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Executives

Kim Gran – CEO

Analysts

Eric Gouland – ABG

Thomas Besson – Kepler Cheuvreux

Niels Fehre – HSBC

Gaetan Toulemonde – Deutsche Bank

Artem Beletski – SEB Enskilda

Martino De Ambroggi – Equita

Nokian Tyres, Plc (OTC:NKRKF) Q4 2013 Earnings Conference Call February 7, 2014 3:00 AM ET

Kim Gran

Good morning. This Kim Gran, CEO of Nokian Tyres speaking. I’m very pleased to welcome you to this conference of Nokian Tyres 2013 results. As usual we have audience here, analyst, investors and some media present and I hope various lot of people on the phone lines prepared with good questions on our results on our future.

The material we will be using in this conference has been published on our website this morning and I will refer to the pages in the handout material when going forward. The presentation is as usual will first take a couple of key messages or takeaways over the market situation on how we see our business developing and then we will take a summary on last year’s results. We will be on some key alignments also concerning raw materials, markets and how we see the future in total and then we will move on to the business area result and guidance and of course we will spend some time also on Russia as usual.

But if we start first talking a bit about the key messages, first of all last year was quite a struggle in Europe for the tyre business. The market was down, both are still and also we’re looking at the winter tyre segments. And there was as you recall also some like reduction in pricing probably basically in all product categories. Fortunately the market seems to be have been turning already during the second half of last year and we believe that we will see some growth on all our key markets during 2014.

I think the only question mark which will come back to is Russia and how we see that developing. The raw material costs came down quite significantly during last year and we had a quite nice tailwind on that. We also believe that the raw material cost will continue to be on a low level during 2014 and will enjoy the continued tailwind from that. Then last but not least the key message is that Nokian Tyres market position on our core markets in Nordic countries and Russia and also on our growth market in CE has improved quite clearly. We will look later on that.

Our market shares, we haven't been publishing those for a long time but we will do that exceptionally. This time we will tell a bit more on where we’re on different markets more in detail. But let’s move on to the page five where we have the summary of the results, there are some slides before that we cross, we will go straight to the summary page.

And as I already stated there was quite a lot of headwind in the marketplace and so we have not managed to grow during last year and our top line was weakened a bit by exchange rates. So in the €1.52 billion you’ve to add in the ball park €56 million as exchange rate when looking at the comparable sales number competitive to 2012. So 56 million currencies that had a negative effect.

And we’re looking at the operating margin, we booked about 25% of EBIT margin but when factoring in a bad debt which relate to business which was done already back in 2012 we actually showed an improvement in profitability. The good point when looking at that, despite the fact that we had a flat or small decline in the top line we managed to improve our margins, our gross margin improved from roughly 44.1% to 46.1% and so quite a significant improvement and when factoring back the bad debt into EBIT we actually improved our EBIT margin from 25% to 25.5%.

So, all in all a very good results considering that we were not like utilizing all the potential which we haven't achieved. And of course as usual we had a quite strong cash flow during the last quarter like the winter tyre receivables coming in. We had a very good relation to let’s say receivables and collecting those in and especially in Russia where we collected I believe the ball park of 99% something of all the receivables by the end of the year and as a result of that we showed an improvement in cash flow on operating level from €260 million to €325 million.

The Company is of course again I think fourth year is running now debt free and we have pile of roughly 425 million of cash at the moment. So fairly like good position to move forward and having a lot in that respect further on and create total value. But the highlights really of last year was that the market has improved as I already told you know a very difficult we managed to like keep our ASP on the back of our new products, the ASP €/kg decline only by 1.1%. As a result of the mix improvements the new products and the fact that the winter tyre share of total sales increase to roughly 79%, the volume is more than 85% of the sales value.

And of course the new product and the institution [ph] expansion so we saw already like results from the fact that Vianor has been expanding again roughly with 1270 shops.

Okay that’s the summary then we will move on to details and perhaps guidance also if we move to page 9 where we have the creation or like the split by quarter on how we were doing. During last year we lost some EBIT in the first quarter due to the fact that we had stopped producing contract manufacturing for Bridgestone. Then in Q2 and Q3 we managed actually to do all time high EBITs and in the fourth quarter as told it slowed down in Russia and the weakening through.

For the this year when looking at the situation we believe that the demand is better on all of our core markets, we will believe that we will see demand improving in Central Europe I will come back to how much later on. Also in United States due to the snow storms the inventories, and the channel inventories are quite low so it bodes good for sales during this year and in Scandinavian we also expect that improvement in the market and expect to grow faster than the market.

Our order book at the moment is still fairly low which is quite usual for this time of the year but of course it's improving and we estimate that we will have a fairly low start for the year during Q1 perhaps in-line with what we saw last year and then gradually improving as we move forward during the year. If I would have to guess today which is a good guesstimate I would say that the distribution between EBIT like build up and the split between the first and the second semester would be in the ball park of 45 during the first half and 55 during the second it could be 46. So it's going to be an accelerating development. At the moment we’re running both blocks at full capacity so we’re running the plant in Russia at full speed and the Finnish plant on the passenger side and five days full speed and on heavy side also full speed.

