Nokian Tyres Plc Unsp/Adr

Good afternoon from Helsinki and welcome to Nokian Tyres Q2 2020 results conference call. My name is Päivi Antola and I am the Head of Investor Relations in Nokian Tyres and together with me in the call I have Jukka Moisio, the President and CEO of the company and Teemu Kangaskärki, the CFO of Nokian Tyres. And as usual, we will start the call with a brief presentation by Jukka and Teemu and then continue with a Q&A. So, Jukka, please go ahead.

Thank you, Päivi, and welcome on my behalf. So, this is not yet 100 days milestone for me. It's actually about 70 days now as the president and CEO. And so, therefore, I move to page two and talk about the results from our presentations. Q2 was hit by COVID-related economic slowdown. Look at our net sales. We were about 271 million euro. Remembering Q1, we had about 270, 280 million euros. Obviously, comparable numbers. In Q2, the expectation was higher because prior year, our top line was about 416 million. So the decline is about 32% in comparable currencies. Obviously, the COVID and the measures to reduce the carryover stocks in Russian distribution channel had an impact on our net sales. In terms of operating profit, we reported 24.4 million versus 98.8 in 2019. The big impact came from COVID, about 40 million euros. Additionally, we had about 20 million euro impact from Russian inventory reduction and distribution channel stocks reduction and also from low factory utilization as we stopped all of our factories during the second quarter in order to observe the low demand due to COVID. We got some bail-in from lower raw materials and also cost-cutting measures helped our profitability. profitable was Viano's performance in the second quarter and they had a good reaction to market decline and the profitability is slightly improved compared to 2019. If you look at what impacts we had in the first quarter obviously the Covid was only at about 10 million level in the first quarter and the Russian and the first to about 40 million in the second one. If I then move to page number three, some key figures to repeat it. So net sales, 271 million change in nominal numbers, about 35% and 32% in constant currency. Year-to-date, our net sales are about 550 million which is 27% change in nominal currencies and 25% in constant currency. Operating profit of the segment, 24 million, about 9% margin, versus 24% margin in 2019. Year-to-date our margin is at 7.4 versus 20.6 in 2019. And segment EPS, 9 cents in the quarter, and year-to-date 16 cents in the quarter, as well as in half-year, clearly behind the prior year performance. Return on capital employed at 10.6 versus 17.2 in 2019. and equity ratio still remaining at high levels despite the weak quarters in 2020. Now I hand over to Teemu and he will talk about the cash flow and capital expenditure. Teemu, please.

Thank you all for the call. If I move to the cash flow from operating activities, you can see that we were able to perform better. in the first half this year compared to the previous year and clearly the networking capital component is the key for this development. And there naturally one of the key components is the trade receivables due to the decline on top line our trade receivables didn't increase And then also our inventory level decrease, and especially I would say that the inventory management was a good topic that we were able to manage well. We were able to cut down the production in the declining market, and we were able to decrease the inventory levels, which I find good achievements. Then if you look at our interest bearing net debt, we were on the same level than last year, and the additional benefit that helped our cash flow was the capex that was clearly down from last year, and the main decrease obviously came from the Dayton factory. Out of these 87 million CAPEX this year, the biggest three items are about 50 million containing Dayton, heavy tires, and Spanish test truck.

Thank you Teemu. I move to page four and look at the market development. Of course, we have two important drivers for our demand. One is the new car and the other one is the replacement markets. If you look at the new car evolution in 2020, the first six months, we see that in Nordic countries it's got minus 25% versus prior year. Russia minus 23, Europe minus 40, and North America minus 25. If you recall, the first three months, Russia actually had the new car sales slightly positive, plus 2%. Nordics were about minus 10% in the first quarter. Europe minus 27 and North America minus 13 so therefore in the second quarter as you all know and have seen the statistics the decline in new car sales accelerated quite significantly car tire selling in our estimate in Nordics is about minus 11 percent in the first six months Russia about minus 33 percent Europe minus 19 and North America minus 22 What drives especially the replacement market is miles driven or kilometers driven. We will look at some of the statistics and you probably have seen the similar statistics that in heavy lockdown countries when the lockdown happens so the private car use goes down significantly up to 60 to 70 percent and in some of the light lockdown countries the car usage goes down less to 30 to 50 percent And that drives a lot about the replacement demand. So consequently, replacement markets in some of the countries went down by 60 to 80%, and then some of the lighter countries, less, 30 to 50%. But these numbers obviously explain why the tire demand has been quite weak in the second quarter and also year-to-date. Now looking forward, so obviously the important thing is to anticipate what will happen with lockdowns and also equally what will happen with the new car sales in the coming quarters and the second half year. Heavy tires, we saw a decline in demand in the first quarter but also in the second quarter. Lots of that is driven by the new equipment construction. Many of our customers suffered from the parts shortage and therefore the demand for the OE segment as well as the replacement was relatively soft for the heavy tires. Teemu, I'll hand over to you to talk about the segment profitability and the passage of our tires.

