Nokian Tyres plc (OTC:NKRKF) Q4 2015 Earnings Conference Call February 5, 2016 3:00 AM ET
Ari Lehtoranta - President & CEO
Artem Beletski - SEB
Kalle Karppinen - Danske Bank
Tomas Skogman - Handelsbanken
Nikhil Bhat - JPMorgan
Thomas Besson - Kepler Cheuvreux
Sheila Weekes - Bank of America Merrill Lynch
Edoardo Spina - Exane BNP Paribas
Gaetan Toulemonde - Deutsche Bank
Henning Cosman - HSBC
Ashik Kurian - Goldman Sachs
Okay, good morning, everybody. Once again, welcome to our fourth quarter and 2015 result call here at Helsinki. And we have a room full of distinguished financial professionals and as distinguished media representatives and behind the lines we have again 200-plus people following the call.
You have received the material. I'm not going to say which slides I'm talking about. It should be straightforward to follow. And I remind once again to turn off your mobiles at least to silent mode. What a year, all kinds of ups and downs, quite a drastic year actually if you think about it. Our key market, Russia, [Technical Difficulty]. We sold more summer tyres than ever before. There was one of the worst winters we have faced ever. Typically, at least one corner of the world has some kind of winter, but this year 2015, there was hardly no winter anywhere at all. So all kind of difficult and a bit kind of revolutionary things for the industry.
Also, the distribution structure and timing changed quite drastically, timing of the winter tyre deliveries. There was a huge change last year. In our case, also currencies had quite a huge impact, one of the biggest ever. Additionally, we had our own dancing with the Finnish tax authorities that will likely continue for a few more years.
So as a standard practice, I'm going to go through kind of market outlook and our scorecard, how did we do; then talk a little bit about the figures; and then make a deep dive on the business units. And a bit of a historical session in that respect that most likely this will be the last time for a while when we cover Russia separately because Russia share is - Russia now for us is one of the areas, not the area. And then I will finish with the outlook and talk a little bit about the dividend as well. And then we will finish the session with the questions-and-answers part. So again, my presentation should take about half an hour, maybe a bit more.
I start from the Nordics; this time a bit mixed. Overall, there was growth in GDP in every Nordic countries. And in Nordics, we group now Norway, Sweden and Finland. Finland was the kind of poorest child and Sweden was - this year was the kind of most positive child of the family. Sweden new car sales as high as 14%. Norway was a bit hit by the oil price in many aspects and Finland was still quite low tone. Should be - this year should be better for Finland. But new car sales overall for the Nordics was as much up as 9%.
Sell-in tyre market was up 5%. We believe that sell-out market was actually a bit lower than that. So against the sell-in figure, we actually lost a little bit of market share, but we believe that sell-out - in sell-out comparison we kept or increased our market share as well.
But then of course Russia has gone basically all the time towards worst. There were some kind of up - more positive turns during the year, but the end of the year was again quite drastic. And like we have been reporting, the oil price is driving Russian economy and oil price has gone down, now recently stabilized a little bit. But part of - our guidance is of course that extremely difficult to estimate once again what's happening there.
GDP decline was at the higher end or more negative end of the scale than what we estimated at the early part of the year. And the new car sales was even worse than we estimated, as much as 36% down on a year level. Tyre market was about 20 - a bit more than 20% down or so, impacted by winter, lack of winter which is very sad for the market because the tyre dealers are having tough times already and now they got the bad winter to kick - give another kick on the bottom.
Then rest of the Europe pretty solid. There were huge growth in new car sales in many markets. That drove partially the tyre market to grow. And this - I come back to this when we talk about the guidance, that tyre market is not just one tyre market. Tyre market consist of OE which is driven very much by the new car sales; then you have the replacement market for the summer which is typically quite solid, depends on the driving miles; and then you have the winter tyre markets which is then subject to the seasons and a few other things.
And in Europe as well the tyre - winter tyre segment actually went down. It was negative even though the whole tyre market went up by 3% supported by the summer and especially the OE segments. North America, again very solid drive of the - driver or drive engine of the world's economy. Last year new car sales up 6%. Tyre market, however, was zero here, impacted by mainly two aspects. One of them is also very bad or no winter at all, all customers have inventory issues now and then also the previous year's antidumping - Chinese suppliers' antidumping case. There was a huge starting inventory levels that were consumed throughout the year.
This year should be a bit better. We're estimating that the tyre market should be about 2% for the North America. However, winter tyre market going down because of the inventory levels. Heavy tyre segments were supporting us through the year. No drastic change there either at the moment, maybe even slightly more positive. Naturally, Russia, all segments down.
And then currency, I have been repeating the same story, we've got the huge negative impact from a few - Russia and CIS currencies. And then also a big hit from the Nordic currencies. That, however, was compensated by the positive impact from - mainly from the North American currencies.
And this is how then we believe that we performed. We got a positive growth. Especially, of course North America on a year base was our star child or star area, star team, 25% growth. Even despite this lack of winter, we got a good year. But it's good to remember that this is a sell-in figure, so this was better than the actual sell-out figure of our customers. We increased our market share there clearly.
Other Europe, we ended up increasing the market share. It was a little bit of nervous moment when we had estimated and reported that the deliveries for winter season will be very close to the actual season even the last months of the year, unlike in the past when also the Europe was delivered already at the end of second quarter and at least third quarter. Now, we've got quite a lot of deliveries even in the fourth quarter and we increased our market share despite in the tyre segment going down. So this was a remarkable achievement from our team.
And then, Russia, 34% down. It's a huge change in our scale. We also lost market share for the reasons that I reported earlier, the purchasing behavior went more from our premium to the B and C segment products. Not a huge drop value-wise. We kept the market share. Profit-wise, we even increased the market share.
And then in Nordics, I already explained that very close to the market, sales increased as well from our side, a little matching or exceeding the sell-out market development. Currency impact was as much as €70 million. So maybe it's worth mentioning that with the comparable currencies, we would have had 3% net sales growth for the year. So this is how much the impact is.
Average selling price went down 4% to 5%. Again, currencies was the main reason. Overall, we had local prices in local currencies. They actually stayed about the same which is one big reason for our good margins. Naturally, in different markets there was a different development. Russia, we increased a lot our local prices and then in other markets slightly down, mainly enabled by our competition's raw material cost benefits. But then the mix took back the currency, negatively impact about half of it back to the positive direction.
