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Executives

Kim Gran – President & Chief Executive Officer

Anne Leskelä – Vice President, Finance & Investor Relatoins

Analysts

Tommy Ilmoni – Carnegie Investment Bank

Tom Skogman – Handelsbanken Capital Markets

Artem Beletski – SEB Enskilda

Kalle Karppinen – Danske Bank

Erik Golrang – ABG Sundal Collier

Thomas Besson – Kepler Cheuvreux

Simon Sigvardsson – DNB Markets

Stephan Puetter – Goldman Sachs

Alex Hysel – Credit Suisse

Martino De Ambroggi – Equita SIM

Niels Fehre – HSBC Global Research

Cecil Boex – Brigade Capital

Nokian Tyres plc (OTC:NKRKF) Q2 2014 Earnings Conference Call August 8, 2014 3:00 AM ET

Kim Gran

Ladies and gentlemen, this is Kim Gran, CEO of Nokian Tyres. I'm very pleased to welcome you to this conference on Nokian Tyres' Interim Report for the First-Half of 2014. The material which we are going to use in this conference has been put on our website, it is published on our website this morning, and I'll try to remember to mention which page I'm on when addressing different issues.

I would like everybody here in Helsinki, please to turn off your mobile phones in order to make sure that we have clean lines when moving forward. And as usual, the presentation will – I'll start with the summary and some key messages concerning the market development and then talk about the various markets and our businesses. And on those, we'll touch, of course, on our cost development, productivity, and the drivers for the same. And spend some time on Russia, which of course, is the key issue today, and how we see the development in Russia CIS and how that affects Nokian Tyres' results going forward during this year and perhaps a couple of comments on how we see the future when moving on longer term.

But part of, let's say, the key messages I would like to convey to you is that, first of all, we have seen, Nokian Tyres have seen quite good growth in Western markets, driven by the fact that the recovery, both in car sales in Europe and the tire-replacement markets have been quite good in both Europe, Nordic countries and the winter tire market also in North America. And that has helped us to partly compensate for what has happened in the East, where the situation has been clearly weaker than we expected after Q1.

Of course, nobody could envisage a Malaysian airplane being shot down, which has, of course, led to some escalation of the situation and puts the cloud on what the development in Russia is going to be. But we'll address that when moving forward and I'd like then you to turn to page 3 where we have a summary of the results and also the repeat of our guidance for the full year. And our opinion internally is that we managed to do fairly well in all markets. We had growth of more than 20% on all the markets, excluding Russia and managed, in fact, to increase sales volumes during the first six months. But unfortunately, that was not enough to compensate for the losses in Russia, the devaluation effect, and also the deterioration in sales mix.

So all in all, when looking at the top line of the first semester, the six months, we had a decline of roughly 9%, which was deeper than during the second-half, when looking at sales. And we lost a total of roughly €418 million of revenue in Russia and CIS due to devaluations and, of course, partly also to the fact that not Russia but the other CIS countries, Ukraine and the others, were down due to the situation and the crisis.

The €52 million of devaluation, so different currencies, of course, is part of the €118 million of decline of the top line. We had then also some positives during the first semester. Our top line growth in the West, when we look at Nordic countries, CE and North America, was €47million, which helped to support the top line a bit. And we had a tailwind of raw materials during the first-half of the year of roughly €33million, which supported it, and our fixed costs came down partly because of currencies and also then saving programs of roughly €5 million.

So when looking at the top line, you could state that the biggest effect was devaluation and then the second was mix change. And the mix change relates basically to two things. The first is, the share of Russia being smaller than the West, where we have lower prices. When you compare Russian sales ASP to Central Europe or North America, there is quite a significant difference. And the fact that costs in Russia also went down, so when looking at input costs were not enough to compensate for the change in mix.

Also, in Russia in the climate where we are today, the mix is changing. The reduced car sales has resulted in the premium segment not growing and because of the B segment growing, we also had an ASP decline in the Russian market as a function of the mix. And then when looking at the second-half of this year and the guidance, we expect the second-half to be clearly better than the first-half, and I'll go through that and explain why that is the case. And – but despite that we'll – for the full year maintain the guidance of top line and EBIT declining.

I think it's worthwhile stating some positives on the results as well. That is that, when looking at the full year of this year, we will see a clearly better operating cash flow. During this year we already had €71 million better cash flow during the first-half of the year and that will continue for the full year, and of course, our net results and EPS will improve compared to last year as a function of the fact that we have a totally different situation with taxation and we should see a quite significant improvement in net earnings and EPS.

Okay, then we'll move on to – I'll pass the comments on market development and summaries and move to page 7 where we have information on the quarterly generation of EBIT and sales. And as usual, I'll make a comment on how we see the first-half of the year and then things when moving forward. During the first, when looking at volumes, we had a 4% increase in the total volumes. And of course, the total top line came down, as I already explained. Our total production was also up compared to last year during the first six months and presently we are running factories both the Finnish plant and the Russian plant at full speed, Finland five days and Russia seven days. And in fact, we have ramped up the capacity a bit in Russia after we came back from holidays.

And then when looking ASPs, we are going to have, as I already told a better second-half for the year and that has to do with seasonality. It has to do with the mix we are going to be selling during the second-half more than anything country mix, and also with the raw materials going further down during the second-half when moving forward. So basically I've always given some guidance on how much I believe that we have already generated of the annual EBIT. And this year, I believe, we are ballpark first-half of the year to the second-half of the year about €45 million to €55 million.

Of course, that is with a big parenthesis and question mark on how Russia will develop, but in the present situation the way we see it and the way we plan it, that's going to be partly are the end result. ASP will improve already in Q3 and also in Q4, as a function of the Russian sales going down as a share of the total. As you quite well remember, we sell a lot of Russian products during Q1. Q2 has traditionally been the highest focus on Russia and the Russian share. And then in Q3 and Q4 that share is going down.

And when looking at the ASP factors, basically we have pre-season sales during the beginning first-half of the year where we are rebating sell-in volumes, which are delivered. So the difference between a seasonal price in currencies and a pre-season delivery depending on month is between 5% and 10%. So gradually month by month when we move forward all seasonal prices are kicking in and helping. So we expect the gross margin, which declined during the first-half roughly by 1% unit compared to the previous year, to be better during the second-half as a function of higher ASP, seasonality and country mix changing, lower raw materials and higher productivity. So that is the way we see it.

So the growth in the West will continue and we believe that the situation in Russia and CIS will continue to be quite tough during this year. Then a couple of words, we turn to page 8 and the development by market, and I'll start by Nordic countries and talk about each different market area a bit about their development in the market and also our position and pricing and volume development.

