Nokian Renkaat Oyj

Good afternoon from Helsinki and welcome to Nokian Tyres Q1 2019 results call. My name is Päivi Antola and I am the Head of Investor Relations in Nokian Tyres.

And together with me in the call is Hille Korhonen, the President and CEO of the company, and Teemu Kangas-Kärki, the CFO. As usual, we will start the call with a presentation by Hille and Teemu, and then continue with a Q & A.

So Hille, please go ahead,

Thank you Päivi. Good afternoon everybody and thank you for joining us today.

So we have had a diverse start of the year with good progress in heavy tyres and Vianor, but some softness in the passenger car tyres market, especially in Europe. I will go through the market details more in detail during the call, as well as the business areas.

Our focus is strongly on our long-term targets and on our strategic projects. We are moving in line with our plans both in building the U.S, factory and testing centre in Spain, which are supporting our future growth and business.

So let’s look at the start of the year. As said, it looks quite diverse.

Overall, the net sales growth for the whole company was 3.8% with comparable currencies. And as mentioned already we had good progress in heavy tyres and Vianor.

In passenger car tyres we had some volume growth, but somewhat weaker price mix and passenger car tyre net sales grew only slightly because of that. In order to compensate the soft market conditions and lower sales in Central Europe, we started the Russian winter tyre deliveries earlier, which explains part of the Russian growth numbers.

As you can see, there was good growth in Nordic countries and it’s mainly driven by the growth in Forestry segment in heavy tyres and sales increased in own Vianor chain mainly related to B-to-B sales. Operating profit was down from previous year, due to headwind in currencies and higher raw material costs as well as price/mix of the sales, meaning that, first of all, we had higher share of Russian sales with more B-segment tyres according to current market demand.

Secondly, we have been selling inventory or end-of-lifecycle products in CE to give room for sales of our new products both in summer and winter tyres. And third, also share of products in Finland, with higher cost base was higher compared to previous year and as we have earlier stated, in the coming quarters, we continue to balance the production between Finland and Russia according to demand.

Net profit for the quarter was increased by almost €150 million, as we recorded tax returns due to closing of the tax disputes in Finland. So when we look at the different markets we are operating in, the new car sales continues to be soft in all markets, which is also impacting the replacement tyre market sentiment as expected.

The only positive market has been Norway with improved availability of Tesla cars. We have lowered our estimate regarding new car sales in Russia for full year to be on the level of 5% to 7%.

This is mainly resulting from weakening consumer purchasing power and as a counteract, the Russian government has continued to provide incentives for purchasing new cars to maintain the demand and this incentive is mainly provided to the budget cars. The replacement tyre market has been declining during the first quarter.

We keep our estimates regarding European full year replacement tyre market on the previous year level, although there is some growth in the SUV and small all-weather segments. Regarding prices, with the current competitive environment, prices are stable or decreasing, which is the case already with bigger sizes where competition is tougher.

For the Russian replacement tyre markets, we lower our previous estimates to growth between 3% to 5%, with declining summer tyre sales due to high channel inventories of summer tyres. So the summer tyre season has already started in Russia and the season is expected to bring the high channel inventories down.

Our sales volume of summer tyres in the fourth quarter will depend on the success of summer season sell-out. So as said, the season has been started as normal, but it's yet too early to draw any conclusions from that.

In North America, we continue to gradually expand our distribution with new customers and increase the number of outlets selling our tyres. There has been some shift in sales between the fourth quarter and first quarter deliveries in terms of timing, but the overall performance of our North American team is according to plan.

And I will now hand over to Teemu, who will go through the numbers and business unit results. So please, Teemu.

Thank you, Hille. So let's start with the top-line which was on the level of €344 million, comparable currency growth of 3.8%, thanks to heavy tyre and Vianor good growth in the Nordics and then, the Russian growth in passenger car tyres.

Operating profit decreased to the level of €54 million due to the softer result in the passenger car tyres. Vianor and heavy tyres, they were able to improve their operating profit.

If we look our earnings per share, the reported EPS was on a level of €1.41, that was positively impacted the positive tax ruling and we booked this €149 million to our results in this quarter. The cash flow impact was already visible last year, when we got the money from the tax authorities.