Raw material cost, 13.1%, down for the year. Quite a big positive impact for us, about €40 million in a way that we reported in a comparable volumes between the years. Fixed costs [Technical Difficulty] - we actually - in the local currencies, we increased, we're investing. I need to maybe at this point of time make a statement that we made this capacity reduction at Nokian factory and we will get a saving. But the investments that we're making for marketing, R&D and sales are multiple times higher than that saving is. So we're not making our results by using the cheese grater and cutting corners. We're making it at the same time when we're making investments to the future.
Production volume 7% down overall, so even more than the actual sales was. And then the productivity up 5%. So this is a - we were able to keep this productivity improvement level throughout the year despite the volume decline. So here we're actually quite proud about it.
And then in distribution, over 400, so about 100 per quarter. This quarter - actually last quarter, we added 149 outlets, Nokian Tyres branded outlets that are selling our products into our [indiscernible]. So that's a good solid growth and then kind of brings stability to the future. So performance-wise, even Russia is here, red Russian team performed in that market. We performed very well. We were able to keep the premium position. We did not go to the price war that took - a little bit took place throughout the year.
Naturally, the challenge what we had is and it's worth mentioning here is that this was our worst quarter what comes to bad debt. So in a big picture, still the levels are - in some other industries they are much, much higher. But for us it was historically a high figure. We had a few cases from Russia that impacted us and this tells about the difficulty in the market. Our way of managing the business at least help us to note this term immediately and we were able to start working on those and limit the damage. But quite a substantial impact.
Okay, then going to the actual figures. If I start from the annual figures, remind that what the year was, so 2% down from 2014 in sales. So this was within that zero and 5% fork that we said at the beginning of the year. Operating profit actually ended up being in the same fork that we said at the early part of the year, so at the higher end of the latest range that we gave during the very strong fourth quarter. But then profit before tax up by 4% and then profit for the period 15%.
So we have this tax dancing impacting our figures back and forth. It's reasonably difficult for our people to kind of make clarity that what's the impact on the figures of this. We got about €6 million less back taxes than the first claim that they forced to cancel early part of the year. So that €6 million is now a positive gap, €1 million in the interest and then €5 million on the tax side, about.
But then we had clearly lower financial costs as well. So we performed much better. We have changed the way that we hedge some of our currency securities and we got clear profit for the period for that reason. Then, before looking at some of the balance sheet items, maybe still look at the fourth quarter results. We're proud about the results even with this [Technical Difficulty] deliver extremely strong results.
Central Europe was our performer in the fourth quarter. We got there a huge growth, also market share that we were lacking kind of all the year until the last months. We not only catch-up, but we went ahead increasing our market share, 11% growth in sales which as such is remarkable. But then even more remarkable is this 22% improvement in operating profit, remembering, for example, this bad debts that we got.
Operating profit percentage ended up being on the 22.5%. That is the level where we wanted to be in a minimum level. Then, we have the negative impacts of this back tax in this quarter. On an annual basis, as I said, there was this €6 million, almost €5 million impact on the respective lines. Earnings per share was therefore €1.8, clearly up from last year. But then if I look at the balance sheet, equity ratio going up, RONA improving now for first time for quite some time. We started towards the better direction. Fourth quarter of course was already extremely good. And gearing here very good.
Cash flow, you may wonder why such a drop from the last year. The way that we report this cash flow is a bit special and, for example, the currencies impact here quite a lot. The fact is that the cash that we have in our pockets at the end of the year was at the same level than last year; there was a €10 million difference. So very good cash flow continued. So overall extremely happy for the end of the year.
This is how drastic the changes are and typically you should have much drastic changes in the figures as well, from 26% from our sales - remembering that this was the kind of most profitable part of our business - now almost 10% decline, 10% unit decline of the overall shares in one year, remembering that this used to be at best something like 43%, over 40%. Anyway, so we have gone from being a kind of Russia-driven to very balanced geographical-wise. The Russian drop is equally shared by almost all areas. However, North America had relatively biggest - almost 30% increase from last year.
We're happy that this direction is now going well. Next step after this strategy period is of course to get also this blue other part increasing a bit, reminding that the growth will continue to come for us in the next three years from these two areas, North America and other Europe.
Raw materials, especially second half was - the cost level remained on a lower level than we estimated due to several reasons, China economy cool down or growth in a little bit lower levels and then oil price naturally impacting us quite drastically. However, it's worth to note that the fourth quarter was already clearly higher than the third quarter and we therefore don't believe that this kind of drastic drop will continue. We estimate about 5% decline for this ongoing year, giving us about €50 million positive tailwind for this year as well.
Oil price for us reminding you that we believe - we hope that the oil prices would go up. It still has a more positive impact to us than the impact that we get positive on the raw material side. And this is now the summary of the different business units. So passenger car tyres declined on a year level 5%, even though the last two quarters were very good. EBIT also declined 2%. So clearly less than the sales which is typically the other way around. And EBIT margin 30%, so very good in that respect.
Vianor is typically hardest hit when there is no winter. We have the cost level. We have the outlets there. And in every country, the situation is the same that if the winter doesn't come before about latest mid-December, even earlier, then there will be no winter for us. So this [Technical Difficulty] - here, for example, in Nordics and North America, it doesn't any more impact winter tyre sales. People will drive with the tyres to the end of the season that they got at home. So they will only change the worse winter tyres to better ones if the winter comes early enough.
And therefore, we got clearly lower sales. Even though there is a growth, but we were expecting clearly higher sales. And then we ended up on the negative EBIT instead of a positive one that we had last year. Heavy tyres, good solid year. Overall, clear improvement on the profitability. The fourth quarter was impacted by a couple of things. Main impact was that we delivered relatively more OE tyres, where we have a little bit lower margin than the replacement market tyres and there were a few investment that we booked the cost side on the fourth quarter. Still ended up on a very good profitability level of 18.5% for the year.
