Nokian Renkaat Oyj

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

Panu Laitinmäki - Danske Bank Petri Kajaani - Inderes Oy Artem Beletski - SEB Enskilda Henning Cosman - HSBC Ashik Kurian - Jefferies Gaetan Toulemonde - Deutsche Bank AG

Good morning, everybody. Ladies and gentlemen both here in Helsinki and on the line.

My name is Hille Korhonen. I'm President and CEO of Nokian Tyres and I will present you Nokian Tyres Third Quarter Results and give you guidance on the full year expectations.

First on practicalities, so please mute your phones both here in Helsinki and on the line and after the presentation I will first take questions from the audience here in Helsinki and then over the line from other participants. So my main message regarding this interim report is that Nokian Tyres has had very strong performance throughout the whole year and solid full year expectations.

So our net sales has been growing in all our main markets, especially in Russia, however Central Europe has been our biggest market. And what comes to profitability we have been increasing our volumes and through the operational efficiency and also price increases that have been made to cover the raw material cost increases our profitability has been improving.

And naturally this is all also based on the fact that we have very competitive product range which we have been further developing by launching new products to winter, summer and all season segments. The presentation is consisting of general overview of the whole company and its performance and then I'll go through the financial performance figures more details about business units and then the guidance for rest of the year.

Regarding our key markets the GDP has been growing in all our key markets giving support consumer confidence. In the Nordic markets, new car sales has been slightly picking up however the car tire sell-in in our core segment A and B segments has been declining.

Heavy tire segments are all positive and in Nordic countries especially the forestry segment is still growing. In the Russia, the consumer confidence is slightly picking up however after the 15% drop in 2015 it's still on a very low level and I would say that the consumers don't have any more cash to spend what they used to have, however the new car sales is gradually increasing since March and it's estimated to be on the level of 11% to 13% this year.

However, these are kind of low end, low-cost cars and it will take quite a long time until we reach the numbers that they used to have regarding the new car sales. Car tire sell-in, in Russia has been picking up due to the fact that there is deferred demand from previous years and also because the pipeline has been empty however we're now in a situation where the channel inventories are on a normal level.

What we're seeing at the moment regarding the summer tire sell-out it seems to be on a back on a normal level compared to previous years. Heavy tires sales to especially mining in Russia has been developing well.

Then what comes to Europe, Central Europe the new car sales is growing and the car tire sell-in is flat, what we are experiencing in our core segments. Heavy tires segments agriculture is on a healthy level and growing nicely and we are seeing it continuing also next year.

Let's come to North American. The new car sales is negative in North America and positive go growing in Canada and the car tire sell-in is flat, so the market is, it seems to be on a previous year's level.

Especially where it's moving is growing in heavy tires segments. Then I'm on Page 4, Nokian Tyres performance in this market.

So the net sales has been growing in all our key markets. In Nordic countries despite of the challenging market situation, we have been increasing our sales due to the fact that we have very strong distribution in the Nordic's we have good product portfolio very competitive one and our brand awareness is high.

And we have been gaining market share in the Nordic countries still. In Russia, the net sales has been growing almost 86% and out of this number more than 50% is volume related and rest of the growth is supported by currencies and also price increases.

Our market share has been increasing in Russia. The growth in Russia has been more positive then we have anticipated beginning of the year and we have been able to supply the market, we have made decisions earlier in the spring to focus on Russian market serving the customers as the demand is picking up, so this has been a very decisive action.

Also we have there very good product portfolio Nokian Hakkapeliitta 9 supported by Nordman 8 and very strong distribution. In Central Europe, our net sales has been growing and volumes has been roughly on the same level throughout the year compared to previous year, however we have been gaining our market share.

And as said the Central European market is our biggest market in passenger car tires. In North America, we're seeing also healthy growth 16.5% also in volumes and we are improving our market share although were starting from a very modest level.

Profitability has been improving and there are several factors behind, so the currency effect on the net sales is €32 million and that is coming mainly from Rouble from the first half. The currency impact during the third quarter has been actually slightly negative.

Our average sales price has been increasing due to the price increases we have made in all our markets and the impact is already visible and it also means that we have been able to improve our price position in all our markets. We're still experiencing the negative raw material cost impact 20% and it has been slightly going down during the third quarter, so comparing with the second quarter we're about 1% on a lower level, what comes to raw material cost.

