Nokian Renkaat Oyj

Andrei Pantioukhov - Interim President and Chief Executive Officer Anne Leskela - Chief Financial Officer, Vice President Finance and Investor Relations

Artem Beletski - SEB Panu Laitinmäki - Danske Bank Tommy Ilmoni - Carnegie Mattias Holmberg - DNB Thomas Besson - Kepler Cheuvreux Henning Cosman - HSBC Gaetan Toulemonde - Deutsche Bank Paul Kratz - Berenberg Kye Miller - Bank of America/ Merrill Lynch

Good morning, ladies and gentlemen. This is 10 O'clock Finnish time and we're starting our meeting.

Welcome to the Result Presentation of Nokian Tyres. We are here today to review the results of the first quarter of 2017 and speak about the prospects for the rest of the year.

So my name is Andrei Pantioukhov. I am Interim President and CEO of Nokian Tyres.

And we'll follow the usual practice here today. I will start with the brief presentation overview of results and our guidance and then we'll take questions first from the audience here in Helsinki and then from participants over the telephone lines from other places.

And just as a kind reminder, please make sure your telephones are switched off or in mute here in Helsinki. So if we start with the one sentence which in our opinion best describes the results of the first quarter and the prospects for the rest of the year, it's here, it's strong start of the year and good prospects for steady growth.

And in this presentation, I will start with a general overview of the markets and our performance. Then give a few highlights of our financial performance in the first quarter and speak about other like corporate level things and news including of course the recently published news about our new Greenfield investment in the North American factory.

Then we'll have - we'll get deeper dive into our business units and then finish this presentation with speaking about prospects for the rest of the year and our financial guidance. So we start with a brief market overview.

I must say that most of the market areas where we operated showed quite positive performance in the first quarter of this year. The economy grew in all our markets, Of course in some places like Russia for example the growth quite modest, but it's already a big improvement compared to the situation during the last couple of years.

Also the sales of new cars which is of course very important for us as a tire manufacturer also increased in all market areas, in some markets like Europe and Nordic countries, the growth was quite significant for a mature market a mature economy. And Russia here also showed the first positive development in new cars sales in over four years, but I will come back to that in more detail.

Speaking about tire market, it was also increasing in almost all market areas apart of the Nordic countries. In the Nordic countries, we saw a decline in both sell-in and sell-out of tires in the replacement market.

And of course one of the main reasons for that is quite milled winter. So the weather conditions didn't support the continued demand for replacement tires during the winter months.

So practically the sell-out season was over in December and never picked up again until spring. And then of course speaking about markets, one important factor for us was the effect that the currency exchange rates had in our result.

And here for the first time in quite a few years, I guess this result was significantly positive. So speaking about our performance, we managed to increase our sales in all market areas where we operated.

And I think this is the very important message that it was not only one market area like Russia for example or a couple of those but all market areas where we operated, we managed to increase our sales. Of course Russia was the biggest contributor to this growth, growing over 50% in net sales revenue in euro terms compared to the first quarter last year.

But as I said, Russia was not alone and we actually managed to increase sales in all our market areas. And quite significantly in some of them like for example in Central Europe, as you can see the growth was over 18%,which in our opinion is quite remarkable for quite a mature market and strengthens our implementation of our strategy of growing our sales in Central Europe and North America.

North America also as you can see here showed quite a significant increase over 9%. And this is also remarkable because the winter in North America this year again was quite milled second year in a row and didn't support sales of winter tires.

So this growth which we have over here actually comes mostly from all season tires in which we continuously reinforce our market position during the last couple of years. Our sales volume increased compared to the previously year.

This increase came from all market areas apart from Nordic countries. In Nordic countries, our sales volume remained more or less in the same level.

But as we already discussed as the market itself decreased keeping the volume on the same level practically meant for us improving market share gain in Nordic countries as well. In other market areas, our market share remained on the same level as previous year or improved like it was the case in North America.

Coming back to the currency effects, as I mentioned already it was quite positive, so the positive impact of currency effect on net sales in Q1 was about EUR 21 million which contributes slightly over 40%, about 42% of our growth in the top line. It's of course a significant part 40%, but on the other hand it means that about 60% came from the actual growth in our sales.

Our average price increased during this quarter and of course something which this year has a very significant impact on our operations is the development of raw material costs. This continued to increase quite rapidly.

So the effect on this quarter compared to the first quarter last year was almost 19%. I will come back to raw materials in a few minutes.

We increased our production volume by about 12% compared to the previous year. We actually started the year from a very strong utilization, capacity utilization rate by the strong output in both our factories from the very beginning the year in the anticipation of strong demand during the year and building the capability to serve our customers and ensure good availability during the year.

Also productivity in our production increased compared to the last year despite a very complex product range which we have in both our factories. So then I move to highlights of our financial performance.

On Slide 6 you can see a summary table of main financial indicators with our results. Perhaps only two figures that I would like to draw your attention to.

First is the increase in net sales which was slightly over 18% compared to the first quarter 2016 and operation increase was almost 17%. So it means that we practically managed to keep the operating profit margin on above the same level, slightly above 18%, showing quite healthy profitability, despite the increasing raw material costs.

Then on the next page, we have a historical development of our operating profit by quarter and on a cumulative starting from 2013. And you can see here looking at how the Q1 2017 stands in comparison with the first quarters of the previous four years.

We can see that it's better than the previous two years, but still lower compared to the level of 2013 and 2014. So clear improvement compared to the previous two years, but still room to potential to improve judged by our historical performance a few years back.

But as I said, for a start of the year, it's really good. Then looking at the geographical breakdown, geographical split of our sales, of course with Russian revenue growing over 50% in euro terms, it's quite clear the share of Russia increased in our sales.

It was 26% of our net revenue compared to 19% a year ago. So clear growth in this year but of course it's still quite far from the peak levels of up to 40% that Russia used to account for in the Group sales back in 2012 I think.