No huge drastic change in the relative split of our sales to these business units because the passenger car tyres had a good end of the year. So 66% still on the passenger car tyres. However, this has been more than 70% and more. This is naturally - then with this EBIT margin, our overall profit is also better. But luckily, now this red bar that used to be much, much bigger now was clearly smaller and almost compensated by the other business units.
Passenger car tyres, [Technical Difficulty] so huge improvement, 45% improvement on the EBIT on the passenger car side. So fantastic result, 16% growth on the sales. EBIT margin, however, still for the quarter was below 30%. The fourth quarter always for us has been a bit challenging. But full year, 30% [Technical Difficulty]. EBIT margin which keeps us clearly the most profitable tyre Company in the world.
I think I have gone through all the issues already in my previous statements. And this is another historical moment, so we now show you the splits. Some of you have kind of waited. I believe that we will be spending now next few quarters to study how to translate these splits, but at least we start now.
So we have here the sales splits for passenger tyre business on an annual level. So volumes were lower and that impacted negatively the sales-price mix. And this is again - combination will be very difficult to estimate because it's not only the kind of premium and mid-segment, but it's also the country mix and it's also the summer and winter tyre mix that impact. This is the end result of it.
And then the currency, currency impact for passenger car tyres on a €65 million level. And then this delivers the end result on the sales. And then on the EBIT side, a bit different split here. Volumes naturally here impact. But then you have here price mix and currency combined and that gives now both positive and negative and some of it is €21 million. Materials; note that it's not raw materials. This includes all materials, including, for example, rims that we deliver in the Vianor side and so on. So this gives the positive boost. And then the production cost, once again the impact is a combination of the actual cost levels, but also currencies.
And then we have other cost which is quite significant as well in our scale and that includes, for example, increased logistic costs due to the heavier weight of the North American business. And that then gives the explanation for the decline.
I use this opportunity once again to educate you why we're the most profitable tyre Company and our tyres is one of the main reasons. They are the best in the industry. We launched two new summer tyre lines. One specifically dedicated for the electric cars. One of the best, if not the best, rolling resistance support for the cars. And then the volume summer product for the Central Europe.
Very specific innovations. Once again, we're using this - for all you physics - we have this Coanda technology here known from the other industries as well. Basically, Coanda technology is the one that kind of wipes the water out of the tyre and makes it grip better on the road again. We expect good performance from these tyres both in the market and tests.
And then one of the hits and one of the explanation for the Central Europe success was this all-weather product family, renewed all-weather product family, unlike all-season tyres that has this M plus S, so mud plus snow stamp. Mud plus snow stamp is something that the supplier himself can just decide to put on the tyre. It doesn't basically mean anything even though it says mud and snow. It doesn't require you to perform certain tests.
However, this Snowflake is well defined at what kind of tests you need to pass. And when you have the Snowflake, then you can drive this in those environments where the tyre is meant for. And [Technical Difficulty] meant for - especially for Southern and Central Europe [Technical Difficulty] very little winter or similar type of conditions.
This has performed extremely well. This has been a winner in all the tests which have had any kind of winter condition requirements in the test. It has been the winner and with the great distance to all-season type of tyres.
This is helping us to also not only to grow in Central Europe, but to enter some new markets, like, for example, UK which is a kind of a - from London downwards, this is a typical area where this tyre will do well. Russia, I have already talked quite a lot about Russia and I'm not going to repeat any of it. The car part itself continues to grow, however, here. So kind of a base for - the future growth is going to be there.
Operatively, we don't have any problems in Russia. Our factories working extremely well at the moment and cooperation [Technical Difficulty] government, local governments is also going extremely well which is partially explaining our very low tax rate. Our tax rate is especially low now because of the fact that we have got all the agreed support from the Russian law authorities and because this is coming from the sales that was actually higher in the past. So we have a little bit of [Technical Difficulty]. Because of that we're now in the low - sales is lower when you look at the tax from the sales.
And then we had this €5 million back tax difference that also improves our tax rate. So 12% is not the kind of our standard tax rate. It's especially low. We have been talking about something like 17% tax rate that we believe that is the kind of ongoing historical running rate, 17%, 18%.
Heavy tyres, strong year. However, the quarter is impacted by this OE sales in a profitability level and therefore only 16%. Of course even in the historical terms this is quite decent figures, but we aim to keep it more on this level on a yearly level. Agri segment actually looks now a bit more positive than let's say in the recent quarters and forest still looks pretty solid. So segment-wise, the year does not look too bad.
Again, better portfolio. We have renewed our Forest King product family. This is our kind of flagship on the forest segment, by far the best products for the industry. Especially, now we're entering the cut - or kind of strengthening the cut-to-length segment for us. And then in the non-Agri, we have delivered now the [Technical Difficulty] we use this tyre to make the world record on the fastest tractor, 130 kilometers per hour during the year.
We're not repeating the bad performance on the EBIT side. So we made on the fourth quarter - we made the profit like we always do, but we were expecting €10 million, €20 million more sales and the respective profit as well. We're changing the structure all the time with higher than tyre sales, higher sales on the services sides. So services sales increased 6% and the car services as much as 8.5%. So this gives us gradually more stability against the seasons going forward.
And this is now then the map of our branded distribution networks. We have extremely good and increasing network, exceeding now 2,800 shops that are Nokian Tyres dedicated or branded shops. Both Vianor and Nokian authorized dealers' concepts networks continued to increase.
So [Technical Difficulty] and increasingly [Technical Difficulty] - also now you can see that in China we're already more than 100 shops. Turkey and Iceland were started last year.
Okay, then moving to the outlook. A little bit about the assumption first. So we expect the car sales to continue, but not as fast as last year was in Europe, about 4%, 5% level. New car sales and this is now one of the specifics behind our guidance, the range what we see from the markets, from estimations have - was not even as high at the early part of last year. Now, when we talk to specialists, we talk to car manufacturers, they estimate from 5% - 4%, 5% decline which is car manufacturers' estimates and then some of the specialists and experts they estimate as high as 25% decline from already very low level.
It was 1.6 million cars last year. So not on the kind of rock bottom yet, but with this decline we would call it the historically low levels. Of course this is such a huge range [Technical Difficulty] impacts us depending on where this ends up being, then of course we will have a positive or negative year in Russia. And then of course this Russian ruble very volatile. Had been changing last year from about RUB52 to over RUB90. So very difficult to estimate what kind of average rate for this year will be. Starting point of course is bad. We're over RUB80 when the last year's average ruble rate was RUB67 against the euro.