Yes, so in the second quarter the passenger car tire top line decreased 45% reaching the level of 164 million euros. Our segment operating profit was close to 14 million and a clear decrease naturally compared to Q2 2019. And the key drivers have been already mentioned, the COVID-19 and the measures taken in Russia in order to reduce the high carryover stocks from last year in the distribution channel. And as we have commented, the biggest impact from the Russia carryover stocks is in the first half. As I said earlier, one thing that we managed well is our production. We decreased the production in both factories and our volume produced was clearly lower than our sales and therefore we were able to reduce the inventories in the passenger car tire business. And then you can take a look to our bridge, starting with the net sales. So clearly, the sales volume drop is significant. The price mix is almost flat, where the mix is improving, but the price is naturally decreasing. One explanation is the measures taken in Russia. is about three percent in the second quarter and then looking our segment operating profit bridge the two biggest components are the sales volume and and the under absorption in our supply chain and that that effect in the in the second quarter is about 14 million the under absorption in the supply chain part then looking to our sdna development there We took all the measures necessary to save costs. And on the passenger car tire level, it is on a level of 7 million. And on a group level, it's about 10 million euros savings. And then we increased our bad debt provision due to the situation, especially in the Central Europe. where there are clearly indications of tightening market with our retailers. Moving to the second quarter in heavy tires, the top line was on a level of 40 million, down by 15%, and the operating profit just shy of 3 million euros. In terms of the net sales development, it's good to remember that we acquired the Levi Pyöra, a small acquisition, in the second half. Therefore, the decline excluding the Levi Pyöra in the second quarter was about 22%, so 5%. plus impact on our top line development. And clearly, in the heavy tires as well, the negative operating profit development was driven by the lower volumes and the factory utilization. And then moving to our B&R business in the second quarter, All in all, I would say that it was an excellent performance in this environment. Even though the top line was decreasing by 10% on comparable currencies, minus 5%, reaching the level of $80 million, we were able to maintain the profit or even slightly improve the profit from comparison period. reaching almost 10 million. And the reason for this good profit development was the timely reaction in declining markets.

So to sum up, where are we heading right now? So one of the key things is to observe that this is a very uncertain environment and we need to observe how the demand will evolve and so on. We talked a bit about the drivers. So one is the new car sales. The other one is, of course, miles driven and kilometers driven and so on. But our priority is clear that we continue with our world class products and services, keeping costs in strict control and obviously the cash flow is protected and we look at the investments carefully and make sure that all the necessary funds are done and non-necessary funds are not done. Then we mentioned already that the working capital is something that we pay a lot of attention to and we will continue that as well as delaying activities in the sense that maybe 2021 and beyond but we are pleased with the achievements and quarter and it's clear that we are ready with the number of actions that have been taken in the past in terms of investments preparing our capacity and capability for growth and once the business rebounds and the market rebounds we are ready to take that opportunity and in that sense we are in a great position because Most of those investments are already behind us. They're ready to capture the market and it's up to us to make sure that we get most out of them. So that's in summary, Nokian Tires, quarter two, and I hand over to Daivi and then any questions or comments,

Yes, thank you Jukka, thank you Teemu. Maybe before moving on to Q&A, Jukka, I would like to ask you as a new CEO the most obvious question. How is Nokia and Tyrus going to change or what are going to be the priorities? Basically, you already answered the question partially during the last slide, but anything you would like to add?

I think that the joining a company at times like these when traveling is not possible and so on is quite demanding because I have met most of the team members via Teams or similar tools and that clearly puts a limit to how much I've been able to interact with people in life. I think Nokian Tyres is in a good position in terms of capability and the most obvious and important thing is for us to gain market acceptance for our products, launch new products, number of them are in the pipeline and then utilize the capabilities that we put in place to make sure that customers and consumers get the best out of our know-how. so focus on selling tires i think in summer if you want and meeting teams because then it would be important to meet the colleagues in various parts of the world and really unfortunate that traveling to russia for example is not possible at this point of time and same applies to the us because for me as an incoming senior to see live our operations and capabilities and as well then interact with the customers live. Now it's based on Teams.