All other market areas more or less kept their positions, maybe one country, separate country which share decreased was Finland and that was driven by the fact that the tire market demand as I mentioned already went down in Finland out of the Nordic countries actually Finland and Norway were the once which saw this decline. And also our increase in sales of heavy tires which are pretty much Finland focused was not as fast as passenger car tires, so that also contributed to the decrease in share of Finland in our general sales.

Then moving to the raw material cost development. During Q1, raw material prices and costs continued to increase.

For some of the raw materials price is started to stabilize or even decline. But I think it's still not clear where this stabilization will end.

But our cost, which of course reflect our consumption of raw materials which have been purchased even three to six months ago continued to increase clearly. So the increase compared to the previous quarter, Q4 last year was almost 10%, a little bit over 9%.

And increase compared to the first quarter last year was almost 19%. Something which should be remembered here is that this increase in raw material costs also has an impact of exchange rate because when we purchase raw materials for example in rubles and then store them and then consume them and reflect this consumption in our figures if the exchange rate of the ruble changed over this period then it will have an effect on this figure.

And this is what happened actually during this quarter because the rubble was clearly stronger compared to the first quarter last year for example or the end of last year. And it's one of the factors which actually increased accelerated the growth of raw material costs.

In the beginning of the year, we said that we expected the raw material costs to increase between 15% and 20% for the whole of the year in 2017. And now this development is more or less in line with what we expected probably a little bit closer to the higher end of our expected range.

So right now, our expectation is that for the whole of the year, the raw material costs for us will draw by approximately 20%, which means that with the currently expected production volumes, it means headwind of about EUR 60 million compared to the previous year. At the same time, I think it's also good to remember looking at the historical graph of indexed raw material cost development that despite this growth compared to the previous years, raw material prices and costs are still on quite a low level.

So that even lower compared to the base year of 2012 not to speak about the peak years of 2011 and 2012. So they are still relatively low and also the tire prices are still on a relatively low level from the historical point of view.

Now we move to the investment part, a couple of comments about investments. During Q1, the total investment that we had were slightly over EUR 17 million, above the same - on the same level as previous year.

We announced in the beginning of the year that we expect our investments for this year to be on the level of about EUR 190 million. And it's still the case, we don't have reasons to change that figures.

We have quite a big investment plans for this year. And just as a reminder, about half of this, almost half of this investment comes from ramping up production capacity of Vsevolozhsk factory in Russia, making significant investments in the capacity and also in the automation and processes at the factory.

And also this figure includes a small portion of the coming big investment into our new Greenfield factory. For this year, we allocated about EUR 6 million, it's part of this figure.

But of course the biggest investment will come during the years 2018 and 2019. So as you probably noticed, we announced earlier this morning that the Board of Directors of Nokian Tyres made a principal decision to invest in a new Greenfield factory.

The factory will be located in the USA, in the city of Dayton, Rhea County and state of Tennessee. The Board authorized the management of the company to sign Letter of Intent and start preparations for the implementation of this investment project.

I can tell you that earlier this morning, I actually signed this Letter of Intent with authorities on the state county and the city level. So we now we can say that this project is officially running.

Of course it's a historic decision for the company, the last time the company made a decision and new factory was back in 2004 when we announced about the Russian factory, and now after 13 years we are about to start a new Greenfield project, this time quite far away. But this is a decision, which supports the growth strategy of Nokian Tyres and the location of the future factory was chosen to be in one of the two growth market areas for us, which are Central Europe and North America.

And we felt and based on analysis that we made that locating the factory in North America at this point is a higher priority for us then other possible locations, and the reason is that you know that to increase our sales in North America significantly from where we are now, we need local production, otherwise the very long lead times that we have currently from our factories in Finland and Russia to the North American market. Do not allow us to serve our customers in North America in efficient way.

Also of course for us there is a very important cost element, because even though our business in North America over a year now is quite profitable with quite healthy average prices, but the costs to deliver the products to customers in North America are quite high taking into account the logistics costs and also the import duties both in the U.S. and Canada.

So these are the main reasons to choose North America as the target location for the factory. Out of the two countries in the North American market where we operate the U.S.

and Canada a bigger sale potential is on the U.S. part that is the reason for the factory being located in the United States, now have a very strong position especially in winter tires in both Canada and the snow belt of the USA, but we also need to continue developing our all season and all weather markets in North America, especially in the in the USA.

So speaking about the investment as such at this point, we commit to the first phase of this investment, which will result in new factory with annual capacity of four million tires it will produce Passenger Car Tires, light truck and SUV tires, which are sold exclusively or primarily in the North American market. And what is very important for us it will enable us to localize the production of those products, which was sell primarily in North America also easing the complexity of our production at the existing factories taking these North American specific products away from our factories in Russia and Finland which would enable us again to improve productivity and increase output at the existing factories, because complexity is a very big factor, which is currently limiting our production capacity and output at the existing factories.

The total investment of this phase is about $360 million at the current exchange rates, of course, this figure can change little bit the exchange rates especially the euro and dollar exchange rate will change overtime. But this is the approximate amount of investment, which we are planning.

We plan to start construction on the site in early 2018 the rest of the year will be used by the local authorities in order to prepare the construction sites. So we can enter a ready site and as I said construction will start in early 2018 and we plan to produce the first tires in the new factory in early 2020.

Then according to our plants it will take us about two years to get to the level of four million tires a year in terms of production output. So overall very great and exciting news, which will support our growth strategy and of course we're very grateful to our board for supporting us in these important decisions.

Moving forward to business units, I'm on Page 13 now and this is an overview of our business units. We can say that during Q1the growth driver for the whole company was Passenger Car Tires division, which increased net sales by over 22% in euros and EBIT by almost 22%.

So the EBIT margin of our Passenger Car Tires business remains on a very healthy level of over 30%. The other two divisions Vianor and Heavy Tires also showed some growth around 5%, but their profitability was not so good.

I will come back to this and comment a little bit more. So as a result of faster growth for Passenger Car Tires its share in the total company business increased from 69% to 72%.