Then another change that is visible in the first quarter numbers is the IFRS 16 change that will be visible in our interest-bearing net debt. So the interest-bearing net debt change is mainly coming from that €132 million is more on our balance sheet on both sides, on the assets and on the liabilities.

And on the capital expenditure line, we can see the continued growth investments and majority of the growth is coming from our Dayton factory project. Then moving to the passenger car tyres, on a comparable basis the growth was 0.7%, reaching €256 million and the operating profit was down to the €63 million level.

The softness in the European markets had impact to our operating profit as well as the ASP. The ASP with comparable currencies decreased slightly due to the country and product mix.

If we move then to the next slide, where you can see the bridge in net sales, and EBIT for the passenger car tyres, you can see that breakdown between volume, price/mix and currency on top-line. So, in the first quarter, the volume growth was 1.5% and we got a headwind from the currencies minus 1.8%.

Moving to the EBIT bridge, where you can see still the significant currency negative headwind in the first quarter, coming both from Russian ruble and strengthening USD through the material costs. And if we take a look to the Russian ruble, it has been strengthening towards the year end last year, but still Q1 is weaker than the Q1 previous year.

The raw material impact, yes, you can see the increase of our material cost, as well as the product mix effects. In product and other costs, you can see €0.4 million negative impact.

There we have the factory impact due to the fact that more was produced in Nokian factory than in the comparison period and that negative impact has been offset with the positive items and therefore, the net impact is smaller than the operational one. Moving to the Heavy Tyres, there the good performance continued in the first quarter.

Comparable growth on net sales was on the level of 12% reaching €48 million and the operating profit reaching to €9 million level. Forestry and agricultural tyres increased the sales well, and operating profit improved due to the good growth and better availability in Heavy Tyres and in the Heavy Tyres the capacity increase project is proceeding according to plan.

Moving to Vianor. There we were able to reach strong growth in the first quarter on a comparable basis.

The growth was about 8%, especially in the B2B segment and one other reason was that in some areas the season started few weeks earlier than in the comparison period. Operating loss was reduced and was minus €12 million in the first quarter.

We have been able to increase our efficiency and we have been focused on the sales, especially in the past quarters. And then, moving back to you, Hille.

Thank you, Teemu. Then we take a look at the outlook and our guidance for 2019.

As you can see, we keep our guidance for the full year unchanged. In 2019, net sales with comparable currencies are expected to grow and operating profit to be approximately at the level of 2018.

And as a reminder, it's good to note that we will carry significant additional operating costs in 2019 due to ramp-up of the new factory. As a summary of the first quarter, I would like to make several conclusions.

So, net sales growth during the first quarter was supported by over 2% volume growth in Passenger Car Tyres and growth in Heavy Tyres. Profitability improvement was positive in Heavy Tyres and Vianor, but we had negative impacts from currencies and Passenger Car Tyres groups, both in sales mix and production mix.

Regarding our strategic projects, the testing center construction works are proceeding according to financial targets and schedule, and it will be finished by end of 2020. I am extremely happy about how we have been proceeding with the Dayton factory project in U.S.A.

It's proceeding according to financial targets and schedule. The first team has been recruited and they are currently being trained in Russia, and we are prepared to start ramping up the production process during the coming months.

Thank you.

Good. Thank you, Hille.

Thank you, Teemu. And now operator, we will be ready for questions from the audience, please.

Thank you. I have just one question on the guidance.

You keep the full year guidance for EBIT and sales unchanged. But then you are downgrading the market outlook for all of your markets and then Q1 was kind of below last year.

So why do you think you will reach the same EBIT as before, when you are kind of downgrading the market outlook? That's my question.

Thank you.

So, that's a good question. We actually have downgraded the Russian market outlook.

The other markets we are kind of keeping on the previous estimated level. And if you look at the guidance, we are guiding to be approximately at the level of 2018, what comes to operating profits.

And in general, we see that reaching this full year target is a bit more demanding compared to the situation in February, due to the lower growth estimates in Russian markets, but as said, we keep the guidance unchanged.

Thank you. Can I just have a quick follow-up related to that?

You are basically expecting better development in the remaining quarters than in Q1. Can you kind of remind us what are the main drivers for the better development as Q1 was down and then full year around the same level on EBIT?

