Nokian Renkaat Oyj

Hille Korhonen - CEO Anne Leskela - CFO, VP of Finance and Investor Relations

Artem Beletski - SEB Kai Mueller - Bank of America Merrill Lynch Nikhil Bhat - JPMorgan Thomas Besson - Kepler Cheuvreux Henning Cosman - HSBC Edoardo Spina - Exane BNP Paribas Mika Karppinen - Handelsbanken Panu Laitinmäki - Danske Bank Tommy Ilmoni - Carnegie

So good morning, ladies and gentlemen here in Helsinki and also on the line. We have now the second interim report of Nokian Tyres available.

And I guess it's quite easy for me to smile at this point of time when I'm going through the material. My name is Hille Korhonen.

I have been the President and CEO of Nokian Tyres since June. And also, being a member of the board for several years, the company is, of course, known to me beforehand.

And I have been, as a board member, approving the current strategy, which means that, naturally, I'm following the approved strategy and taking it further. We are here going through main points of the presentation, so I will not cover every word, and I try to remember to tell at which page I'm currently.

Please mute your phones. And after the presentation, I will first take questions from the audience here in Helsinki and then from you who are participating over the line.

So my smile is all about our strong first half of the year, and we are expecting solid full year performance for Nokian Tyres. So that's the key message from this presentation.

Page 2. The presentation has 3 parts, 3 main parts: summary, of course, of the results; financial performance for Nokian Tyres as a whole; and then I will briefly go through the business units and also how we see Nokian Tyres going forward throughout this year.

So regarding the markets. Russian growth has been continuing.

We saw the first signs of Russian growth during the fourth quarter in 2016, and it has been developing more positively than we have actually expected. The economic development and growth is taking place in all our key markets.

And that is, of course, supporting the consumer confidence and consumer demand, which is good for us. New car sales is, of course, important.

However, it's mainly impacting us from a winter tire sales point of view. Also, improvement of the car park then will impact the whole market size later on.

The car tire sell-in has been different in different markets. In Nordic countries, we still see decline, and that also has to do with the weather conditions during the springtime.

So there was no real peak season that would have been taking place this spring. In Russia, what comes to new car sales?

We are seeing good development, although the new car sales is still on a very low level. So what is the estimate for this year is 1.4 million new cars compared to 3 million that it used to be some years ago.

And what comes to car tire sell-in in Russia? The channel inventory has been on a healthy level.

So this is the main reason behind the sell-in in figures. Sell-out figures have been a bit lower also due to difficult weather conditions during this spring.

What comes to Europe? We see negative development in overall car tire sell-in, although positive development what comes to winter tires.

And in North America, the car tire sell-in has been slightly up compared to comparable time in 2016. All Heavy Tyre segments where we operate saw positive trend, and it's also driven by forestry and agriculture demand.

The currency impact is very positive and the size of the bubble in the presentation represents plus €32 million net sales increase. Then Page 4, Nokian Tyres' performance during the first half year.

Main message is that our sales has been growing in all our key markets, and especially in Russia where this plus 84% growth is coming from; partially from volume increase, about 50% from increase in volume; and the rest, 50%, comes from average sales price increase and the currency impact. Our volume has been increasing and improving in all markets except in the Nordic countries.

And we have been clearly able to improve our market shares in all main markets, whereas in North America it has been flat. Profitability-wise, as said, the currency impact is positive and it's -- the profitability is also supported by average sales price increase.

What comes to price increases due to raw material cost development, we have made all the necessary price increases in all our markets. And we are planning to make another round still during autumn selectively.

And this means that the total impact of price increases will be visible in our numbers during the second half of the year. Our raw material cost is -- during the first half year, on the level of 20%.

And our fixed costs are slightly up due to the investments into sales and marketing activities to support growth in our main markets. Our factories are running close to full capacity and that is also improving our productivity by 2%.

So we have been able to increase the output with current shift pattern, for example, in Nokian by adding resources. What comes to distribution?

Our distribution development, which is very important for us to get the visibility in our core markets, that is proceeding according to plan. And especially, we have been adding the NAD concept to 140 stores in our main markets.

I'm now on Page 6. So summary of the financial performance.

I will only take a couple of points out of here. First of all, we are growing.

