Nokian Tyres Plc Unsp/Adr

Welcome to the Nokian TIRES Q1 2022 interim report. Throughout the call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. I'll now hand the floor to Head of IR Paivi Antola. Please go ahead.

Thank you. Good afternoon from Helsinki, and welcome to Nokian TIRES Q2 results conference call. My name is Päivi Antola, and I am the head of industrial relations in Nokian Tyres. And together with me in the call, I have Jukka Moisio, the president and CEO of the company, and Teemu Kangat-Kärki, the CFO of Nokian Tyres. In this call, we will go through Q2 results and then update on the progress with the exit from Russia, with the new capacity, and our focus in the coming quarters. And this all will be presented by Jukka and Teemu and followed by a Q&A. So Jukka, please go ahead.

Thank you, Taivi, and welcome on my behalf as well. I would like to go through the third notes in the presentation where the heading is for Ukraine overshadow H1. And I move to page two. Some quick reflections before I go into highlights of the numbers. exit from Russia initiated. So the board decided to initiate the controlled exit from Russia as it's no longer feasible or sustainable to continue operations. Right now, at this moment, we are evaluating different options. We've hired external advisors and we are in discussions with possible candidates as we speak. a part of the process impairment and breakdown of about 300 million euro were recorded in quarter two results. Actions to increase the capacity outside Russia are ongoing, so we are increasing capacity at the Finnish and US factories for passenger car tires. These programs were initiated already in 2021 and they have continued throughout 2022. in the latter part of this year so that they will be used for readiness for 2023 and also as mentioned about the US factory readiness for 2024 and we are on our way to achieve 4 million tires capacity in the US and between 5 and 6 million in Finland. Investment in new factory in Europe is proceeding. We have a list of possible locations in place. We are doing the evaluation Engineering has been done and we are finalizing the steps to make the decision to start the investment. Outsourcing options are also being blocked, so we look to have alternative suppliers to help us during the time when the capacity is being built in Europe and these offtake options are being developed currently as well. I move to page three, have a highlight of the numbers of quarter two. Net sales increased by 7.4% in constant currencies. So we recorded 482 million in net sales versus 416 million in 2021 in the same quarter. Tire demand continued good and volumes were down due to supply constraints in our company. operating environment was increasingly more challenging due to war and targeting sanctions. Segment operating profit at 86 million versus 89.6 million in Q2 2021. We increased prices to combat cost inflation and that led to higher net average selling price. Our team performed extremely well. It was a demanding quarter in terms of sanctions having an impact as well as the logistics becoming increasingly more difficult to take raw materials to Russia and also ship tires from Russia to other markets. Under these circumstances, I want to thank our team and also congratulate them, because it has been a very demanding environment, and we did well in that environment. I move to page four. We have a strong balance sheet. Cash flow was impacted by higher working capital. I call out some key numbers in the financials. Net sales popped by 7.4%, as mentioned, year-to-date. We are about 14% in constant currency ahead of the entire year, so at about almost €900 million in the first six months versus €758 million in 2021. Operating profit percentage in the quarter was about 18% versus 21.5% a year ago. And year-to-date, we are at 17% versus 18.5% in 2021 and 19% in full year 2021. Segments, earnings per share, so before the write-off and so on, 55 cents versus 51 cents a year ago. And in the first six months, 93 cents versus 80 cents in 2021. one return on capital employed at 15.2% before the write-offs. Our equity ratio, including write-offs, is 64%, so that shows that we have a strong balance sheet, and despite the write-offs, continues to be strong. Obviously, the currencies and various other matters are impacting that, but nevertheless, so 64% equity ratio. Cash flow was weaker, and we incurred higher working capital. Both the inventories were high because of the more expensive raw materials. Also, the receivables were higher because of the good net sales, and also the currencies impacted in our working capital by increasing the absolute amounts of working capital. Gearing at 14.8% and interest rate net debt at the end of the June at 243 million versus 140 million a year ago. Capital expenditures are 18.7 million in the quarter and 33 million year-to-date, both below last year numbers. However, as we've said, we will start incurring more capital expenditures towards the new factory in the latter part of the year. And with that, I hand over to Teemu to talk about financials and segment and profitability.

