Nokian Renkaat Oyj

Good afternoon from Helsinki and welcome to Nokian Tyres 2018 and Q4 results conference call. My name is Päivi Antola.

And I am the Head of Investor Relations in Nokian Tyres. Together with me in the call I have Hille Korhonen, the President and CEO of Nokian Tyres; and Teemu Kangas-Kärki, the CFO.

We will start the call with a brief presentation by Hille and Teemu, and then continue with the Q&A. So, Hille, please go ahead.

Thank you, Päivi, and good afternoon and thank you for joining us today. I'm very pleased with the work and results our team has been achieving in 2018.

The underlying operative performance of Nokian Tyres was very good. We had strong growth both in North America and Russia.

Although, when you look at our reported numbers you see significant headwind from currencies. 2018 started with very strong first half and business sentiment changed especially in Europe during second half of the year.

It almost looked like two different years. And during the coming 10 minutes, I will explain the drivers behind more in detail.

On the group level, the growth was mainly driven by Passenger Car Tyres. It's also worth mentioning the 10% currency neutral net sales growth in Heavy Tyres, which was supported by increase in production output.

As you know, we continue to be capacity limited in Heavy Tyres and our priority is to serve our OE customers and focus on growing in our core segments, forestry and agri products. Our operating profit improved during full year despite of significant negative currency impact.

During the year, we have been investing in building the business platforms, focusing on [search] [ph] IT systems and processes, which will be taken into use in Dayton factory. We have also been further developing our branded distribution network.

I'm very satisfied with the profitability improvement in Vianor, which is actually realizing now one year ahead of the original plan. So driven by our good financial performance, our Board of Directors is proposing to increase our dividend to €1.58 per share.

I will now spend couple of minutes to explain the key drivers behind our strong growth in North America and Russia as well as the market situation in Europe during the second half 2018. In Nordics, as we already announced before the fourth quarter, the new car sales is one of the important drivers for sales of winter tires.

So when people buy new cars they also buy set of new winter tires. And as the new car sales declined in whole Europe during second half of the year, due to poor implementation of, for example, the [WRLTB] [ph].

It had an impact on our sales. In Norway, key driver for the new car sales was lack of electric and hybrid vehicles to fulfill the market demand.

And we are expecting that to improve slightly in 2019. Replacement tire sell-in were showing overall growth in Nordics in 2018 with budget segments growing more.

In Central Europe, the competitive situation was getting tighter in the replacement tire market due to several reasons, for example declining OE business and situation in Turkey. The replacement tire market growth was more related to growth in budget segment with increasing imports of tires outside Europe, while the premium segment was clearly declining.

I would say that when we look at the year 2019, the visibility to the market is still very low at this point of time. In Russia, the new car sales was increasing by 13% as we estimated earlier, which is about 1.8 million new cars been sold.

The summer tire inventories continued to be on a higher level than normal and we are expecting that situation to normalize towards end of 2019, which means that it will be normal after the next summer season. Overall, our estimates for Russian market regarding 2019 are for new car sales 8% to 12%, driven by the deferred demand from previous years, but having impact from lower consumer purchasing power.

And the replacement tire sell-in is expected to grow between 5% and 7%. And that's driven by the low number of new cars sold 3 to 4 years ago, coming to the replacement cycle and also lower new car sales.

In North America, the replacement market was growing in 2018 and we continue to grow together with our existing customers. In the second half of 2018, several tire manufacturers announced the price increases as we also did.

When we look at the fourth quarter in 2018, the sales in Central Europe was slowing down, as explained due the lack of winter conditions and aggressive pricing in the market. At that point of time, we decided to allocate more capacity to the Russian market, where we were actually selling more summer tires than expected due to competitive commercial terms and good availability.

Overall, when we look at the full year 2018, we were clearly over-performing the Russian market. So we continue to implement our strategic ambition supported by investments in Dayton factory in U.S.

and testing center in Spain and capacity increase in Heavy Tyres. This also means that in 2019 we will carry extra cost for starting the Dayton factory ramp-up.