Let's hope that the situation improves.

Indeed. And that would also help the replacement market demand because then my students will be higher.

Exactly. Good. Thank you. And now we would be ready for questions from the audience. And as we only have one hour for this call, we would ask you to kind of limit the number of questions to one or two so that everybody has a chance to ask questions and we will have enough time to cover them all.

Thank you. If you wish to ask an audio question, you may do so by pressing 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Again, that's 01 on your telephone keypad if you wish to answer the question. Our first question comes from Ask Bab Akar, JP Morgan. The floor is now open to you.

Thank you, Akshat, from JP Morgan. Welcome, Yuka. I have three quick questions, please. The first one on price mix. Can you split out the price and mix impact on the passenger car bridge, please, for the second quarter? And if you could comment on general pricing trends in Russia, as well as what you're seeing in Europe currently. That's my first one, and I'll follow up with the other two later.

So, Teemu, you can go ahead. If I broadly comment, the price mix... So... As I stated in my earlier comment, the NEX has been positive in the first half and in the second quarter. And with the actions that we have taken, like in Russia, in terms of pricing, the pricing is clearly negative, leading to the fact that the net is... more or less flat, I would say.

And if we could get some general comments on the pricing environment in Europe as well.

So if I continue, I would say that in general the pricing environment is tight and You also see that people are cautious in terms of the tires, what kind of tires they are buying, and therefore all the competitors are cautious in terms of pricing, and therefore in Central Europe and in all the markets, the price development is slightly negative.

Thank you. The second question is on the North American shipments in the second quarter. The decline in sales was much sharper than what we are seeing the market trend. So can you comment on what happened in the North American shipments in the second quarter, please?

I can comment that it's basically related to winter tire supplies and shipments probably were moved from second quarter to third quarter. So that would be... the explanation, most explanation for the decline.

Okay, thank you. And the last one from my side on the personnel costs, you mentioned that you plan to continue the temporary layoff in Finland going forward. Can you talk about, Jukka, if possible, any cost actions that you are planning to take structurally and on a long-term basis? And if you've made some progress on that front, please. Thank you.

Lower-term actions, I think, at this point of time are premature, but I can talk about the short-term tactical actions that, depending on the demand and so on, we use temporary layoffs and shutting down capacities and things like that, what we do short-term, and that reduces cost. And, of course, as I mentioned, we delay all the actions that are not necessary, and we do the usual tricks of the cost reductions. Long-term actions at this point of time when we are in a tactical mode are more difficult to comment. When those come, they will come in the autumn when we see what the underlying demand is.

Thank you. I'll call back in the queue.

Thank you. Our next question comes from Gabriel Adler, Citi. The floor is now open to you.

Hi, thank you very much, Gabriel from Citi. And my first question is on the US plant, because I noticed that you commented the recruitment for second shift operations in the US has now been delayed. Could you just provide an update on your planned timeline for the US plant ramp and confirm whether the crisis has changed your strategic approach to the US market or the ramping of the plant in any way? And then my second question is on the dividend and whether you can provide an update on the second half of the dividend payment and when the decision will be made or whether to pay out. second instrument. Thank you.

Okay Jukka here, I'll take both questions. So first of all North America, yes we are delayed because of the crisis and so on. So our plan is to introduce the second shift towards the end of the year, hiring people for the second shift towards the end of the year and then start operating two shifts in early 2021. This is an unfortunate delay, most of that caused by the but we hope to be back on track towards the end of the year and early 2021. Dividend payment, there's no update on dividend payment, so we will come back in the third quarter timeframe.

Okay, and as a quick follow-up, because I just asked on SG&A costs, could you comment on whether you expect any of the SG&A savings that we saw in the British course to repeat in the second half, how much of that 7 million could be deemed structural?

So as you understand, the biggest impact was clearly in the second quarter where the COVID was hit hardest and we evaluate how the market will develop in the in the second half and then we take actions according to the demand.

Okay. Thank you very much.

Thank you. Our next question comes from Kai Muller, Bank of America. The floor is now open to you.