If we look at the Passenger Car Tires then I mentioned already that we managed to increase sales in almost all market areas, so you can see on this Slide number 14 there are a lot of positive development the green plus is something which I would like to emphasize is that to a great extent this growth in Q1 was driven not by winter tires, but by summer and all season tires, which is actually a great thing for us because it means a more balanced product portfolio for us throughout the year ability to serve the same customers not only winter tires, but more and more also with summer tires. Russia for example, was one of the regions where we managed to significantly increase our sales of summer tires and once again reinforced our position as the market leader in Russia not only in winter, but also in summer tires outperforming all of our major competitors over there and this is great thing, because it will come to sell out already now during this consumer sell out season and winter tires will still have time to deliver for the next winter season.

So this timing plays greatly for us. And then we really try to come up with some negative comments about Passenger Car Tires, but it was quite difficult this time maybe one to comment was that we made necessary price increases in all our market areas in order to compensate for the increased raw material costs, but in most regions the full effect of these price increases still remains to be seen in the following quarters in the figures of Q1 it's not really visible yet, which led to a slight weakening of profitability.

But as I said, we made these decisions already, so we can say that the price increases are implemented and they right now entering into force in all our market areas, in Nordic they already there, in Central Europe they effective from the beginning of May, and in Q2 and Q3 you will see the effects of these price increases already visible. We are also prepared to make possible second step in further price increases if needed depending on how the actual raw material cost development goes, but if raw material cost increases more than the anticipated 20% then they are prepared to make another increase before the winter season in most of our market areas.

Here again of course, we should remember that we operate in different markets. In some of these markets, we have very strong position like in Nordic countries and Russia.

And this is market where we are able to actually be the first with the price increases and then being pretty sure that the competition will have to follow, but in other market areas where our position is not as strong like in Central Europe and North America. We are much more dependent on what the competition is doing.

And I must say there is a certain gap between what our major competitors what kind of public announcements they make about the price increases and what we see actually happening in the marketplace. First of all, the price increase which are in reality implemented by most of our competitors.

They are smaller than what they announced in public. It's always the small font up to 8%, what this up to actually means, what's the actual average increase which happens in reality.

It tends to be smaller than what they announce. And then the second thing is of course the timing and there is a delay between the announcements and the actual increase that we see with our customers for example and because on the fact on also in our ability to implement this price increases for all our customers in this markets.

I am speaking Central Europe and North America. Another comment about this development of our business in Passenger Car Tires and Q1 also comparing in to competition, of course in the anticipation of the coming price increase, we have seen for example from Q1 reports of some of our major competitors that they noticed a certain increase in orders from their customers in that anticipation of the coming price increases to benefit from still lower prices before the price increases coming to effect.

And for some of our competitors at least by some their announcements that was a major reason behind relatively strong results of Q1. Now for us, we have witnessed the same effect also in some market areas but to clearly lower extend.

And the reason for that is that for us we're still in most of our market areas in much more seasonal business where much more dependent on summer and winter seasons. And the pricing and the whole like order delivery cycle in the seasonal business is completely different by the year around business in many other market areas, where it's possible to make a price increase and then it's an effect one of two months from now and then there is another one and so.

We are practically doing the pricing in twice a year for two seasons in most of our markets that is Nordic, Central Europe, Russia and also big part of North American sales, which means that we haven't seen this kind of like pre-purchase effect in our sales the same way as our competitors witness that, which means that the growth that we had in Q1 was actually genuine growth for the most part. Now if you look at the next page number 15 and see where the growth in sales and EBIT came from.

Looking at the sales first, you can see that all factors were actually positive both volume and price mix effect were positive. And then as I mentioned already significant positive effect from the currencies.

And then looking at the EBIT, bridge you can see here that also positive effect from volume, price mix and currency and then some negative from materials. But you can see here that it was clearly smaller than the positive effect from combined price mix in currency which is of course a good thing for us, then increased product costs of course on higher volume which is natural.

And also we can see here some effects of on the cost side of stronger ruble because many of our costs at the sale they are ruble based and even though the increase in ruble based costs was as significant. But when we convert these costs to euros at the current exchange rate compared to the rates a year ago when the ruble was clearly weaker then we can see a big difference.

Also a significant increase in fixed costs, about one third of this increase was also caused by currency effect negatively of course mainly coming from Russia. But also there was some actual increases, plant increases in fixed costs specifically in the marketing side to support our growth strategy mainly in the growth market areas of North America and Central Europe.

And then the last element here the others costs have positive effect of EUR 5 million. That was mainly clearly lower provision for bad debts in Q1 2017.

Actually this quarter it was a slight negative I think minus EUR 100,000 compared to about 4 million bad debts reservations that we made in Q1 2016 coming from the customer bankruptcies in Russia in 2015. So this reflects a clearly better situation with our receivables and contributed to some extend to the positive result.

Then moving to our other divisions and brief comments on those. Heavy tires, we managed to increase our sales of heavy tires by about 6%.

And especially our core segments of forestry and agricultural and mining, they were quite strong. The segment which didn't perform well was on the road, truck and bus tires where we don't have own production but relay on off-take supplies.

This market was quite weak and our sales didn't grow. But what is really important is our core segments increased.

And then of course the operating profit didn't develop in line with the sales. Actually it clearly decreased compared to the last year.

Of course by taking here about quite small numbers, so the total impact on the whole group was not that significant but for this division, it was quite a big change. We reviewed this quite thoroughly.

I think we understand the reasons behind quite well right now. And to summarize this, the main reason was that the increases in raw material costs already visible in this figures but there was a delay in the implemented price increases to cover this raw material costs.

One of the reasons for that is, was the bigger share of OE sales to forestry machinery manufacturers. And clear difference to replacement markets here is that the pricing is determined there based on the formula which takes into account the raw material indexes.

And there is a certain time gap when this increase is coming to force. So we will see the situation improving during the next few quarters.

And then there were of course like increased fixed costs which were planned investments into future sales and production of this business. And of course heavy continued also to rollout new products, here is just one example of new truck tire Hakkapeliitta truck F2 which we recently launched for the Nordic conditions.