Nordic countries of course, have improved a bit during this year and will continue to do so, with the exception of Finland. Car sales in Scandinavia and Nordic countries have increased consolidated by roughly 11%. The tire-replacement sell-in volumes in fact, have declined by about 1%. Our growth in Nordic countries in volume terms increased in the ballpark of 5%, but in total value terms only by 1%. And the reason for the difference there has to do mainly with currencies of the Swedish and the Norwegian krone. So in currencies we've kept the pricing and increased volumes and also market share. We are market leader in Scandinavia. Our market share increased as a total when you combine all the different product categories roughly by 1% unit from 29% to about slightly more than 30%.

Then Russia and CIS, I will address more in detail. Of course the GDP and the economy and, more than anything, the devaluation, we estimate that the total market of the replacement market in Russia came down roughly by the same amount as our winter tire sales in volume terms, which is about 5%. And basically, the picture is twofold. We've seen increased prices in rubles in the premium segment, but a decline in the growing B segment where the competition has escalated. And we'll talk, as I said more about that when we come to that point.

In the Rest of Europe excluding Scandinavia, we have seen the market growing by 7% to 8% during this year, car sales improving by about 6.7% and we had volume growth of in the ballpark of 25%, and a total – sorry, that is of – no 20%, the difference is about 4%, so in value and in volume. Then in North America we have seen also a quite good increase and a market share improvement.

Going back to Europe, the strongest growth we have seen basically in Germany and, when looking at our total market share in the Europe excluding the Nordic countries, we have during the first six months, which is not representative for the full year increased our market share by roughly 1%. We've gone from about 11% to about 12.5% during the beginning of this year. And our total market growth in Central Europe has been more than double compared to the market, which we believe relates more than anything to improved distribution and, of course, the improved availability of our products.

Okay, then we'll move onto some input costs and on page 9 raw materials, which represents more than 65% of total. Input costs are going down. We are maintaining our total estimate of €50 million for full year as a tailwind. I stated after Q1 that it's somewhere between €50 million and €60 million and that is still intact. So it could be more than the €50 million, in fact, I believe that it's more than €50 million. But, to be on the safe side, we've stated €50million in this.

During the first-half of the year, we had a tailwind of €33 million and during the second-half, we will see a decline further. Our situation is that this is not an estimate. We, in fact, have already contracted all the raw materials for this year and are buying, for instance, natural rubber already for Q1 of next year. And then when looking at the other input costs, our productivity has also improved as a factor of utilizing more of the Russian plant. 79% of all the production we had was produced in Russia and that, of course, increased the output level kilos per man hour, so we have seen more than a 5% improvement in labor productivity, combined with the other positives of Russian production. But despite the positives, as I already stated, we had a decline in gross margin of roughly 1% unit compared to the previous year.

Okay, that perhaps enough on costs and we'll have the Q&A later and talk about that. Then we'll move to the profit centers and the comments on how we see those developing during the second-half of this year. Of course, the total picture is that the biggest unit, our passenger car tires was hit by all the factors I mentioned, so it had a decline. But in fact, we managed to improve our profitability both in heavy tires and also Vianor slightly during the first and we'll continue to do so also during the second-half of this year.

Then we'll move to page 12, and look at couple of comments and estimates for the passenger car division. During the first-half, of course, our last year's second quarter was exceptionally high. We had a 36% EBIT margin on the back of very high share of Russian sales and production, which came down to a level of 30% in the second quarter of this year. And when looking at the second-half of this year and the full year, we made last year an EBIT margin of 33.3%. And my estimate is that for the full year we'll be quite close to that, not 33.3%, but somewhere I would say ballpark 32% is achievable also for this year.

And I think when talking longer term, of course, I've been asked many times about what the longer-term profitability is, (inaudible) (0:19:48.0): Okay you are not in the perfume business so you can't be making 35% of EBIT forever. So what is it going to be when the mix changes in Russia? More B, when your mix changes with Russia maturing and you are having to sell more in West, in the Western markets and grow there? And my answer has been that I believe that longer-term when we move forward, we will see our EBIT margins of a level between 30% and 33%.

Presently when looking at the mix, which we've shown you in the first-half of this year, we are in that situation to some extent, the change in mix, roughly two-thirds of volumes sold in Russia has been B segment because of car sales has been dropping, we've seen the increase dramatically in Central Europe and the share changing. So, in fact, that is where we are, and I think that this is in a way my legacy for the future. I think this is the level we will see. It can be, of course, better, when we talk about Russia we'll talk about the positive scenarios as well as the situation today and what that could be.

So I believe that this is a level – the bottom level from which we can pick up. Okay, so during the second-half more Nordic sales and also more new products. Of course, we've done quite well in different magazine tests as usual, both summer and winter tires, and launched quite a lot of new products during the beginning of the year, and we will follow up later this year with launches of summer tires, especially the high-value products, SUVs, for both Central Europe and for Nordic and Russian markets.

So, of course, we'll try to mitigate some of the negatives by keeping the product range intact and adding to the goodies. Okay, then we'll move on to page 15 and Russia, and I start by making a couple of comments on the economic situation and also not too much about politics, the tire market, perhaps a little bit about the competitive landscape and how we see things forward. Of course, it’s very difficult at the moment to give a clear answer to what is going to happen in Russia. Nobody knows what plane might be shot down next and how the situation develops. But of course, first of all we have to remember that Russia historically has been an up-going sinus curve. I don't believe that this situation has changed.

The question is only when is it going to change for better and how deep is it going to drop before it turns? Have we seen the bottom or we still going to go further down? And then when is the recovery going to kick in and which are the elements that are needed for that to happen? And how will that affect the car – sales of new cars and also the tire market? But short-term, we've taken down our estimates from Q1 when looking at the market..

First of all, we state in our text that we believe that the Russian GDP is going to – for this year is going to be 0%. It's basically a compromise. I think that the consensus is that it's going to be somewhere between 0% and 1%, and more negative some people believe that it's going to be negative. So, of course, nobody knows exactly. So we have stated 0% and based our thinking on that. Consumer confidence has stabilized which is – and in fact, it has improved during the last couple of months, which could be a surprise to some of the Western business.

Also when looking at, let's say, business in Russia as such, it's business as usual. You can't see many effects, in fact, in normal daily life. The problem which started in Russia and the economy going down started already during the second-half of 2012, with interest rates starting to go up and, after that we basically see a stalling of the economic development, car sales also hit more than anything by the cost of financing and not the economic crisis. So, in fact, when looking at it, we believe that the increase in base rate, which happened a couple of weeks ago with $0.5% doesn’t reflect the true interest rate going up, which has gone up in practical terms much more than the 0.5% which had been reported.

And when looking at car sales in Russia, and there is a chart on, I think, page 18 or 19 on this. We've seen the market dropping during the first seven months already, and we believe that that will continue also to drop during the second-half, but in percentage terms it's not going to be as bad during the second-half because the base already is lower from the half year – second-half of last year. But all in all, car sales will drop somewhere between 10% and 15%, nobody knows exactly how much. But our estimate is that it will go down by somewhere between 10% and 12%, perhaps 400,000 units on 2.8 million to 2.4 million cars. There are different estimates, it could be 2.3 million, it could be $0.45 million, but in that ballpark.