Changed in such a way in Russia that our premium was clearly bigger than the year before. But purchasing behavior change continues to go towards lower B and C segments. Not anymore so drastically as in the past as we're already in the low levels, but still some small decline. And then we expect the passenger car tyre markets to grow in North America - I already mentioned 2%, a bit more for Nordic and CE.
And then going from this new car sales figure to the tyre decline, again quite a fork, but not as big fork, 10% to 15%. We estimate the summer tyres market to grow actually in Russia, but then because of the inventory levels the decline will come from - more than 15% decline on the winter tyre segment in Russia. Raw material cost decline of 5%. Investments about €130 million. So no change on what we have been talking in the past, for example, in the CMD Day. Heavy tyres reasonably stable outlook for the segments and we start the year with extremely good situation what comes to our balance sheet.
We estimate that even we have this challenge with the winter segment, winter tyre segments in North America and Russia we will be still performing better than those segments. But because the decline in winter tyres - winter tyre segment is such strong or can be as strong, that strong, then we can't unfortunately now estimate an increase on the net sales.
We have a good portfolio increasingly, so we estimate the pricing environment to remain tight. There were some indications in certain part of the last year that there would be some increases likely estimated that we did not expect them to hold. We have been holding. We have been improving our price position in Central Europe. And that is what I'm very happy about, that we did not do anything stupid to achieve the sales growth in fourth quarter. But we expect that the pricing situation is not going to be very supportive for the year.
We have best tyre factory in the world which is giving us positive impact. But then end result of these uncertainties is that we guide the year to be at about the same level as this year. Naturally, this year ended up being better than what we estimated to have when we had our CMD Day. So there's no such a big change on the kind of absolute levels of the next year. But still from this - after the excellent quarter and a bit more positive annual results for the 2015, the guidance is on a stable level.
Then, we had a net profit improvement. We had a good profitability. Overall, we had a good cash flow. Therefore, we're able to increase - propose an increase on our dividend from €1.45 to €1.5. With this increase, we still kind of payout a bit less than last year from our net profit. And this will be then decided in the Annual General Meeting.
A - Ari Lehtoranta
I have now used 35 minutes and we're ready to go for the questions. We start from this room first. I understood somebody came to - the organizers came to change my microphone, so I understand that some of the people may have had some problems hearing throughout the session no since you should have heard correctly. So please press 0 and 1 to inform the operator if you have any questions behind the lines. Meanwhile, we start from the question in this audience.
Artem Beletski from SEB. And a couple of questions regarding 2016 outlook and what comes to pricing picture. Could you maybe comment what kind of price changes you are expecting in Central Europe, North America and Russia?
Russia we're expecting a slight increase due to the recent ruble development. Central Europe, we're expecting to hold our prices. We're expecting an improvement in our price position. Still a little bit difficult to see that whether the price - overall price level will remain or go slightly down. North America, reasonably stable pricing situation there. There might be some pressure on the winter tyre side, but that remains to be seen later in the year because of the inventory levels.
And maybe then what comes to volume development. So I guess the picture is quite mixed. So you talked about the Russian pressure remaining still and presumably North America is still quite challenging. Central Europe likely to look a bit better. So what is so to say overall let's say volume development what you are expecting for this year?
First of all, the estimation, when we look at the upside, downside analysis, it's quite big. Now, the kind of volatility is clearly I would say even bigger than the early part of the last year and this winter tyre inventories makes it a bit difficult to estimate. Naturally, if the good seasons again come, then those inventories will be consumed and there will be even more sales. Russian situation is very drastic. We estimate this 10% to 15% decline on overall volumes.
North America, we estimate the market to go up, but the winter tyre going down. So from our point of view, it means that we should be at about the same level as this year. Central Europe, we aim to grow. There the situation, inventory levels and everything is in a clearly better shape than North America and Russia. Nordics for us is quite stable.
Okay. And then maybe last question is regarding credit losses and provisions. So it has been at a fairly high level in Q4 and you spoke about some Russian customers having some issues. Is it so to say sustainably high level what we should be seeing going forward or has it been quite exceptional situation in Q4?
If one would be able to estimate this, one would do quite drastic things already proactively. Therefore, it's quite difficult to estimate. We're not happy at all for this kind of high level, so I'm not going to say that this is sustainable. But there is a risk that we will see some more even this year. But this is historically high level. I would be hugely disappointed if we would come to the same levels this year.
There has been talk about the third production unit. Could you already tell when, what and where?
I cannot say because we have said already earlier that we will make a decision and proposal at the end of this year. So we're - we have started the project. We have a project ongoing. We have consultants involved. We're going to meet all the different states in North America. We're going to meet some country representatives in the Eastern Europe. We're going to look at what kind of benefits we're going to get from the authorities. And then look at all the cost and operative issues depending on the different locations. So the location is the kind of open issue, a little bit also the scope of the factory and therefore, the investment levels. But that will be communicated in the fourth quarter.
And also you mentioned here that the investments would be around €130 million. How will you spend them?
It's a slight increase from this year. The main reasons for the increase is the summer tyre test track in Southern Europe, a bit more on the Russian factory. We continue kind of completing some of the capacity investments on the Russian side. For example, we're going to build the most - world's most modern automated storage for our tyres, increasing the storage. But other than that, it's the normal.
So R&D investments on the moulds, new moulds and new tyres, it's the IT investments enabling better support for e-commerce and so on. Further automization, so the productivity comes partially from the investments on the technology - production technology that helps us to reduce the headcount on a long run in certain corners of the process. Maintenance investments are quite significant as well. So it's split to the different baskets.
There is also a little bit investment on the expansion of the distribution network, so equity-owned part. So we still have a few holes in our mainly Nordic set up where we want to pick up some individual locations.
Kalle Karppinen, Danske Bank. A question about currency exposure to the ruble. You have previously said that you recapture about half of what you lose in sales from the lower costs. Since you have been making that comment, share of Russia in sales has continued to come down and production in Russia is still a bigger share of the total. So are you gradually closing in on the situation where ruble is EBIT neutral for you?