So when we look at the markets during the first quarter, they have been down, and our estimate has been that, for example, European markets would be on the same level, compared to previous years. So there is some expectation for the positive signs towards the year-end.

But, of course it's still quite early.

All right. That’s all for me.

Thank you.

Hi, thank you. I have a few questions actually, but they are all relatively short.

So, first question is, if could you please clarify on the inventory level, especially in Europe. When you say that's high, I understand Russia is probably more your own inventory, but could you also please comment or clarify, if you're talking more about industry energy levels or your own?

And then also, I think we've understood from Michelin's commentary that the European, especially the replacement, market was unexpectedly weak in a magnitude that's quite unusual. If you could please share your view as to why you think that's been the case?

I have a few questions on the EBIT bridge as well. If you could first, please comment on the drop-through of currency.

I have never seen this to be above 100%. If you could please elaborate how that's possible?

And then on the production and fixed cost, I am actually a bit surprised to see that this is not more negative, given the ramp-up of the U.S. us as well as the reallocation of volume to Russia.

I think, Hille, in your closing remarks, you also said to remember that there is also going to be a significant additional operating costs. So I am a little bit surprised to not see it there.

And I'll get back into the line after that.

If I first start with the EBIT bridge. So in terms of the currency impact, there, you need to remember the impact from the raw materials and the USD.

So, therefore, it's a bigger impact than on our net sales. And then, in terms of our product and other costs, there we don't have yet the impact from Dayton ramp up, but we have the impact of our factory mix change between Nokia and Vsevo.

But as said earlier in my commentary, we had also other cost timing issues where – why the negative impact is small.

So Teemu, just to clarify the material portion in the EBIT, that's exclusive of currency right? And the entire currency sits in the currency bucket including the currency effect on material?

Yes.

Okay. Thank you.

And if you could please, Henning, repeat your first question.

Just of the inventory level, if you could talk more about inventory level, if you were mainly talking about your own inventory level in Russia and in Europe or more about market inventory? And then secondly, if you could please share your view as to why the European replacement tyre market has been so weak?

I think in some markets, for example, Germany, I understand it's been down 10% in the first quarter, which is very unusual. If you could please, share your view as to why you think that has been the case?

Thank you. So, we are more talking about the general inventory levels than inventory levels of our products in the channel.

Of course, in Russia, we have better visibility to what is in the channel because our distribution is covering the whole country. And in general, we have seen that the summer tyre inventories in all our customers' distribution channels are on a high-level, compared to previous year.

And that's why, what is really needed is good summer season to clean the inventory issue and that will then give more space for the customers to be prepared for the next season and place orders. Then what comes to European situation, we have also noted that there have been higher levels of summer tyres in our customers' warehouses.

And we have noted that, it's probably driven by different factors, one being the OE market weaker and therefore, there has been good availability of tyres to all the channels. And also the seasons have been varying in different parts of the Europe.

And what we saw was really a quite slow start of the year, because customers had enough inventory at their warehouses.

Okay, great. And then finally, if I may, on Russia, then, your introductory comments, I understand that how you sometimes talk about it, you reallocate capacity according to where you can sell it, right, and seeing that Europe was a bit tougher, you sold more in Russia.

Do you see a risk that you sort of front-loaded the volume into maybe also into your own channels in Russia a little bit and therefore, it's going to be even tougher to sell more volume in Russia later in the year? Is there certain risk of that?

Well, I said that summer tyre sales is – maybe one of the things that we pay most attention to, because that will be then impacting the fourth quarter. And there is still room for sales of both A-segment and B-segment for winter.

Okay. Thank you very much.

Yes, good afternoon. Thank you for taking my questions.

The first one would actually be, historically, you gave us a production number for your Passenger Car Tyres. Would you mind sharing that number with us?

And then my second question would be on the cost headwind from the U.S. expansion.

Do you have a rough indication how much that will be in 2019?

We'll start with the production costs. There we have now – a new year has started, we have reviewed the level of disclosure and that is a figure what we are unfortunately no longer disclosing.

And what comes to the cost levels...

I can comment that based on the materials that we disclosed in the Capital Markets Day, the impact to the Passenger Car Tyres profitability on an aggregate level containing not only the factory, but also increases like in R&D. So, it is on a level of €20 million give or take.

Okay. And then quickly follow-up, because we were discussing the guidance question a lot.