Fixed cost have been going up due to the fact that we're investing in sales and marketing especially in the new markets supporting our growth and supporting our sales increase in also smaller customers especially in Central Europe where we have made strategic decision to focus on the smaller retailers instead of selling everything through wholesalers. Sales growth has also maintained, our volumes have been growing and our production volume is plus 12% up from previous year's level and it has also enabled us to gain productivity in all our factories.

Regarding distribution, Vianor equity the number of shops is less compared to previous years and this is due to the fact that we have made decisions to kind of reorganize our network in order to improve the profitability. Total number of Vianor shops is also a bit down from last year.

At the same time we're focusing on expanding our Nokian authorized dealer network in Central Europe and also the entire network especially in Russia. I'm on Page 6 now.

This is the summary of financial performance and when we look at the net sales we have been improving by 14.5% in third quarter and 16.3% change over the whole year. Operating profit has been improving even more 21.3% during the third quarter compared to previous year and 22% compared to previous full year.

And the operating profit we have stated earlier that our aim is to keep the operating profit above 22% and we are now on the level of 22.4% as total company. What comes to the profit for the whole period, we've booked here now the additional taxes and interest €59 million from the tax year 2011 and this has been based on the reassessment made by Finnish Tax Administration and which the decision we find, unfounded.

However it has been booked now during the third quarter and the amount will be paid in November. When we look at the operating profit per quarter comparing our performance with the past quarters, we see clear improvement in every quarter this year so far.

And when we look ahead at the fourth quarter and the performance in 2016, we see there high peak so I will come back to our own estimate based on this later. So the net sales by different market areas we see here clear growth in Russian share, Russia is today one fifth of the total sales and compared to other Central Europe it's still below European number and also the Nordics as a total market is still very important for us.

And North American share is 11% which is very good basis for us for the future growth. And on Page 9, and this is about the raw material cost development.

As stated earlier, our raw material cost is still on a level 20% above last year number and we're estimating it to be roughly on the same level during the whole year and this gives us approximately €60 million headwind compared to previous year and this is coming from the fact that we're purchasing our raw materials even five to six months ahead, so we see the impact actually quite long time even after there are changes in raw material prices in the marketplace. And when we look at the long-term development of the raw materials we are roughly on the same level compared to 2014 and we have been experiencing quite low raw material prices and costs during 2015 and 2016.

Total investments are estimated to be on the level of €150 million this year and we have been taking this figure down from the previous level which was estimate which was €190 million. We have been taking into use already the capacity increase in our Russian factory, so our nominal capacity when starting next year will be 17 million tires per year.

We have been adding automation in Nokian factory and also in heavy tires which is seen in our productivity gains. So part of the investments that have been planned to be made this year are now postponed to next year's numbers.

And naturally one of our key projects and investment focus is our North American factory. We had the ground breaking ceremony in North America in Dayton, Tennessee during September and the ground work has already been started and we actually a video picture available for us to follow what is happening in the site every day.

And we are very excited about the project because it gives us possibility to grow our business in North America and our customers who have been participating in the groundbreaking ceremony have been as well excited about our presence there because it means that we will have better possibilities to develop our specific product range for the North American market and also supply our customers with short lead time. We have high ambition and targets for the factory, so we want to by having the capacity available so we want to double our sales in North America during the coming five years' time.

We want to be leader in sustainable products and manufacturing amongst North American tire manufacturers and of course we want to attract good talent and retain the talent to service our customers in a best possible way. And the production is planned to start in 2020 and at that stage, we will be able to deliver 1 million tires to the market.

And this is Dayton factory in numbers, so we will be producing four million tires when everything is completed. Also having the possibility to expand the manufacturing later on.

And we will be employing about 400 people in the site. By having this extra additional capacity in USA it will also enable us to release capacity both from Russian and Nokian factory since we're today supplying the North American market from this factories and we have several hundred North American specific tires in the manufacturing today which of course adds complexity to our current operations.

Then some important news about our sustainability performance. We have been selected to Dow Jones World Sustainability Index in 2017 and we are in the auto components sector where we are the number two as a company.

So this gives our good ground to continue our work, since we know that we're working on the right topics. Improving the rollings resistances of the tires and through that impacting the energy consumption we're working on sustainability sourcing, we want to create best places to work for people and we want to be the good citizen in the all the countries we're operating.