We're going to that direction - not yet. We still hope for the stronger ruble, but we're going to that direction. Where we're at the moment, maybe say 75% or something like this. But clearly now more balanced in that respect.
Yes, this is Tomas Skogman from Handelsbanken. Can you give some comments about the inventory situation in distributors in Central Europe? There was also quite a warm winter with warm temperatures in December still in most countries.
Yes, it was, but - and it was a bit of a positive surprise that the sales was going well. Also, the sell-out. This is not only sell-in success that we got, but also the sell-out. And this is also the phenomenon that - because the deliveries were so close to the - they were actually inside the season, our deliveries. So they were against the sell-out success.
So there was a kind of - for Central Europe, if you get a little bit of white on the road that is a winter. And you know how much chaos you can get from slightly negative minus degrees. So it was not that bad for Central Europe. Inventory levels are not the problem. I would say that they are in a better shape than last year.
And then I have to just go back to Kalle's question, this 75%, do you mean as it stands now using the spot rates for 2016? Is that what your comment about 75%?
On the present currencies. And what do you say, 75% or even more?
Unidentified Company Representative
Well, actually it's a little bit more. So I'm saying that it's almost like 80% [indiscernible].
Yes. 80%, 90% then is the - so quite close to being on an [indiscernible].
Unidentified Company Representative
Which is of course a more relaxed position to be so that we benefit already so much from the export.
And then about how do you see the quarters this year? We had a very different seasonal pattern and now you guide that summer tyre markets are expected to be quite strong even in Russia and then we had this behavior that people would disappear so lately in Q4. So how do you see this earnings distribution in 2016 compared to 2015?
We still estimate that it will be kind of gradually more back weighted, the kind of profile of the quarters because we expect Central Europe continue the trend, even maybe strengthening. The deliveries will be closer to the season. Most probably Nordic following. That has been the case already in the past, but even stronger.
And then if there will be any kind of normal seasons, then the customers who will be most - more hesitant to take winter tyres in the early part because the inventories are there. If the season happens, then we will be able to sell closer to the season.
So basically we will see - despite this good summer season situation, we will not see a very strong first quarter, is it - that is -
No, no, because if there is any delay on the winter tyres - it's more profitable anyway - then it's very difficult to compensate on the increased share of the summer tyres.
As you mentioned yourself, this has been a very - or the last year was very strange when it comes to weather. So does this climate change really effect on your strategies in the future? How will you look at them?
In a way not because the fact is that even when you have this kind of variation, you might have a - I don't think that we're going to go to the kind of that there is no winter. You will - like, for example, here in Finland, North America, you had huge winter, but it just came a bit late.
So there will be unpredictability. If there will be any kind of warming, the actual need for the sturdy tyres increases because you will get more ice instead of proper snow and then the friction tyres will have problems to perform. And so we may have no change in our strategy because of this. It's this kind of one year, two year - it's too short, this kind of long term view on the possible climate change.
Last year, for example, in North America they had the histories - kind of from our point of view best winter already clearly before the December and this went to the other direction now. So what is the conclusion? You can't make any conclusion here.
Okay, we don't have - at least at the moment, we don't have any more questions in this room. So we will now go to the questions behind the lines. So please?
[Operator Instructions]. We have a question from Nikhil Bhat, JPMorgan. Your line is now open. Please go ahead.
I have three questions and one clarification and I know your preference; I'll take them one by one. The first question is on the revenue bridge; thank you for that. I was wondering if you could give us more details on the fourth quarter. From what I understand volume growth in the passenger car division was probably low single-digit and FX was a negative impact. So I think the division grew revenues by 16% year on year in the fourth quarter. Could you explain, is it entirely price mix? If so, what drove the high price mix and do you expect it to continue in 2016, please?
You are getting now a bit greedy. When we had the first splits, annual splits, you now want quarterly splits as well. But I don't have all the details for that except that currency impact was still €20 million negative on the quarter. So we had a continued negative impact from the currencies.
We performed well on the pricing side. So I'm proud for the fact - I already mentioned this - that we did not make any stupid things on the pricing side. So our price position improved and therefore in the quarter we didn't have any negative impact at all on the local price level. So that was one big part of the profitability improvement.
But then volumes always help us a lot. So this is quite volume driven. When we get the volumes, then the profit starts to go not in an - even in a linear way, but almost on an exponential way upwards.
And just a clarification. I went by the production volumes that you disclosed and you said it was down 7% for the full year. And if I remember correctly, nine months it was down 10%. That's why I assumed it will probably be - it would have grown by low single-digits. Are you saying the growth was much stronger than that in the fourth quarter?
Yes, that's about the right conclusion that we were able to kind of start going back to the last year's levels on the volume when the fourth quarter was very good. Our inventory levels are in normal situation. They aren't at the - about the same level as past year.
The second question was, you have - you are now expecting raw material tailwind in 2016. Could you guide us on how do you expect that to progress through the year? Should we look at it as a tailwind in the first quarter, second quarter shifting to a headwind in the second half?
Yes, when you look at this year's quarters and then if you kind of estimate that this is about the level where we're, then the decline will come from the fact that last year we were still on the higher level in the early quarters. So we will get the benefit more on the early part of the year, first half of the year.
And the third question was on the third production plant. And I fully answered - I, sorry, heard the answer to the question before. But the question was that is it still on the table. I mean given the extra capacity that you have in your Russian and Finland plants, is the third production plant still on the table and is it only the location and scope that has to be decided?
Yes, it is. Definitely we're going to need the capacity. We're going to need also the kind of management of our increased portfolio. There are other economical reasons to have. There are other - I would say the security reasons to have a third factory. So it's good to remember that even though we make a decision at the end of this year, the production will start earliest at the very end of 2019, most probably 2020.
So this is quite a long term investment and we need to see the future. But how I look at now our performance, everywhere we go and we do a proper quality work on setting up our sales on the new markets or new corners of the countries where we're already. We perform. We're able to capture market share. Customers like us. They prefer to have products like ours which give them possibility to earn more money than with any other tyres.
Therefore, I'm very trustful on this growth. We're now hit - this year we're hit by this situation. But remember again that even in these segments we're going to continue increasing the market share and perform well.