Of course it's partly because our inventory level in volume terms at the year-end was lower than the year before and we need to like also be lock some inventory for the summer season and then also for the winter season and the deliveries in Russia which traditionally start already in March and April.

So that perhaps about this slide and we will come back to the rest of the quarters as we move forward but today it's still a bit early to state where exactly we’re going to be. If we then move to page 10, our pie chart on our markets the situation we’re looking at the portfolio geographically it's pretty much the same as before. Russia represents in the ball park of 40% of the manufacturing sales and as Scandinavian in the ball park of slightly less than 30%. And in these two markets as we have told many times before we have been improving our market shares and positions and in fact we managed in the Nordic countries to share those small growth despite the fact that the market was down about 2%. In Scandinavian Nordic countries we estimate the market we improve during this year with car sales starting to grow we have seen already some indications for that and also the tyre demand to improve in the ball park of somewhere between 3% and 4% depending on what product categories we’re talking about.

When looking at the CE area and in this chart roughly a 6% growth compared to the previous year and it's the fleet which is taking out the contract manufacturing of Bridgestone. So this year sales of the replacement one. And as you may remember we had a decline in Europe, in the European replacement market of 2% and a 5% decline in winter tyres. But despite that we have an improvement of overall 6%, our ASP came down a bit but profitability improved.

You could basically say also that when looking at the different markets that you’ve improvement needed, a slight improvement in Russia. In absolute terms on EBIT and also in [technical difficulties]. Scandinavian had a small improvement and both of these are significantly higher than average EBIT of 33%.

And Central Europe we managed despite the size growth of profitability roughly EBIT went from 27% to 29% and so we had growth. I will come back to Russia more in detail. Then a bit about this is the new chart which we haven't filled for some time but it's closest how European market developed and also the market development on page 11 and if we start with the Europe and Europe as a total the market came down with roughly 1% last year and as I said with their gain came down by roughly 5%.

In Western Europe if we take a longer view from 2008 to the present situation. In winter tyre terms we have doubled our market share to 5% to 10%. And last year we managed to improve market shares on our sales especially in Germany which is the biggest winter tyre market in Europe also in France and Poland we made quite good progress.

So now we’re roughly 10% of with a 10% market share becoming bigger player also in the Central European markets and I believe that the main reason for this is the launch of our new products which we have continuously doing for Central Europe during the last couple of years combined with the buildup of our distribution network. You may remember that we started using Vianor and not distribution chains roughly four years ago and that is something which is now started to pay dividend and are showing results plus being able to swim against the current and of course in the Scandinavian market which is our traditional home market we have been able also to continuously grow of course we’re approaching market shares which are so higher than it's a bit dangerous to take much more but if we take the development during the last 15 years we have basically doubled our market share in Scandinavian also we take all summer and winter tyres we have gone from a level of roughly 15% to 30% market share.

And last year with the view of launch of Hakkapeliitta it actually made an all-time high with the tyre market share of more than 37% of all the weakness [ph] only Scandinavia being Nokian brand.

So a quite good result. Unfortunately for us the market was weak and we were not fully able to capitalize on the good position. So what we’re looking forward to this having with the markets improving a double effect of better distribution, better market, share combined with market growth. When it happens one day I don’t whether it's this year or next year we should see quite a healthy improvement in what we’re doing.

Okay then I will move on to the raw materials and slightly more details on the comments before. Last year we had a very good tailwinds we had a decrease in raw materials cost €/kg roughly by 30% which of course is one of the main reason for our margins as raw material margin and our gross margin improving as saw about one point in the ASP.

When looking at this year our raw material cost are going to decline compared to last year beginning as we have already bought in the material, many materials have been contracted and we know that we’re going to decrease during the first quarter our raw material cost by roughly 16%. Then we’re stating that we’re going to have a tailwind of roughly 22 million, 5% that is based on perhaps some sort of like safety margin taking into account with the same thing that the raw material cost which started last year than second half of this year. At the moment there is no indications of what’s happening which means that the tailwind could be higher than we’re estimating here. It could be instead of 20 million, 30 million instead of 5%, 7% such that they still a bit uncertain and therefore it's better make a safe view on this aspect.

Then let’s move on to the our weakness areas and a couple of comments on the company structure, business portfolio, we’re now on page 4, the traditional tyre and some numbers. What we have decided to do is we have previously been talking during a couple of years about perhaps changing our portfolio, capitalizing heavy tyres, focusing and investing in more passenger. We have now decided to keep the structure which we have at the moment at least for some time and also the development, the heavy tyre business. So I don’t think that there is going to be any major changes during the next 2 to 3 years in the structure of our business.

We have an inbuilt capability of improving our results and our sales without major CapEx, improving productivity and also returns on equity or net assets. We’re utilizing presently only about 84% of the nominal capacity of passenger car tyre, still doing the 33% EBIT margin in heavy tyre. We’re doing double digit EBIT margins utilizing presently in the ball park of 65% of our capacities.

So there is quite a lot of potential within the existing structure to increase top line and simultaneously also to improve productivity and profitability and also ramp ability in our cash flow.