We are growing in a profitable way. And I think that's very, very key and important message to all of you.

Our investments are clearly higher than during the previous years, and we are investing in the future for future growth, and that is being enabled by our strong balance sheet. So the clear cornerstones for Nokian Tyres that you have been also used to seeing before are there again.

Then on Page 7, I would like to highlight that the growth has been starting already during quarter 4 in 2016 and we are clearly above previous years in quarterly results, both in Q1 and Q2. And this means that we are estimating rest of the year 2017 to be roughly on the same level compared to previous year second half, assuming that our volumes are growing slightly, but we are not getting the same support by currencies as during the first half of the year.

And therefore, we have changed our guidance for the rest of the year, as I will come back to. Page 8.

When we look at the market area split of our net sales, this looks very much in line with the plans that have been made already in 2008 when we were very dependent on both Nordics and Russia. Russia was representing 43% of the total sales at that time.

And it was seen that we need more legs from the market diversity point of view. And we have clearly been able to implement strong sales in Central Europe, and now the fourth leg will be, actually, North America, which is then supported by our investment into that new factory.

Russia plays, clearly, a big role for us still. And I also -- I will have personal interest in getting to know the Russian market and Russian customers.

I will actually be meeting with the top 7 customers in September already. So raw material cost development for us is a slightly different picture than when you only look at the raw material price development.

That is coming from the fact that we buy raw materials even 5 to 6 months before the consumption. And that means that our estimate for the raw material cost development for the rest of the year is on the same level than it has been so far during the first half of the year.

The estimated headwind, euro terms, will be about EUR 60 million. Total investments for this year, as I already mentioned, is higher, on the higher level compared to previous years.

And we are not only investing in Russia, as it was the case in the previous years. We are investing in a new line in Russia for this year, which will add our capacity 15 million tires towards end of the year.

We are seeing that productivity improvement in all our factories is very important, so we keep adding automation and investing in all our factories all the time. So you can clearly see that also Nokian factories get their share.

And also the third important area for investments is the distribution. So investing in customer interface, distribution and helping us to work more smoothly with our customers is very important for us.

Then on Page 12, what comes to business units, a couple of remarks. The Passenger Car Tyres, their share is higher than 2016 same time, so it means that our company level profitability is, therefore, also higher.

Our EBIT margin was more than 30%, which is on a very healthy level. Vianor, doing slightly worse than during respective time last year.

We also have some one-time costs there that are burdening the EBIT level. However, there has been a slight increase in sales.

And what we are doing about the profitability of Vianor, we are running a profitability improvement program and that is proceeding according to our plans. Heavy Tyres did a great job in Q2, and they have been able to increase the production levels and also come out with successful new products.

And that is, of course, important for our growth. I will skip some pages because I have said already what we have to tell.

But on the Page 14, we have the EBIT bridge. And here, it's clearly visible how the raw material cost for us has been developing during this year.

Heavy Tyres, also what comes to profitability improvement. We have been doing price increases according to our contract terms and the full effect of these price increases will be also visible during the second half of the year.

Here are then some pictures of the new products, which I said are very important for us when we work with -- closely with our OE customers. Distribution network on Page 21 is clearly visible here.

And I want to point out that we are also present already in U.S., with 81 stores. In Canada, we are working with a customer who has very wide distribution there.

Then Nokian Tyres' outlook for 2017. We are expecting our sales and position to improve in all key markets.

And also, the market situation in Russia looks more positive than earlier. We have great new flagship products, Hakkapeliitta 9, Hakkapeliitta 9 SUV and also Nordman 7 product families, which are positioned to support our growth.

And as said, price increases have been implemented and the full impact will be visible later. And of course, the profitability will be supported by efficient cost structure and also the high share of Russian production.

So what comes to currency impact on the EBIT in terms of Russian production? We are saying that we are EBIT-neutral when 1/3 of the production goes to Russian market and 2/3 of the production are exported.

So that's roughly the equation. And we have updated our 2017 year guidance, with the current exchange rates, net sales and operating profit are expected to grow at least by 10% compared to 2016.

So thank you. And now, we will take questions first from the audience here in Helsinki.

Artem Beletski from SEB. A couple of questions from my side.