That means that roughly 400,000 cars will not be sold and the reflection on that for tire market is that four times 400,000 is 1.6 million. 1.6 million premium tires will not be sold during this year compared to last year. So that will have a negative effect on premium winter tires during this year. And also reflected in when we state that our sales came down – winter tire sales came down by 5%. So that is part of equation. All right. Then, when looking at the other areas in CIS, of course Ukraine is an area where we can't sell.

Last year we sold more than 0.5 million tires to Ukraine and this year's estimate is that we will sell a little bit in order to keep the Vianors which we have there intact. So we'll deliver in the ballpark of between 50,000 and 100,000 tires to that market, which volumes need to be compensated in the West in order to keep it running. All right. So that is the picture on Russia. And when looking at the total picture this year, I already stated that the mix is changing. When looking at the pricing situation premium tires, the Western producers, a French company, a German company, and a Finnish company, have increased prices are in the premium segment.

For instance, our ruble prices for the Hakkapeliittas have increased by in the ballpark of 10% during this year. Then unfortunately, the volumes of that due to the car sales have not developed as well. B segment, on the other hand, have increased and we're looking at the competition in that area, we've seen, especially the Asians being very active and aggressive. And the pricing level, which came down last year is on a lower level already inherited from last year compared to the average. So we've also seen a decline in prices in the B segment on top of the increased volumes.

So all in all, the mix effect and so on has hit us quite a lot. But one point which is worthwhile mentioning is that despite all these negatives in Russia, the company – our company and our unit in Russia is still very profitable. And the old slogan of where people – analysts have been guessing about the EBIT margin locally in Russia of being somewhere between 40% and 50%, the rate in that range is still intact. So the Russian operation is still within that range with this type of operation. So it's an extremely profitable and healthy unit, despite the situation today in Russia.

And of course, one of the most important things for us when looking forward is the development of our distribution chain, which continues to grow gradually. We have not added more than 13 Vianors during this year to the total numbers, but we have a total of roughly 3,600 stores which stock Nokian products and sell them. So we believe that this is still quite a strong point for us. When looking at the factory, we are running 30 lines, running daily capacities of between 43,000 units and 45,000 units per day running full speed seven days per week, supplying the Russian and also the export markets.

So today in the ball park 60% volumes are exported from Russia to other markets. Totally we have spent in CapEx in Russia about €80million. What we have not reported as one number, but it's easy to calculate if you've been reading papers is that, we've taken out during the last three years about €1.2 in dividend to Finland. So the investment has already paid itself quite well and, with the present profit levels, it will continue to be a very good cash generator for the company and we are going to continue to develop also this operation.

Okay, then page 18 to 20, there is more information on the Russian economy. Of course, we have not been updating all the numbers based on the negatives, so you could view these numbers as a positive scenario rather than something which would happen if everything goes down the drain. And – okay. Then a couple of words about Vianor and heavy before we move onto Q&A. Vianor, in fact, is very seasonal, as everybody remembers, we are losing money during the first-half of the year and then improving the results during the second-half.

The difference we estimate during this year between the first-half of the year and the second-half of the year is, in EBIT terms about €10million. So we'll make €10million more EBIT margin on during the second-half compared to the first-half. So also, this is one of the reasons that we believe that the second-half of the total Group is going to improve. It's going to a supporting factor. The most important issue, of course, for Vianor is expanding the network and then internally to develop new concepts, more than anything developing service sales, which has happened.

We've now bought totally about 51 shops and integrated them for car maintenance and the service growth, in fact, grew during the first-half by 26%. Then the network itself, I'm proud to state that we continue to add to the structure, which I already stated is going to help us, especially in Central Europe. During the first six months, we've added 54 stores to the Vianor network operating now in 27 countries. And also, the new concept, which we call NAD, Nokian authorized dealer, a software franchise operation, which we started by end of 2012, we've added this year already 240 stores, mainly in Central Europe. And we will reach the target of roughly 900 operating by end of this year.

Of course, it will – it’s mainly in areas in Central Europe, Germany, where we've seen the best growth during this year already, and also quite massively in, for instance, Northern Italy. Unfortunately, it doesn't help too much to have NADs in Ukraine at the moment, but hopefully, one day also those will contribute something. Okay, then a couple of words about heavy tires, which is, of course, a smaller part of the total. As a reminder, this is a cyclical business related to machine building, with the cycle being about five, six years. We are on the upturn of the cycle at the moment.

During the bottom of the cycle we make ballpark 3% to 5% EBIT, on the top we make about 22%, 23%. Presently we are on the way up at the level of 14%. So last year our utilization rate of the capacity was about 65% of what we could produce. During this year we have been ramping up and investing in the business and we are close to 90% in utilization at the moment. We've gone from five days to seven days working, but despite that we have yet not been able to fully keep the service level up. So our inventory levels are too low in relation to our order book.

So order book, both in – I forgot to state about passenger so I'll go back there. Our order book and inventory level in the passenger car sector is same level as last year, in this instance. In heavy tires our order book is clearly better and we basically could sell more than we can produce, so we are continuing to ramp it up. And this means that we will able – we will be already able to show growth during the second-half in heavy tires and also a couple of millions of EBIT to what we've done during the first-half of the year. so that is another small positive for the end of the year.

We believe that if the economy continues to improve we are going to go back to our previous top and pass them in 2015 and 2016, I stated this already earlier, roughly six months ago, and I still believe it's valid. So we have an opportunity to increase top line in this operation by roughly 20% and EBIT also quite clearly from where we are today, and it’s happening, new products also in this.

Then a couple of words about cash flow and investment for this year and also for the next two years. As an estimate, we estimated that this year's CapEx totally will be in the ballpark of €100, it could be slightly less, it could be slightly more. The exact (inaudible) is €103 million presently but, of course, it will change a little bit as we move forward. It's slightly less than we did last year and significantly less than two years ago when we were building Russia.

Presently we have quite good capacity reserves in existing factories. We can increase production and output quite well without CapEx, which means that when looking at the level of CapEx for 2015 and 2016, unless the market dramatically changes, we should be in CapEx on a level of roughly €100 million per annum, with some repeats and so on. Roughly €30 million of CapEx relates to launches of new products and then we have maintenance, investment and some improvements.

And the impact of cash flow when you consolidate the change in our sales profitability, CapEx, changes in working capital and so on, we believe that our operating cash flow will improve from last year's €325 million to in excess of €350 million. How much exactly? Is it going to be €390 million or €350 million, it’s difficult to say, because that will relate quite a lot to the receivables and the timing of the winter season. But nevertheless, an improved operating and net cash flow compared to last year. And we believe that that is going to stay.