We will be recruiting people, implementing IT systems and starting the production process to be ready for the commercial production beginning of 2020. At the same time, the products that we are selling in North America will be produced and shipped from Russia.

We will also have extra cost for Heavy Tyres capacity increased as we are running the production in parallel through having the project ongoing. In Spain, we will start part of the testing activities during this year.

All of this is fully in line with what we have communicated in Capital Markets Day in November. In order to support our strategy and ambition, we have also reorganized our business areas beginning of the year in order to have even better focus in Central European market and to be able to utilize better synergies between Nokian Tyres, Nordics and Vianor chain.

I will now hand over to Teemu to go through the figures in more detail. Please go ahead, Teemu.

[indiscernible] This slide is a remainder of our financial targets that we announced last year in our Capital Markets Day. Then moving to the year 2018, and if I start with Q4 performance on a comparable currencies, our top line growth was negative minus 1%, reaching the operating profit of €117 million.

Looking to the full year performance on a comparable currencies, we were able to increase our top line 5.7% being at a level of €1.595 billion for the full year. The operating profit reached a level of €372 million.

Looking our return on capital employed you can see that we were able to perform strongly in this respect. The cash flow from operating activities was strong, especially at the end of fourth quarter we were able to collect really well trade receivables contributing positively to reaching the level of €537 million.

There we need to keep in mind that during the year we've got this €148 million from the tax authorities. The CapEx level for the full year was €226 million and our three strategic projects.

Dayton, Heavy Tyres and Spain, they were in line with the original plan and compared to the earlier guidance we were short of some investments in Russia and in Nokian factory. Then looking to the Passenger Car Tyres at the full year level, the top line was €1.150 billion with a comparable currency growth of 6.1% and operating profit was almost at the previous year's level of €357 million.

We had a good volume growth and positive price mix effect on top line. Last year we announced that we will increase the capacity in Finland, and now we will plan to adjust the utilization rate as the Central European car tire market is not as robust as we estimated a year-ago.

Then moving to the bridge, where you can see in detail the performance of our net sales and EBIT and looking to net sales development, you can see that the fixed currency impact on top line was close to €60 million and on our operating profit level, the negative impact was around €31 million. Volume and price and mix contributed well to the bottom line and then production and other costs were increased and one explanation for that increase was the added production line in [Sevo in] [ph] at the end of 2017, having the full impact last year in 2018.

With regards Heavy Tyres as commented by Hille, strong growth continued there especially in agricultural tires and forestry tires and the operating profit was on a level of €29 million, which was lower than in 2017 and it was decreased due to the currency impact inventory valuation and the increased costs related to the ongoing ramp-up of new production capacity. As planned the production capacity in Finland will be increased in the coming two years and the project is proceeding in line with the original plan having the full impact in the year 2021.

Vianor was able to grow the top line with comparable currencies the growth was close to 2% and reaching a positive operating profit on a full year basis. As we have communicated earlier, Vianor had the target of reaching the 3% EBITDA by the end of 2019, but we were able to reach that target already in 2018, so good, excellent performance in Vianor.

The operating profit improvement cost driven by the better sales management and increased operational efficiency. Then going to the outlook for 2019, we are expecting our net sales with comparable currencies to grow and our operating profit to be approximately at the level of 2018.

And as communicated in our Capital Markets Day, we are having investment programs ongoing to support the growth, and therefore, in 2019 we will have additional operating cost visible in our result 2019.

Thank you, Teemu. Thank you, Hille.

And now, operator, we would be ready for questions from the audience, please.

Thank you. Hi, everyone.

So you write in report and you talk a bit here as well in the presentation that you intend to adjust the plant capacity increase in Finland as the Central European core tire market is not as robust as you earlier estimated. So my question is does this new insight have any implications on your ambition to increase sale in Central Europe by 50%?

No, this is only a timing issue, so the ambition level, increase in the sales by 50%, we see still valid and we continue to pursue that target.

Thank you. And just a follow-up on the timing here, because you write in the report as you look forward to increase sales by, as said, 50% in Central Europe and double North America in the next 5 years.