So we are very proud of the work that the whole organization has been doing in this respect. Then I will go to the business unit figures and performance and when we look at the net sales.

Sales of our different businesses, the passenger car tires is now representing 70% of the total business and having the EBIT margin of more than 32% of course it's improving the EBIT margin of the total company, which we can see in the EBIT bridge here. Vianor the sales has been improving however the EBIT is still behind our expectations however we have the profitability program ongoing and it is proceeding as planned.

Heavy tires is representing 11% of our total sales and there the EBIT and EBIT margin is on a very healthy level as well. so when we look at the passenger car tires I would point out couple of things here, first of all now that we have the additional capacity in our Russian factory available, we also have capacity in Nokian factory that we can take into use, so there should not be any capacity limitations for coming years before we have the North American factory up and running.

Which is important to us is of course the competitive product range and we have been excelling in the tire tests and we have been bringing to the market launching great products for both summer, winter and all season. So this gives us a very good basis for future growth and performance.

I'm now on Page 17, when we look at the EBIT bridge we can see clearly that we have been able to compensate quite well. the raw material cost increase is through the price increases and of course it has been supported by currency as well.

here we have some examples of our new product ranges and it's important to note that we have launched new summer tires for the Nordics and Russia called Nokian Hakka 2, Hakka Black 2 and Hakka Blue 2 for SUVs and passenger car tires so we're not only focusing on the winter tire performance improvement but also developing summer tires for demanding conditions and we launched also North American specific tires called Nokian eNTYRE C/S which are all season tires for - designed for SUVs and CUVs. Heavy tires had very good third quarter, it was supported by good growth in their key segments especially sales of the agricultural tires have been strong and all of this has been enabled by focus on developing new tires for this segments and also we have been improving the automation and adding capacity in heavy tires.

And EBIT wise, the improved productivity has been also important. What comes to raw material cost, we have been doing the necessary price increases to compensate the cost increase however it's visible only now during third quarter and onwards due to the fact that we have high share of OE sales and this increases are being implemented by customer by customer at different times.

Vianor especially the owned equity Vianor is very important for us to support our sales in the Nordic markets and position has been very challenging so far and what we are seeing is very tough competition so despite of that we have been improving the sales and top line slightly. And as said we're focusing on also improving the profitability of the owned equity Vianor sale.

And here on the Page 21, you see the map of Nokian Tyres branded distribution network which is very important for us in terms of entering new markets and making our brand visible in the stores for customers and helping our customers to sell the product to consumers. Then how do we see the outlook for the rest of the year we're steadily on the growth track and we are assuming that our key markets are continuing to grow, the raw material cost impact will be roughly on the level of 20% which gives headwind of €60 million, the investment level will be on the level of €150 million and what comes to top line as said, our fourth quarter in 2016 was very strong due to the fact that the Russian sales of summer tires picked up very strongly during that quarter and we're estimating that we will be roughly on the same level compared to last year's quarter, fourth quarter.

And sales wise and what comes to EBIT I would be slightly more positive about the EBIT level of what comes to the fourth quarter this year. The concern we have regarding the markets is the winter, when we look at the weather forecast in Germany the winter is not yet there, so the winter season is very important especially for our Central European sales and also in North America.

And based on these assumptions, we keep our year 2017 guidance unchanged. So in 2017 with the current exchange rates net sales and operating profit are expected to grow by at least 10% compared to 2016.

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

Panu Laitinmäki from Danske Bank. Starting from the guidance that you kind of gave for Q4 three months ago you said that the second half would be roughly at the same level in terms of sales and EBIT but then Q3 was up 20% and now you indicate Q4 will be slightly higher, so basically the question is, what has changed?

And then second question on Russia, you've grown by 100% and you said will invest half of that and then you say that, market will grow around 15% so you took some markets there. The question is really, what kind of revenue growth rates should we expect for you going forward?

So what has changed from the previous session. We did not expect Russian sales to still develop as positively as it did during third quarter.

however, what comes to fourth quarter the summer tire sales in Russia was exceptionally high in 2016 and now we are back to kind of normal inventory levels, so we're estimating the total sales to be roughly on the same level for passenger car tires. And also the winter season in Central Europe it's moving closer to the quarter four and I said, we don't know about the weather so there are some concerns about that.

It's Petri Kajaani from Inderes. As we look at your result and we go through the business segments I see a lot of pluses a very minuses.