Of course, it also means that, as we don't have any dramatic needs for CapEx and investments generating high cash flow, we are not in an acquisition game, means that the level of dividend is going to be good last year. This spring we paid €1.45 and for yesterday's share price, I think, it's a yield of slightly less than 6%. So we'll see what the AGM decides, but I would believe that there is no need at least to reduce the dividend. I think there is an opportunity to further, at least to keep it intact.

Okay, we talked about capacity already. We have – our production output is going to be this year somewhere between 15 million and 16 million tires in passenger car tires and then increased capacity and an output in heavy tires. We could produce with the present without investing anything close to more than 18 million tires with some bottleneck investment and full capacity utilization in both factories we can do 24 million tires.

So there is quite a lot of potential for further growth without spending too much money. And I have many times stated that Nokian Tyres is like a V10 engine presently running with four cylinders. So what we need is some help from the Government in Russia concerning the political situation and also like some sensible decisions on interests and how – the currency policies in Russia and we could see a rapid kickback of the Russian market and us laughing all the way to the bank.

Right, then the last page the guidance repeated, and I won't go into this any further, but we'll move on to Q&A first here in Helsinki and then through the phone lines and web lines. So please state your name and the company you are representing and I'll try to give you answers the best I can.

Question-and-Answer Session

Tommy Ilmoni – Carnegie Investment Bank

Tommy Ilmoni from Carnegie. Could you give a split up of the sales mix in Russia between A and B segments, is it 50%-50%, or how do you see it for the full year?

Kim Gran

For this year, the mix is going to be roughly one-third A and two-thirds B.

Tommy Ilmoni – Carnegie Investment Bank

And the price difference between your A and B segment tires, is that the same as in the past or…?

Kim Gran

Say, more or less the same as in the past, in ruble terms. And also perhaps one question, which was asked by the friend next to you, Tom Skogman, he asked us whether the prices are – in Russia are still higher than the average of the company. And with the devaluation and the mix change combined, Russian ASP is now par with the average of the Group. So that was – you didn't ask the question, but I didn't answer Tom's question a couple of months ago, so I did it in retrospect.

Tom Skogman – Handelsbanken Capital Markets

This is Tom Skogman from Handelsbanken. And then what is your view about the financing situation for car buyers in Russian, given the new actions from European Union? What will happen with the – what are the key sources and the key banks for the car buyers in Russia, and how will they be impacted?

Kim Gran

Yes. Okay, well, I think that you know the answer quite well yourself, but you want me to state – come out my view on that. First of all, I would remind you that the Russian, let's say, natural at the moment so it would be the ballpark of 3 million, 1.5 million of cars annually are purchased with cash. And the drop in car sales during this year relates directly to the financing being expensive.

So when I was talking about interest rates in banks and so on, it's not easy. It has become – it was expensive to start with since end of 2012, and now, of course, it's more difficult than to get loans as well. We haven't seen dramatic effects yet on that. And – but as I said, when factoring in all the different elements, including this financing element, we believe that the car sales will be in the ballpark of roughly 2.3 million, 2.4 million and that car sales will drop by in the ballpark of 400,000 compared to last year.

We've seen part of it. We will see part of it during the second-half, but the difference compared to last year is going to increase more, because we already had very high interest rates during the second-half of last year, which was the main reason for the car sales dropping.

Tom Skogman – Handelsbanken Capital Markets

I'm thinking more about next year, given the – it can be very hard to get funding for the banks and I wonder is it really the – if you're a person in Russia needing a loan to buy a car, are you going to mainly to SpareBank and these national banks, and do you have any insight into how the financing, how quicker that is deteriorating?

Kim Gran

Well, of course it is changing at the moment and what is going to happen next year is practically impossible to say, because we don’t know. There is too many uncertain elements being there. So the political crisis, decisions with the interest rates, the trade barriers which came through. In the worst scenario, car sales will continue to drop during next year as a factor of financing being very tight. It will depend on how well the Russian Central Bank supports the industry and the banks and what policies the local banks will take to consumer loans. So too difficult to guess, but I think that there is quite a lot of changes need to be done in order to – for that to change.

One thing, by the way, on Russia and the market, which I did not mention and I think I'll take it here is that, when looking at the market development in Russia, with the present level of car sales about 2.4 million the Russian car park is still expanding. So the car park from, let's say, 2010 to 2014 has expanded by roughly 4 million units. We're seeing in the car market growth about 36 million to 40 million. And despite the fact that the car sales are declining this year, the car park, cars in traffic will go up by an estimated 800,000, which means that when looking at the total tire market, we are seeing, in fact, a change in proportions of car sales, premium tires needed for that and the B segment. And also with the car park growing, we will see the continuous like growth in the B segment of tires.

So I think that, when estimating or looking at the future, we will have to look at in a normal situation at car sales perhaps maturing slightly below what we've estimated in the past. We've said that the maturity would be about 4 million. I personally – my guesstimate today is perhaps 3.5 million as a level of maturity and then the car park continuing to grow. We've seen the – let’s say, the penetration rate in Russia to come also to a certain level of maturity. We've gone through during the last 10 years from a level of 100 to roughly 320 cars in traffic per capita.

When looking at Eastern Europe, when the market came to 300 the rapid growth matured and we came to a level where the continued growth was on a slower pace. I think that we have reached that level and that the growth from 300 to 350 and 400 will not be as rapid as before. We will see a more slow growth of that driver. Nevertheless, still the car park growing and the replacement market of tires continuing to grow with a different mix than we've seen so far.

Tom Skogman – Handelsbanken Capital Markets

And when it comes to sanctions, we know that there are no direct implications for your business at the moment, but do you have any indications if they will be stepped up that in what order you could see export ban or import ban of Russian-made consumer goods products, because it's not a key export item in Russia naturally?

Kim Gran

Well, I think that the ball game in Russia because of the situation today has changed. I'll come back to this trade barriers, but still talking about the tire market itself. I've already talked about this year the car sales going down. But the other thing which has had an effect this year is that, because of the interest rates, distributors are unwilling to take inventory. So reactivity during the season is quite important. Nobody wants to become indebted to somebody else and have inventory after the season and being forced to pay for it because of the financial situation.

So that has a, let’s say, slowing down and also timing effect on the demand in Russia. When looking at the trade barriers and what will happen, I think that the financing is the thing which will hurt most and have a biggest impact on the economy and so on. When looking at the sentiment of people, how they behave and so on, it is totally different than here. The same issues being addressed in the media on Russia side and in West are black and white.

Personally, I the truth is somewhere in between; nobody is fully right. But trade barriers could become worse. I hope Russia doesn’t take a military – direct military step and started war with Ukraine. I don’t totally exclude it, but hopefully, that doesn't happen, because that would, of course, further make the situation difficult and make things worse for Russia, not only short-term, but also longer-term. But trade barriers changing the situation, I think that is wishful thinking from Western politicians. I don't think it will have any big impact on the thinking of people, at least short-term during the next year.