And I simply just want to clarify what 5-year period that you're referring to given that you or I thought that 2017 was the base year, given that these targets were stated already in the 2017 annual report. But as I read the report today or in your release, it seems like it would be 5 years from today.

So I would just like to clarify what 5-year period you're referring to.

Well, you are right, that 2017 was the base line and base year for that ambition. And, of course, we have to take into account what is happening in the marketplace.

But then, of course, when looking forward, it's even more challenging target for us.

So should I think of it as a 5-year target with 2017 as the base or as 2018 as the base?

2017 as a base, yes.

All right, thank you.

Thank you very much. I have a few questions for you.

If that's okay I'll ask them one by one. First, I would like to come back to the bridge you give us for the Passenger Car business on please.

It's different from what we had in the past. Can you explain why FX is having such a high impact on your earnings in 2018?

And can you say whether this had very positive impact in 2017, if we were to use the exact same bridge?

So in 2018 all our major currencies were against us and the major currency headwind we got from Russian ruble. But then also that Swedish krona and Norwegian krones and the U.S.

dollar had a headwind in our - effect in our operating profit.

Okay. Could you give the equivalent effect in 2017, please?

2017, now I don't have the figure in my head. But if I remember correctly, we had a positive impact from the currencies in 2017.

Okay. If I move on to the next question, could you clarify whether there is still a remaining positive impact to expect in 2019 from the tax disputes you have with your tax authorities?

And in any case indicate what tax rates we should assume for 2019, please.

So the tax dispute is still ongoing and we are expecting to get an answer from the high administrative court in the coming months. And if that is positive to us, then the case is closed.

But unfortunately, we cannot give you any exact timing when we get that information. And then, going forward for the next three years, I would say that you should assume a tax rate around 19%, 20%.

Okay, can you remind us how much there is left for the case where you expect the High Court to give you a final judgment?

So the amount that we got last year from the tax authorities was €148 million. So that is the amount that we are now waiting the decision from the higher administrative court to know that is this tax case over or not.

And that relates to the year 2007 and 2011.

Okay, right. Last question for me, please.

You've indicated that 2019 and 2020 will also be a heavy year in terms of investment between the Dayton plant, the Spanish test track and the capacity in the Heavy Tyres. Is it fair to assume that the peak year in terms of CapEx is going to be 2019 and that we should be €40 million or €50 million higher than in 2018 or is 2020 going to be the peak year for CapEx?

As communicated in the Capital Markets Day, the big year in terms of CapEx is 2019.

Okay, and at what level, please?

That is approximately on a level of €300 million.

Right, thank you very much.

Thank you. Two questions, please.

First on your sell-in expectations for Nordics in 2019, as the OE should still be weak in the first half, what are you expecting overall for 2019 for Nordics? That's the first one.

And the second one is on Russia. If I heard you correctly, you still see high channel inventories and you are expecting sell-in to be up around 5% to 7% for the full year.

So when should we expect a rebound in volumes in that as such in 2019?

So regarding Nordics, as we have estimated, the overall market is not growing. And as we are in the A and B segment that part of the market is remaining quite flat.

However, there are some positive signs of increasing the new car sales slightly. But the timing of that is still not clear.

And what comes to Russia, the channel inventories of summer tires, they are still on a higher level. And after the next summer season they should be coming down to normal level.

So that's why we are stating that the replacement tire market growth will be between 5% to 7%, less in the summer tires and more in the winter tires.

Okay and overall growth higher in the second half versus first half for 2019 Russian volumes for you?

The visibility to the full year is more clear than between the different quarters for - or between the first half and second half. So I would not confirm any specific volumes at this point of time.

Okay. Thank you.

Yes. Hi, this is Artem Beletski from SEB.

So I have also a couple of questions, so let's do those one by one. And the first is relating to your 2019 guidance, just a clarification relating to sales growth and EBIT being flat, is it basically in local currencies the development what we are expecting or in euros?

So we are giving the guidance on comparable currencies total that means in local currencies.