Starting with the Central European situation, so there has been some 5% growth in Q2 and we have seen comments from your competitors stating that wintertime market and preorders have been on a solid level. Is it the same situation with you?

So basically it's a timing factor, which should be visible later on what comes to Central Europe, European outlook for you later on?

Well, we -- of course, the competitive situation in Central Europe is tough. However, we are seeing healthy demand for winter tires already.

Then maybe a question regarding your capacity situation, and you have been talking 1 quarter back about some increased volumes at Finnish factory. Do you think that some further ramp-up could be done before 2020 when you get initial volumes from the U.S.

factory because volume growth has been quite healthy?

Of course, the new line in Russia will be fully running in -- with full speed already beginning of next year. So we will get some extra volumes through that.

And then, of course, in Finland, there is always a possibility to change the shift pattern, et cetera, to increase the capacity.

Yes. And maybe the last one regarding Heavy Tyres and pretty healthy margins what you delivered in Q2.

So is it fair to state that the worst raw material cost inflation pressure in this segment is basically behind? Because in history, we have seen that said segment maybe has taken, so to say, more than Passenger Car Tyres segment hit from higher raw materials.

What comes to Heavy Tyres, of course, there is sometimes even more delay with the price increases due to the contract terms. And what helped us in Q2 actually profitability-wise was that our production output was about 13% higher.

It's Panu Laitinmaki from Danske Bank. I would have a couple of questions as well.

Firstly, on the inventories, could you comment on the situation with the retailer inventories, especially in Russia, where you had strong growth in Q2 but mentioned that the sell-out to consumers was down year-on-year. Is it limiting growth in the second half?

I think it's too early to estimate how the inventories are developing, but I would say that they are still on a healthy level.

Okay. And then the second question is about raw materials.

So you don't expect to see any benefit from the decrease in the raw material prices in the second half as you have the same kind of inflation guidance for the full year as you saw in first half. So you will only see the benefit in the next year?

We'll see the full benefit next year.

Okay. And then about this capacity situation still, do you expect to incur any costs from ramping up the Finnish factory in the second half while you wait for the Russian expansion to be in full speed?

Well, we have already taken into use the new shift pattern, not shift pattern, but adding personnel to current shifts in Nokian factory. So we already run at the cost level, that is the same for the rest of the year.

Okay. And the final question.

Just to clarify, did you say that you expect the second half sales to be flat year-on-year?

We said roughly. Roughly on the same level.

Mika Karppinen, Handelsbanken. In Q2, in the Passenger Car Tyre unit, its price-mix component was very slightly positive.

So were there some items that had a big negative impact on that component? Or why it was all so moderately up?

Well, the equation is very, very complex because there you have the currency, you have the sales price, you have the product mix, you have the customer mix and market mix and country mix and market mix, yes. So it's actually even for us, quite difficult to track backwards the biggest differences.

Then concerning these receivables. Your receivables are up only 1% year-on-year despite the very healthy sales growth.

So have you changed something in receivables collection? Or what's the reason for that?

Well maybe, Anne Leskela, our CFO, will answer that question.

Well, of course, this is like the end result of what the change we done already before this year are actually implemented already last year. So as said, we are like going through, for example, the Russian customers like inventories like at least 3x a year.

And of course, all the tires which have been sold out are then paid for us. So it's like a very efficient way of collecting the money on that market.

And as said, there has been no, like, bad debt cases in -- from the last year and neither from this year. So the situation that way is pretty healthy during the -- with the customers.

Tommy Ilmoni from Carnegie. Can you comment on the sales mix in Russia in the second quarter winter versus summer tires?

That's my first question. The second one is that has there been a change in the seasonality pattern in Russia?

Are you selling more now, filling the channel more now in Q2 than normal -- than what we would do normally regarding winter tires?

Now I don't remember what was the mix. I remember the quarter -- second quarter overall sales mix was consisting of, I think, it was 70% winter tires, whereas the full half year was 55% winter tires.

And of course, in Russia, we started deliveries of winter tires already end of quarter 1, and most of the volume is during the second quarter.

Has there been a...

Any shift change?

Any shift change between the second and maybe affecting in the third quarter in Russia now, as the inventories are low according to your report?

I think I will now ask for some support from our CFO.