So we believe that when going forward during the next couple of years we will be providing growth of between 5% and 50% and the growth accelerating there is a certain potential to improve the EBIT quite significantly when you’re just having higher utilization and with the CapEx requirement which is lower than in the past we should be able then also to improve cash flows compared to last year during this year and also when going forward.

So a fairly like good position to go forward from and of course with the strong balance sheet that would be likely more dividends or looking at how to reward our owners.

Then I move on and a couple more points on the passenger car business and then I will move on to Russia and also heavy tyres but a couple of points perhaps on the passenger car slide on page 15, we had last year the share of Russian production was fairly increasing gradually so we had about 80% the exact number is 79.8% something, I don’t remember the second digit but 79% of production volumes produced in Russia and of course in the Russian factory we have been with the automatic lines also shifted more of the production in the higher line utilized or higher automatized lines.

So despite like not being able to grow that much we were able to still to improve also productivity but looking at the production side so we had an improvement in the outlook kilos per man hour and if you look on our numbers you can see our salaries in fact came down last year compared to 2012 with a couple of million on group level as a result of the improved productivity.

When looking at the share of winter tyres they went up as I said already from roughly 74% to 79% of volume and more than 85% of value [ph]. The growth areas were pretty much Central Europe winter, Nordic countries winter and in Russia also winter in absolute terms had a growth. We enjoyed roughly half a million more new gains so in Russia in winter last year compared to 2012.

And we’re looking and the targets for this year we aim to beat the markets and be able to show higher growth in and the markets generally and the target is also to improve the utilization rate of production and be able to improve our productivity and volume.

One of the highlights as I already told last year was the launch of the new Hakkapeliitta 8 with the tyre range on page 16, there is a summary of test result. You could basically say that the this product is timed for winter tyres and remember exactly how many but in the ball park of 20 different test which we participate out of that which only one which we did not win.

So we have to educate in magazines and try a bit more on our tyres in order to rectify it. And this we’re configuring expanding this range so we already two weeks ago launched the follow-up expansion of Hakkapeliitta with also now including all the SUV tyres for the core markets into the same range and we added also some new products in light tyre [ph] and plan CE tyres in in the range and I would say that looking at a position where we’re today our product range is the best ever during the roughly 20 basis that I’ve been working with the company. So very good position of that as well.

Then let’s move on then to Russia and spend our time on that. So we will move to slide 20, where we have the summary slide on our sales and there is quite a lot of information in the slides after that concerning the Russian economy and upgraded estimate for how we see the tyre market developing.

Last year of course the Russian economy we started with macroeconomics slowdown quite a lot compared to previous years we had the GDP growing based on our information couple of days ago of roughly 1.3%. Car sales declined last year with 5% down to about 2.8 million units sold which is a 5% decline and winter car sales declined in fact roughly by 3% last year compared to 2012.

And the sales are bit like the fact that there were an incentive program in place which was ended and the year-end market I believe that the biggest single factor for the decline was the fact that interest rate in Russia remained quite high for consumers. So consumer confidence is still in a very good level but interest rates in Russia have been supporting consumer behavior and also investments in industries and trade. When looking at this year and the macros we had various estimates and they range somewhere between 2.5% to 3% in GDP. I personally believe this is a very conservative [ph] view that those estimates are on positive side so I will say that we’re in the ball park of that perhaps the 2% GDP unless something internal about the interest rate than something else.

Of course the main driver as usual it's centered on oil prices in the Russian economy. So we don’t force a rapid turnaround in the market in Russia also car sales there is still quite a lot of potential for the growth than the car park for 1000 capita [ph] is now hovering around 300 so it just expanded to higher number and we believe that this year we will see a flat business [ph].

Again there are like 600 [ph] and the outcome is quite difficult to state today as we don’t know what the essential backlog is actually going to do. How that’s going to affect the general market. I think the biggest answer about Russia and CIS countries overall at the moment is expense rate which last year the rouble weakened against the euro by roughly 11%. When looking at different estimates we have some people believe in that growth and there will be a further devaluation some say early, some say late, but there is also those who think that the exchange rate will kick back and be over the level of 41 to 42.

I personally can’t take a certain stand on that market, and more to have some on this devaluation than on the strengthening. So until we see some positive signs. I’m sure no Central Bank that intervenes and tried to support the rouble during the last week and would have to see what the policy is going to be concerning that.

Okay that was a long story about macroeconomics and of course obviously it is not all leading to macroeconomics but what we do ourselves but that’s we’re the clear market leader, it is the market for example one in volumes, price leader and also the distribution macros have some effect on what we’re doing but if we go back to a couple of steps last year the Russian replacement market for tyres declined and there is the full markets decline by somewhere around 6% to 7%, there is no statistics available so it's a bit difficult to estimate exactly in this depooling which is all the major players who give information had a decline of 8.7% in volume terms last year. So what we did basically was we had an improvement in market share as an end result of that our volumes were roughly the same as before with higher share of winter tyre sales like supporting the ASP but also a higher sale of mid-segment products the non-tyre [ph] range growing more than the previous stage.

So there has been a change in the market structure so that the extent the mid-segment at the moment is fast growing segment in Russia. What was negative in the tyre market was that we had two strong Japanese companies using the price weapon which had an effect especially in the mid-segment but despite that we have as I said managed to do well in the marketplace and to improve our margins, gross margin and EBIT margin in Russia.