Thank you, Jukka. Let's go through some key figures by business units, starting with the passenger car tire. In the second quarter, our net sales was on a level of 335 million net sales increased, and the tire demand continued on a good level. However, the segment operating profit declined partly because of lack of tire supply impacting especially our business in Central Europe. We are happy how our average sales price has been developing. we have been able to increase prices in all our markets strongly, and therefore, we have been able to offset higher raw material and other cost inflation in the second quarter and the first half. Our inventories in the passenger car tire business are on a higher level than in the comparison period in order to to safeguard better supply in term in the second half as we all know now we cannot get any tires from from Russia then moving to look our net sales development by quarters and let's focus on the price mix Here you can see how it has been developing in the first quarter and in the second quarter. And if we exclude the Russia, you can see there in the call-out box that the price increases without Russia has been on a level of some 9% in the first quarter and around 20% in the second quarter, meaning that the price increases in Russia, Asia, has been exceptional high in the first half, impacting also our absolute profit for the second quarter. Then if you look at our bridges, and i'm focusing to the segment operating profit here if we look at the price mix component we see that we have had a positive development of 87 million versus the material headwind of 58 million so we have been able to offset that one and then the supply chain bucket negative development of 20 million and their majority of that is coming from increased logistic cost because we have been taking extraordinary measures to get the tires out of Russia. We have leased ships and full trains. So, therefore, on top of the cost inflation, the cost level has been on a extraordinarily high level, which then should benefit us a little bit in the second half in order to sell the volumes. then moving to the heavy tires performance in the second quarter there you can see that our net says for the for the q2 was on a level of 74 million and our segment operating profit close to 16 million and if we then also look at relative profitability that was a level of 21 percent clear increase from the comparison period this is the performance is a result of a strong demand in all product segments and we have been also in been able to improve our production efficiency and therefore the profit development was according to the numbers that i highlighted earlier in in heavy tires the inventory levels are on a low level unlike in in passenger car tire business and this is the indication that the demand has continued to be on a good level and we haven't been able to to increase the inventory levels in the heavy tires lastly the vnr business unit the second quarter had a good season says which lasted longer than than normally therefore the net says was on a level of 99 million and and the segment operating profit a little bit below 10 10 million euros Because of the longer season, it also increased some of our cost and therefore it has an impact on our profit and profitability. Moving to the assumptions for this year. As we have been communicating already earlier, the controlled exit from Russia will have an adverse effect on our supply capacity, impacting especially our central European business, and the raw material and logistic costs are estimated to have a adverse negative impact also in the in the second half nevertheless the demand for passenger car tire and heavy tires is estimated to continue strong our guidance for this year is unchanged meaning that our net sales are expected to decrease or to be at previous year's level And segments operating profit is expected to decrease significantly compared to 2021. And back to you, Jukka.

Thank you, Teemu. And moving on, it's important that we continue building the new Nokian tires, so something old, something new. The old and important thing is that we have a strong innovation pipeline for the future. Look at some of the key products on page 12 that we've launched. Akka Blue for summer in Nordics, Nokian Tires Outpost AT. also introduced R5 Hakka Pelitta friction tire and new Nokian tires Hakka truck coach and these are following a succession of product launches last year like Nokian tires Hakka Pelitta 10, Season 2, etc. This is something important, something old and this will continue to renew our product offer and product pipeline. This coming season, coming autumn, so we will have a Hakkapelita R5. It's a new flagship for Nordic non-studded winter tires that will be launched and will be available to consumers in this autumn. It includes one-third of the threat compound of renewable and recycled materials. It also has a Hakkapelita R5 SUV with animate strong sidewalls. and Hakkapelit R5 EV with ultra-low sound levels silent drive with silent drive technology. This product will come with over 160 SKUs and available to consumers as of fall 2022 and the main markets are between Nordic and North America and this product will be made in Nokia. Priorities for the coming quarters, something new. We will build new capacity, so we are working on the final site selection, final engineering, and also preparing ourselves for starting the project and starting the actual building. We will continue exiting Russia, so the process will continue with our external advisors and potential candidates. We will also keep costs in strict control and protecting our cash flow temporarily, especially in quarter two, because of the extraordinary measures we took and also that we built inventories of ready-made products. We have a high working capital. We expect that step by step we release money from the working capital. Business units and areas will implement their specific plans in Nordics, North America, Central Europe and heavy tires. And we will keep on providing customers with world-class products and services, and we will keep our innovation pipeline up and running, and we will be looking forward to introducing R5 in the autumn. We are highly confident that this will be a very, very successful product. So, going forward, we will focus on building the new Nokian tires. These were the prepared notes for the presentation that I will hand over to you.