The last question which is more of a clarification on what you mentioned earlier during your prepared remarks. I was wondering, did you mention that you are making 43% margins in Russia right now versus 40% previously?
No, I did not say that. On the Russian margins, I said that we're making good business there. We're just making a little bit less of it. But we're making very good business still in Russia - what comes to local market. Naturally, then the factory is a totally different story where we're making even better business.
The next question comes from [indiscernible], Morgan Stanley. Your line is now open.
Really just on the very strong top line growth for Q4, I know that you talked it through with Nikhil. But is there any more guidance that you can give us on that given the poor winter that you've talked about and with the FX tailwind - headwind rather for the Group revenue to be up so strongly in Q4? Is there anything else you can help us with there?
Yes, the growth came from the kind of solid performance on the Nordics. Still - of course Russia, Russia we needed the Russian volumes as well on the fourth quarter. But then Central Europe was the real star for us. And when you have this kind of situation that the market takes and accepts your products, then of course you have a good situation that you can supply. You don't have any problems with your own inventory. You don't need to kind of increase unnecessarily your inventory.
And then when - like I said, mentioned, that the sale-out was the reason for the good sell-in success. So the situation going into this year is very good in Central Europe. Our customers are very happy for what they were able to do with our tyres. So Central Europe should do well also this year because of this.
This is based on our investments. We have made the dedicated Central European products increasingly so, we have increased our own sales force there. We have increased our marketing. I have used this term, but this no rocket science. You just do the professional good quality work and our tyres deserve the prices and the market shares that they are now gaining.
And then is there a price mix benefit from being stronger in Central Europe versus weaker in the U.S., the Nordics kind of not really changing and then Russia volumes negative? Is there a mix benefit there that helps the top line?
No, because Central Europe price levels historically for us have been on a lower side and I have been reporting that our target is to increasing it gradually. You can't make big changes in a quarter or even in a year. But we have been doing it now systematically and we did it also in the fourth quarter which we need, because the share of the Central Europe sales will continue to grow and therefore the price position needs to improve.
It's the natural result of when you do your work well and your brand awareness increases. Our brand awareness in certain corners of the Central Europe is really lousy and still we're making already good business. When we're able to get it even half of what it is here in Russia and Nordics, it will give an automatic boost to the sales and price position.
The next question comes from Thomas Besson, Kepler Cheuvreux. Your line is now open. Please go ahead.
I have a few questions as well. Firstly, could you please help us clarify what you are meaning with the guidance because depending on where you are looking at in your interim statement, financial statement bulletin, it seems that you are aiming for higher margin somewhere and at other places for flat EBIT? So could you please clarify that point please?
I'm not sure if I captured the question. We're guiding stable sales and stable margins. Of course the stable - you may have a few percentages changes to one direction or not. So if there would be any kind of change, I would expect that our profit would be doing a little bit better than the sales. But nothing else than guiding on the stable sales and profit. So we're not going to do--
On the inventory situation, if I understood correctly, you said that your own inventory were relatively flat year on year. Is it fair to assume that they are down in Central Europe and probably up in Russia and NATFA along with the market or is that incorrect?
That's a correct assumption.
Okay. Can you help us understand why you are saying the Russian market can still decline in 2016? Can you just give us an idea of the absolute level of the Russian replacement market in 2015 compared with 2009, for instance? Is there really still 10%, 15% downside to that?
Yes, for us, in Russia, new car sales has quite a big impact because most of the new car sales in Russia takes place so that they also buy at the same time the winter tyres. And therefore, if we will get the 25% decline in the new car sales, it will have a drastic impact on the winter tyre segment itself.
Additionally, there is quite high inventory levels now and there will be more hesitance both from our side - we don't want - we have just got this bad debt cases, so we don't want to push our customers' inventories and therefore, the risk of any further bad debts. And then the customers are more sensitive to take in anything extra than they need.
This means that going to the season most probably the inventory levels will be lower this year than they were last year. And if the season comes in a proper way now, then we will be able to start filling towards the season. And therefore, this estimation of 10% to 15% tyre market decline in Russia, it's a combination of 5%, 10% increase in the summer tyre and then a bit more on the winter decline, 10% to 15% on the winter tyre.
Okay. Can you comment on the financial situation of your dealers and the potential risk of seeing several write-downs in 2016 on the Russian side?
Yes, they have a bad situation behind, but of course we have now seen the worst cases or at least they are facing nothing drastic on the other side. Our key customers, they have a long history of making good business. They are solid. And we work of course very close with them. Like I said that I would be hugely disappointed if the bad debt levels would be at the same level this year than they were last year.
Okay. Moving on to Central Europe, can you give us an idea of your mix between summer and winter tyres in Central Europe, because it seems that part of the Q4 end market growth was driven unusually by a strong summer tyre volume growth? And can you also mention how successful your new products in the All-Weather Snowflake symbol business have been, please?
Yes, it's still a smaller part of our business, this All-Weather tires, but then increasingly so. And depending on where you put this product, whether you put it as summer tyres or winter tyres, we recorded in the winter tyre segment. The success in the fourth quarter in Central Europe was coming from the winter tyres, not from the summer tyres.
Okay. I have one last question and I'm aware I've asked too many of them. So sorry for that. Is it possible to get a statement on where we should stand on forecast on the two tax disputes you have ongoing because it has been certainly messy in 2015 with the big plus in Q1, the big minus in Q4. What should we expect and what kind of timeline should we expect for an update on these disputes please?
Unidentified Company Representative
Perhaps I answer this question. It's really a difficult situation of course with the Finish tax authorities. As you all remember, this has been like going on quite many years already. But of course at the moment we're at this stage that we're again making our appeal to the Board of Adjustment. It's actually going to be seen there in a couple of days. And then we again have to be waiting for the case to be taken up in that Board of Adjustment. And I would think again that it will take roughly a year, hopefully less. But that's like estimation at the moment.
Sorry, I actually have a final question if I may. If I remember correctly, on November 17, the CapEx plan you had indicated was slightly higher than the guidance you indicate for 2016 for CapEx at €130 million. What should we assume for 2017, 2018? Still something at or above €200 million or are you somehow indicating that the sub plant ramp up is a bit postponed?