So perhaps enough about Russia on this phase. Our developmental distribution which I believe is key to our strong positioning market and also past and future growth and without the involvement more than 3300 store bearing Nokian products and we expanded the our network here so we have now in Russia here we have now 621 shops, we added 88 shops during last year and so roughly 1.5 shops every week and so looking at our situation compared to our competitors we have in fact widened the gap and they have not being able to narrow.

So our main competitors are still the factors of all the successes which we have. So we still feel that the distribution is our strong point and we continue to do so also in the future. For this year we’re looking at adding both Vianor’s and also the new concept of which is called NAD tyres we’re opening the first 12 shops in Moscow which is targeted at that slightly different end consumer, a group in order to have also a particular foot hold in the Moscow markets.

In the rest of the CIS countries we had a growth last year despite very turbulent environment especially in Ukraine our strongest growth we saw actually in Kazakhstan where we kicked back to more than a level where we used to be a couple of years ago and we’re continuing to improve the operations. Both the Kazakhstan and in Central Russia where we believe that we will continue to grow also during this year.

Ukraine of course it's first to market in all senses so we have to wait and see what happens politically before we take that back strong year on the development over there. Our Russia factory there is practically nothing new we have converted lines and at the moment we continue to develop the factory, there is still space for one more line. At the moment we’re not planning to install for these line during 2014 and our CapEx for the Russian plants for this year was in the ball park of €42 million. So we will complete a couple of like upgrades and also add the new lines to the two factory putting in some new equipment in order to support the upstream of all the processes and during that there is no hiccups when we’re moving forward.

So the potential the capacity of other plant with existing machinery and product lines is roughly 50.5 million units and the plant fully upgraded and full install the (indiscernible) some upgrades can go on the level of 21 million. So there is no immediate link to build a new factory in Russia, we have potential to further go forward.

On slides 23, 24 and 25, there is background information on the market and I won't go deeper into that perhaps we can stop a bit on page 25 with how we see the markets developing and on this slide we see that we’re factoring in for this year a slight total growth in the market place where the market is in the ball park of last year’s slightly less than 40 million and this year we will be around 42 million or 41 million earnings.

The growth will not come from that much car sales but from replacement markets and the Russia car park [ph] continues to grow each year with more cars coming in the traffic than going out. And our market shares in the segment when there is profitability in A and B improved from we’re now opting winter tyre in those segments to 38% than I suppose in summer and with a combined we roughly 31% market share.

Then we leave Russia for now and a couple of words about on our overall distribution chain which last year we started we had a quite a lot of negative EBIT during the first quarter, first half of last year we invested quite a lot in changing the structure and going into the service business. We have now more in the Scandinavian range 45 car service which have integrated into the structure and the good cause of that level is service and the profits from the service are now starting to begin and when you look at the numbers of Q4 we had a decline in top line of course of black winter but we managed to do a better EBIT with 12 million EBIT in the fourth quarter despite the fact that we had a lower top line. So profitability improved and all of the profitability improvement is actually the fact that we’re changing the business model to service and our service is now like starting to pay dividends in the structure. So we will continue to develop the equity part by adding service in the short term and we believe and also when going forward this year the fact that we don’t have the start up front the consolidation cost of the all the shops we almost automatically see some improvement in the profitability of Vianor.

The target is of course also then to like utilize these concepts which are developing in equity owned shops to franchising and we’re already working together in the research and we’re now changing in order to develop in the franchise market and there are a couple of opportunities in 2014.

Then moving on to the slide on our structure on 27, we have handled last year 1206 shops in 27 countries so we added the franchise today a comparable funds and 169 shops. We completed this year and already stated this year during the first we have added new country Denmark to the portfolio and we have already the first four shops in Denmark and gradually started to move forward most on that market. In China we’re operating the NAD project we have a couple of (indiscernible) but we also had contracts with two major car brands, car manufacturers one major Japanese company which is the biggest company in the world and then in Scandinavian car manufacturer which is in Chinese, we also got like dropping (indiscernible).

So we have already focused on more than 200 rolling out already in 2014. So I’m very hopeful of that as progress of that.

Then a couple of about heavy tyres and shops, we told already in Q4 that we’re going to combine these two smaller profits into one which is still called Nokian Heavy Tyres so truck and heavy tyre page 30 and page 29, together these two profits have top line of last year they had 149 million of sales and they made slightly more than 20 million of EBIT which means that they are making about 30% of EBIT at the moment. Heavy tyres making in the ball park of 11% EBIT and the truck and bus unit which is consolidated through the same making 70% and 80% EBIT margins. So in fact when looking at the combined numbers of these units we managed with a flat decline in top line to improve profitability in these two units and the market outlook for heavy special tyre is better and last year it started turning in the second half of last year and in heavy tyres especially our key area for tyres quite a loss anticipate for this year than last year. So we and the ball park [ph] are running flat out in the heavy tyre factory, in fact we have a bit shortage of product in the inventory and the lead times have started to become problems. We need to ramp up the utilization rate.