Everything seems to be going so well for you at the moment. In your opinion, what are the main risks going forward if we think about your ambition to grow faster than the market and grow profitably in the new few years.

Thank you.

Well of course, although the numbers are good. There is a lot of work behind the numbers and all the markets are very competitive where we operate and of course when we are growing, we need to work harder in order to gain the market share.

And also building our branded network take some time and the increasing and improving our brand awareness takes a lot of work. So the number don't come as granted as when we move forward it's really understanding the market and selecting the right customers and growing with the customers.

Artem Beletski from SEB. Two questions from my side, what comes towards [ph] in market?

Could you maybe comments as there has been quite nice growth from low levels? What has been really happening this mix for you and also for the market has it been improving this year?

and then second question regarding capacity utilization you mentioned that you won't be capacity constrained between the [indiscernible]. What are you plans regarding especially Finnish factories for next year and so?

Okay I start with the first question regarding the Russian mix. We have been actually increasing our share in A segment.

However when you look at the total market, the C segment which is representing about 50% of the total market has been growing. And during the first half of the year, we have been selling more Hakkapeliitta so the A segment products then towards the third quarter we have been focusing on the Nordman which is then our B segment product.

So despite of the fact that the market is growing in C segment, we have been able to still be the major player in A and B segment and growing there. Although, at the same time we have to remember that the present market and the volumes they have been relatively on a low level during the past years compared to what they have been earlier.

So the growth numbers are high because of the smaller base numbers. And then what comes to the manufacturing in Finland.

We have these possibilities to take into use more shifts to change the shift pattern as needed. So the nominal capacity is there and we will take into use as needed.

No further questions from Helsinki. So then we'll take questions from the audience on the line, please.

There's three in total. Firstly I'd like to come back to yes maybe the visibility of the elements that we're discussing in these calls.

I think not only the sort of level that was indicated flat year-over-year for the second half and now we're up so much, but there's obviously also quite a few other elements when we talk about the bridge. I think we also said that the other material lines will be flat it's another €8 million positive effect of I think.

In Finnish, your predecessor has said you're looking at some capacity constraints and now even though the growth is a lot stronger you're saying you don't have any capacity constraints anymore. I think we have discussed no further expansion in Russia and due to some sort of country risk that was indicated and now you're expanding further in Russia.

So I suppose what I'm guessing at is, is just is the visibility in your view generally a little bit weaker than it used to be with Russia in particular and it can be erratic going forward and obviously it's all going your way right now and it's very positive, but you see an increased risk that things could turn negative as well in the future, in the same sort of likelihood, that's the first question.

Okay, thank you. That was quite a few questions in one question.

So coming back to the my previous comments after the second quarter. I would like to emphasize my statement was not to be flat for the second half, but roughly on the same level and what comes to third quarter, the volume and productivity they were higher than we were expecting early on.

And the capacity situation we have taken into use all the capacity that we're able to build in the short-term in our Russian factory. So there is like no change from what we have stated earlier and when we look at the factory and capacity in Finland, we have been at some point producing even double the quantity we're producing today.

So with a different arrangements in shift patterns, we're able to increase the capacity there.

Great, so maybe just to confirm. You don't see any pull forward if you like in Russia but it's just the strong underlying level of demand and very strong market share gains obviously on your part, outgrowing the market by the factor of three basically.

Yes.

Okay great. And then on CapEx, seeing you're shifting some of the CapEx into next year could you just roughly confirm the order of magnitude I believe it should be around €300 million CapEx next year and €250 million in 2019, is that roughly correct?

Next year we're estimating the CapEx to be on the level of €230 million. We have not yet made final calculations, but roughly on that level.

Great and then finally quickly on the US. You've reconfirmed the target profitability number of 22%, do you have a soft budget in mind for margin dilution from when you start ramping the US plant, are you prepared to temporarily go below the 22 and could you give us an order of magnitude for that?

Well that's definitely what we are expecting that the margin will go slightly down while we're ramping up the capacity there because we will have kind of more resources in our operations and not really comparable capacity in place for couple of years' time. Regarding what our estimate for the profitability would be maybe its 1% to 2% down.

That's really helpful. Thank you very much.

I've got three, maybe just talk one after the other. The first is, in your comments you highlight that sell-in is expected to be up 15% in Russia while the sell-out at least on summer tires is flat.