So we continue developing this business as well. Then moving to Vianor, Vianor was able also to increase sales by almost 5%.

Operating profit was negative as this is always the case in Q1 because of lower consumer sales in Vianor of course for Vianor the retail business is very important, for the equity owned network. Especially this year, the sales, retail sales in the Nordic countries where VNR operates were affected by the delay in the summer tire sell-out season because of the late Easter and also quite cold weather, up until now, it's of course now very warm and sunshine in Helsinki but it was snowing just a couple of days ago.

So we can see clearly delayed consumer season of summer tires this year in the Nordic countries. And then of course the profit improvement program which we announced in the beginning of the year that to optimize costs and improve profitability of this division is ongoing accordance of plans.

There are a few elements in this program, one of the most important one is the optimization of the equity own network and we already started making the first measures about it. Some of the shops which were loss making were closed during this period, moved to partners for example to operate or relocated it.

It's always done like on a case of case by case individual basis. So this program is proceeding according to plan.

And then the development of our branded distribution network also continues positively of although not as rapidly as it used to be a few years ago. And the main reason for this is of course that the growth of Vianor network in Russia is still not possible because even though we are opening new Vianor partners in Russia.

Some other all the partners continued to be closed down during also this period because of the financial difficulties that they faced during the last couple of years. So this process still continues.

But overall, all our branded distribution network increased the amount of stores including Vianor, Nokian authorized dealer entire by over 60 stores in the first quarter of 2017. And now I'm ready to complete the presentation with our prospects for the rest of the year and our financial guidance.

Overall, our assumptions for the year are not changed so much compared to what we were discussing in the beginning of the year. But before going into the guidance as such, I would like to comment a little bit on the risks and the uncertainty factors as we see them which could affect this result during the next quarters.

The main risks or uncertainty factors for us, we think there are three of those and two of them are closely related with the development of raw material costs. So the first one is above the actual increase in raw material costs that we will see during the next two, three quarters, whether it's going to be the 20% that we expect or whether this development will continue and we will see by the end of the year higher raw material costs than what we expect now.

And of course as I commented already, the exchange rates will continue to affect this development to a great extent. We have quite good visibility into raw material costs for the second quarter.

We have quite good understanding of how this cost will develop in the Q3. But visibility into the longer periods starting from Q4 this year is not good.

So there are some question marks about how the prices of our main raw materials will develop in the second half of the year. So this is a risk area number one.

The second one has also to do with raw materials, but it's about how we are able to - how well and how rapidly we're able to increase our prices in order to cover the increased raw material costs. As I mentioned already, we have made necessary price increases but of course the magnitude of this price increases will depend on what the actual development of material costs will be for the whole year.

But also as I commented before, we are - in Central Europe and North America, we are dependent on what the competition will be doing. So to what extent and how fast the overall price increases that the global industry is implementing, how well they will stick.

That's a question mark for us. And if the actual price increases implemented and the markets are not sufficient or if their timing is such that they will come only after a few months or quarters after the raw material costs are already on a high level, then we can see some temporary weakening of profitability because the increased prices will not be enough to cover increased raw material costs.

So this is a risk depending on how it develops, where we will have an effect on our results. And then point number three which is also a kind of uncertainty factor for us and this is the first time we face this in quite a few years, its production capacity constraints.

We're now somehow we forgot that it used to be a constraint for us during the last few years, we operated in a situation where we always had some spare capacity. We don't have it now.

And of course the situation will improve during the second half of the year when we install and start the operation of the production line number 14 in the Vsevolozhsk factory. It will add nominal capacity of 1.5 million tires annualized to our factory in Vsevolozhsk.

But for example in the current quarter, we already now facing some constraints because of our production capacity and probably we could have sold even more than what we planned so if we didn't have that constraint. In order to improve the situation also for the rest of the year, we made a decision - and also partly during this current quarter, we made a decision a couple of weeks ago to increase our production output at the Finish factory in Nokia.

So we started - in order to do that we started recruiting additional personnel for the production. At this time, we will not change the shift pattern of the Nokia factory but we will increase the daily output of the factory.

So until the end of the year, it will continue to work in the current shift pattern with five working days a week. But as I said with the increased daily output and for that we need additional workers.

The equipment we have because this factory used to produce much more than what it has been produced in the last few years. So it will help to increase our production as I said already in Q2 and for the rest of the year then we'll have increased production in sales which will clearly ease the situation in Q3 and especially Q4 and also in 2018.

But I would like to mention this that we are now in this new situation, we think we are fine for the next couple of years, but clearly this is the one of the underlying reasons why we need new capacity and why this investment decision about the third factory was made to have enough capacity from year 2020 onwards. So keeping these uncertainty factors risks in mind the prospects of the company for the rest of the year are quite good.

We in the beginning of the year, we said that we expected both net sales and operating profits to increase by at least 5% compared to the previous year. We now updated this guidance to some extent saying that now we expect the net sales to grow by at least 10% reflecting clearly better prospects for our sales.

And for operating profit to grow by over 5% compared to 2016, of course it remains to be seen what kind of actual results will be able to achieve that also depends on how these uncertainty factors, which I mentioned will develop. Yes there is an upside potential to these figures, we can deliver even better results, but this is something, which we are now confident about and if the situation develops positively then we can outperform this guidance, but it's premature to promise it at this phase.

So with that I will finish my presentation and the end just to mention that because especially because of the investment decision concerning North America will arrange an additional conference call for investors, analysts and multimedia later tonight at 6'o clock finish time, so that also participants from U.S. and Canada can participate and everyone is welcome to join that event and the information is now materials that we published earlier this morning.

So with this I finish my presentation. Thank you for your attention and I'm ready to take the questions.

Starting from Helsinki, please.

Yeah, Artem Beletski from SEB. Actually two questions and both coverings is to risk factors for the rest.