Hi, thank you very much for taking my question. The first one is really on your Russian situation. If I think about the stock levels that you've been now running down, how much more is there to do and what sort of level would you be happy with? How far are we away from that as the first question? And then the second point is when we think about pricing, obviously you mentioned the pricing situation in Europe. How do you think about the Russian market? And also when you think about pricing, is that something that players are starting to compete on price to get volumes? Or is it really just a pass-through effect on the lower raw material costs?

If I take the inventory perspective, levels in the distribution. As we have earlier commented that these actions that we are taking, the biggest drop will come in the second half and more so in the fourth quarter compared to the year end. And if we compare to the stock level in the distribution to second quarter last year, they are already down at the end of Q2 this year and then going down further in the Q4 compared to the level of Q4 last year?

So I think the actions or the plan we had in this year to make sure that we get to a right level by the end of the year is pretty much ongoing and goes according to our expectations. So far so good. And we took significant downtime in our operations in the second quarter. There was another question about the pricing environment and so on. Exactly.

On the pricing, it was more really pricing within Europe. You obviously commented it on, but also in Russia. Is it competitive pricing? Are people trying to gain market share? So what's the driver for the pricing? And maybe to follow up right on that, you take obviously provisions for inventories, but with bad debt, is there more to come in the current situation?

Teemu will take the bad debt discussion and I comment about the pricing, especially in Russia. Clearly there are actions in pricing, which are market actions, competitive actions in order to make sure that we keep our market share and increase that. So that's one part of it. The other part is that clearly the raw materials are beneficial and so therefore some of that is a pass-through of the raw materials, but obviously it's not attractive to pass all of it to customers and consumers. So some of that we hope to keep ourselves. And Teemu, then if you talk about the padded, yeah.

So in the second quarter, we increased our debt provision because of the market outlook, especially in Central Europe. So we haven't recorded actual bad debts in the second quarter, but we wanted to prepare for the tightening situation.

Okay, that's very clear. So it's more anticipating an impact in the second half rather than what has been actually already happening. Yes, it's very clear. Thank you.

Thank you. Our next question comes from Thomas Benson . Thank you.

It's Thomas Benson. I have a few questions as well. I'm not sure I understood your answer to the question about inventory levels. So I'll ask it again. Are you happy with current inventory levels or do you need to continue to produce in the second half?

We are on our way working down the inventory. We believe that the most of the downtime that needed to be taken was taken in the second quarter. And of course, I hope you appreciate the fact that we will need to look into the season of course also when it comes to the final part of the year that how is the winter season and so on. But at this point of time we don't expect that there's significant downtime in our operations coming from inventory distribution channel reduction. So actions that needed to be taken have been taken.

And it's good to always be clear when we are talking about our own inventories and when we are talking about inventories in the distribution in Russia. Thanks.

If I look at your slide 9, which I think is a great summary, is it fair to understand that you have way enough capacities for the next couple of years and that therefore your capex requirements may be substantially lower than what we've seen in the last three years? Could you give us an idea of what you believe Nokia needs to spend in 2020-21, given how bad the environment is and may remain?

I think that's a good question and you see that already in 2020 the investments are less than anticipated and we work our utmost to see that what more can be reduced and clearly our current visibility is such that in 2021 they're going to be even lower so we would expect difficult to give a range because of course some of that is dependent on the market evolution and so on it would be below 2020 level in installed, which is ready to be used.

Okay, thank you. I have a last question and a comment, so I start with a question. Your predecessor said she had not made the calculation whether it was a better idea to temporarily stop your U.S. plant to better utilize your Russian plant in terms of group margins or continue to use the U.S. plant. Listening to you, it seems that you want to robot the U.S. plant now Have you effectively made the comparison between effectively freezing this US plant for two, three, four years if necessary and maximizing the use of your Russian plant and doing that slow ramp of the US operations?

I know the calculation, it's been assessed and so on. At the same time, we've chosen to wrap up the US plant because it's part of our strategy and long-term ambition and that does not hurt the company profitability.

significantly compared to what what we would achieve by doing something different so therefore we go ahead and ramp up the us plan now okay thank you it's very clear just make one comment indeed hopefully you plan to have a convergence between segment operating profits and what i call operating profits which is r for us when historically nokian has not made a substantial adjustment they become bigger and bigger And normally it's not necessarily a sign of quality. Looking at your slide line, I have the impression that you're going to focus on cash and returns. So I guess they are going to converge. But that was my comment. Thank you.