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

Thank you. Our first question comes from the line of Kirio Pescatori of BNPT-XM. Please go ahead to your line.

Hi. Thanks for taking my question. The first one on your profitability for the car segment. Can you give us any indication of how much of the segment operating profit was linked to your operations in Russia? And I guess that's key as we move into H2 because of the lack of supply. Because it looks like the majority of your operating profit in cars did come from Russia. So any call you can give us on that would be great. And then moving to free cash flow. The cash burn in H1 was quite significant, also considering that the capex are yet to increase. I understand the movement, but can you help us maybe bridge maybe what we should expect for the full year to a working capital reversal? Should we anticipate in H2 and how much should the increase in capex be? Any color on that would be super helpful. Thank you very much.

If I start with the cash flow and there we need to bear in mind at least two topics. First of all is the normal seasonality, which means that we are burning cash in the first nine months and then the cash is coming in in the fourth quarter and we don't expect any major changes to this normal seasonality. Then in the second quarter, we took some extraordinary measures in order to secure the supply and the logistics out of Russia, and therefore part of that is already visible in our profit, and the second part is visible in our cash flow and balance sheet. due to the fact that we have now higher inventory, as mentioned in my prepared notes, not only for finished goods, but also for raw materials. And the raw material part, we will consume that in the coming quarters, being on a more normal level than after the year end. Then your question regarding the Russia and profit and profitability. As I showed in the net sales, a bridge by quarters, it was visible that especially in Russia, we were able to increase prices significantly. even though in other markets we also increased prices strongly. That also indicates that we had a strong profit generation in Russia. And then these extraordinary logistic measures that we took, those costs are visible outside Russia. So those are maybe a few comments to give you some color. Thank you.

Our next question comes from the line of Thomas Daston of Kepler Schiffer. Please go ahead. Your line is open.

Good afternoon. I have a few questions. If that's okay, I'd like to ask them one by one. First, could you help us understand the timeline for the board decision and the communication of your strategy ahead?

Okay, so timeline of the strategy and the systems will be such that we are working right now on these initiatives and we expect that type third quarter results, immediately after third quarter results, we will have new financial targets that we can talk about most likely. And then by that time, we have... plan and decision to invest and also we will then see how this exit from Russia will continue because obviously this is not totally in our hands, it also takes into account that there are other parties involved in that process but basically our plan is that by the end of this year we have new financial targets in place and we've updated our expected financial performance in 2023, 2024 and beyond.

Thank you. You had record inventories at the end of Q2. It's been discussed in the previous question, but the extent of the increase is such that I wanted to ask whether you have eventually overproduced in Russia in the second quarter where you could still use that asset to secure potential revenues in H2, or it's not the case, and the you effectively fully rely in H2 on your capacities outside Russia?

It's our capacities outside Russia. When we serve the markets in Western Europe, North America and so on, also offtake and so on will then help in 2023, so the Russian capacity can operate and produce for Russia.

But so in the second quarter, you have not overproduced in Russia, for sale that will take place in q3 does you have you have already put outside russia and that you can use for sale outside russia yes we have brought ready-made goods outside russia to european and north american inventories okay can you give us an idea of the magnitude of the number of stars that have been effectively already taken out of russia for being sold in h2

not to be precise but just to give you some some color we have increased the inventories with in a way that it will give us some benefit in the in the second in the third quarter but it doesn't change the overall picture that we lack tires in the second half

Yeah, if you look at the volume development quarter by quarter, you see that especially in the second quarter, the year-on-year volumes were down. But if you look at the fine print of the announcement, the production volumes were up in the first half.

Yes, that's what I understood as well. Until you take the decision, can you help us understanding what you're going to privilege between passenger tiles and heavy tiles? Because you it's going to be difficult for you to make both insufficient numbers. So are you going to continue to make heavy tires, because right now they are 20% plus margins, or are you going to privilege studded winter tires? How do you effectively assess the priorities?

Well, we have an ongoing growth plan in heavy tires, so that will of course continue and then the most important priority at this point of time is to ensure that the passenger car tires will get new capacity both in those plants that are already ongoing but also the new factory and then complemented by offtake in coming years.