Artem Beletski – SEB Enskilda

Continuing on Russia and the sanctions situation, so there has been some comments by Prime Minister yesterday basically stating that they could be getting more protective what comes to automotive industry. Of course, it is a bit speculative but what is your keen thinking that they could be doing, is it basically import tariffs what they could be raising on cars and maybe tires, or what is your best guess?

Kim Gran

Well, when looking at the availability of all cars and the manufacturing of cars, nine out of the 10 bestselling brands have already made and assembled in Russia. So that, of course, will continue. I think it's only the star emblem car which is not produced and everything else you can already get made in Russia. Of course, if that is the case, then they would have to cut the supply lines to these assembly plants, because the main supply lines or all the components – main components for these car factories come from the West.

So they could stall that, but that would have a dramatic effect as Tolyatti and Lada can produce about 68,000 cars a month and that's not enough to supply the market. So unlikely, of course, putting a duty on cars assembled and made outside Russia is possible, but practically it wouldn't have any big impact on the situation.

Artem Beletski – SEB Enskilda

Yes. And maybe still continuing on Russia and consumer preferences, has there been this kind of like patriotic mood in the country and so on? So what is your feeling about upcoming season, what kind of preferences consumers will have? So do you expect that maybe they will be buying more made-in-Russia Nokian tires than imported stuff, or do you think that you could be actually a net gainer out of this kind of situation?

Kim Gran

Well, I think that when looking at the net effects of different issues is that, of course, what Russia could do is cancel its duty of tires going down. As you remember, we had a 20% duty on tires two years ago which gradually has come down to 16% and is expected to go down to 10%. This is something that the Russians could change quite easily, because the domestic supply base is enough to supply all the domestic need. If that happens it could help Nokian short-term in the marketplace to increase volumes, especially in the B segment. But and also other players, like Yokohama and Pirelli who have already existing and operating plants in Russia. Other than that, we haven't seen any like decisions or any changes in our competitors' policies.

When looking at their projects on what they do with investment in Russia, when talking about both industrial or distribution expansion, they seem to be continuing as planned. So we haven't heard any news of the policies changing.

Artem Beletski – SEB Enskilda

Okay. And maybe last one from my side. What comes to Central European market, could you maybe comment how much your – or what is the outlook for second-half of this year? So, for example, how much your order book is up year-over-year end, has there been…?

Kim Gran

It's up proportionally pretty much as our sales during the first-half. And we're looking at our order for – presently I stated that the order book is pretty much on the same level as last year, but the content is different. The share of Russia is smaller. The share of Nordic countries, North America, and Central Europe is clearly high than last year. so when looking at that, we will continue to see a change in the mix.

And as I stated on the like ASP development and sales and EBITs being very close to last year second-half, that relates basically to the seasonality and also the Scandinavia positives.

Artem Beletski – SEB Enskilda

Okay, very good. Thank you.

Kalle Karppinen – Danske Bank

Hi, Kalle Karppinen from Danske Bank. Question about Russian volumes, can you give any indication how much your volumes declined in Russia in the second quarter, and what do you expect for the full year?

Kim Gran

Well, we had a decline of a roughly 5% in volume terms during the first-half of the year.

Kalle Karppinen – Danske Bank

Okay.

Kim Gran

We had a slight increase in Q1 and a slight decrease in Q2. We expect the volumes to be roughly on the same level in Q3 compared to last year. But I would say, the order book is not as high in Russia for the third and fourth quarter as was last year. So the mix is different. We have more western orders than Russia at the moment.

Kalle Karppinen – Danske Bank

So was this Group volumes, and also the focus on decrease in Russian…

Kim Gran

That’s purely Russia.

Kalle Karppinen – Danske Bank

Thank you.

Kim Gran

Okay. Any further questions here in Helsinki? If not, then we'll move on to the phone lines and try to address questions from abroad or perhaps domestic. Please go ahead. Yes.

Operator

Thank you very much. (Operator Instructions) We have the first question from Mr. Erik Golrang from ABG. Please go ahead, sir.

Erik Golrang – ABG Sundal Collier

Thank you. I have three questions and my apologies if they have been covered. I've had a very poor line on and off. Firstly on Russia, you understand correctly that you didn't gain market share there in Q1, which I believe you did in – or that you didn't do that in Q2, which I think you did in Q1. What's the reason behind that? Is that simply mix, I know you say that you want to take decisive action there to defend your market position, what does that mean?

Kim Gran

In looking at quarterly sales in different areas of our market and say you might see it is quite useless. In fact, what you should look is at the total sales of the first semester. So we sold, it has a timing effect basically. We were selling more in more in Q1 and slightly less in Q2. So it’s more than anything has to do with timing and how we feel different markets. Basically, in Russia we had in the beginning of the year, a situation where it was quite easy to fill inventories to distributors whereas you can't do that in Central Europe during the second quarter. It was worse in the third quarter, we are addressing the Nordics. So it has to do with timing, more than anything else.

Our market share in the first quarter improved as a factor of timing and our market share in the second quarter was slightly down because of timing when looking at the total of sell-in our market sales are flat. The market came down roughly by 5% and our sales came down in volume terms roughly by the same.

Erik Golrang – ABG Sundal Collier

Okay, thank you. And then the second question also on Russia. I heard some comments on this, but assuming there is a sanction limiting exports of tires from Russia into Europe or North America, how would one look at your Russian entity, will it be seen as a Russian company, or do you think you will be excluded from such sanctions?

Kim Gran

Well, presently tires is on a list which is on products which are going to be excluded from further barriers. How long that will be the case, we will have to wait and see. But come worst to worst, if the borders would be closed totally and we would be unable to ship goods out from Russia. We would, of course, then try to compensate with adding to production volumes in Finland.

Presently, we are exporting from Russia ballpark 7 million tires to other markets, mainly to Central Europe, North America and a little bit to Scandinavia. And we could increase our output in the Finnish plant from the present level of slightly more than 3 million to roughly 6.5 million. So we could compensate in the ballpark of half of the exports, which we are doing it in Russia by adding to – of the production volumes in Finland. And short-term we would lose then roughly 3.5 million of volume, which could not be compensated from our own production base.

Erik Golrang – ABG Sundal Collier

Okay. Next question, if you have any updates on the tax situation in Finland. Has there been any development there?

Kim Gran

Well, I think it’s best our CFO, who is in-charge of that process answers you, but basically there is nothing new. The short answer is that first of all, the decision we had last year of €100 million relating to Russia was already fully booked last year and had a big negative effect on our net result. We have not paid it and we are not going to pay it, so there has not been any cash flow issue. And there has also been a decision already in Finland, not for us but another company which we have reported also in the text in our stock exchange release, which supports our case. But, Anne, please add what is important.