So I believe that this is going to be like a new strength, we’re looking at the total heavy tyre, the new heavy tyre potential. I believe that during the next three years we have a potential of improving top-line by 50% so multiple of 1.5 and taking the utilization rate from the present 65% to more than 95% would give us also an EBIT margin of more than 20% and a significant improvement in profitability and also in terms of the equity and assets.

Okay a couple of words about cash flow and our CapEx on page 32, we have a histogram on our CapEx. Last year we spent a 127 million in building still Russian operations for the new lines and also like investing quite heavily into new products more than 30 million most of our new products.

For this year our budget for investment is 160 million Russia taking about 40 and the Finnish plant including also moderate take and involves being in the ball park of 50 million and the rest being upgrades in the distribution chain by couple of shorts in the core market and developing the facilities business as stated before.

And this year we made cash flow of 300, last year of 2%, $325 million which was in this way that it's not going to be smaller this year and we’re still to see at least 105 million [ph] improvement in cash flow for this year. So I would be very disappointed if we end 350 million and expect to be 400 million. Let’s wait and see on receivable and working capital going forward as well.

I see that’s pretty much conclusive here on page 34 we have summary of the plantation, we are let’s say cautiously more optimistic about the markets. We believe that we will see good growth in North America, good growth in Central Europe, we will see growth mostly in Nordic countries and we will lots that in market in Russia some growth with the likely I say a question market and currently it's included in that overall cost number that is to be taken for consideration when looking at top line. The rouble and perhaps I should say something still about the rouble decline, when looking at the total effect of rouble change. Of course we have cost in roubles as well and it's more than half for the total volumes, Russia has exported and sold in markets with Russian currencies and mainly in euros and Scandinavian currencies and part in North America but mainly in euros and U.S. dollars.

So if the rouble weakens we should still see a very small on EBITDA. In fact when looking at the results of 27 million in rouble on top line and quite less than earlier, our profit guidance in Q4.

I will stop here and we will go to Q&A as usual and then we will go to audience here and as usual please state your name and company you’re from and you can ask whatever you like I will do the same and then of course we will move on to the phone lines for questions.

Question-and-Answer Session

Unidentified Analyst

Pricing environment for in Europe and what category in Russia on price increase?

Kim Gran

Well I already mentioned that we have headlines in the end of 2012 and the first half of 2013 quite below the price going on and size current if you like due to some uncertainty but the negative impact and reductions in pricing have helped and we have seen already like some price increases some made by our sales system in Europe also we have made price increases in Russia, in rouble terms and for this year and there have been declining worldwide.

We have not seen for the prices from our competitors in Russia. We look for our price as we discussed. The (indiscernible) supported by expense rate like in France last year and we have been looking at the weak approval many of our most of our competitors being in Russia. We estimate that we have the need for certain price increases. So slightly positive also on the pricing issue compared to last year. So we’re seeing pricing decline and it might be some down the line erosion in Russia due to the fact it is growing and growing more than previous years. So we will have to wait and see. I don’t expect any big changes.

Unidentified Analyst

Still a little bit on the same issue on slide 25 where you had question mark, if I read this correctly the AMB market volumes are roughly flat relative to last year. So rouble will be 10% lower so that’s in forecast to market average price in rouble will rise more than 10% in Russia, am I reading this right?

Kim Gran

Well you’re reading it not fully right because we have not factored in the 10% rise in the rouble. So we have slightly lower in that when we look at CapEx. But in our case if I continue a little bit on the operation pricing we have soliciting pricing in Russia. The biggest segment growing but into these there are product for (indiscernible) which is priced roughly 10% higher than previous year. So providing that we’re able to actually shift majority of the weakness to improve our market in that region. Also we’re looking at the premium we don’t expect the market to grow that dramatically but the share of Hakkapeliitta 8 which was viewed last year and also the fact that this year we have launched the SUV which is a significant part of premium tyres, the car range. With that we believe that we will be able to get some positive effect. So as I said like volume growing in mid-segment but the elements in these segments having some positives which will offset some of the volume exchange. Okay, other questions?

Operator

(Operator Instructions). Well first question from the phone line comes from the line of Eric Gouland from ABG. Please go ahead.

Eric Gouland – ABG

I’ve three questions, the first one you provided some comments but could you please repeat where we’re on inventory levels across your different regions given the back going there, are they elevated anywhere?

Kim Gran

The line is exceptionally bad. So you’re interested in the channel inventories, so channel inventory are of course different for looking at the different market. And if I start with the biggest market which is potentially the European markets, the channel inventory maybe from our estimate is slower winter space this year than of last year. So we have a starting point weaker sales in Central Europe and looking at inventory levels and it may sound a bit broad volume sales were a bit down and partly in the Central Europe last year but it has to do with the fact that sell inputs declined to five as we have sell out not declining at the same level and also wholesalers and resellers have gained to better where they don’t find before it is shared like inventories but during the season itself. So it means there has not been (indiscernible). This is I think a factor which we also see to sell during this year but channel in Central Europe are lower than last year. It's one of the reasons that we estimate that when Central Europe bulk of the market will grow to 4% in the winter tyre volume we expect to grow between 5 and 10 in Central Europe.

And North America this is easy to explain you look the weather reports during the last couple of months, huge snow storms and so on have emptied winter tyre in those areas both on the Canadian and on the U.S. front. So there is a clear improvement in our business to be expected in the North America.

