Nokian Renkaat Oyj (TYRES) Earnings Call Transcript & Summary

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 Kangas-Kärki, 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 2 and talk about the results from our presentations. Q2 was hit by COVID-related economic slowdown. Look at our net sales figure about EUR 271 million. Remember in Q1, we had about EUR 270 million -- EUR 280 million, obviously, the comparable numbers. In Q2, the expectation was higher because prior year, our -- the top line was about EUR 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 EUR 24.4 million versus EUR 98.8 million in 2019. The big impact came from COVID, about EUR 40 million. Additionally, we had about EUR 20 million 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 tailwind from lower raw materials and also, cost-cutting measures helped our profitability. Especially profitable was Vianor's performance in the second quarter, and they had a good reaction to market decline. And the profitability slightly improved compared to 2019. If you look at what impacts we had in the first quarter, obviously, the COVID was only at about EUR 10 million level in the first quarter, and the Russian distribution channel impact was about EUR 20 million. So COVID impact, especially in the second quarter, moved from EUR 10 million in the first to about EUR 40 million in the second quarter. If I then move to Page #3, some key figures to repeat it. So to net sales, EUR 271 million, change in nominal numbers, about 35% and 32% in constant currency. Year-to-date, our net sales are roughly EUR 550 million, which is 27% change in nominal currencies and 25% in constant currency. Operating profit of the segments, EUR 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, EUR 0.09 in the quarter and year-to-date, EUR 0.16. And 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 weak quarters in 2020. Now I'll hand over to Teemu, and he will talk about the cash flow and capital expenditure. Teemu, please?

Yes. Thank you all on the call. If I move to the cash flow from operating activities, you can see that we are able to perform better in the first half this year compared to the previous year. And clearly, the net working capital component is the key for this good development. And there, naturally, one of the key components is the trade receivables. Due to the decline in -- on top line, our trade receivables didn't increase. And then also our inventory level decreased, 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 a good achievement. Then if you look our net -- interest-bearing net debt, we were on the same level than last year. And the additional benefits 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 this EUR 87 million CapEx this year, the biggest -- the 3 items are about EUR 50 million containing Dayton, Heavy Tyres and Spanish test track.

Okay. Thank you, Teemu. And I move to Page 4 and look at the market development. So of course, we have 2 important drivers for our demand. One is the new car and the other one is replacement markets. If you look at the new car evolution in 2020, the first 6 months, we see that in Nordic countries, it's about minus 25% versus prior year; Russia, minus 23%; Europe, minus 40%; and North America, minus 25%. If you recall, the first 3 months, Russia actually have 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 sell-in, in our estimate in Nordics is about minus 11% in the first 6 months; Russia, about minus 33%; Europe, minus 19%; and North America, minus 22%. What drives, especially the replacement markets is miles driven or kilometers driven. If we look at some of the statistics, and you probably have seen the similar statistics that in heavy lockdown countries when the lockdown happened, so the private car use goes down significantly, up to 60% to 70%. And in some of the light lockdown countries, the car usage goes down less to 30% to 50%. And that drives quite about the replacement demand. So consequently, replacement markets in some of the countries went down to -- by 60% to 80%, and then some of the lighter countries, less 30% to 50%. But these numbers, obviously, explain that -- 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 the lockdowns and also equally, though, what is -- what will happen with the new car sales in the coming quarters and the second half year. Heavy Tyres, we saw a decline in demand in the first quarter, but also in the second quarter. Most of that is driven by the new equipment construction. Many of our customers suffered from the parts shortage and similar and, therefore, the demand for the OE segment as well as the replacement was relatively soft for the Heavy Tyres. Teemu, I will hand over to you to talk about the segment profitability. And he will start with Passenger Car Tyres.