I understand your comment. And I think that we will achieve that. And of course, we recognize that the bottom line is the bottom line. And we work towards making sure that that is attractive and competitive.

Wonderful. Thank you very much.

Thank you. Our next question comes from Henning Kosmin, HSBC, for Floss and Huygens U. Hi, thank you for taking my question.

Jukka and Tim, this is Henning from HSBC. I'm just going to ask one question, Jukka, with respect to your strategy beyond COVID and utilizing that headroom that you have under the currently installed capacity now. You've obviously somewhat inherited that U.S. expansion strategy now with the local production. But I'd be interested in what you think sort of the mid-long term for Nokian looks like. It sort of looked like you were becoming more normal tire company. five six percent uh top line growth driven by volume uh and and once you utilize that spare capacity you'll also have to keep spending so a little bit similar to tomorrow's question but different time frame um how do you see a sort of post covert um uh midterm state Is it fair to say you want to keep growing 5-6% which will then also require a sort of continuous investment into further capacity and in terms of where do you want to generate sustainable sort of earnings growth? Your predecessor obviously thought it's easier achieved in North America rather than an already competitive European market. So if you could just have your strategic comments in that sense, please. So apologies for the long question, but I just have the one.

No issue and I understand what you are asking. Obviously a lot of the time in the past weeks have been on tactical issues because the crisis is what it is and so tactical decisions and tactical approaches have been the mainstays. clearly but thinking about the longer term so one of the important things we need to keep in mind is that we have a premium brand so we have a certain specific know-how which we want to deploy and so therefore one of the starting points for me has been to look into our innovation pipeline new product pipeline and see that we have products and product configurations that actually are premium and targeting the markets where we can have good profitability and where our know-how and our brand is valued. That's been one of the key topics. I've been working quite a bit in that and talking to our innovation team and so on, as well as in heavy tires. I'm pleased that we are right now. I'm not saying that it's good, it's best. I'm saying that I'm pleased at this point of time. Clearly, of course, we will pay more attention to that and enhance that. But I think that from the heritage point of view, the company point of view, we are premium. We have certain specific know-how area segments where we can do well and where customers and consumers value us. And that's where we aim to work. But the start is because the capacity capabilities out there and the money has been well invested. So the most important thing is now to make sure that we have a content and the product accordingly. And this has been my first point of stop and it looks quite good. Not the best, but very good at this point.

Okay, thank you and all the best in the new world.

Thank you.

Thank you. Our next question comes from Artem Belinsky. The floor is now open to you.

Yes, hello. This is Artem Belinsky from SCB. A couple of questions from my side. So maybe continuing on strategic team and overall, you mentioned about focusing on premium brands and so on. How crucial for you to basically feel the excess capacity of what you have currently out there. I guess markets will be recovering, but still, I should say, you have a lot of premium, very efficient capacity in Russia, which is not really utilized for a time being. Then the second question is relating to inventory situation. So you will describe what is happening in Russia. Could you maybe speak a bit more about the situation in Central Europe and North America? And the last one is on heavy tires, how do you see the demand output for second half of this year? And is there a sense of market improving or getting bigger?

Teemu, if you take the inventory question and touch that point in Russia and also the other parts of the world.

Can you, Artem, repeat the inventory question?

Yes, so the inventory question is really the situation in Central Europe and North America. How do you see it right now within dealers?

In Central Europe and North America. So from our point of view, for example, in Central Europe, we don't see similar kind of an inventory headwind that we have in Russia. And therefore, we are optimistic, I would say, both in... in Central Europe and in North America, maybe the situation is different for players who have a bigger market share in those markets. But for us, those are new growth markets and we see opportunities more there.

The Russian capacity, so obviously we took downtime in the second quarter and now going ahead, the important thing to keep in mind about Russia is that COVID situation in Russia is still quite difficult, and so we need to watch, first of all, that we can run the operations well, but to the extent that we can run them well, we see that the loading is relatively okay in coming coming immediate future so therefore yes we have a open capacity in or had open capacity in early part let's see how the demand evolution goes but we see relatively strong operations in in coming weeks and the quarter but clearly of course then we come back to that copy that how much will people drive and what's the replacement market demand and so on so lots of question marks there and the other one is that Russia in terms of COVID that let's hope and let's pray that the situation is improving and let's hope that we can run operations well so far so good but keep in mind that heavy tires it's a OE market and it's also a replacement market so let's see how the industrial demand recovers and how then the economic activity starts moving again. Third quarter, clearly, a number of our customers are taking holiday stops and things like that. So that will impact. But then beyond that, let's see what the demand is. But we are pleased with the heavy tires performance so far. And obviously, even there, we have a new capacity capability coming on stream in latter part of next year.