Okay. Very clear.

And then the second question is relating to Finnish production. As you mentioned you won't be ramping it that much as though one year ago.

And then you have been talking about increase from 3 million to 4 million units. Could you provide some number what we should be expecting?

Will it still go up from last year levels or would it be flat basically?

So it should go up from last year levels, but to what extent that's very much depending on the need. So we will be reacting to the forecasted volume and adjusting the capacity utilization accordingly.

Okay. Okay.

And then one question relating to inventory situation in winter tires. I know that season is not really over yet, but could you provide some color on what is the situation you're seeing in different key geographies?

Well, our understanding at the moment is that in different markets, so winter tire inventory situation is on a normal level. When we look at Russian market, the premium segment is a bit on a higher level compared to mid or budget segment.

Okay. Very clear.

And the last one from my side is relating to volume development in Q4. So as I do some calculations, it seems that volumes also declined in Q4 by roughly 5% year-over-year.

Could you maybe explain whether it's basically demand-driven or capacity limitation of what you had in Q4 of this year, which was driving basically low volumes?

Well, we have been selling according to the demand. So we do not have any capacity limitations in Passenger Car Tyres.

Right. Very clear.

Thank you very much.

Yes. Thank you.

I just wanted to ask about Central Europe, so basically in Q4 when your sales were down. How much of this was due to the late winter season and how much kind of other market weakness?

And then on to this 2019, if the outlook is slightly worse than you expected earlier kind of how much has changed as you are still saying that the market is expected to increase slightly? What was your earlier expectation and could you talk a bit more about that kind of what are you seeing in the market?

Thank you.

Thank you. So in the fourth quarter as you mentioned, the winter season did not start practically at all.

So all the snow was coming only after Christmas time. And that of course has an impact on the sales, because when the season is on, people are not coming back to the tire shops to change their tires.

And when we look at the market, the overall replacement market was growing, but it was growing mainly in the budget segment, as there were quite a few Chinese tires coming to the markets, so that part of the market was growing, but not the premium segment. So an additional, if there was a lot of competition due to the fact that as the OE demand has been going down, the OE producers, they have been forcing the volumes to the replacement market in order to build their capacity.

So that's very natural market reaction. When we have been looking at the forecast for 2019, we were also assuming stronger fourth quarter.

So that is explaining part of the kind of gap we see in the overall situation in 2019.

Okay. That's clear.

Thank you.

Hi, thank you very much. My first question was also regarding Europe.

I was hoping you could maybe elaborate some of the points you made in your initial statements about visibility remaining quite poor, and also what you said just now about competition and growth and favor of the budget segment and not so much premium. I was under the impression that Conti, but also Michelin and Pirelli had recently made indications that they were quite happy with the winter tire business in the fourth quarter.

Is it maybe pricing also then on part of your premium competitors? Is it the offset you referred to as OE producers where competition has increased?

If you could please elaborate on that a little bit? And whether the focus maybe also on repercussions for 2019 inventory levels and pricing levels and so on?

That is my first question please.

Yes. So you are right about the pricing.

So when there is tough competitive situation, it means that the prices are going down. And that was not what we did.

We did not take our prices down during the fourth quarter. And - but comes to 2019, we are now clearly seeing the big players coming up with price decreases.

And it means that the market will be very competitive in 2019 as well.

So that's what do you mean with visibility, right, that we don't quite know yet the dynamics between price and volume, and which players is going to play which strategy?

Exactly. Exactly.

Great. And then secondly I wanted to ask about the capacity expansion in Finland.

So I think you are proceeding with that as planned, adding that 1 million additional unit. I wasn't sure if I understood you earlier when you were asked about capacity utilization.

Are you prepared to give a number for capacity utilization in 2018 and how that's developing? And with respect to the expansion in Finland, can that be at Passenger Car division profitability?

Or is the fact that you have these higher production cost in Finland, does that naturally mean that it can't be at existing profitability and it would be slightly less profitable if you ramp that up?