Scandinavian, their inventory level on our markets is of course we don’t have fully scaled to our competitors in our chain it is slightly up but let’s say on a normal levels. There is not any problem there so we think the growth and specifically in Sweden and Norway we believe that the inventories are quite a low level. So we that as a positive.

We’re looking at Russia, our biggest market you have slightly like different picture depending on what part of the markets you’re looking at. In Moscow at the end of the year the big wholesalers have fairly high inventories in the regions and there is quite of snow and lack of weaker buyers. So inventory level as of year-end was quite low and for once we have incurred the Moscow wholesalers have been able to like significantly when I address like these regions.

We don’t the inventories and the channel has been the major especially in Russia.

Eric Gouland – ABG

Just two quick questions, you talked something about the FX, what would the FX impact be on spot prices this year and then lastly you say market pricing is very tough in ’13 but do you in any region cut your prices?

Kim Gran

The first one was what?

Eric Gouland – ABG

The impact on EBIT this year on spot rates.

Kim Gran

Okay well that we have not disclosed but if you look at the profit I think we estimated 40 million of the FX. And that is not only related to the Russian rouble but we had a top line we have stated 56% of Forex impact, 27% of that is related to the rouble and rest is for other currencies, the Czech Koruna and so on the EBIT well the number I mentioned is a combination of all these currencies. So if you factor in the bad debt the EBIT number with the last year for the year 2012.

Operator

Thank you. Your next question comes from the line of Thomas Besson from Kepler Cheuvreux. Please go ahead.

Thomas Besson – Kepler Cheuvreux

I have several questions please first on the dividend can you explain why you have decided to maintain the dividend instead of rating it given the strengths of your balance sheet and I think the aim at redistributing more cash from here given your plans on CapEx. Yes why are you keeping the dividend flat.

Kim Gran

Well let’s put it this way that unfortunately Finnish tax have penalized us during the beginning of this year end of last year with 100 million of tax to be paid and so that takes out a bit of the cash flow. But I agree that the rates might improve the dividend by 145. We’re taking it a bit cautiously also that guidance I gave to you on the cash flow going forward. But in the border we’re a bit on cautious on the dividend because of the tax issues we have at the moment.

Thomas Besson – Kepler Cheuvreux

Another question for you please, your inventories in million euros at the end of 2013 were €7 million higher at the end of 2012. Despite the big moving currency and very big moving in the raw material prices. So can you say in units how much your inventories have gone up in 2013 at your end please?

Kim Gran

On the top of my mind we have is a ball park of 400 high or less in relative to end of 2013 compared to 2012. Our inventories we report are actually include also raw material so we have low raw materials we did quite a lot and the value of finished goods stock and the volume of finished goods stock are down compared to the previous year.

Thomas Besson – Kepler Cheuvreux

On the receivables can you help me understand what was the rate off you have met and the elevated level of receivables at your end if we look at it as a proportion of your 12 months rolling sales, it's at the high level and can you just help me understand what the impact of the rouble and the value of these receivables getting into 2014? Are we going to see another write-off just because of currencies on these?

Kim Gran

If we say the total receivables again on top of my head I don’t have numbers.

Thomas Besson – Kepler Cheuvreux

It's a bit more than €500 million.

Kim Gran

Our source of receivables and continue that, which is slightly less than the last year. So the share is down as we said we had a very good collection of receivables with Russia there is no problem there. Our receivable are up in Central Europe and as a matter of fact we will I think increase in sales during the third half of last year. Some of our receivables were created off late in Q4 so that has an impact on the receivables. So basically like 35% and nothing major there in receivables in the Central Europe. Our replacement of receivables is pretty much on previous year’s level.

Thomas Besson – Kepler Cheuvreux

Have you communicated on your plan to spare on EBIT?

Kim Gran

I’ve not communicated that and I don’t plan to do so.

Operator

Thank you. Your next question on the phone line comes from the line of (indiscernible). Please go ahead.

Unidentified Analyst

I had two questions, the first is just regarding your comment about more materials and the initial guidance of the €22 million benefit. Do you think that the spread between pricing being tight and that €22 million of raw material benefit do you think that will be a positive for EBIT or neutral or negative?

Kim Gran

Well let’s put it this way, if currencies are at present level I believe it's going to be a positive. If there is a strong weakening of some currencies we have to start increase prices in the case where like very strong devaluation of the rouble it will be difficult to pass on immediately effect of the devaluation. If I would have to guess today what the effect is going to be I would say that on raw material and gross margin they are pretty flat this year compared to last year.

Unidentified Analyst

My second question was just regarding the tax dispute that you’re having, I wonder whether it would be possible for you to publish the actual report from the Finnish tax authorities?

Kim Gran

I don’t think that it's possible. We cannot pass on the information about the decision but it's fairly unlikely a long, long story and painful also in our opinion. I think on the point of tax I didn’t cover it in our presentation. First of all it relates to the tax managing in similar lines looking at our business in Russia during the last couple of years in 2007 and 2010.