And first one start in this raw materials versus pricing, could you maybe comment what is happening in terms of pricing in your core markets also markets where your market leaders, so basically Nordics and Russia and there may be as you have all sorts of fairly good visibility into Q2 and Q3 in terms of raw materials do we see that you will be able to compensate for this raw material price pressure, so that is the first one. And the second one in terms of production capacity situation and your volumes grew by over 10% in Q1 you will get some more capacity in Russia, but looking at years let's say 2018, 2019 before U.S.

factory what kind of actions are you thinking about for example increasing automation at Russian factory and what field most likely happen with Finnish factory will it go beyond $6 million of productions there?

Okay, thank you. Starting with the first question, what we see happening in our core markets is that we were as usual we were the first ones to come out with pricing for these seasons in Nordic countries and Russia.

We made necessary price increases to cover the increased raw material costs, that means price increases in the magnitude between 5% and 6%, in Russia, of course it was even more than that is needed because of the stronger ruble, our raw material costs in Russia rubles actually decreased compared to previous year, because the ruble appreciated more than the raw material prices and costs increased. But we still implemented this quite significant price increases and most of the competition especially in the premium segment followed suit, so we didn't notice any drastic changes in price positioning, maybe our price positioning went up as a result by one or two percentage points something like that not significantly.

As some of these competitors especially in B segment they were maybe more aggressive at this time not increasing the prices to the same extent, but we're pretty confident that they will be forced to do that and we don't see that as a big threat for us anyways. Now speaking about the future, as I said, what we have decided already now will be enough in the core markets and in other markets as well to cover the increase in raw material costs that we expect, but if it's more than 20% then we'll have to do more and we already agreed with each market are how to do it, when to do it, and what will be the process.

So I think everyone is prepared for that. So especially for the core markets we are pretty confident.

As I mentioned the other markets for us it's probably a bigger question mark at this time. Now coming to the second question about production capacity, of course, taking the new line in production, in Vsevolozhsk, we'll increase the annual capacity in nominal terms to 17 million tires, which is a significant increase compared to previous year and this year by increasing the daily outputs the measure, which we already announced about the Nokia factory we are able to increase the output of the Finnish factory by approximately half a million tires, and it's still far from the big six million level that used to be before, so the next measure, which at some points will come into action is taking the Finnish factory from the current five day shift pattern also with some weeks to a continuous 24/7 operation mode as used to be, and that could bring us to the level of outputs up to five and a half million tires a year.

So we are pretty confident that we have enough capacity with these measures in place, we'll have enough capacity to meet the demand in 2018 and 2019, but from 2020 we clearly need more capacity hence this decision. Thank you.

Thank you, its Panu Laitinmäki from Danske Bank. I would have three questions, firstly a follow-up to the previous question of expanding the capacity in Finnish factory again what kind of margin dilution do you see from that and does it reverse your productivity gains.

Second question is on the third plant investment you are investing EUR 330 million which is a bit more I think that you communicated earlier, how - just to clarify what is the timing of this CapEx is it like fully ready in 2020 when you delivered the first tires. And then third question on the raw material cost outlook, you increased it while I think one of your competitors reduced the expectation for the inflation and you comment that ruble will act you inflation while I would have told it other way if you sell your products in rubles, but the costs are many of them are USD based, so could you explain that dynamic, how do you see that cost development?

Thanks.

Thank you. Starting from the first question, increasing the output - production output in Nokian factory and what kind of margin dilution it that might have, of course, when we take the weekends into operation in Finland, of course, it's more expensive for us then to work only on weekdays, that's quite clear.

On the other hand, we need that measure in order to cover additional demand, which means additional sales, and we don't expect any significant margin dilution to happen from this measure alone, because it will also be supported by increasing our sales, which will be actually to a great extent be covered from the Russian factory, which has of course entirely different cost base and these much more beneficial. So in order to cover incremental sales this is fine, but it's practically the only way for us in the next couple of years to cover that.

Fortunately we have this potential. Speaking about the second question about the timing of the investments for the third factory, the bulk of these investments will take place during 2018 and 2019 so most, there is some also which is left for 2020, but most of this investment is during these next two years.

Of course, the whole construction cost will take place during this period and most of the machinery and equipment acquisitions. I'm not sure whether this figure is higher than what we communicated before, but this figure also includes not only investments into the factories such, but also the malts for the new products to be produced at the factory, so this is quite a full amount of investment, which is planned right now.

And that means that for the next few years our total investment level will be clearly higher than what we use to have and even compared to this year, because it's a new factory, it's a significant investment. And the third question about the outlook for raw material cost development comparing to some statements of our competitors.

May be it's a little bit complicated this effect of the exchange rates and the ruble may be it has already like historically effect on our euro based raw material costs because of some purchases made at one rate and then converting them into consumption at another rate when the ruble was stronger, if the exchange rate of the ruble remain stable for the rest of the year at the current level when we make the purchases, for example when we consume these raw materials in three or five months if the rate is the same then probably this effect will not be visible in the figures anymore. But what we have already these figures will not disappear and it will, of course affect the whole year as well.

I think I mentioned that we see that some of the prices of raw material, raw materials already go down from the peaks that they achieved a couple of months ago, but we feel that it's very far steel from stabilization, it's still quite volatile and that's why we lease this as one of the uncertainty factors for our business. Thank you.

Any more questions?

Tommy Ilmoni from Carnegie. Regarding the U.S.

factory when do we expect to be producing four million tires at the factory, it's the first question. The second one is, considering that you are at the moment as you producing not much more than a million of the tires in the U.S.

Do you think you will find that kind of demand in the U.S.?

What about a one million - what is one million you mentioned?

Passenger Car Tires sell out in the U.S. Or what is the situation at the moment?

Okay, okay, thank you. When we start production in early 2020, we expect to produce something like one million maybe slightly more than one million for the first year it's always a ramp up phase of a new factory, which takes time.

We expect to come to the level of annual production output of four million tires within about two years after the startup of the factory. And we don't see any risks with us being able to have enough demand for these tires in the domestic market in North America, because over a year now we are selling clearly more than the one million that you mentioned.

