’s driving this?

This trend that has been there now for quite some time already, margin stock getting thinner, the retail and wholesalers don’t come to keep inventories. But the big reason has been that so far couple of years now, the prices has been going down and when you wait one more week or one more month, you get an additional 0.5 percentage point and that is very important when your margins are very thin.

We see however now that that is starting to change now because the prices are now starting to climb up, whether that’s permanent or temporary let’s see, I’ll come back to that when we talk about the raw materials. It’s to be noted however that when we now get these price increases which we welcome in the market, they don’t impact this year, because this year is kind of volume pricing has been out.

This mainly impacts the volumes starting from January 2016 onwards. Nordic countries, new tyre sales up sell-in up 9%, and the sell-out is clearly much more normal than this.

There are few winter tyre inventories deliveries taking this figure up, Nordic figures are quite small, so some deliveries impact this. And then, North America still flat, even though the market is clearly going up flat, tyre market reflects still this poor negative taxes that Chinese suppliers took place, last year and early part of this year, confirms the early part of this year and the huge deliveries that took place just before those taxes took place.

Those are being cleared now during the summer season in North America and the situation there normalizes. And we come back to our growth you can see that it hasn’t impacted us too much.

In the heavy tyre segments, we have had a good situation with our core segments, forestry has been doing well. We also believe that it will continue doing pretty okay throughout the whole year.

Agri segment has been doing well but now there are some signs that there might be a bit of a decline there which is compensated partially by the upper segment that has been good but is, it’s not mining segment that has big, but it’s now returning back to the small growth. Currencies continued to impact us and not as much anymore in the second quarter because the comparative effects are also going down from the last year but we still cut quite a big impact.

We had about €39 million in our net sales cumulative in the first half that has been caused by the currency exchange. We are compensated partially by the mainly North American currencies.

Well, then looking at our scorecard, Nordic, nice growth. We are holding our good position there.

We are actually assuming for the full year still a market share increase. We have been doing well on the sell-out when we trust, we look at those market shares, this official market share we look at the sale in figures and there because of these deliveries you see here are minus mark, I’m not too worried about that.

Other Europe, we had this delay of the winter season and because of our market share being clearly bigger there, there is a decline of the first half’s market share North America huge growth and then market share capture continues there. Recent decline in sales growth sales is now almost 40% and that’s of course huge, posted both by the currencies and then the more leadings.

I’ll now go through a little bit more in detail these volumes and market share development in Russia, so I said the volumes went down. It’s been 20% sell-out plus even bigger, in sell-out of course the biggest numbers of products are summer tyres.

There is very little winter tyres mainly related to the new car sales has taken place in the sell-out. In the summer tyre season, actually we did very, very well.

So our market share increased and then this new premium summer tyre sales surprised us positively. We’ve been capturing their market share.

Overall we’ve had 50% growth in our premium summer segment and that has been helping us of course a lot. There are still lots of kind of niche points in that premium summer segment that we can in the future also capture.

This gives us very good confidence going forward. We sold more premium summer tyres in Russia than the previous leader, the Western European competitor has been selling.

And that was the first time, so, really, really encouraging news. In the winter tyre sales, of course the winter season there as well is moving amongst the second quarter.

But then what has happened there on a couple of different things. So, first of all, the purchasing is moving more towards the B segment and C segment in this kind of situation, bit more than we were planning and estimating.

Then I already mentioned in the last time that we had this timing challenge but when we came out as the market leader we came out with winter tyre prices for the season, we came out when the ruble was pretty weak in the early part of the year and then the competition typically there, probably is steady probably about one month after that. And at that time, ruble temporary strength and the price positions were at about in average about 5% lower than our price increased.

And that temporary cost situation our price point moved in this kind of situation a bit further up. And that of course impacted partially the volumes for this particular season.

I’m pretty sure we will now see because ruble again has weakened quite a lot we would be seeing some turning times for the competition and they need to react with their prices. Also, slight impact was from the situation I have already explained to you, how we control the situation in the market.

We are very close to the customer. One of the things that we do is that if there are any delays of one or two days of quarter, of the payments, we need to assemble the customer and are discussing deliver any new increment that caused a few customers to take some volumes from somebody else.

All these are temporary issues and we’ll be corrected. But this impacted into all of our volumes and being closed to being C segment, our volume based market share declined.