And they have basically made a decision which in our opinion is totally against legislation, it's not based in any legislation not the Finnish legislation nor in others [ph]. Also it would mean double taxation in two countries which is Russia and in Finland which also is against the agreement, and in Russia have a tax agreement which means double taxation which will be possibility against those laws. And we have quite a couple of like expert opinions over the taxes, this decision is against legislation and also again for the agreements which is applicable to the case.

So the Finnish tax man seems to be believe that they can create their own law before the regulatory, before the parliament has taken any decision. So of course we’re going to strongly like fight the case and we believe that we’re going to win, it's going to be a quite painful and long case and by the end of the day we believe that the decision will be right and at that rate which we forecasted at 17% going forward will impact. If not of course it will increase somewhat but based on the legislation and tax agreements we can’t see that it will take quite this long.

Operator

Thank you. Your next question comes from the line of Niels Fehre from HSBC. Please go ahead.

Niels Fehre – HSBC

The first one is on the recovery you’re seeing in Central Europe, you mentioned you believe 5% to 8% volume rebounce this year. Is that something what you see already currently in your order book or is it based on your inventory calculations on where is it rub optimistic number coming from?

Kim Gran

Well first of all I have to like say that the 5% to 10% related to winter tyres and not for the replacement [ph] market. So we believe the total replacement market will grow perhaps between 2% and 4%. The 5% to 10% is based on the fact that the sale during last year actually declined by 5%. So 5% increase in volume should also grow would be to go back to the levels of 2012 which also is historically worldwide growth. So it might be that the 5% to 10% is a pessimistic view on winter tyres and not the optimistic one and our estimate is based on this point of factor when looking at the total cost we believe that there is a pent up demand of consumer level and we’re looking as an estimate of cost for Central Europe, different analyst report saying that cost as some analyst 4% compared to last some say 8%. So also the estimates from analyst reports the new cost is support the winter tyres which are in markets compulsory will go up simultaneously with car sales.

Our older group (indiscernible) good for Central Europe and our four parts from our key customers are also higher for this year than the last year. So it's a combination of different information.

Niels Fehre – HSBC

Okay and last question on your bad debt, is the write-down you had the book again in the fourth quarter, can you remind us again what is this related to and should you expect several provisions in the first quarter of ’14 is that close one?

Kim Gran

It relates to Central Europe and the market situation there after the prices, stuff like (indiscernible) end of the year. We have not amazed by one of for these companies, won't mention the name but if you turn around a little bit it's 2% out there company payments as well. So it's one off which doesn’t relates to our Q4 in 2013, it will be like one point than previous years which used to be quite higher but unfortunately we couldn’t clear off it.

When looking at the numbers in our balance sheet, our receivables they are quite healthy at lower level there is no overview receivables so I don’t see any effect during this year.

Operator

Thank you. Your next question comes from the line of Gaetan Toulemonde from Deutsche Bank. Please go ahead.

Gaetan Toulemonde – Deutsche Bank

I’ve few quick question and soaking around a little bit on the same subject as the previous question, if the rouble first one if the rouble stay at the current level what would be the impact in 2014? Is it roughly 50% when they get achieved in ’13 when you mentioned well 50 million you can see on the revenues and 25 million at the operating level?

Kim Gran

On top line well it depends on what date you’re looking at. Are you looking at today’s rouble rate or?

Gaetan Toulemonde – Deutsche Bank

47 roughly.

Kim Gran

Oh that level but on top line with today’s number compared to the average of last year we would be talking 12% to 14% effect on sales. In EBIT terms we would look at practically nothing that’s 1 million or 2 million.

Gaetan Toulemonde – Deutsche Bank

And the reason on EBIT is because you’ve increased the pricing right?

Kim Gran

Well we increased pricing already and of course we have our cost base in roubles and roughly 55% of production this year is exported and we paid in euros but have the cost in roubles. So it might be the export would improve and balance out any negatives.

Gaetan Toulemonde – Deutsche Bank

That’s pretty clear. I’m going back now to the second question on the pricing side and going back to some previous point. Let’s put Russia on the side which is a little bit different, you mentioned in your statement that pricing is tough whatever but if I understood well your comment earlier is that we should work in our numbers for 2014 with the positive pricing environment. Is it correct?

Kim Gran

Yes we’re looking at that modest price increases in all markets, in Central Europe, also in North America and in Scandinavian.

Gaetan Toulemonde – Deutsche Bank

Okay so if we’re 1% or 2% price increase plus the tailwind of raw material the sum of those two guys will represent a pretty nice impact on your operating result and I could explain why you’re optimistic this year? Is it correct?

Kim Gran

Yes modestly optimistic, yes. We have good potential to improve gross sales.

Gaetan Toulemonde – Deutsche Bank

My last question is on these tax rates, what advise do you give us in terms of using a tax rate for 2014 and 2015?

Kim Gran

I think for ’14 and ’15 our tax rate which is ball park of 16, 15 and 17. The tax rate is going up we have in 2012 the tax rate of slightly more than 14.7 I think it was in exact terms. Last year if we take out this additional tax I think we have about 15.1% as the tax rate for the group and our tax rate is going up a little bit this year due to the fact that the tax incentive in the Russia plant for the old plant it's pretty utilized and we’re now likely being with the new construction of plan. So a slight increase in tax rate as of date for this year. For year ’14 I would give you output in something 16-16.5.