So we already have this volume in place, and of course the most increase of the volume will come not from winter tires, which we push out the same products actually, which we sell in Nordic countries and Russia, but mostly from all season and all whether tires where we also have quite strong sales already. Now if you look at our Q1 results from the whole Passenger Car Tires division the share of all season tires actually increased dramatically and accounted for 15% of the total volume of Passenger Car Tires and most of this volume comes from North America.

So it's already - it's already there, as I said it's quite profitable business, which we'd benefit even more when we localize production, this is the only problem with the sales that we currently see. Thank you.

It's Artem from SEB, maybe one follow-up on production outlook. I remember in the past you have been talking about potential to optimize is like production lines in Russia older ones so basically increasing capacity, and looking at next couple two to three years if also suddenly demand outlook is still very robust, could you consider making these type of investments, I think you have been talking in the past that payback periods resource once could be quite short, so is it completely over the tables would say?

Thank you. Speaking about increasing automation of the Russian factor, we continue to do that, the level of automation we have right now is entirely different much higher than what used to be in the beginning when we started the factory.

So the figures of investments for this year for example, include quite significant investments into the improvements of automation also in the Russian factory and actually the Finnish factory the same way. But when we speak about these investments in automation, they help us to increase improve productivity and keep the production costs under control, but maybe not so much to increase the output as such.

I think what you're referring to is a potential which we mentioned probably few years ago to replace the first production lines that we have at the Russian factory with the newer technology of tire building and that's technically possible, but we don't have plans to do that, because it would practically increase the capacity of our Russian factory and instead of doing that and further increasing the country risk of Russia as a production base for the whole company we prefer to make these investments somewhere else and closer to those customers in those markets where we plan to increase our sales. So as I said, this is technically possible, but not in our plans in the foreseeable future.

Okay, thank you.

Any more questions from here, if not let's take the questions from the telephone lines please.

Good morning thanks for taking my question. So given the weaker winter tires season that you saw in the U.S.

could just briefly comment on the inventory levels that you see there, and I would be happy to hear something about the inventory levels in Russia and Central Europe as well? Thank you.

Thank you. Speaking about inventory level in the situation is quite different in different markets.

If I start with North America, yes, the winter was quite mild and the carryover stock is according to our knowledge are higher than normal, but still lower than the previous year because the previous year was close to disaster in terms of sell-out and very carryover stock which negatively affected also our sales in 2016. So the now the situation is better but still not perfect because of weak sell-out of winter tires.

But as I mentioned already during the last few years and also this year, this Q1 is not an exception. We have been steadily increasing share of all season tires in our North American sales.

And all season means, practically in all seasonality more like balanced sales throughout the year and less problems with this carryover stock. Commenting on other markets, in Russia, the situation is very healthy.

One of the reasons for our very strong sell-in of summer tires in Russia was exceptionally low carryover stocks from the last year sell-out season in summer tire. There were practically no tires left in the distribution systems.

So it helped us to boost summer tire sales Q4 last year when we started pre-season sales to this year summer sell-out season and then that continue also in Q1 this year. For winter, the situation is mainly not as fantastic, but also very, very healthy, very good sell-out during the winter season and very good base for pre-season deliveries for us for the next season.

In Central Europe, the situation is actually very good because compared to for example North America or even Nordic countries. Central Europe had actually a stronger winter which is exemplified by some of the statistics about the amount of snowfall and average temperatures in many European cities.

So we understand that the carryover stock situation is quite healthy enabling us to have also good pre-season sales winter tires for the next season which are starting right now. Thank you.

Great. And then back to the investment in the factory, I think most of us are a little bit surprised about the investment amount at 360 million, I think you said in the CMD that it was - you are looking at EUR 250 million, but that aside, you could you just comment on because you said then that you were planning to keep the dividend per share in absolute terms at least intact to increase your year-over-year throughout the investment period.

I was just wondering if you could comment if this still is valid.

Yes. Thank you.

Even though we have now these quite ambitious plans for investment also included in this new factory, we don't see any reasons to change our dividend policy. We feel confident that we are able to keep the high level of dividend payout as we have had during the last few years.

I think we should remember that we have a very solid financial position and a lot of cash available also for this investment. And of course if it is necessary way use also external financing in U.S.

dollars for example to finance this investment to some extent. But we don't see that as an issue.

And this is not like kind of extraordinary investment for the company, we can manage it even from our cash flow.

Great. And just finally a more strategic question, given that you decided to place the third factory in North America and the significant size and potential of the Central European markets.

For how long do you think that you will be able to supply and service the demand from the Central European market from your current facilities and when would you need to either expand the current facilities or think about another solution to meet the demands of Central European market?

Thank you. That's actually an excellent question I think because you're absolutely right that we should not discuss where we will have our new factory only, but it's more a question of where the next factories is going to be, what is a higher priority at this point.

And I tried to explain in my presentation why we saw the North America being a higher priority at this point, but it doesn't mean that we will - we don't plan to have a local production facility somewhere in Europe to serve the Central European market. We think that it might happen, not probably in the nearest years but pretty soon.

Because, yes, while we will have enough capacity to serve the European customers from our production base in Russia in few months, it is true that already now we are selling significantly more tires in Central Europe compared to North America. So in order to improve this business even further increase our sales volumes and reinforce our market position, at some point, we should have a local production base.

And I guess that in a couple of years, we will be ready to discuss that option as well. But probably right now it's still premature to speak like definitely about these plans.

But from the strategic point of view, yes, it's now like longer range plans.

Great. That's very fair.

Thank you.

Thank you.

Yeah. Thank you.

Thomas Besson from Kepler Cheuvreux. I have three questions.

Firstly, do you not have room left in your plants to increase your capacity further?

After we have installed production line number 14, we have used up all the space that we have in the current facilities. And even in order to get the benefit of this new production line, we are now making also other investments, like for example modernization expansion of our mixing meal at the factory in order to have enough compounds and components to support this increased production volume.

So answering your question briefly after production line number 14 is installed, there is no other space or room for further expansion.

Okay. Great.