Okay, thank you. I have a last question. I mean, you have still some operations and receivables in Russia. How do you effectively pay your employees in Russia, on one side, and how do you get paid for your tiles in Russia, given the sanctions?

So, now the Russia business needs to operate in itself, so we cannot do any any payments or receive money from Russia, and then how to get the money out of Russia. It's part of the controlled exit process, how we structure the possible deal to get the money out of Russia.

Okay. Thank you very much.

Thank you, Al. Our next question comes from the line of Artem Beletsky at SCP. Please go ahead. Your line is open.

Yes, good afternoon, and thank you for taking my questions. Actually, we'll ask one by one. And one element, of course, is in Russia. Maybe you could provide us with some sort of a color relating your cost structure, how it has been distributed between Russia and basically other countries, just thinking about, for example, SG&A levels last year. administration costs and the depreciation. So all the color would be much appreciated.

So as you know, the cost level, and now if we talk about excluding the production costs of the SG&A breakdown, if you were asking that one. So majority of our costs are outside Russia. So the Russia SG&A level is is clearly on a different level than outside Russia, so majority of the costs are in the West.

Okay, and maybe the other question is really, you spoke about inventories and growth on that side. Could you also maybe comment on trade receivables? I see growth there was some 40% year over the year. Do you see some elevated level of uncertainty relating to this kind of receivables, or do you see the situation is as normal as during previous years?

How to put it? In a way that with the information we have at hand, I would say that there is no elevated risk with the comment that situation might be different tomorrow, as we have been seeing this year, that what we say today might be totally different tomorrow.

Okay. That's clear. And then maybe the last one from my side, just thinking about your guidance for this year, I think last quarter you provided some additional color in terms of segment EBIT decline for this year and making some comparison towards the levels that you made in 2020. Could you provide color around the full year earnings outlook also at this stage?

I don't think that beyond this guidance we have, it's difficult to give many moving elements and so on. So, say that this is going to be a similar year to COVID year, so.

Okay, very good. That's clear. And all from my side. Thank you.

Thank you. Our next question comes from the line of Christoph Laskavi of Deutsche Bank. Please go ahead. Your line is open. Thank you for taking my questions as well. I'd like to start with a process from exiting Russia, essentially. So the first one there will be, could you potentially recover machinery and move it to Finland to increase your capacity? I guess this is part of the negotiations, but I'm wondering if you would like to share any comment how likely that will be. And in case all the negotiations fail, could you consider running the plant as local for local? And as you just elaborated on how difficult it is to repatriate cash from Russia to Europe, and you still have, I think, in the release you said, around 400 million in net assets that you have in Russia and Belarus. What's the confidence in that you really get the cash in from that? Also part of the negotiation, so is there a way to channel it to you? And then I appreciate that you will provide financial targets post Q3 for 2023 and 2024, but is there any comment you could currently give on what the potential size after the exit might look like on the passenger car side? Would it be fair to assume about 30% of the capacity, and how big could outsourcing, which you mentioned on the slide, really be, given that there's not that much available capacity, I think, to outsource to. And lastly, even though I appreciate you might not comment, just the margin profile of the PASCAR plans in the US and Finland to give us a rough proxy. Thank you.

Thank you. Maybe if I start with the equipment that... Clearly, today, getting equipment out of Russia is not possible. One day it may be, and therefore, obviously, when we go through the process, then that could be one and might be one parameter that we factor into the deal, including also, as Damon was mentioning, about the cash repatriation and all that. So, obviously, there are multiple ways of working on the deal, and we will see then what the final outcome is. In any case what has to happen is that Russia becomes localized so it operates locally and that would be the only way going forward and then make it possible for any transaction to happen so that is ongoing right now. And then the financial targets appreciate your quick asking and so on but many moving elements at this point of time we would love to come back when we are more clarity about the excuse me the site selection outlook and long-term long-term plans of our volumes and then when we have all that available then we would love to come out come out and talk to all the investors about that and as i said by the end of the year hopefully after quarter three at ASAP, so we will be ready to do that, but at this point of time it would be too early to talk about that because there are too many moving elements at this point of time.