We have estimated that our value based market share did not decline at all. So, we would not have had too much different result even with any kind of other pricing.

And that resulted in clearly better than profitability naturally with our mix, mixed change there was quite drastic, the local price increases were already quite big once and then the overall resulting mix change was quite remarkable. I have used this kind of picture that then we have the overall winter tyre space and then the margins that the summer tyre is at a similar state, a little bit lower.

But now actually bit, with the recent low on the summer tyre premiums, summer tyre margins are approaching the best winter tyre margins, which is once again because of our constructions there that is helping us immensely for the future. Currency impact, €38 million here negative however only €9 million in this particular quarter.

And then maybe ASP interesting phenomena again in ASP, this was clearly solving now that the price declines are leveling off. There has been a price, the average price decline in the market for several years already.

Now we start having kind of leveling off in that. So, in our case, we had still lower ASP but only very modest in the quarter and mainly impacted by the currency.

The prices start to now stabilize themselves currency naturally impacts your prices. Every time one direction or another, this time it’s negative but then the mix took a substantial part of impact back already to the positive directs.

So in this respect as well, this gives now a little bit better feeling on the ASP side looking forward. Then raw material cost continued a bit more aggressively decline than the estimated in our plans.

And then the reason is of course the oil price that has paid lower, I’ll come back to this at the end when we go back to the outlook. Fixed cost neutral now, we have still a currency impact but clearly lower which reduces the fixed costs so we are at about the same level as last year.

The volumes both sell volumes and the production volumes have about 10% decline, so the productivity has been also let’s say even a positive surprise how strong the productivity improvement is because typically when your volumes go down you have more challenges to get the product up. But we have been able to do 6% improvement on the product EBIT.

This is extremely important also for the future and your present profitability. On the network side, even slightly better quarter than last quarter, again more than, clearly more than 100 new outlets added to the network, few more owned Vianor outlets and then the most in the partner network both in Vianor and NAD and eNTYRE network.

So now we exceeded in eNTYRE, in NAD we exceeded 1,000 and together with eNTYRE we have now 1,100 outlets. Also just like the format of distributes.

I’ll then move on to look at what does this mean in terms of figure wise. Well, like I said that the figures are such, we’re better than in the first quarter but still net active on the sales side 6.5% decline and then the operating profit declined about 11%, resulting that we have 19% decline in the overall operating profit for the first quarter.

And this is of course part of the reasons behind our near guidance, what the profit is like. Operating profit percentage state on a good level 23.3 but still it’s over 1% less than last year because of the volumes.

Profit for the period however was only 2% down, and the reasons are lower financing costs. Cash flow has been all the time kind of little better than we have planned.

And we expect that the cash flow will be kind of normal good year cash flow for the year. So, if I kind of summarize, so we have a volume issue, it’s mainly caused by these two phenomena, Russian situation and Central Europe, winter tyre market moving before what we have the currency impact still working against us but then the raw materials, the productivity and the mix are clearly supporting us.

And maybe few more kind of main things are that huge success on premium summer tyres and then the productivity, North American gain. Then on summary level about the business units sold, the same kind of positive trend that SUV tyres had in the first quarter had already in the last quarters of last year continued clear improvement on the profitability.

We have no risk, going ahead as planned so good growth on the safe and growth in the profit will come when the season, the biggest annual season which is the winter season is over. And then of course in the first six month figures we have this cancellation of our tax dispute days impacting the figures on the profit side.

And maybe few words about that tax level for the quarter was extremely low and then one operation is that we got the accrete support from the Russian authorities that we have in place at the moment. So we cut process nicely even earlier than we were estimating and that impacted us.

Tax rate, in fact this is not over with the same situation as last time, we expect that they will come back at some point of time, no idea what kind of pace but at some kind of pace will most probably come back. Interesting to see whether the first two years basically are now not anymore valid whether they are still included and I’m not sure what the overall case is.

The money that tax, are unnecessarily collected already against the case, it has been canceled they haven’t naturally not returned it yet. So, we have that big chunk of money there in the gas field which we are expecting back any time.

When we look at the geographic split, now after all these changes you can see here the Russia and CIS naturally have been the mention that naturally the Ukraine situation is clearly even worse than Russian situation and that is taking the overall Russia and CIS figure to, that’s a low level, clearly over almost 40% decline. So the Russia and CIS only 22% now, 33% last time so huge annual change.