Anne Leskelä

Yes, I have some words about that. So it was already in our stock exchange release. It has to do, of course, with the Finnish Supreme Administrative Court's decision, which came out on July 3. And there it was stated that actually the Finnish Supreme Administrative Court took an opposite view on the transfer pricing compared to the interpretation of the Finnish tax administration. And that was specifically using the Tax Assessment Procedure Act, Section 31. That is reflecting on the market pricing between the companies but it does not include any specific provision for re-characterizing and reclassification of what the business is. And that is exactly what happened with Nokian Tyres case also.

So they actually overruled the Finnish legislation by the OECD transfer pricing policies and that should actually back up our case and we are going to make a new appeal on this explaining it to the tax authorities. But, in due course, of course, this case will come up in the Board of Adjustment and then we had tax authorities like decision on that. But it's backing our case clearly.

Kim Gran

Okay. If I – layman's like simplification to all this. A knowledgeable answer is that, we are not going to have any tax issues during 2014 or going forward. The decision, which has been made on another case for another company supports directly our case. And therefore, there is a precedent as a decision for what will happen. Of course, the process, how long it will take for us is uncertain. Probably it can take 2015 or 2016. But my personal estimate it that, the majority of the 100 million will be back to our result in a couple of years. Is it going to be next year or the following year? Time will tell, not the full €100 million, but the majority of it.

Erik Golrang – ABG Sundal Collier

Very good, thank you. And then one final question from me. For Vianor in terms of the growth rate in number of stores, 2%, I think is the lowest level we've seen for a long time. How should we interpret this? Are the NADs the way forward here, and does that impact the model in anyway?

Kim Gran

In fact, it has to do with the focus more than anything that we have been focusing when looking at the Vianor concept, expanding it more in Central Europe and the West than in the East. So our penetration rate in Russia is much higher than in Central Europe. So of the 54 shops we opened, 40 was actually in the West and the rest in Russia, CIS. And you are quite right in that it's more rapid and easier to get these NADs done than Vianors. Also, of course, the climate in Russia and the Ukraine, Kazakhstan and so on, is uncertain and we don’t want to spend money opening shops when we don't know what the future is going to be on that specific location.

Erik Golrang – ABG Sundal Collier

Thank you.

Operator

Next question comes from Mr. Thomas Besson from Kepler Cheuvreux. Please go ahead, sir.

Thomas Besson – Kepler Cheuvreux

Yes, thank you. Good morning. A few questions on my side as well, please. Firstly, some practical questions, Kim, can you remind us practically how the transition period is going to be handled in the coming weeks and whether you are going to stay around longer than the end of September 30 or whether you'll be completely gone at that time, please?

Kim Gran

Well, I'm going to retire on the last day of September as planned and my successor, Mr. Ari Lehtoranta is going to start on the September 1. Of course, we've already like spent some time together talking about the business, the strategy and so on. He has been to some of our meetings, our Board meeting yesterday. And during September we will go and see our own organization, major customers and so on. And my own future is that I will continue in the Board, I am already the Board Member of Nokian Tyres. I will continue in the Board and will be available to help the management and the company in any way that is required.

So I won't disappear anywhere. I will be available. But let's put it this way that despite the headwind in Russia, I'm glad that the company, I feel that the company is in great shape. Our products, our manufacturing, our distribution are better than ever. And we have a fantastic team and the new guy taking over from me, I believe he is much smarter than me. So I think it's going to be a great future for the company.

Thomas Besson – Kepler Cheuvreux

Thank you. Coming back on the different impact of sanctions, can you as well practically tell us what process you used to finance your dealer inventories in Russia, and whether the restrictions on some of the Russian banks actually affects your normal way of operating business in Russia? And also remind us the amount of assets you currently have in Russia?

Kim Gran

Okay. Well, first of all, we are looking at how we finance any of our operations, it's done by our treasury in Finland. So it's all financed through the Finnish treasury and Anne is in-charge of making sure that all our operations have all our operations have financing for their operations. So it's being done the say way as before. So loans from the mother Group to the Russian entity to finance the working capital, which is needed for the seasonal business.

And perhaps one thing which people might be worried about is receivables and how we see those coming in. And so in this situation, the collection of receivables during the first six months in Russia has been 99.5% of all receivables. So we have not seen any disturbances in payments from our customers. And traditionally, we have always been during the last years ahead of 99%. So that is pretty much business as usual on that front.

Thomas Besson – Kepler Cheuvreux

Okay. And the amounts of assets in Russia, please?

Kim Gran

We have, of course, fixed assets. I already told you that we've invested about €800 million of fixed assets in the plant, of course, it’s been depreciated a bit and then we have working capital, we have receivables of roughly – Anne, you could help me here, but I have a number of roughly €400 million in my head, but you could – 49% of total receivables of the Group. So you can count from there.

Thomas Besson – Kepler Cheuvreux

Okay. Next question, please. Your absolute level of inventories in euros did drop only slightly, so it's just an increase in the inventory values. Is that correct or is it – am I missing something?

Kim Gran

Yes, actually inventory level in volume terms, we produced about 7% more than the previous year in volume terms and we sold about 4% more than previous year. So there is a slight increase in volume terms in inventory. And it relates to more than anything to the fact that we had to ramp up the volumes for Central European products and also build some buffer against the growing sales in that market, which is located not only Russia but also in our main warehouse in Czech Republic.

Thomas Besson – Kepler Cheuvreux

Okay. Last question for me, please, Kim. Can you give us an update on the relationship between Nokian and Bridgestone, both from a shareholding standpoint and a cooperation standpoint, and what's your understanding of where they want to have this relationship going forward, please?

Kim Gran

The short answer is that no change since February 2003. They own 20 million shares, they have not increased or decreased the share during the last 11 years. They don’t have a Board seat any more since last year, so they cease to have a mandate in the Board. They are making some truck and bus tires for Nokian with the Nokian brand. We are not making anything for Bridgestone in manufacturing. And other than that, they seem to be quite happy with the dividend flows coming in. I think it's been a very good investment for them.

Thomas Besson – Kepler Cheuvreux

Yes, absolutely. Thank you very much, Kim, and all the best.

Kim Gran

Thank you, Thomas Besson, same to you.

Operator

Our next question comes from Mr. Simon Sigvardsson from DNB Markets. Please go ahead, sir.

Simon Sigvardsson – DNB Markets

Yes, hi. I had a question firstly on that monthly car sales have declined – accelerated lately. So I was just wondering if you saw a weakening more towards the end of Q2 and also how the business has developed so far in Q3 in Russia?

Kim Gran

Well I think we addressed this question already that we the decline to continue also during the second-half. But when looking at the percentage and the change such, the base from last year is lower, which means that that will not come as much down as during the beginning of the year. Of course, last months have been quite dramatic. We have seen more double-digits drops in cars during the summer season.