Teemu, any additional comments you have? Maybe to the repatriation of the cash. I think that's one of the fundamental elements in structuring the possible transaction, and so far what we have been seeing and hearing, it

should be possible yeah thank you just one follow-up if i may um on supplies of yours and um i mean in general you have been sourcing for uh your footprint in russia as well partially from europe did suppliers already approach you and have been asking for changing conditions how they supply you given that your footprint will likely be smaller and could there be any cost associated to that as well or so far or as it was before and no major changes so far no major changes things continue quite normal with the exception of Russia of course which is not normal as maybe unnecessary to say here Yeah, indeed. Thank you. Thank you. Our next question comes from the line of Panu Latimaki of Danske Bank. Please go ahead. Your line is open.

Yes, thank you. I have two questions related to your plans on new capacity. So first, can you give any color on the shortage of options that you have? I understand you haven't made the decision, but any color on kind of whether you would think it's a greenfield or an acquisition or what size should we be looking at? That would be very helpful. And the second, what do you think this will cost? Should we kind of use the US factory as a kind of guide of what would it cost? And do you think this can be done without new equity?

So those are my questions. Thanks. Okay, so let me comment about the options and then we'll talk about the cost and expected investment amount. So options, we've been through already because obviously this process started quite some time ago. So we've been through multiple countries and options and we zoomed in into a few. And out of those few, we are doing a deeper DDA right now. And we have... There's strong candidates on that, and it's going to be greenfield. So it's not going to be brownfield or joint venture. It's going to be greenfield.

And then in terms of financing the investment, my current view is that we can do the investment without any equity, and then the U.S. factory is a good proxy for the total investment. And in the U.S., how we are doing it is 2 plus 2 million phases in the new CE factory. We are currently planning to do it in 3 plus 3 million tire phases.

Thank you. That's very clear. Can I just ask one follow-up? So can we use the U.S.? ? building of the factory as a proxy of how long will it take from position to getting cars out from the factory?

The concept is slightly different because we go with the ambition that we start producing as quickly as possible so therefore we change the order of equipment and we start with the And so we actually built the tire building and we start from that end so that we get tires faster to market. And then we bring a mixer from Nokia and build the mixing department concurrently when we are in the factory. So that gives us a fast time to market from the factory.

And that is the label that we used in Russia. So we made the mixings in Finland and then moved them to Russia.

America is too far away from doing that, but Europe is close enough that you can take mixes from Nokia originally and then have a faster time to market. All right. Thank you.

Thank you. Our next question comes from the line of Michael Jacks at Bank of America. Please go ahead.

Your line is open. Hi. Good afternoon. Thanks for taking my questions. The first one, if we can please just go back on the inventories balance again. Can you please give us a sense for how much of the increase is contributed by higher raw materials and logistics costs versus the finished goods build-up? Obviously, because one will benefit revenues in the second half, the other one would have an impact on margins. That's the first question. Perhaps I'll just stop there and I'll ask my follow-up after that.

Maybe I start to answer this slightly different. I think that the One big portion is the higher cost level that is visible in our balance sheet. And as you can read in our release, the year-on-year increase is over 40%, which is significant impact on our balance sheet inventories. Then the split between finished goods and raw materials, I would say that the good proxy is somewhere between 50-50.

Okay, thanks. And maybe just as a follow-up to that, how has that split changed relative to the prior quarter?

The prior quarter, we started to increase our purchases when the war started, so inventory levels were on a lower level at the Q1, and now at the end of Q2, I said both raw materials and finished goods inventories are on a high level. compared to Q1.

Okay, so the proportion between finished goods and raw mats is similar, in other words?

I cannot recall by heart what was the level at the end of Q1 at the moment, so sorry to comment.

Okay, thank you. Maybe then I guess following on from that, I guess you are going to see some pretty significant cost headwinds, as you mentioned. coming through in the second half. Do you expect pricing to be sufficient to offset that in the second half?

We are continuing to increase prices and naturally we will get the benefit of already increased prices compared to prior year in the second half. So there we see a positive development continuing.

It's also important to keep in mind that we have relatively new product offer now for the winter season for the friction tire R5 as well as the Hakka Pelita 10 studded winter tire which was launched last year. So therefore, that allows us to look at the pricing.

Okay, thank you. That's clear. Last question from my side, just on Dayton. Are there perhaps any thoughts as to potentially converting some of the capacity there to winter tires?