Am I right to think that at one point you were discussing increasing the capacity of production line to 1.5 million which would mean higher output of the 17 million you have mentioned, so that was basically the sense of my question?

Yeah. I think it kinds of relates to the question which I answered a few minutes ago that whereas it's technically possible to replace the first production lines which we installed in the Russian factory during 2005 to 2010 I think for the first like 4 or 5 years to replace them with newer machinery with increased production output, we don't have plans to do it right now instead we plan to invest into new facility in other markets in this case in North America.

Okay. Good.

Have a question on your bridge on page 15, please, actually several question on your bridge. Can you explain why the effect drove 65% to your EBIT and then why the price mix of currency translated into 100% in the EBIT, so that's bridge base?

Could you please repeat the first part of the question, I didn't get it.

Sure. If I take the change in revenues in volumes 18.5, it translating to 10.2 million EBIT gains that's 55%, if I take price mix plus currency, you get to 27.1, it's precisely the change in the EBIT.

So the question in, can you how it can be so high in terms of look through for both volumes and price mix plus currency and whether this is going to continue during the year?

Maybe I will ask Anne here to help me to have a good answer. Anne?

Yeah, of course this has to do with the big exchange rate differences which we have in the beginning of the year, which maturity is coming from the Russian ruble and, of course when going through the year, of course the difference between the actual currency rate and the rates we had last year, of course is going to be diminishing. So the first quarter of course, is quarter we have the biggest track changes.

And the slight currency change which we are describing is really maturity of that is coming really from the ruble aside.

Okay. Thank you, last question please.

Can you confirm what you said, I know about the lower provisions for but that so you said 100,000 materials for the first quarter of this year versus EUR 4 million, EUR 5 million in Q1 2016, so it was nearly a five million positive boost to your Q1 2017 EBIT, is it correct or I misunderstood your comment?

I mentioned that out of the EUR 5 million positive effects in these other costs about EUR 4 million was came from the bad debt reservations. And yes, it's correct that were is in Q1 2016 we had a bad debt reservation, credit loss provisions in the amount of about EUR 4 million, which came mainly from Russia from 2015 cases.

Q1 2017, we didn't have any. On the contrary we had one small provision, which was actually paid back, so we pretty serious there's a positive in this line, so the total credit loss expense for Q1 was minus one EUR 100,000 compared to expense of EUR 4 million Q1 previous year.

Thank you very much, that was significant.

Thank you.

Hi good morning, thank you. I'd like to try the currency question may be another way then.

If we do assume the currency jobs through at 100% so say the EBIT effect is also EUR 20.6 million, I think you said the production cost and the fixed cost respectively include an element of currency, which I suppose it's from the higher ruble cost partially compensating a positive effect on the revenues. Please can you comment how that compares to your statement from three, four months ago about being naturally hedge, because this now seems like you're getting actually quite a big positive impact from a strong ruble to the EBIT line, that's the first question.

Thank you.

Yeah, I think we have been discussing this natural hedge and it is it is really the case for us, but we also know that when the increase in our domestic sales in Russia is so significant and when it's not only increasing volumes, but also increasing the average price in healthier product mix then if this continues then we will have a positive effect also on the whole group result. Of course, we should remember that our sales in other markets, which based on production from Russia, of course, the production cost of this products we sold in other markets are higher in euros just because of the exchange rate development, but on the other hand we have been able for example, this quarter to compensate that to some extent by increased production volumes taking the unit cost down compared to previous year.

So to bullet shortly when we grow it's just you know a very healthy development that we get.

Sure, sure that what I'm looking for is just a statement, I mean what I'm looking for is for you to say whether the ruble, the strong ruble is positive to the EBIT line or not and from the bridge in the first quarter at least it clearly looks like it is so - if things don't really change directionally that will be the case, is that right rather than being in net neutral where the strong ruble?

I think when we made that statement about make sure Henning, I think we said that it's based on assumption of the current split between exports from Russia and domestic sales, which for example last year on annual level was 30% domestic sales in Russia and 70% export. But if you look at this year, this quarter figures, then the share of domestic sales in Russia was I think closer to 40% if I'm not mistaken 39% and 61% was export.

So the share of export was actually lower and it's a different picture compared to 30-70 split that we had for the year. So when we have the share of domestic sales higher and this positive development coming from domestic sales in Russia, then yes we get positive result.

That's very clear, thank you. And maybe a second question, on the materials line, I know that in the last call we discussed this quite a bit and I think we understood at the time that not all of the materials element and EBIT bridge is raw materials, could you please give us an indication if that was the case for this quarter, as well as all or if all the 9.5 million materials is raw materials?

I will ask Anne to comment here.

Yeah, it's of course also other things that only raw materials, there are like rims and like other like changes also in the inventory level, so that's including an embedded all those issues of course, maturity of this column is like material as such, but raw materials, but also like, quite a lot of rims et cetera, which we have.

So there finally maybe could you please give us an indication directionally, what we should expect for the materials line apart from the EUR 60 million raw materials headwind. So is the other portion is it a headwind or tailwind or positive or negative and maybe and what magnitude very roughly for the full year?

Yeah, if we are talking about the EUR 60 million guidance for this year, off course, we have seen quite a lot of it already in the first like quarter as such as we were explaining also the currency effects, which we have. So it will be like for the whole year but like the first quarter of course we have hit the share part of that EUR 60 million already.

Thank you.

Thank you.

Yeah, good morning, it's Gaetan Toulemonde from Deutsche Bank speaking. I'm little bit lost about your performance in Russia, so can you explain it little bit more, when you look at the numbers, I think Russian CIS revenues up 60% if I stripped out FX impact we still end up with something like 30% to 40% increase, it's a very strong performance.

So can you explain a little bit where this performance is coming from and how do you see to next coming quarters in that respect? That's my first question.

Thank you. As I mentioned I think all the elements in our sales in Russia were positive to start with the market itself, namely this summer tire market was growing, that's the first element.