And this is quite evenly split now to all the other areas, other Europe mainly Central European countries have kept their share. No, the list is North American growth and we are of course, we would get also support on the profitability side from the currencies.

Then on the raw material 14.8 half year comparison but it is no better, there was already again an increase on the quarterly level. And first quarter was higher than fourth quarter, so there is a clear trend of increase and then we keep our estimates and for the full year impact 5%.

It might be now if anything will happen we feel it might cause slightly higher than this for example if Iran returns back to the oil market, the oil prices will stay or even coffer the task. So the estimated tailwinds might increase some millions from that end.

But that still is our focus. And this is how now the business unit split looks like.

Clear drop of the car sales, back into car tyres share of the total sales, and that’s naturally always dilutes our overall margin because car tyres when you get the EBIT margin is forced to fairly still 28.9%. However, last time it was over 30%.

So with the volumes being clearly lower, this has a clear impact in the margin, even with the mix developing extremely well. We have lots of sales plus us developing, I will come back to this where the safety increase is coming from, EBIT about same level however the EBIT margin improving, like I said that this growth will bring the profit growth during the season for us.

NV Tyres nice growth, very substantial EBIT growth, but the fact here is of course that the big drop in EBIT on the passenger car tyres did not become even with this least positive development on the heavy tires. So we are now picked up to operate smaller share of the business.

I think that our tyres’ EBITDA margins for the quarter they were 28.9%, this is actually the same than the first half has been, so couple of percentage point drop there. On the product side, the main thing clearly this quarter is this continued success of the summer tyres, premium summer tyres.

So big size tyres on the premium SUV segment, a new for example the new car sales development in all markets, SUV cars are still gaining shares while the size of the cars are constantly increasing. And now we are filling in the product gaps for, to that segment we are benefiting, so 50% increase.

If we dissolve it in our quarterly figures the summer tyre sales was 35% of the overall sales. This is most probably the highest ever or at least very close.

To support the North American, continued success we are constantly filling in some of the portfolio gaps there that we have and then this is a good set of nearly improved tyres. We will continue these in the coming years also there are nice applications that we are able to deliver to the market that will further boost our market sales there.

On the Magazine tests, quite silent quarter, not too much happening. The winter tyre tests will now take place mainly in the third quarter, early part of fourth quarter.

We look really confidently to watch those because we have a new Central European winter tyre family that will be part of the testing. And we now own test, they have been extremely remarkable.

Summarizing again, on the Russian side, new car sales very low but still the car bore itself is constantly growing. This dynamic that you can have, pretty decent summer tyre season because you’re actually not buying cars, it’s the new sign, using your old cars and then you’re consuming your tyres.

Therefore the impact to the winter tyre sales will be a bit higher than for the summer tyre sales. I’d like to say that our market share for the summer tyres increased and that will go now to the second half with a pretty good inventory situation for summer tyres.

Our biggest customers they have lower summer tyre, clearly lower summer tyre inventories than they have ever had. So this gives us confidence for the fourth quarter because fourth quarter is already a big summer buyer sales quarter.

The difficulty with the Russia is that impossible to estimate that when this turnaround will start happening. And I’ll come back this maybe still later on.

Heavy tyres remarkable EBIT profit now, we’re approaching the big considering the heavy tyres, they consider the kind of level magical level this 20% EBIT, 19.8% for the quarter. And this is clearly not yet drove, sales change was kind of seasonally was bit lower than in the first quarter full year, now it’s so far 6% of EBIT increase still even with the smaller sales almost 40%.

The machine, this machine now is in a good shape. So operatively this is delivering very good results.

And we see good growth opportunities for the coming years, for this business, now that the machine is in good shape. And we have some ASP decline also on the heavy tyre side, but clearly lower than the raw material decline would have come out.

And here, this is a good example of the products things that we do in heavy tyres to make sure that this growth will continue. We are looking at the specific applications, almost inventing applications here that bring value added to our customers.

And this is a good example, specific truck tyre, very specific one for - one specific dedicated axel in this big box, there are now different types of tyres for the different axels because all of them have a different type of usage they’re almost needed. We have now like I said about 120 outlets added to the overall network, few more equity owned one of them quite big and then those acquisitions are causing part of this growth.

But then this boost of our service business is causing the bigger share of the growth. So, services revenue increased now by 8% on services where we have been doing investments 10%.