Not at this point of time. We surely are looking to introduce more our own tires rather than, because if you remember when we started to ramp up the factory, we had some off-date to other customers, but now we introduced more our own tires to Dayton and ramp it up that way. But winter tires so far will be made in Nokia, and that capacity is of market, especially for static wind tires. Friction tires, it remains to be seen. We will see how that will evolve. But the studying technology, studying equipment to move them back to North America at this point of time is not operationally clever. It's better that they stay where they are and are fully utilized in their current location.

Okay, that's very clear. Thank you very much.

Thank you. Our next question comes from the line of Pasi Faisonen of Nordea. Please go ahead. Your line is open.

Great, thanks. This is Pasi from Nordea. So just to confirm, so do I understand right that this announcement regarding the Greenfield project is going to be coming out in the coming months before the third quarter earnings announcement? And are you still... thinking about this subcontracting model, which actually could offer the missing European sales volumes for a period you are building up your own plant, because you actually say that you have selected Greenfield, not the joint venture, but does that exclude the subcontracting? And if you're using a kind of capacity bridging for the European production, are you targeting at the full five to six million for that bridging and what could be the profitability of that possible outsourcing deal. Thanks.

Thank you, Pasi. Thank you for the question. So we are working with the new location in a professional way, and we will make the announcement as soon as possible. We expect that that will happen before the Q3 earnings. And then about the offtake, yes, we will have that. and that will help to bridge the gap in missing volume in Central Europe. Obviously, what is important is to look at that uptake and ensure that there is money in it enough that it makes sense, no labor business decision to sell volumes and not make money. So, obviously, that's a criteria that we look into. But within that criteria, yes, we will have uptake and we will bridge the gap as much as possible. is financially justifiable. So all the plans that we've talked about are very much valid and continue as planned and as announced or as discussed.

So you are able to keep up your market share and you are preferring to market share over your profitability in that sense?

We want to remain relevant in the market because it's important that Nokia and IOS is relevant and a brand that people recognize and value. And therefore, it is important that we do that work while we update in the new capacity and capability because then launching and bringing that into the market is far more easier when there's recognition and important market positions.

Yes, precisely. And what was the target year or date for this 3 plus 3 model in this new green field? So what's the year we are talking about to reaching 6 million?

We will come back to that when we talk about the financial targets 23, 24, 25 and the investments and C&D or mini C&D and financial targets hopefully soon after Q3 results.

also then it must be 25 because if it's included in your kind of first or that period then that says that's your conclusion yes okay yeah i hear you thanks thank you our next question comes from the line of peter caster at one investments please go ahead your line is open

Hi, thank you.

Maybe just following on from Patsy's question, can you talk a bit about the practicalities of getting high-volume outsourcing, thinking about modes, the quality of your product versus the outsourcing available, and maybe whether that would have to come from other regions, just so we kind of understand the framework around that, please? Again, maybe if we would leave that to CMD in the future, the third quarter when we have the plans and volumes and expectations available and then we would be more qualified to talk about these expected volumes and probabilities. It's very much work in progress right now. We have internal information but this is not the time to disclose it. And then in the late in your release, in the fair value part, you talked about the investment has been substantially commenced. I was wondering if you had already ordered equipment or signed the necessary equipment for molds and maybe mixing facilities. Have you already made those decisions and then started ordering? Or is that still to come?

So we have already made the first steps and during the balance of the year in our capex will be visible our down payments in order to accelerate the equipment deliveries.

And then just a question on just so we can maybe get some understanding of profitability in your existing organizations. And if you look at direct labor as a percentage of sales plus logistics comparing Nokia to Russia, can you just give us some sense as to what the difference is between those two in a normal year?

So to give you a flavor about the impact of our Russian factors versus others, what we have been discussing in the recent course is the 10 euro difference per tire produced in Russia or outside Russia. So that gives you a high level indication of the headwind that we are getting when we now have lost the supply from Russia to other markets.

And would you expect to be able to do better than Nokia in a new ramped up facility or would it be similar because Nokia is more depreciated or how would you think about a new facility versus Nokia?

I'd like to go back to CND from 2018 where we put to the scale the three factories Russia, Nokia and Dayton because that is the relevant comparison also today. There we indicated that from the production efficiency point of view, there are no major changes between the factories. One factor impacting the cost level is the pure scale. So depending what is the scale of the factory, that will reduce the cost per tire. And then on top of that, nowadays the electricity or the energy has a factor, and let's see how that will develop in the coming years.