I struggle a little bit to see where your improvement should come from over the year, because volumes will be tough because of inventories, price/mix is negative at the moment, and I don't know what you're expecting there. By then costs should actually be an incremental headwind, so I am struggling a little bit to see how you can kind of improve your EBIT more -- to offset the decline in the first quarter, could you comment on that by any chance?

In general, the improvement is based on the top-line growth numbers.

So from volumes then?

From volumes.

Yes.

Understood. Thank you very much.

Yes, hi this Artem from SEB. A couple of questions from my side.

So, you covered inventory situation what comes to summer tyres, but could you maybe comment there what is the winter tyre inventory in your key markets as the season is now over across the regions? And then, the second question is relating to share of Russian production which did really decline quite substantially in Q1.

Should we see more, so let's say, a normal level or higher level of Russian production going forward or what we should assume on that front? And then, maybe the last, more detailed question relating to the U.S.

service center numbers, what you are providing in the report. I have noted that, that figure has declined quite substantially looking at Q1 compared to last year.

What is the key driver behind it? Is it basically a strategy around the independent dealer distribution?

How are you planning to grow your volumes in the U.S.? Or what is a key trend there?

So, first of all, if I comment on the winter tyre inventories, I would say they are, in general, in the normal range, a bit higher in the Europe, slightly higher in Russia, but nothing dramatic. In some parts of Canada, they are on a higher level because of weak winter.

But in the other part, on the other hand, they are on a lower level. So, there are quite big differences between the markets.

But nothing extraordinary, I would say. And then, what comes to the U.S.

distribution, we have done some recategorization and we are proceeding with implementation of the Nokian-affiliated dealer network and we are, at the same time, renewing the concept. So, there is some, I would say, intentional slowdown of that rollout, because we want to finalize the concept first.

And maybe the last one was relating to Russian share of production, which was down quite substantially in Q1?

As I commented, we are balancing the production between Finland and Russia based on the demand over the coming months. So, I have difficulties to make any numbers for you at this point of time.

But it will be based on the demand.

Okay. Very clear.

Thank you.

Thank you. I'll try two questions, as well please.

First on the currency topic, which I think, surprised few of us over the last couple of quarters. If you look at current spot rates, should we assume that currency is again going to be a headwind for your Passenger Car Tyres within Q2 or at the opposite?

Because we have seen the ruble, actually kind of stabilize if not strengthen relatively, currency could actually be a smaller tailwind in Q2? That's the first question.

Yes. So, with regards to the ruble, if the ruble remains on this level, we shouldn't get any headwind and it might turn to the tailwinds.

Sorry, can you repeat?

So, the current level of Russian ruble is now stronger than in the balance of the year, last year up to Q1, If I recall right.

Yes, absolutely, so what does it mean, should we expect a tailwind or just no headwind?

You should expect a small tailwind.

Okay, great. Thank you very much.

My other question is on, what you call the pricing environment. So, can you be more specific about where you see negative price actions from competition?

Are you just referring to Germany and Western Europe? Or are you referring to all your key markets?

I would say that it, of course, varies by markets. But in Russia there has been competitors who have been taking down prices and there are competitors who have been increasing the prices.

In Central Europe, it has been difficult to see any price increases and mainly the price decreases have been focusing on the bigger sizes. So in general, the price increases are rare.

Okay. So, is that a fair comment to say that, as in, all the time you have some price actions from different players with unity.

So that in Western Europe currently the pricing situation is clearly more exacerbated? Is that a fair comment?

Yes. Yes, definitely so.

Okay. But it's more centered on what we call Western Europe and what you call Central Europe, right?

Yes.

Great. Thank you very much.

Thank you. Akshay from JP Morgan.

If I may, I'll take the question one-by-one. The first question is confirming your 2019 operating profit guidance?

Is it flat in absolute terms, that is €372 million or is it flat excluding currency, which means the number could be lower including currency?

So, our EBIT guidance includes the currency impact.

And you are expecting it to be flat at around €370 million?

We have said that approximately at the level.

Okay. Second question is, what is your raw material headwind guidance for the full year, underlying without FX?

We have been giving in our material -- the material unit forecast, including the currency and there we are expecting that to be on a full year level somewhere around 3% to 4% increase with the headwind from USD. And my earlier comment to the currency question was that, we might have a slight positive tailwind from the Russian ruble.