So we have been adding number of people in the Finnish factory in order to be prepared for the growth and to be able to support our ambition in different markets. Now when we look at 2019 and have lower visibility to what is happening for example in Central Europe, we are ready to exhaust the capacity utilization accordingly as the Finland production cost is much higher than what it is in Russia.

So that's the natural place for us to have the flexibility.

Is it - I mean, is it fair to say that your capacity constraint to a certain extent in Passenger Car Tyres, say to a volume growth of 5% or so under the current setup?

We are not capacity limited at the moment.

Okay.

Only in Heavy Tyres, not in Passenger Car Tyres.

Yeah. Understood.

Thank you very much.

Hi, thanks. This is Pasi from Nordea.

Regarding this ramp-up costs are related to Dayton plant, so which probably are also included to the full year guidance. So could you actually kind of elaborate amount of these costs you are actually including?

Is it €5 million or €50 million? And secondly regarding this utilization ratio adjustment you are going to make in Finnish factory.

So are you also able to adjust costs in line with the lower utilization ratios or is it going to hurt the margins? Thanks.

With regards to the Dayton ramp-up costs, I can refer to our communication in the Capital Markets Day, where we said that the impact in year 2019 will be between 1 to 2 percent points from the Passenger Car net sales.

Yeah. Okay.

That's great. Thanks.

Hi. Thanks for taking my questions.

I've got three. The first one is just a confirmation on your guidance.

At the Capital Markets Day, you mentioned your net long the ruble and shot the dollar. If I look at spot rates today for what it implies for 2019, you should have transaction and headwinds on both the ruble and the U.S.

dollar. So when you guide for flat EBIT, is that factoring into these transaction headwinds?

Or is the flat EBIT not taking into account any headwinds that you have from currency?

Our guidance in terms of EBIT takes into account the current exchange rates.

Thank you. You mean as of today and maybe not in line with 2018?

As of January 2019.

Thank you. The second question is in terms of your sales and production that you show on the revenue bridge, you show volumes up 5% and then on the slide you show production up 6%.

Are these like for like? And then, I guess, did you end up producing more than you sold or we should not be comparing these two numbers?

Yeah, directionally, you are right with your thinking.

And then the last question. When I compare the EBIT bridge that you've shown for third quarter and for the full year, it seems like you had bit of a tailwind in terms of fixed cost for fourth quarter.

Is that completely driven by the lower volumes in the fourth quarter or was there any level of lower investments or cost-cutting that you did in the fourth quarter to reflect this low amount?

Clearly already earlier of the year, when we were seeing shortening top line growth and as a prudent leaders, we managed also our cost base with the view of our top line development.

Great. To add like when we look at for 2019, would everything in the fixed cost line be reflecting the 1 to 2 percentage point headwind that you flagged in terms of the North American ramp-up?

Or would there be some offsetting cost measures that you will have too? On other words, would the fixed cost line in your full year 2019 bridge, will it be just the 1% to 2% margin headwind or will it - or can it be substantially lower than that?

The communication in the Capital Markets Day that was the net of all the activities that we do at the Passenger Car Tyre business.

Okay. Perfect.

Thank you.

Yes. Thank you for taking my questions.

I just have a couple of follow-ups. On the CapEx question, I understand that you guide for €300 million for this year, but I think you were guiding for €250 million for last year.

You spend a little bit less maybe you can explain why you spent less and why it's not kind of added to 2019, so it's the kind of a net saving on some investments. And then the second question would actually be on the Nordics.

Can you give a rough indication of how much from your sales is kind of directly linked to OE sales in the Nordics? Thank you very much.

So in terms of the CapEx guidance for this year, which I earlier in the call said that is about €300 million. So we are managing all the time every year the overall CapEx level and some investments were postponed from this year - from last year to this year.

But it then means that we cannot implement everything that was originally planned for this year, so it will have a rollover effect to 2020. But the amount for this year is at the level of €300 million.

Well, I don't have the Nordic specific car dealer business figure, because we are looking at that business as a whole for whole Europe and Russia.

What would that be for the whole business?

Well, we - sorry, we are not disclosing that figure.