All right, thank you.

Thank you. Our next question comes from Pasi Vasen, Nordia. The floor is now open to you.

Yes, thanks. This is Pasi from Nordia. Sorry to come back to this inventory issue again, but could you please actually give some color for your inventories, your own inventories? by giving for example one figure which is the kind of the excess inventory compared to the ordinary seasonal level or which is the inventories compared to the net sales so that we would have something to work with for the for the second half and secondly about this data ramp up just to kind of cross check so when the breaking result is going to be reached for this us plant thanks okay inventory so

I would say that in a simple answer is that we don't have any inventory issues in our hands. So that should be clear for all the listeners that there's no inventory issue within Nokian Tyres. The inventory issues what we have is in Russia in distribution.

Yes, thanks, that's all.

Thank you. And the data ramp up, so that's an important question. So what we do now is that we go to two shifts and obviously we hope that then by the end of 2021 we are running that very utilized and then we believe that the profitability can be achieved and we are moving closer to three million tires in terms of continuous production. that would be 2.5 to 3 million tires. We believe that that can be achieved in a certain timeframe, maybe not next year, but we hope that we are moving towards that target and we are closer towards that target than to zero in 2021 at the end of the year.

You mean run rate on an annual basis or the volume for the full year, 2021?

Run rate on an annual basis at the end of the year we are closer to the target of making breakeven positive rather than negative and then obviously full year 2021 is still ramp up time and then when we get to 2.5 to 3 million tires we hope that the profitability is breakeven or positive breakeven. This is depending of course on the mix and the raw material cost and production efficiencies and many many other things but That's what they work towards.

Great, thanks. I'm happy with that one.

Thank you. Our next question comes from Tanu Litinmanski, Danske Bank. The floor is now open to you. Okay, our next question comes from Victoria Greer. The floor is now open to you from Morgan Stanley.

Afternoon. Could we talk a bit more about Vianor, please? Very good performance there in the quarter. You just said it's sort of good management, but could you give us a bit more detail, both on the top line and on the profitability? Organic revenues only down 5%, the market's obviously down much more, and then Russia pricing on top of that. And yeah, in terms of EBIT looking pretty normal versus the normal Q2, which clearly it wasn't. So could you give us a bit more detail on that side, please?

I would say that one of the key factors in our V&R business is how we manage our seasonal employees because that's the key to maintain or destroy the profitability and in that area we were able to manage that well on top of all other cost-cutting activities that were done in the V&R business in the second quarter. So even though the top line was declining, we were able then to manage the cost base according to the demand.

And for the top line, as you said, declining, but declining much less than the surrounding markets. So what were the drivers there?

I would say that in our In our areas, the demand was better than we expected in March. So the demand surprised us positively, even though it was negative.

The season was slightly delayed also. The season was not as early as you would expect, because there was lockdown measures and things. So people came a little bit later in the quarter. But that happened nevertheless.

Yes, okay, that's clear. So the usual switch over back to summer tires was delayed because of the lockdown and then that came in. Okay, and so for the second half, would you assume that the top line for Vianor moves more in line with the underlying markets?

That's what we basically see today, but obviously the important thing and driver in Vianor's performance will be the winter season or when and how that happens.

And it's good to remind all of us that in terms of profit generation in Myanmar, it is in Q2 and Q4. Those are the critical quarters.

Great. Thank you.

Thank you. Just as a reminder, if you do wish to ask a question, you can do so by pressing 01 on your telephone keypad. Our next question comes from Panu Timoniski. The floor is now open to you from Danske Bank.

Yes, thank you. It's Panu from Danske Bank. I still have three quick questions. Firstly, can you comment on early Q3 trading? So what have you seen in July in your different markets in terms of volumes for replacement tires? Then second is on raw material costs. They were actually up in Q2 compared to Q1. Can you comment what is the outlook for the rest of the year and do you expect to kind of get the benefit to yourself? You already said that in Russia you might give some of that in pricing, but what about the other markets? And then the third one is more technical one on depreciation. It seems that it increased quite a bit from Q1. So is this a level to look going forward? Thank you.