Gaetan Toulemonde – Deutsche Bank

Okay last more question, you mentioned in your comment to expect weak first quarter ’14? Weak first quarter is what flat on last year which was already weak vis-à-vis 2012 that’s the order of magnitude?

Kim Gran

If you factor out the contract manufacturing you’re pretty much if you’re not in the same level as such in 2012 and that’s the result no change in our business portfolio as such. I believe we’re going to be fairly close the numbers which we had past year, it could up a bit or it could be flat or it could be down a bit. We don’t know yet to-date.

Operator

Thank you. Your next question comes from the line of (indiscernible). Please go ahead.

Unidentified Analyst

I’ve three quick ones, one is on Ukraine if you can tell us how much is Ukraine on your group stage or manufacturing unit stage as a percentage and how much the market has already declined in 2013.

Kim Gran

Well, if we take Ukraine is a total of, talking about 2.5% of decline.

Unidentified Analyst

And with regards to the tax dispute and you’re appealing to that in the cost. Do you have an indication of how long this could take? You said long time but if you are like few months or years?

Kim Gran

I guess that you’re asking about the tax cost because I missed your question, it depends a bit on what’s route authorities will take. If we’re able to like use an accelerated route which we’re applying for we’re then talking perhaps about the year. If we talk about the normal process we’re talking about 3 to 4 years.

Unidentified Analyst

Very last one is on the pricing. I heard that you said that positive pricing is realistic also in Central Europe and is that specific to Nokian because you’ve new products or are there other reasons?

Or using the market in positive pricing in Europe?

Kim Gran

I think it's both.

Operator

Thank you. Your next question comes from the line of Artem Beletski from SEB. Please go ahead.

Artem Beletski – SEB Enskilda

Actually I’ve two questions from my side, the line is quite horrible. Can you say again what is your view what comes to inventory situation right now in Russia?

Kim Gran

Yeah I think it's pretty much the same as a year ago with the difference that the pricing of inventory in the channel in the Moscow region and quite a lot less in the regions.

Artem Beletski – SEB Enskilda

And my last question is basically on price increases what you’re implementing so could you quantify how big source are for Central European market and for Russia?

Kim Gran

Well we already increased on 1st November in Central Europe price increase is a little bit 3% or 4% in Europe in euro terms and we did the same in Russia in rouble terms also and we’re looking at like adding in roubles something as we go forward now Europe has been.

Artem Beletski – SEB Enskilda

That’s all from my side. Thank you.

Kim Gran

Okay. Thank you. Also what perhaps is important to understand with Russia is that the way we have built our pricing structure is Russia is to that there is an automatic change in prices month by month when we’re moving forward and we can change the pricing every month if we want. So there is a potential to like react quite rapidly to any changes.

Operator

Thank you. Your next question comes from the line of Martino De Ambroggi from Equita. Please go ahead.

Martino De Ambroggi – Equita

I was wondering since you expect market volume recovery in Central Europe, is there any update on your plan to build up a new plant in Central Europe or you simply don’t need having available capacity positioned in Russia?

Kim Gran

First the capacity issue, yes you’re correct in that we have already platform agreed in Serbia [ph] which we were most thought. Those are plans are for the moment but that has to do with the market development has been significantly lower than we predicted about the project four years ago. Today in the present ones we have capacity to increase output quite significantly. So the potential to run the Finnish and the Russian plants at full speed and do the upgrades in Russia we can add (indiscernible) or increase the output. We believe that this is not for the year, so you not have to build new factories this year.

Martino De Ambroggi – Equita

Okay and the second question is on Russia, you mentioned during your initial speech two Japan is riding competitive pressure I was wondering what do you expect going forward, are they the only ones or do you expect softer competition from these two, so what do you expect in Russia particularly?

Kim Gran

Let’s put this way, I mentioned already that the weaker rouble was quite because of pressure, due to increased price there is a lot of pressure due to increased competitors. So let’s say that our expectation is that they would increase prices and follow our lead. Now that we have received prices, here it's impossible to display the tax rate. Traditionally when we look at Russian markets and several pricing environment we have seen aggression in the market twice, back in 2009, the prices would fall low than Japanese companies. One of them is actually the owner of this plant. And also fortunately we saw the same happening throughout the year and the results depending on global markets. With the market improving and the rouble, I don’t see any negative impact. There is price elasticity in Russia. Reduced prices it could be more volumes without reducing (indiscernible) lower margins. As you may remember that we have products in the market which are improving.

Martino De Ambroggi – Equita

Okay my last question on the winter tyre legislation if you expect any change going forward all over your selling products? Just if you expect any change in winter tyre legislation in different countries.

Kim Gran

At the moment for this year I don’t expect any major changes there.

Operator

And there are no further questions on the phone lines. Sir please continue.

Kim Gran

Okay it seems like we have to cap on all the phone questions. The lines are bad so perhaps you can with the rest of your questions you can give me or Anne, our CFO a phone call and we will be happy to help you with an further information. Is there any questions here in house or are we covered most points? I suppose we have so thank you for attending and let’s see you again after Q1. Bye for now.

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Source: Nokian Tyres' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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