Well, actually, we are back in the normal, like, pattern in Russia as we used to have a couple of -- 2 or 3 years ago, because we have the -- nominal capacity is what we have. So the pre-winter tire sales is -- the majority of that is done in first half of the year, then the Q3 is the rest of the market and Q3 -- Q4 is the seasonal sales.

And that's how it's done this year. So this reflects on the way we were doing the normal business in Russia 2, 3 years ago, yes.

So we don't seem to have any more questions from the audience here in Helsinki, so now we will take your questions through the phone.

Just 2 if I may. I mean, we spoke about Russia a few times now and the channel filling.

And you're saying in terms of volumes on the second half, it will be slightly up, but obviously, the effects won't be as effective. Can you just remind us again -- you mentioned earlier it's roughly EBIT neutral, it's about 1/3 of the products go into Russia and 2/3 come out.

What do you expect on that effect on your EBIT bridge in the second half? Sorry if I missed it earlier.

On the second point, on Scandinavia, your market is -- the network continues to be difficult. You're also working, obviously, on your Vianor network and trying to restructure that.

Can you just update us in terms of when do you really expect this profitability or what level of profitability over the medium term, let's think of 2 or 3 years out? And thirdly, just to look at sort of the competitors environment, actually, in the Russian market.

You mentioned the inventory levels are where they should be, and wonder whether we saw a prebuy ahead of price increases. But how has actually the competitors' environment changed with new players coming into the market?

And I think you or your predecessor mentioning that there's also a shift from the premium end towards the mid-range, lower-range tires. Have you been able to see that?

Or do you feel you're offset of that development?

Okay. Thank you for the questions.

Maybe Anne will -- our CFO will answer the first one.

Yes, we have not specified any actual euro or term numbers of the EBIT bridge. What we have been stating that we are pretty EBIT neutral, as you earlier mentioned, that if 1/3 of the production in Russia goes to Russia and the rest is sold in other markets, then, of course, we are -- if the ruble is devaluating, we are losing on the top line but that is then because of this structure got back in the EBIT line.

So we are pretty EBIT neutral if that sales situation is as described.

Okay. And then the second question was related to our Vianor equity-owned chain.

And there, I see that our ambition level is to create 2% to 3% EBIT within couple of years, which would be kind of the normal level for that type of chain. And then what comes to the Russian market and the shift from premium to mid-segments, this is also very much driven by the car park development and, of course, the consumer confidence and capability to invest in higher-priced tires.

And we are able to operate both in the high-end segment and in the kind of other part of the mid-segment in a very efficient way. And we see that our competitive edge there is the model how we work together with our customers.

And any sort of competitors entering that market, given it's sort of in an upswing mode? Have you seen that or been trying to compete a bit on price?

Of course, the new competition is attracted by the lower-priced segment, where we are not that much present.

All the global competitors as -- they're in place as they used to be already before. And you could say that if you look at the tire market, that's us, it's like -- the fact of that is that roughly more than half is the C segment and the rest is A and B segment, where we are the, like, leaders as such.

Perhaps it's good to mention that we are back on -- if you are comparing the A and B share of sales, we are back on the level which is, like, clearly more than 30%. So there is an improvement that way.

I have three questions. The first one is on the bridge that you presented.

The take-up of materials, you know, in other materials line, which is new, could you possibly elaborate on what it refers to and how should we think about it? And also, if you could give us a first quarter number for this line in the bridge so that we can back the second quarter impact?

And also, if you could help us how should we think about it in the coming quarters, because I presume your €60 million headwind guidance refers to the raw materials line on the bridge and does not include the other materials. So that would be my first question.

Second question was on how do you expect volume growth to behave in the coming quarters now that you've taken -- passed on most of the price increases into the market? And the third question is more of a clarification.

Your second half guidance on it being similar to 2016, I didn't -- I'm sorry if I didn't hear it properly. Did you refer to the revenues or the operating profit?

Nikhil, it seems that we are coming back to this EBIT bridge every time, so I don't know what to do, if I skip it away next time. But nevertheless, now, of course, we are talking about we wanted to divide it into two pieces because there has been a lot of discussion what is actually the raw material cost and how it's affected in car and van tires.

We are, of course, guiding that €60 million to happen in the whole group level. This bridge is, of course, for the Passenger Car Tyres.