If I start with a couple of those questions and the last one can be then You can start with the raw material and material unit development. It's good to remember that we comment the raw material development in our release and then in the presentation we give you the material unit cost development and those are two slightly different things. So the raw material development is positive. This year in the second quarter, the total material unit cost was negative, partly because of the lower volume produced in the factories. Then the second question was the depreciation. In the second quarter, there you can see the impairments that relate to the non-price exclusions that we reported in June. So that's the main reason for the increase, about 30 million.

Thank you Teemu, and I can comment the early Q3 trading. Obviously, when you work in the recovering market and people are coming from lockdowns and so on, they need to potentially recover in the second half. So both in the replacement market as well as in the OE market, positive signals coming. But it's still important to keep in mind that that's a normal reaction after a significant decline what we had in the second quarter but we are cautiously optimistic that if this momentum continues that no significant lockdowns and so on which actually cut the demand of replacement tires quite significantly those don't do not happen it's bound to have a fear recovery in the second half and so therefore people are optimistic and bits and pieces of positive news happen but you know that they can pick up as easily as they come if there are significant change in the COVID or lockdown situation. But so far so good, cautiously optimistic at this point.

All right. Thank you. Thank you. My next question comes from Henon Kozma, HSBC. The floor is now open to you.

Yeah, thank you. I'll just take a follow up then if we have time. I was going to ask you about the current production level. You sometimes report it in either the presentation or the report, but I can't find it this time. So just wondering if you're prepared to share the unit production number with us in pieces of tires. and also the available capacity now with the lower available currently temporarily reduced capacity in Finland and before you go to the expansion in the U.S. And then finally to maybe reconfirm the fully expanded available capacity, I believe it's 17 in Russia, 3 in Finland and 4 in the U.S. once you go back to full capacity everywhere. If you could just confirm or give us these three numbers please?

I think those numbers are in macro level pretty much in the ballpark. Specific numbers we don't comment but obviously it's dependent on the shifts and depending on the temporary layoffs or not to have those and so on but essentially fully manned and running relatively efficiently, not too much overtime, so on, those numbers on macro level are pretty much in the ballpark.

Building on that, regarding the production volume, as an example in the second quarter, as we stated, our own inventory levels were down, so you could assume that if our top line was net sales was going down 45% so the production volume was going down even more than 45%.

So we took a significant downtime in the second quarter and that in the interest of helping the inventory situation in Russia as we talk about the distribution channel but on top of that also not to make too many products in the inventory in anticipation. But now we are it's a clear run for the second half, and then it's based on the demand expectation.

Okay, thank you very much, Bob.

Okay, now we are getting close to four here in Helsinki, so if there are any questions on the line, we would still have time for one additional question before finishing this conference call.

Okay, our final question comes from Jossi Gangstenen, private investor. The floor is now open to you.

Hello. We are aware of short-term reasons impacting on profitability like coronavirus or capacity in tire manufacturing, ramp-up of U.S. plant and so on. Before those, Nokia and Tanya's EBIT was at the 22% ballpark. Can you identify any reasons that could prevent us returning back to that level in the long term?

What was the number? Sorry, the line was broken at that moment. Can you repeat the number please, the EBIT?

Yes, before those reasons, Nokian Tyres EBIT was at 22% all-park. My question was if there are any long-term reasons that could prevent us returning to that level.

I think it's a good ambition on level, so we will need to work towards restoring good profitability on annual level. Is it 22 or is it 20 or is it 18? I cannot comment at this point of time. Sorry, I've been focusing on the short-term tactical agenda, but then longer term, of course, we want to be competitive and to benchmark in the tire industry. So what does it take? We will look into that. difficult to comment will it be exactly that but we'll come back to that target setting once we are through this crisis. Okay, thank you very much.

Thank you and maybe just as a reminder you've got a short-term focus area what you mentioned in your last comment.

Yeah, the short-term focus areas are really that we will make sure that the cash is important so in terms of investments working capital that's quite important and also make sure that we are quite sharp on costs and so whether they are temporary in terms of regulating capacity or they are long-term as structural if needed so that we will need to assess when we when we get towards the end of this crisis or the other side if somebody might call and then the most important is that we focus on the essential switches then selling and making, selling and innovating tires and then target the organization and our work accordingly. But very tactical focus at this point of time, I'm sorry to emphasize that and then longer term strategic ambitions and targets will get back. It's the 70th day for me, so too early to make that kind of long lasting comments.

Thank you, Jukka. Thank you, Teemu. This ends today's conference call. Thank you for participating.