So this is improving throughout the seasons that the EBIT presented are returning all the time to the better positive levels. And this is now reminder of our network starts to be very expensive.

However there are in most of the markets here besides Scandinavia and Russian markets, there are still nice growth opportunities available. We have the best distribution available in the Nordics countries and in the CIS and the Russian countries.

And even here in these difficult times the net focus is expanding. Okay, then moving on to the outlook.

So there are few changes now in the outlook mainly related to the Russian side, where we have kept the new product sales growth in Europe at the same level but then we have updated our assumption for the new car sales in Russia. So, unfortunate situation in the second quarter that the growth did not start means that we are now increasing our decline estimation over 30% now, so, that 36% first half year means that the second half still needs to be clearly better than the first half.

Currencies will stay weak against Europe they are now weakened in the last few weeks. There has been quite a strong weakening now starts to be again at the 70 rubles per Euro level.

North America, Central Europe, Nordic countries, no big differences there, there was this delay but we believe that the winter market is now coming and with any kind of normal season there should be quite a good market situation for the Central Europe as well, Nordic, very, very solid. But then, we have updated this buyer market estimation for the Russia from about 20% now we estimate it’s going to decline over 20% to 25%.

Raw material costs as I said we’re keeping it. However, now the likelihood that it will go little bit higher is clearly bigger than earlier.

Investments at the same level no big changes here and like I said in the pricing environment has changed, we have seen now several increases from several big competitors but it doesn’t impact or doesn’t get into market, yet some positive impact coming from that quite small in terms of reduction. So, even with lower volumes, we have been kind of downgrading our own sales estimates.

But our estimates are still stays clearly within the earlier guidance as well. So the next sales we’ll still keep estimation that they will decline slightly.

But then the operating profit we have taken out use this absolutely core of €270 million to €295 million sold up rent stocks from the kind of present trends. But then the bottom gross amount will roll.

I promised that I would also explain the action that we have started today. So we are starting the negotiations to cut down the capacity in Nokian factory, the capacity Nokian factory with the present earning is about 3 million buyers and the earnings.

So we are cutting it to 2.5 million. So we see that the present situation in the Russia, CIS allows us to now go for the next one or two years, so that we can manage with the existing capacities and the planned capacity investments in Russia.

Naturally we have this readiness to hit the growth with the enhancer again, if it would be materially bigger than we are estimating, then we would be able to scale back the Nokian site. But at the moment we see that the next couple of years we should be able to manage its present capacity.

It’s good to be noted that we are already today we are not using the capacities what we have, on the Nokian side the last two years, we have been forced to go for this temporary layers any way to cut the capacity there. So, these negotiations will concern basically everybody else on the Nokian side except the heavy tyres.

So there are about 900 people involved. The biggest part of the 250 positions, are related to the production which is clearly smaller figure out of this 900.

And we are looking for getting about €8 million savings very near. The situation what we have here naturally is that because of the ruble, the cost difference between our Russian factory and Finland factory has extended and now starts to business.

But we did not have any other choice but to do this particular action. This will not have kind of any real impact to our figures this year but we’ll then help our profitability side from January onwards.

And then another thing that I use this session to announce is that we returned back to the Capital Markets Day, perhaps after I don’t even know how many years of absence but we have completed our strategy work. We have got even an approval for it from our partner and we are ready to come out with it.

So, we are going to go through what we are planning to do in different business units overall, distribution, product portfolio and so on. And we will also talk about our promises for the market what comes to the financial targets for next three years.

This session will be organized in Finland, in Helsinki due space event being of November. And you are all more than probably welcome to join us.

And now we go to the questions.

The first question comes from Mr. Thomas Besson at Kepler Cheuvreux.

Please go ahead.

Thanks. The next question comes from Mr.

Hanen Kurseman at HSBC. Please go ahead.

Next question comes from Mr. Ashik Kurian at Goldman Sachs.

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And we have a question from Mr. Nikhil Bhat at JPMorgan.

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Next question comes from Mr. Austin Earl at Marshall Wace.

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Next question comes from Ms. Sheila Weekes at Bank of America.

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Next question comes from Mr. Edoardo Spina at Exane BNP.

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Next question comes from Mr. Gaetan Toulemonde at Deutsche Bank.

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There are no other questions at this time. Please go ahead, speakers.