We can say that the highest impact of raw material cost is the second quarter. So as you can see, we have roughly seen the half of it and the next like quarter is going to be quite similar, but not that as high as the second quarter.

And the fourth quarter is then a little bit -- the effect is a little bit lower. But that's how it's going towards the end of the year.

And we really just, like, divided the material slide or material, like, bracket to two just to elaborate what the raw material cost actually is for the car and van tires. You could remember, again, that all the FX impact in the cost side it's embedded, so it's not visible in this chart.

So the currency mix and currency price mix effect, which is elaborated in the right-hand side, actually is for the sales side, and the fixed cost side is not given out.

Yes, so regarding the guidance -- I don't need this. So regarding the guidance, it -- I refer to both net sales and operating profit.

And the question on the volume growth in the second half of the year?

We are saying that we have slight volume growth, but we are actually not giving out the exact volume numbers.

Thomas Besson, Kepler Cheuvreux. I have a few questions, if I can ask them one by one.

To start, I'd like to come back to your comments about doing another round of price increases in the autumn. And I'd like basically you to comment on pricing developments in your 4 different regions.

Some of your competitors are talking about a sequential deterioration in pricing, notably in the U.S., in June and July. So could you explain us where you think you can still raise prices and where you think the opposite, that we may see some weaker pricing in the coming months in Q4 and Q1?

And that also links with your comment about the fact that you would see all the benefits of lower price -- lower material prices next year. The point is, don't you think that prices will have to go down at some point?

That's the first question.

Okay, thank you. So what we are saying is that we are doing the prices selectively, price increases further selectively, meaning that, of course, we have to take into account the competitive situation and also our price positioning in different markets.

So it -- I'm not able to disclose any general rules how we do this, it's really up to our sales organization to really look into this in more detailed way. And then, sorry, I did not get the rest of the question properly.

Okay. Sorry for that.

I'll try another way. I'm not asking you for how you are setting up your prices, I'm asking you about the competitive environment in terms of prices in the different regions.

Because Goodyear and Cooper, specifically, mentioned that pricing was deteriorating sequentially in June and July, and Goodyear profit warned on that topic last week. So my question is, can you still raise prices in the second half when the raw material headwind clearly declines?

And do you expect prices to stay at the current level or higher in the first half of next year if raw material prices stay where they are?

Okay. It's too early to comment the raw material price decline and the possible impact of that.

But as said, we really need to look at different competitive situations in different markets and the price positioning, and we are acting accordingly.

Great. My second question is on the production line you are installing in Russia currently, and that will be up and running at the beginning of next year.

Can you update us on how many passenger tires you can produce in your Russian plant starting next year? And whether you still have room for 1 or 2 more production lines or whether this is over now?

Okay. Unfortunately, we are not disclosing the volume numbers.

But the theoretical capacity is 17 million tires per year. And for the time being, we have utilized all the space we have in the factory, so it's not possible to add any more lines into the factory.

Although there might be some potential in improving the productivity through further automation. But we have not yet any major projects in our plants.

Can I ask you to give us some indication on the full year net financial and net tax charges, please? Because there has been some volatility for both items in the last quarters.

What do you expect for 2017 on the whole, please?

Yes, if you are talking about our tax, like, level for -- as a group for 2017, the guidance actually is and should be in our, like, presentation. If I understood correctly, I said you the page.

The page is on my presentation, six. And as said, we are expecting the tax rate to be like 19% up to 2019 where, of course, then our, like, tax agreements in Russia will be ended and the situation is different.

So that's the whole year guidance also for 2017.

Okay. So 19% up to 2019, and then it changes.

Okay. Last question, maybe for Anne.

There was a question earlier on receivables being broadly flat or up 1%. There's another line called other receivables.

Can you tell us what this covers, please?

Well, like, FX hedging, like, items are there, so it's receivables or payables, so that's the line where they are reported.

I need to come back to the Russia situation, please. I think if we look at Q2 alone for the Passenger Car Tyre division overall, the price mix was pretty much flat.

And I think currency was about 20. I suppose that implies that volume was almost up 100% in Russia and it seems like the market was up more like 20.

So can you please talk again a little bit about how you were able to gain so much market share? That's the first element of the question.