No, it's not postponed. I think that you can estimate exactly the same, what we were - what kind of estimates we gave in the CMD Day. So there are no changes to that at all. So there is the €240 million - €250 million for the factory and then €90 million for the Russian expansions - capacity expansions in the next - about four years' time.
The next question comes from Sheila Weekes, Bank of America Merrill Lynch. Your line is now open. Please go ahead.
The first one just on - just to revisit the question in terms of Russia and your profitability there. Could you please comment on what your passenger car tyre EBIT margins are in that region and not just ASP of the tyres, but the percentage margin and how this compares relative to the overall Group on a pass car level?
Yes, I commented in the same way I have commented now every quarter which is using this average price levels. Russian price levels are now below the corporate average because of the Russian ruble, not drastically, but they are below. And that's why we're now - for example, we made big increases local level, ruble increases last year and we're making also increases this year.
And then just in terms of the investments that are you making in that step up from the €100 million to €130 million, what portion of that should we think of as maintenance CapEx and then what portion of that is more growth CapEx relating to those items that you mentioned earlier in terms of the summer tyre test track and the storage facility, et cetera?
Our running rate - we have said that our running rate CapEx is about €100 million. Then, that includes the kind of typical investments for the year, what comes to maintenance and this ongoing new product stream. And then this additional €30 million, this you could maybe categorize as growth - clear growth investment.
And lastly, just on the heavy tyres division, what's the outlook that you have in terms of the replacement demand given the pressure that some of your customers in forestry and agricultural industries are facing?
We see the segments reasonably positive, so our outlook has been quite positive throughout the year. And on the forestry side, we have not changed it towards more negative at all.
The next question comes from Edoardo Spina, Exane BNP Paribas. Your line is now open. Please go ahead.
I have just two; one is on Russia and the situation with the dealers, especially with reference to the receivables. I think I read an article in Russian which of course I don't speak at all. So the translation was not very good. But I think that maybe there was even a law suit involved with one of your customers. I wanted to ask if there was any details on this and if you expect maybe the receivable to possibly go back to a more stress situation if that case evolves in that country. Thank you.
Yes, the fact is that when we see any kind of problems with the receivables, we jump on the case immediately. And one of the things in order to protect our rights is to start a law case. So this we do in every case unless we're able to immediately negotiate the kind of payment schedule with the customer. We need that case for the further kind of pressure on those cases.
The final outcome varies from that you don't get anything back, that banks will be able to get the first right or that you can get everything back and anything in between. So typically we get something back from all of these cases. How much remains to be seen.
And the other thing was about - just to confirm your [indiscernible] - the production in Finland for passenger car, does it go only to Scandinavia I presume? And so the Russian production is exported everywhere else - of course also Russia. So can you update us on the share of local Russian production that you export in 2015 versus 2014 and then how do you think is going to move in 2016?
And maybe also possibly I want to ask about the flexibility of this plant. I understand the products portfolio is going to be different of course than in Russia or in Scandinavia. So when you make the decision of investment, the CapEx that you put for the new line, do you have to make the decision about the product or is there a lot of flexibility with that?
Edoardo, quite too many questions. So I'll try to remember the kind of subparts of it. So first one was about the Nokian plant and where do we ship from there. We mainly ship to Scandinavia, that's right. But we also ship to other countries because we're not able to have the full portfolio in both factories. So we need to a little bit dedicate some of the products in different factories.
We ship about 73%, if I remember correctly, from Russian factory we exported last year and this year it's going to be even more. So it's going to continue. The share of the export will continue to grow.
And can you change the production from the [indiscernible] in Russia very easily or is it sort of fixed depending on the line that you put on, whether it has to go to Europe, to North America, to Scandinavia?
The product line as such is flexible. It's a question about the moulds. Every tyre needs its own mould and depending on where you want to have the moulds. And like I said, that we want to dedicate some of the tyres to certain factories so that the full portfolio is not in one factory, otherwise it will be a little bit more difficult to manage the turnaround times of the different tyres. But when we make the investment for the production lines that is as such flexible.
Sorry, very quickly, so this extra €30 million you want to spend in CapEx this year. Are they going to go more in the mould or you actually want to have a new volume capacity?
Main parts of this increase is this summer tyre test track in Spain and this new store warehouse solution and capacity increase in Russia.
The next question comes from Gaetan Toulemonde, Deutsche Bank. Your line is now open. Please go ahead.
Just one question on my side left. I've been amazed and probably not the only one about the very strong volume growth in the fourth quarter and my question is very simple, is there any risk that the strong growth might reverse at the beginning of this year due to some inventory buildup which can reverse - because again, if I do my math properly, I end up with something like plus 20% volume growth in the fourth quarter and I fear that part of that volume will reverse in the first half of this year or at least in the first quarter? Can you clarify that a little bit? Thank you.
I don't think that the problem is the fourth quarter deliveries. Like I said, that they went to the - against the excellent sell-out that took place in Central Europe and some of our competitors have reported a similar type of a phenomena. We increased our market share because the winter segment was performing so well in the fourth quarter.
The challenges for this year are coming from the earlier quarters' deliveries. For example, the Russian inventories, we started the year 2015 already with a high inventory, higher than needed inventory levels in Russia. And then North America the deliveries for the winter tyres took place in the earlier quarters last year.
Okay. So that means that you don't expect negative volume at the beginning of this year as a consequence of a very strong fourth quarter last year?
No, we don't expect an excellent first quarter either. But the reasons are not because of the excellent sales in fourth quarter.
The next question comes from Henning Cosman, HSBC. Your line is now open. Please go ahead.
I'm afraid I want to take another swing at this Q4 performance. So I'm also making a calculation here on the basis of the regions and I'm sort of coming out with 40% growth in Central/Eastern Europe and, yes, like Gaetan as well, almost about 20% for the Group. Something like 3% volume price mix in Russia.
So I appreciate you had good winter tyre performance and some of the volume was shifted from Q3 into Q4 or Q2 even into Q4. It's just the outperformance over what I believe the market growth were in those regions. So I think Europe was up, 10 year up, 40%. Russia seemed to have been down minus 30%. You are almost flat in volume price mix term.