Just want to get your thoughts on where you think the inventory levels in the Russian market would be at the end of 2017 and whether that has any impact and what the volume growth in 2018 could potentially be?

Well our understanding is that, as in 2016 the pipeline was quite empty now it has been so to say filled up and the sell-out especially in summer tires is now proceeding as kind of normal. So our estimate is that, we are on a normal level after 2017.

Thank you. And then on your revenue bridge I think if I back out for the third quarter the price mix probably comes in around 2.3% compared to broadly flat at second quarter.

It is all the improvements due to price increases or is your mix contribution very different in the second quarter versus what you reported in the third quarter?

I will let our CFO to take this.

I mean of course when you're looking at the price mixes such as also involving the contribution as such, as already told the Russia was like the highest increase in sales such but in Russia we have the ASPs such, so it's effecting to the price mix as such, so we have country mix, we have the product mix and we have the customer mix. So all of those involved one like percentage and it's sometimes perhaps bit difficult to get the whole picture, but the fact is that we've been increasing prices in all the market areas and in Q [ph] we actually saw the effect on Russia kicking in slightly higher with lower ASP of course slightly effected by also the share of the Nordman tires as such, so that's the end result all in all, the price increases are in place and especially the summer tire price increases are then fully visible next year but with the tires all, also [ph] like covered.

And any indication on what the rough split of price and mix would be for the third quarter or did it miss it?

No it's the difference which is the bridge, that's the end result.

Okay, fine just last question on North America. You had very strong organic revenue growth I think the volume increases you have in North America scale lot higher than what the market is growing and a lot of the US competitors are having difficult quarters, is all your growth in line with your sell-out demand or because you have seasonal restocking and destocking of the channels, is there has there been more than normal restocking of the channel for you in North America or in other words, is there any reason why the growth rate that we saw for this quarter should not continue in the coming quarters from North America.

Well the sell-in pattern is still the same no changes in that. There are some big customers who are purchasing winter tires well in advance.

So regarding those we don't see the sell-out yet. So when we look at the North American market it's important to remember that now as we are entering the winter season whether we have the snow coming to the snow belt or not that's a decisive factor.

Thank you.

Its Gaetan Toulemonde, Deutsche Bank speaking. I've two questions, the first one is concerning the raw materials they have declined recently so it's going to be a positive for you next year.

If I do my math correctly we are going to end up with tailwind or approximately €20 million, €30 million for you next year. what you think you guys will be able to do like the industry you think you're going to be able to keep for yourself, do you think you're going to be force to pass it on to the customers.

So can you help us a little bit to better understand that point, we go in 2018 and my second question is that, you've some tax agreement until 2019 with the Russian authorities and that's why in the statement you told us that, we should work with 19% tax rate for the next couple of years, what should we work beyond that? should we still work at around 20% tax rate or you will guide us with higher tax rate?

That's my two questions. Thank you.

Maybe the CFO will take the second question.

As said of course in 2019, as you're absolutely right, the agreements with local government. As far as we know, are ending and then of course we're coming back into the situation that we have the normal corporate tax level in all our countries.

The tax burden will increase slightly above 20%.

Sorry, is it slightly above 20% can you help us to get?

Yes, it's slight. It will be like depending of course with the country mix and etc.

so there is of course like other moving parts also then Russian there is also the moving part with this like North America, so perhaps the clearer guidance we're giving later on, but based on Russian and that's changing, we're talking about 2% to 3% change.

Okay, thank you.

And then what comes to the pricing, we're in different positions in different markets. So in the markets where we are, market leader in our core segments.

Of course we are ones setting the prices, but then when we are working in markets where we're not that known and much smaller there, of course it's important that we focus on keeping our price position on a level that we are in the right position compared to our main competitors, so it's' too early to estimate what happens to the gross margins next year.

Sorry I - add a little bit here. It's good to know to remember that even though the raw materials have been going slightly down they are still on a higher level than they were in the end of last year, so we do need the price increases.

Okay, so you don't agree with my back [indiscernible] calculation that the tailwind next year could be between €20 million and €30 million, I'm too optimistic.

I just stated that the raw material prices are higher than they were last year, by the end of last year, so we do need the raw material price increases or the price increases in high end products.

Okay, thank you.

Okay, thank you everybody and I wish you all very good day.