When talking to our people and some dealers they say that it has to do with the heatwave, but nobody is interested in buying cars when they are spending time on holidays. But I think that's a very simplified answer and there could be a more negative trend than we see today for the rest of the year for car sales, basically reflecting the interest rates and the financing climate.

Simon Sigvardsson – DNB Markets

Okay. And then I also had a question on your strong growth rate here in Europe and you continue to outgrow the market. Can you talk about the potential in this market and what kind of market shares you target in the more long-term, I mean, three to five years ahead?

Kim Gran

To simplify it, we plan to roughly double our sales in Central Europe during the next five years. It's not an exact number, in fact, it's slightly lower, the official number which we have in our own long-term plan is slightly lower than doubling. But, of course, as CEO I always expect the team to do slightly better than planned.

Market share, as such, I think that one point which is worthwhile noticing is that we have always been talking about Central Europe in terms of only winter tires. When we look at the – in excess of 20% growth during this year for instance, we've seen that number both in summer tires and in winter tires. So we've seen also summer tires growing at the same pace as our total. So both winter and summer tires have been growing and we've taken share in both, and we target to also grow in both segments.

Simon Sigvardsson – DNB Markets

Okay. And then my final question on Finland and the weak economy that is quite also dependent on Russia and what do you see in terms of sales and also pricing environment in Finland going forward?

Kim Gran

Well, Finland is a very mature market, so the changes are quite small. So when we talk about market changes we are talking about the 100,000 plus or minus from year-to-year. And basically, it relates to numbers in car sales. Presently, car sales in Finland are estimated to grow slightly for the full year, but we are talking in Russia – in Finland, we are talking about 120,000 to 135,000 passenger cars and vans. So I don't think that there is going to be any dramatic. So whether it’s 125,000 or 120,000, it doesn’t make a big difference to the numbers.

And when looking at my total sales of tires, we believe that also in this climate, we will see pretty much a flat market. So the growth in the Nordic region comes mainly from Sweden and Norway, not Finland.

Simon Sigvardsson – DNB Markets

Okay. Thank you very much.

Kim Gran

Thank you.

Operator

Next question comes from Mr. Stephan Puetter from Goldman Sachs. Please go ahead, sir.

Stephan Puetter – Goldman Sachs

Yes, thank you very much for taking my questions. Most of them have actually been answered, but two left. The first one, in one of your previous presentations you talked about the opportunity in the German market, which obviously is also a large winter tire market. And if we listen to your competitors, the outlook for the Western European winter tire season seems to be quite promising.

My question is, the weakness in Russia, does that in any way encourage you to accelerate the market share gains you are targeting in that market, maybe you can give us a little bit of an update you see on the opportunity.

And then secondly, and I apologize if that question has already been answered, the line's been quite bad from time to time, what is your best estimate of what proportion of Russian car sales this year are related to new car sales? And what proportion of sales is pretty much driven by replacement demand from cars sold in previous years for the winter tire market? Thank you. And before I leave you, also from my side, all the best for your retirement.

Kim Gran

Okay, thank you. Thank you for that. First of all the first point concerning Central Europe, of course, it's been our target to increase our market share and our sales in Central, regardless of what happens in Russia. So we were targeting quite healthy growth in Central Europe, specifically Germany, Italy, France, and also partly parts of North America for this year and also when moving forward.

So, in a way, what happened in Russia this year has nothing to do with the expansion plans. I think that the reason that we've been able to outpace and outgrow, outperform the market growth has to do with the fact that we've expanded the distribution and we've also launched quite a lot of new products. We have been slightly more aggressive in pricing during this year compared to the market, in order to compensate for the following volumes and situation in Russia playing safe, if you like. And nothing will change in that sense. We will continue to develop those markets as we move forward.

Then when talking about Russia and what relates to new cars and what relates to replacement market, when you look at the total, I'm now talking ballpark numbers, so don’t take them as exactly. We believe that the Russian total car tire market is in the ballpark of slightly less than 50 million units. 10 million units are related to OE and somehow and then slightly less than 40 million to replacement.

The replacement market this year and the premium segment will be affected the premium by 400,000 cars ballpark less being sold. All of those would have bought winter tires. So that's about 1.6 million of less tires sold – winter tires sold in Russia because of the car sales declining. Then the replacement market and how that develops, the car park has been expanding and that fuels the B segment. But presently the appetite, and what's seen and reported by distributors is quite low.

So taking risk by distributors is on a low level, and that has an impact on sell-in of all categories of tires in Russia during this year. So I believe that, when we talk about the financing, the interest rates, it has a big impact on everything that has to do with trade, has to do with financing of both companies and consumers. So I hope the level of 14%, 15% practical interest rates comes to 9%, 10% and then we'll markets starting to accelerate again.

Stephan Puetter – Goldman Sachs

Okay. Thank you very much.

Operator

Next question comes from Mr. Alex Hysel from Credit Suisse. Please go ahead, sir.

Alex Hysel – Credit Suisse

Yes, good morning. This is Alex Hysel from Credit Suisse. My first question would be on the volumes for the Group for the full year. So in the first-half you were up 4%, production is up 7%. What's the more likely scenario that the sales volumes in terms of units are accelerating into the second-half or the production is coming down moderately? That would be my first question.

My second question would be on Russian exports. With your plant fully utilized and volumes down around about 5%, where is this incremental volume going, this 700,000, 800,000 units, if you can explain on that. And my last question on…

Kim Gran

Sorry, let's take it please, question by question, because I'm thinking about the answer to the first one. Could you go back to the beginning? Your first question relates to…?

Alex Hysel – Credit Suisse

(inaudible)

Kim Gran

Yes.

Alex Hysel – Credit Suisse

Hello?

Kim Gran

Hello. Yes, please, go ahead.

Alex Hysel – Credit Suisse

So I start again with the question, because there's a very bad line. So the first question is sales volumes up 4% in the first half, production up 7%. So my question is [Multiple Speakers]

Kim Gran

Yes, let me please address the first one first. Sales volumes up 4%, production volumes up 7%. We're running full speed, as we speak, higher output totally than in Q2 and in Q1. And we estimate that our volumes will be up slightly for the second-half compared to the first-half, but nothing dramatic. So full-year volumes up a bit compared to last year's slightly more than 15 million. So I already in the presentation said that, full-year volumes would be somewhere between 15% and 16%, provided that nothing dramatic changes. And so I think that should address the question.

Then your second question was?

Alex Hysel – Credit Suisse

The second question was on Russian exports. So, given the volumes in Russian domestic market are down 5% to 10%, where is incremental volume going to be exported, this 700,000, 800,000 units, out of Russia?