So is that fully attributable to incremental product lines like the all-season tyre or can you maybe help a little bit more again on why that performance could have been so strong and especially outperformance versus the market growth, because that should have been - the shifts of volume from earlier quarters into that should have been similar for your competitors which has had much more in-line market growth?
Yes, I'm very happy for the performance for the reason that we have improved the quality how we deal with the customers, how we select the customers and how do we kind of define the price levels for different customer groups. And our customers, they actually like us now more than they did a year ago.
We've been of course making investments all the time. We've been reporting that Central Europe is our growth area. We've been investing on the marketing there. We have been increasing our headcount on sales, on customer support, on logistics. We implemented the new warehouse for Central Europe, quite a big one last year.
So this is now benefiting us. It's true that we outperformed the market, but it did not come because of one single reason but a solid good performance in all of those aspects that you need to get a solid increase in the market share - sustainable market share growth keeping the profitability levels.
In the past years we have been causing problems by closing one quarter with selling to certain wholesaler with lower prices and then you have a negative impact in many countries because of that afterwards. Now, we've been doing I would say better quality work in that respect. Our customers are commenting positively the situation at the moment which give us good confidence now going to this year especially in Central Europe, where we have had earlier bigger problems.
And just because you are mentioning market share again, could you remind us of the order of magnitude of your market share in Central and Eastern Europe now and your target market share in that area in 2016 and 2017?
Yes, it's still small and that's a kind of positive opportunity both in North America and Central-- even Central Europe our market share is still small. It varies a lot depending on the country. In Czech Republic we have very high market share. We're market leader there. But then in France we're very, very small. Germany we're still too small.
Overall market share when you count all tyre segments, summer included, we're still low single-digit market shares. In winter tyres, we're of course already two digit market shares. But not even in the podium position in winter tyres in Central Europe. We're not amongst the top three. We start to be maybe on top three, but nowhere near in number one position where we would desire to be.
Okay. So to contextualize your guidance, then it's really coming from a lower winter tyre market next year because otherwise I suppose you are assuming still market share growth and seeing that you will have volume growth in both Europe and North America plus market share growth, flat guidance must really imply a much weaker winter tyre market. Is that correct?
The next question comes from [indiscernible], D&B Market. Your line is now open. Please go ahead.
I was just thinking about North America and what to expect there in 2016 given higher inventories but also that you plan to launch new products, et cetera that you talked about at the CMD. What we could expect in 2016 and also going forward in terms of growth?
Yes, after that phenomenal growth, 2015, 25% plus growth, we will have a lower kind of - mid-year or kind of temporary year where the growth will be temporarily lower because of the winter tyre situation. We will still perform on those segments. We will be performing better than the market. And we estimate that our volumes should be at about the same level as last year.
Still we're going to gain new customers on those areas where we're not playing at the moment and then the new product applications - tyre application will gradually start giving us gains. So again, I think that this is good base going forward when we're able to handle this temporary market driven challenges we have what comes to inventories.
And then also about the credit losses again in Q4. Have you included an increase in the credit losses in your guidance?
No. We're of course - when we make our upside down - downside analysis, we're estimating a kind of normal year. Typically, in a year we have been at about €10 million level or lower in the bad debt.
Okay. And then my last question is on the inventories again in North America and Russia, if you could provide some year-over-year numbers how much that is up in actual numbers, growth percentage?
The inventories in Russia they are actually not up, but they are at the same level. But when the market goes down, they are relatively now on the worst situation.
The next question comes from Ashik Kurian, Goldman Sachs. Please go ahead.
I just have one quick question. Can you give us a bit - and apologies if it has been answered before. Can you give a bit of color on your 2016 flat revenue guidance? Should we take it that you expect volumes and price mix to offset the currency headwind 50/50? Is that broadly how you are looking at it?
We don't expect currency head or tailwinds at all because we estimate the currencies to stay at the present levels in our guidance. So volumes - volumes and pricing we expect to be reasonably neutral. Mix included. There will be of course some currency impacts because of the average rate differences, but that you can calculate when you calculate last year's currencies' average rates and then the present rates. So from the Russian ruble we expect still a negative impact because the - if you would use the present currency rates, there will be a negative impact still.
And so there was - I mean on the top-line - so are you expecting - I mean at least can you give a bit of color on what the expected volume growth you are planning for in terms of 2016?
Not a big difference on the volumes, unfortunately. So this currency impact on Russia will be partially compensated with the local price increases that I mentioned.
The next question comes from Thomas Besson, Kepler Cheuvreux. Your line is now open. Please go ahead.
I have two follow-up questions please; first, on specialty. Can you update us on what you had commented upon the Capital Market Day? Are you still looking at potential acquisition in that field and can you confirm that all the production for this now - is still in Finland?
Yes, all production for heavy tyres is in Finland. Naturally, we use quite a lot actually different type of off take from other suppliers in our heavy tyre segments. We're - our main priority in the heavy tyres is to look at organic growth at the moment. And only in case there are some particularly good fitting golden acquisitions, we would consider them.
I have one final one please which is increase - the evolution of the growth in Europe by quarter. So if I look at it correctly, over the first nine months there was nothing spectacular and suddenly in Q4 there was a huge jump. So can you help us with that? Is that just linked to the evolution of the market itself or did you do something specific in Q4 in Europe?
There was a combination. So first of all, the biggest driver is this change of timing of the winter tyre deliveries in Central Europe. Additionally, we had this kind of - I mentioned it in one of the earlier quarters that we had this kind of few customers where we have been making this switch. We have been increasing or holding the prices maybe more than the others and maybe lost market share on those particular customers on a conscious decision and then we had taken a little bit more time to replace those volumes with the other customers.
Typically, in a country if you kind of decide to take the volumes from one big dealer, there will be others who are willing to take it, but there is a certain time difference. And this impacted a bit our 2015, that we got these new customers and the volumes to replace those - some of the other volumes from the earlier quarters. But the main driver was really this change in the timing of the winter tyre deliveries.
Sorry, was there an additional question?
No, thank you very much.
There are no further questions at this time. Please go ahead, speakers.
Okay, so we have used now 1 hour 20 minutes with - more than last time. I thank you for your interest. I wish you a good weekend and a good year 2016. And see you in three months' time again.
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