But then, we will have a negative headwind from the USD.

Sure. So that means, the underlying core raw material, you are not expecting any headwind in 2019?

From the material cost, we are getting headwinds around 3% to 4%, including the currency.

Okay. And if I may, in the first quarter 2018, you said that 55% of Russian production was exported.

Is it possible to share the number for 1Q, 2019?

So this is the approach that we have now taking that we don't share that information anymore.

Okay. And maybe the last one on your Central European markets.

What are the key markets that you saw the decline in other than Germany?

Well, Germany is definitely the biggest market, having biggest impact on the sales and the competitive situation is tight all over Europe. So, I would say that it's really determined by Germany.

Thank you.

Hi, Good afternoon. Thanks for taking my question.

The first one is, again, sorry to come back on your guidance on EBIT. You obviously are saying flat including FX.

Now the run rate in Q1 we're looking at is down 12% at the moment. When you think about that 12% you do need a big pickup in the second half.

Is that what gives you confidence on that recovery given the headwinds? I think, Sasha sort of outlined them earlier.

Given your volumes right now are also not really running – picking up as much.

Well, as said, it's still too early to draw conclusions after the first quarter and there is underlying demand anyway in the different markets and positive growth in the Russian markets, as well as in North America. So, as the European market looks challenging at the moment, of course, there is expectation for the market to stabilize during the year.

Okay. And then, just to – also to clarify, when you say around flat year-on-year, what sort of range would that be, plus or minus 5% or plus or minus 10%?

We are talking about plus or minus couple of percentages.

Couple of percentages. Okay.

Very helpful. And then a last one, on competition.

Obviously, the question came up quite often that, that's been intensifying in Central Europe. Is that still the case of that you see OE tyres also entering the replacement market and being quite heavily discounted versus your space?

Or is it really the underlying on the pricing side? Or what do you really see as the underlying driver that demand is suddenly so much weaker, because the replacement markets tend to be much more resilient than the OE?

Well, as we see it, the OE market disturbances have a big impact on European markets, as well as when we were last year talking about the situation in Turkey. Of course, the volumes that were supposed to be sold there, they continue to be pushed to the European market.

So, there are several factors behind, and of course, it could be very helpful for the OE market to pick up.

And just to follow, is that on the pricing side, OE tyres entering the replacement market and what is also the driver that the replacement market in itself has been sluggish?

Yes, it's the total volumes that there is more volume available for the replacement markets at this point of time. And of course, then that is impacting the pricing.

Okay, perfect. Thank you very much.

Thank you and hello everyone. I am not sure that I understood this correctly, but it sounded like you said you have been selling inventory of products that were at the end of the life cycle in Central Europe and if this actually is the case, it makes me a bit worried because I recall your predecessor Ari used to say that Central Europe more or less had been used as a dumping ground, may be its too strong of a wording.

But a market used to get rid of excess volumes. And this obviously wasn't good for the price level for your products in that region and it doesn't really seem to be going hand-in-hand with your current strategy.

And I know he worked forward to take a clear step away from this. So, could you please shed some light on how you're thinking and your strategy in relation to this, please?

Yes, I am fully aware of our practices at some point of time when Central Europe was not one of our core markets. Of course, then we were able to sell some bigger quantities at some point of time through wholesalers and this is not the case at this moment, because we want to grow the market and we want to be in close collaboration with our customers and not dumping the products there.

So, this is not what we are doing. But as we have products available and designed for the Central European markets, and then we get the new products, of course, we are selling out the old products from our inventories to then give more space to the new products.

So, I would not call that dumping, but of course, it's good to understand that this is only selling out the old products that we had.

Great. And the second question from me is, I think, it sounded like you talked about the EBIT bridge and that you yet did not see or have any costs associated to U.S.

plant ramp up visible in that bridge. So, could you please help us a bit on the phasing of how this 100 to 200 basis points headwind that you guided for on the margin will impact throughout the year?

It will gradually increase, as Hille pointed out. Now we have recruited the first people, they are in Russia at the moment in training and the cost base will increase towards the year-end.

Okay. Thank you so much.

Thank you. If there are no additional questions, then we would like to thank you all for participating.

And wish you all a good day. Thank you.