Kim Gran

We have been on other markets, if you exclude – if we talk about history, what already happened, we've seen sales growth only in excess of 20% on other markets in Russia. Russia represents about 35% of our sales. From 64% of other sales, we've seen more than a 20% growth. And we've seen some growth in Scandinavia, clear growth, strong growth in Central Europe and very strong growth in North America, as reported in the report. And when going forward, we expect this pattern to continue compared to last year.

Alex Hysel – Credit Suisse

Okay. And my last question is on currency impact on EBIT. Can you remind us, is there any transaction impact on EBIT from this €50 million you have lost on the top line?

Kim Gran

Yes. Well, we lost €52 million roughly on top line. And on EBIT level so far there has not been a big impact, but we will see some positives during the second half when some of our daughter companies change. So I think that the positive was the €4 million roughly as savings. So top line and then supported the cost of roughly €4 million.

Alex Hysel – Credit Suisse

Okay. That's very good. Thank you.

Operator

Next question comes from Mr. Martino De Ambroggi, Equita. Please go ahead, sir.

Martino De Ambroggi – Equita SIM

Yes. Good morning, everybody. One question on Russia, based on the current market volume environment and currency, are you planning any pricing action in Russia for the second-half of this year?

Kim Gran

Hopefully not, other than increases. We, of course, there is roughly 60 brands sold in Russia. We are market leaders in the A and B segment. And so far in the A segment there has been some increases. I don't think that it's realistic to expect further increases, other than the seasonal rebates falling off.

So in both the A and B segment, because of season prices kicking in instead of rebated pre-sales, we will see roughly a 10% increase in prices as a function of timing and we're going forward during the year. Prices are fixed pretty much for the year, for the season. It's practically impossible to do changes in this situation for any of the players. If anybody cuts the price, they will have big hassle, because they already – all of them have channel inventory.

So it means that nobody knows what the true price of any brand would be. If somebody increases prices, again you have the problem of different distributors being a different situation in the marketplace. So any sensible company are not going to do any changes. But whether they all are sensible, of course, remains to be seen.

Martino De Ambroggi – Equita SIM

Okay. And in Europe you mentioned in one of your previous answers that you were more aggressive and you will remain more aggressive in the second-half of the year, if I understood correctly. Could you quantify the average pricing, price reduction you had in the first-half in Europe overall?

Kim Gran

We have not published that, but there was a small single-digit changes.

Martino De Ambroggi – Equita SIM

Okay, thank you. And I know you do not provide any EBIT bridge, but I was wondering what was a rough indication of the balance between the raw material tailwind, roughly €30 million and price mix in the first-half, just a rough indication if possible.

Kim Gran

I, in fact, stated in the presentation that our gross margin declined by roughly 1% unit. That relates practically directly to raw material and ASP spread.

Martino De Ambroggi – Equita SIM

But there is also volume in there.

Kim Gran

Volumes had very little impact on that. Okay, I think that people seem to a bit restless here and there is two more questions to be answered, so please have some patience and then we'll end this conference. Any further questions?

Operator

Yes. The next question is from Mr. Niels Fehre from HSBC. Please go ahead, sir.

Niels Fehre – HSBC Global Research

Yes. Hi, thanks for taking my questions as well. Just to clarify again a few things on the pricing in Russia. So is it correct that in local currencies the pricing of your Nokian brand in Russia has been up in the first-half year-on-year?

Kim Gran

On Nokian brand, yes…

Niels Fehre – HSBC Global Research

That’s my first question.

Kim Gran

On Nordman, no.

Niels Fehre – HSBC Global Research

Okay. And on the Nordman brand? So Nokian [Multiple Speakers]?

Kim Gran

On Nordman prices declined and on Hakka, I believe it increased, as I stated a couple of times already.

Niels Fehre – HSBC Global Research

Okay, because you also mentioned that the competitive pressure was growing in the first-half, or is that not right from the Asian players. So growing pressure means for me less price increase or prices going down, or is that incorrect?

Kim Gran

Yes, that is exactly the situation. So in premium there was price increases in rubles and in the B segment, where we have the Asian players, there has not been increases.

Niels Fehre – HSBC Global Research

Okay. But you are not – okay, you are not following this pricing pressure. So you are losing market shares then in the Nordman brand.

Kim Gran

We have not lost market share, no.

Niels Fehre – HSBC Global Research

Okay. And then on your margin, you said the margin is still 40% to 50%. Why is it that strong? I mean, as you said, you had some down trading into the Tier 3 segment and some pressure from the Asian players in Q3?

Kim Gran

I propose that we arrange a one to one or you give a call to our CFO and we go through some of the questions which we haven't published. And, of course, we can't give further information which we've published, so I won't go into this. Unfortunately, I think now that it's time to close the meeting. There is one more question, okay, one more question, and that’s the last one please?

Operator

Yes. We have the last question from Mr. Cecil Boex from Brigade Capital. Please go ahead, sir.

Cecil Boex – Brigade Capital

Thank you. Could you just help me understand where the sales mix was between A and B tires a year ago and then 24 months ago? You said it was one-third, two-thirds currently?

Kim Gran

Yes. Last year the ratio was about 60%-40% and the year before it was about 50%-50%. And the year before that – it was about 60%-40% in the favor of premium. So it's been a gradual change in the mix, which relates to the market changing.

Cecil Boex – Brigade Capital

Okay. And when do you sort of expect that to kind of, I guess, stabilize?

Kim Gran

Well, I don’t think it will stabilize to this level. It will depend very much on what the car sales portion, how that will develop and how big part of tire sales relate to the sales of new cars. So when looking at our estimates, I propose you go to our websites and look on slides 18 to 20, where we have full estimates going forward by segment, both in volumes and in values.

Cecil Boex – Brigade Capital

Understood. And in terms of margin, is there a big difference margin-wise between your A and your B tires?

Kim Gran

Of course, there is a difference, because the cost of producing tiers is roughly the same per kilo. So market mix, which country we sell to, what type of product we sell has a big impact on profitability and margins. When you look at our historical numbers in the passenger, when the share of Russia was high, when the A segment was high, we would be making ballpark 36%, between 35% and 36% of EBIT margin. When the share has come down, as I already stated, we estimate the new normal to be somewhere between 30% and 33% when going forward. Okay, I think…

Cecil Boex – Brigade Capital

Great. That's helpful. Thank you very much.

Kim Gran

Thank you. Thank you for the questions. And then I will take this opportunity and thank you all, first of all for attending the conference, but more than anything for the time we've spent together. This is my 56th quarterly report during 14 years and the last one as I will retire.

I've enjoyed very much working with investors and analysts and media. It's been very rewarding and you've given me a lot of things to think about, smart people with smart questions, always we don’t have the answers, but it's been very rewarding. Thank you and I wish you all the best in your private lives and in your business. Thank you, and goodbye.

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Source: Nokian Tyres' (NKRKF) CEO Kim Gran on Q2 2014 Results - Earnings Call Transcript
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