Thank you. And the last question, please, is just if you could maybe give us a split of the network in capital and total between Russia and outside of Russia. Even in order of magnitude.

So before the crisis, our main finished goods warehouse One of them was in Russia, and then the raw materials were in Russia. In that order, Russia played a significant role. Then going forward, I would say that the working capital component, naturally we don't have that in Russia anymore, and that is then split short-term. between two locations and then in the future between three manufacturing locations on top of the normal sales warehouses in selected markets. And then if I continue with the great receivables because that is a key factor impacting positively to our working capital in the coming years is that because in Russia we have had this quasi consignment model meaning that we have been financing with a certain terms our customers now when in the future We don't have Russia in our portfolio. Our trade receivables should come down. That is the planning hypothesis.

Is there a split of current receivables in Russia? Sorry, just to help with the Finnish comment on the working capital.

Can you repeat?

Is there a split of the current account receivables between Russia and ex-Russia? You gave the kind of concept on inventory and how things are held. I was wondering about the complete picture and account receivables currently.

We haven't been disclosing that information, but Russia has been a significant area where we have trade receivables.

Okay. Thank you very much for all the help.

Thank you. Our next question comes from the line of J.P. Morgan. Please go ahead. Your line is open.

Yes, thank you, Akshat, from JP Morgan. Two left from my side, please. The first one on free cash flow going forward. If we exclude investments in the new European plan that you've been talking about and the working capital seasonality, do you think the underlying operations as of today can generate positive free cash flow? That's the first question, please. And the second question is on the current annual production run rate for both Dayton and Nokia, please, and where do you expect this to be at the end of 2022? Thank you.

If I start with the cash flow and my earlier comment about do we need new equity in order to finance the investment. As I said, my current view is that we don't need any new equity in order to finance the cash flow and And therefore, maybe that's the comment I want to make at this point, and let's come back to that after Q3 in our mini-CMD.

QTM want the production run rate, so said that we are heading to Nokia with the equipment that we are installing right now, and in the coming months and so on, between 5 to 6 million in 2020. and we are heading towards 4 million in Dayton, and we said that about 1 million last year, and then linear into 4 million as we install more equipment. Working on that plan, still the same plan.

Thank you.

Thank you. Our next question comes from the line of Rauli Juva of Inderes. Please go ahead. Your line is open.

Yes, hello, Rauli from Interes here. Actually, my original question was well covered earlier, but maybe one on the heavy tires. Can you elaborate if that's running on full capacity utilization at the moment, and how's the capacity growth investment proceeding there? Thanks.

Yeah, it's running at full capacity at this moment. It's very low, so we actually... whatever we make, we sell, and the capacity increases, the new lines are coming as we speak, so we are preparing and installing them, and so they will help step-by-step the volumes, our own production volumes.

Very good. Thank you.

Thank you. And our final question comes from the line of Pierre-José Koumen, of Stifel. Please go ahead, your line is open.

Yes, good afternoon, Pierre-Yves Kamenet with T4. One left for me, please. You made 152 million in Russia and Asia in the second quarter in terms of revenues. How should we think about that bucket into the third quarter and the fourth quarter? Obviously, it should significantly go down in the third quarter, but once you exit from Russia, would that region completely disappear? out of your disclosure? Thank you.

What will happen with Russia is that as we work on to localize then the operations continue but they serve Russia and then when we get to a point that the process comes to a completion in terms of the signing and closing then obviously it will disappear it's very difficult to say when that happens and so on but until the transactions being made Russia localization will continue running in the coming months and quarters okay but you won't be able to monetize anything since the region is under clear sanctions so that we are appearing revenues possibly in third quarter but

you won't be able to channel cash out of Russia, right?

As Teemu was saying earlier, that part of the transaction and discussion with the potential partners in this process, the cash component monetization of that money that is accumulated in the balance sheet and received and so on, is one element in that discussion. And as Teemu was saying, it appears to be possible to monetize it through that kind of a transaction. And so this is what we work on.

Thank you, Jukka. Thank you, Tim.

Thank you. And as there are no further questions at this time, I'll hand the floor back to our speakers for the closing comments.

Thank you very much. As there are no further questions, this ends today's conference call. Thank you all for participating and have a good day.

Thank you very much. Have a good day.