And then ourselves we increased our sales volume slightly compared to Q1 last year, the increase came mainly from summer tires it was really significant. Our winter tire preseason sales during Q1 were actually lower than in Q1 the previous year.

And the reason was the prioritization of the summer tire sales of course, in order to be in time before the consumer sell out season. And then also there were some effects of the big overhaul of our product range for Nordic countries and Russia and the launch of four new studded winter tire models simultaneously, and of course it means a couple of hundred of SKUs which needs to be rolled out to production and it doesn't come in one day, so there was a time in effect, but that's fine, because we still have Q2 and Q3 enough time to ship this tires to customers before the season.

Then there was a very healthy increase in the average price, despite the fact that the share of summer tires was higher than a year ago but we –I think I mentioned we made quite healthy price increases also in ruble terms. And then of course, a big part of that increase, I cannot say exactly how big, but there is significant was the positive effect of the currency.

So for a change you know all the elements played in our favor, very different situation compared to what we're used to be in the last few years. But thinking about the prospects for the whole of the year, I don't think that we have reasons to be too bullish at this point in terms of our expectations from the Russian market as a whole, because of course, it will be the decisive thing will be how the winter tire will develop, and here there are some indications that it can go into the right direction.

For example, if you look at the new car sales in Russia, March was really a positive month with 9% increase compared to March previous year, taking the whole first quarter to a slight growth of just 1% compared to Q1 last year. But still remaining on a quite a low level if you look at the monthly or quarterly sales of new cars, and of course, this is a big factor, which determines the demand for winter tires.

So even with the strong start of the year, we don't have reasons to increase our expectations for the whole year market more than what we announced in the beginning of the year, which is to say that we expect the total tire market to increase between 5% and 10% in 2017.

Okay. By the way the line is not easy to fully understand cut off every minutes, but if the market is expected to grow by 5%, 10% this year, what is your expectation as Nokian in Russia, can you grow your volume by two times more than the market 20% order of magnitude it's something possible?

Well everything is possible, of course, but it's not something that we can promise, I would like to remind that we managed to very clearly strengthen our market share in Russia last year, and this year our main target is at least to keep this market share that that is to grow in terms of volume at least in line with the market. So when we speak about the volume we don't expect a bigger increase, of our sales volume in Russia than the 10%.

But then of course, all the other elements of our sales revenue, the average price mix and the currency will continue to be positive on top of that.

Okay. Second and last question.

In the outlook for this year, you have upgraded the revenue from at least 5% to at least 10% where you left and change your guidance for the EBIT this year, what is the negative element you're seeing to allow you not to upgrade further your EBIT profit much more in line with the revenues, I don't know if my question is clear.

Thank you. Just to clarify would it slightly change the guidance over there as well, because for EBIT because it was at least 5% and it over 5%, which means that it's we can see it like slightly more positively than three months ago.

But you're right, that there is a difference about how we see the performance of net sales and operating profit right now and the biggest reason for the difference is the timing of price increases versus raw material cost increases, and we can see that because of this timing gap there may be a temporary weakening of relative profitability because of that, which would last for one or two quarters, but then we expect it to get back to normal. So this is the based scenario that is reflected in this guidance.

Okay, that's very clear. Thank you.

Thank you.

Hi good morning. Just two questions on my side.

I think in the U.S. or I think in your expansion North America, could you maybe give us a bit more details on if you have any plans also push bit more on the distribution side particularly on with Vianor or gesture equity on shops in North America.

And secondly could you maybe also give us a bit more details in the part of Tennessee if you received any tax benefits to maybe offset some of the higher wage costs you would have in that region? Thanks

Thank you. You are absolutely right, that the development of distribution will play a key role in increasing developing our North American sales in the future, of course North America is a big market, and we don't have like one single distribution strategy for this market, but we have like region based distribution strategies in some of these areas we already now have our own distribution in others we rely more on like selected partnerships, chains that we cooperate with.

And yes we do have also plans to develop our branded distribution networks maybe not Vianor network nationwide, but Nokian authorized dealer network, which has enabled us to get very good results, for example in Central Europe. So there are plans also to do the same in North America.

And come into the second question about tax benefits incentives and so on, I must say that we before this decision, we of course, had a very thorough process of negotiations with actually several locations and especially with this finalist location in the state of Tennessee, and we have seen very good support from all levels of authorities to our project, they also are very happy and very keen to land this project in Tennessee. And we have been also able to agree with them about certain support measures that the state and the county and also their partners will come up with in order to support our operations there and make have investment more affordable, but unfortunately we're not able to disclose specific conditions of this incentive package right now.

Thank you. I think we have only time to take one last question please and then we'll have to finish the event.

Hi good morning. Thank you very much for the last question.

Just a quick one coming back actually to the plants and in Tennessee, just to get a little bit of an idea you're now currently investing EUR 83 million for about an expansion of 1.5 million tires in Russia. The new number now it's you know EUR 330 million for about four million tires extra, can you just give us a little bit of an idea set of how you - how you been determine your payback time for this plans maybe also run us through your assumptions in terms of the capital returns, how does that compare to your Russian facilities and maybe your plant in Nokian?

Thank you. First of all these two figures, the EUR 83 million, which we're planning to invest in the factory this year.

Is not this figure is not comparable with the plant investment for the North American factory, and the reason is that the Russian investments this year they include many more other items, which are quite specific like for example, we are building material warehouse storage at the factory whereas we used to use an external raw material warehouse before. So there are many investments beyond the investment of 1.5 million capacity, which we are making right now in Russia.

And to the second part of the question speaking about the anticipated payback of this investment, it is quite healthy, I cannot tell exact figures as we haven't disclosed them, but remembering the calculations that we had back in 2004 when making the investment decision of the Russian factory, they are quite comparable. And of course, the reality of the Russian investment turn out to be much more successful than what we anticipated, I hope that the same may happen also with our North American investment.

Thank you very much. I think we ran out of time.

Hopefully I have been able to answer all of your questions, if not then we can see in you the conference call at 6 P.M. later tonight.

Thank you. And have a nice day.