Okay. Thank you anyway.

Hi, thank you very much for taking my question. Just coming back to Ashik's point on your guidance, just to understand a little bit, when you say approximately in the range of last year at current FX, what do you mean with approximately in terms of quantities?

Is it plus/minus 3% or what do we - how do we have to think about that?

So we are not defining this in more detail. So it is approximately at the level of 2018.

Okay. And then - sorry, I think I missed that, because I was just off the queue, but in terms of your sales growth at constant FX, when you say to grow, can you give some sort of quantification what that means?

Well, the growth is in line with our long-term financial ambition level. So we would be talking about single-digit growth numbers.

Okay. That's very clear.

And then, just to come back as well, when you were at the Capital Markets Day you talked about this 22% level. Would you say this is a trough or this is still what you say the average over those three years of the plan?

So what we discussed…

What happened at your meeting, yeah.

What we discussed at the Capital Markets Day was that we are saying that it is at the level of 22% and it can be slightly higher or slightly lower.

Okay, perfect. And then, is there sort of some cost savings that you did in Q4, leading to your better margin that could spill into 2019 as well, despite - as the market is still somewhat weaker despite your costs that you're putting in - for the new factory?

So in Q4 we didn't do any extraordinary things, so it was just a prudent way of managing the business.

Okay. Perfect, thank you very much.

Thank you. I have three quick questions.

The first one is on 2018 for Passenger Car Tyres. You show a price mix that is positive.

Can I ask if you can give an indication what is the mix itself without price was positive? I try to get just an indication.

It was mix growth higher than price growth for Nokian? Thank you.

So we are communicating that as one figure, so we are not separating the price and mix effect in our communication.

Okay. For 2019, I think you mentioned that the - you expect some pressure, further pressure from the market on pricing.

Does it mean that also Nokian Tyres would that expect price decline for your own business?

We are in different situations in different markets depending on our market position. And in the Nordics, we are the market leader also in Russia.

And there we have stronger pricing power. And for example, in Russia we have been already increasing prices for the summer tires as we have started to sell those already in the fourth quarter in 2018.

What comes to other markets like North America and Central Europe, there we always look at the market leaders, and then make our decisions regarding the prices based on that and the overall market situation, of course.

Okay. Can you just give us a bit color on this pressure that you mentioned for the market?

Does it focus on specific segments like premium or maybe the low-end market or would you say it's across the board similar level of pressure for 2018?

Well, it - yes, it looks to us that it's across the board that there is pressure also from the market leaders to reduce the prices and they have been announcing price decreases.

Thank you. A very final one on the Heavy Tyres, considering that you said you have capacity constraints, should we expect the level of profitability for this business to improve in 2019?

So we are not giving any guidance on each business area. But clearly, this ramp-up phase that we are having in the Heavy Tyres business it will have an impact on the profitability during the coming two years.

Thank you. Thank you very much.

Yeah, good afternoon. It's [Garth Ritchie, very short.]

[ph] The authorization of rights issue, it's just a mechanical one you do regularly or do you have something in mind behind that? That's my first question and I have a second one afterwards?

This is exactly in line what we have been doing earlier, so nothing extraordinary.

Okay, perfect. Now, I want to have a little bit of clarification about the pricing and volume, and when you talk about pricing initiated by most of your competitors, in the end what are we talking about?

Are we talking about minus 1% order of magnitude or it's something more severe than that? That's a little bit of perception I have when I talk to the industry.

Well, I would not maybe go into that level of details, but what we have been seeing is that many of the big players have been reducing their price.

Okay. Thank you.

Thank you. Hille, before we finish the call, would you like to briefly summarize Nokian Tyres 2018?

Thank you, Päivi. As to summary, I would like to state that our underlying operating performance is solid and we continue implementation of our strategy and growth ambition supported by the investments in North American factory and Heavy Tyres.

All our key projects, they are proceeding on time and on course targets. And of course, this is very energizing for the whole organization.

So we are looking forward to completing these projects.

And this ends today's conference call. Thank you for participating and have a good day.