And what's basically going on with all your competitors, why they're not being part of this recovery or that sell-in at least? And the second part of the question is, having raised the stock levels now so much, and as you commented the sell-out was actually negative, isn't that a very big risk now in terms of being able to sell these volumes?

That's my first question.

Okay. So what comes to the Russian volumes, of course, behind the volume development and sales development, there is kind of new positioning of our product range in terms of price positioning of Hakkapeliitta 8.

And of course, there as said, there was healthy level of inventories in the marketplace. So clearly, we were able to make the right decisions regarding our pricing.

And then what comes to sell-out, it's too early to say what the final sell-out is. I mentioned that the sell-out was a bit lower due to the weather conditions, and that was related to summer tires, not winter tires.

Right. So just to clarify that.

If -- I mean, you're basically showing it in your bridge, that price mix was virtually flat in the second quarter. So does that imply then that, outside of Russia, pricing must have been quite negative then?

So that you end up with, for the Passenger Car division, at roughly neutral overall in the second quarter if your pricing was so positive with Hakkapeliitta 8 in Russia?

Well, one thing is also that we have to remember that we are running our factories almost with full capacity, and we are also making decisions about the timing when we are shipping to different markets. So that is also a timing issue.

And how's that reflected in the price mix line?

Well, of course...

Maybe Anne is answering this one.

It's reflected in a way that, of course, we have been selling to Russian market based on the same, like, pattern as we had before. And of course, you are correct in that way that we have now filled the pipeline and, of course, we are expecting to have, like, a normal winter tire season.

There was a low, like, situation as you remember. Last year, in Q4, we had practically, like, empty, like, summer tire inventories in the pipeline and we saw very healthy, like, summer tire volumes last year.

And now, it seems that we are seeing the same, you could say, phenomenon in Russia so that we have the cars which have been sold 3 or 4 years ago now forced to change the tires, and I think that this is, like, reflecting that issue. But you're absolutely right, we have been selling to Russia more, like, winter tires, and now, it depends on the season how the entries are listed for this year.

That's very clear, Anne. And not to upset you even more about the bridge, but if I can ask you to remind me again what the other materials line actually includes?

And how you see that for the rest of the year. Is that okay?

Yes, of course. I remind you again that there is FX which is embedded in this, so it's not like price to price, but there is an FX, like, momentum also in all these bridges.

And therefore, of course, we do not expect that we have huge positives in this side going forward the year. It's basically, like, all the materials which are not, like, raw materials, it's the majority of this -- those are, for example, rims et cetera, so -- and where we are sourcing them.

So -- and also material change is related to this, like, other materials are included in this other material bracket.

Okay. So this item alone relatively flat for the second half, yes?

Yes.

Okay, great. And one final one.

We've mentioned it twice now about the statement about the guidance, both EBIT and sales being flat year-over-year in the second half. If my math is right, that implies only 8% EBIT growth year-over-year, while your guidance is for above 10%.

I mean, is this pretty much the range you're looking at? Or is there some inconsistency?

Am I missing something here?

Maybe Anne, it's…

Well, as it said, it's roughly the same as last year. So don't take, like, plus minus 2%, it is included in that.

I have a couple of questions. First, if you could please repeat the -- your comment about the share of winter?

I think I missed the details. Did you say more than 70% for the first half and 54% for the first quarter?

No. Sorry, I said 70% for second quarter and 55% for the first half.

And this is not just for Russia, this is for the group?

This is for the group.

And you mentioned the capacity utilization, you said you're running at very elevated levels. Can you just confirm if you plan to run at this high level for the rest of the year?

Yes. This is the level we are planning to run the factories really at full speed for the rest of the year.

Okay. Maybe on this point, very quickly, if I can ask, if you can add more capacity into the Finland plant or you don't plan to do that?

We don't plan to add any capacity to Finland this year. No plans.

And very, very final, on the mix. Just because Russia has got many moving parts over the years, can you remind, if you grow faster in Russia than in other regions, is it a positive for your regional mix?

That is a higher-than-average price your average tire in Russia?

The Russian, like, ASP is still below the, like, group average at the moment with this currency rate in euros.

Okay. So I thank you, everybody, for participating and for the great questions.

Thank you so much.