Yes. So in the second quarter, the Passenger Car Tyre top line decreased 45%, reaching the level of EUR 164 million. Our segment operating profit was close to EUR 14 million, and a clear decrease naturally compared to Q2 '19. And the key drivers were -- 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. And then 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 Tyre 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 that mix is improving, but the price is naturally decreasing. One explanation is the measures taken in Russia. The currency impact is about 3% in the second quarter. And then looking our segment operating profit bridge, the 2 biggest components are the sales volume and the underabsorption in our supply chain. And that effect in the second quarter is about EUR 14 million, the underabsorption in the supply chain column. Then looking to our SG&A development. There, we took all the measures necessarily to say, costs. And on the Passenger Car Tyre level, it is on the level of EUR 7 million. And then on a group level, it's about EUR 10 million savings. And then we increased our bad debt provision due to the situation, especially in the Central Europe, where clearly indications of tightening market with our retailers. Moving to the second quarter in Heavy Tyres. The top line was on a level of EUR 40 million, down by 15%, and the operating profit, just shy of EUR 3 million. In terms of the net sales development, it's good to remember that we acquired the Levypyörä, a small acquisition in the second half. Therefore, the decline, excluding the Levypyörä in the second quarter, was about 22%, so 5%-plus impact on our top line development. And clearly, in the Heavy Tyres as well, the negative operating profit development was driven by the lower volumes and the factory utilization. And then moving to our Vianor 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 a comparable currencies, minus 5%, reaching the level of EUR 80 million. We were able to maintain the profit or even slightly improve the profit from comparison period, reaching almost EUR 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 little 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 word-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 ones are done and non-necessary ones are not done. Teemu 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 a sense that times like these, it is really important to do the essential actions and then leave the nonessential one to later quarters and maybe 2021 and beyond. But we are pleased with the achievements in the quarter, and it's clear that we are ready with a 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 are ready to capture the market, and it's up then to us to make sure that we get most out of that. So that's in summary, Nokian Tyres' quarter 2, and I hand over to Päivi 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 the new CEO, the most obvious question. How is the -- how is Nokian Tyres 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 this, 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 was a limit to how much I have been able to interact with people live. 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, a number of them are in the pipeline; and then utilize the capabilities that we put in place to make sure that the customers and consumers get the best part of our know-how. So focus on selling tires, I think, in summary, if you want. Meeting teams because then it will be important to meet colleagues in various parts of the world. And really unfortunate that travel into Russia, for example, is not possible at this point of time, and so it applies to the U.S. Because for me, as an incoming CEO, it would be really important to meet the team members and 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 soon.

Indeed. And that would also help the replacement market demand. Of course, then miles driven will be higher.

Exactly. Cheers. Thank you. And now we would be ready for questions from the audience. [Operator Instructions]

[Operator Instructions] Our first question comes from Akshay Katkar, JPMorgan.

Akshay from JPMorgan. Welcome, Jukka. I have 3 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 2 later.

So Teemu, you can go ahead.

Yes. If I broadly comment the price/mix, so as I stated in my earlier comment that the mix 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 and in Europe as well?

So if I continue I would say that in general, the pricing environment is tight. And we 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.

The second question is on the North American shipments in the second quarter. The decline in sales was much sharper than what we have seen 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. 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're planning to take structurally and on a long-term basis? And if you've made some progress on that front, please?

Longer-term actions, I think that is 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 used 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, the delay or the actions that are not necessary, and we do the usual tricks of the cost reductions. Longer-term actions at this point of time when we are in a tactical mode are more difficult to comment. If -- when those come, they will come in the autumn and when we see what the underlying demand is.

Our next question comes from Gabriel Adler, Citi.

It's Gabriel from Citi. And my first question is on the U.S. plant. Because I noticed that you commented the recruitment for second shift operations in the U.S. has now been delayed. Could you just provide an update on your planned time line for the U.S. plant ramp? And confirm whether the crisis has changed your strategic approach to the U.S. 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 payments? When the decision will be made on when to pay out the second installment?

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 -- start hiring people for the second shift towards the end of the year and then start operating 2 shifts in early 2021. This is an unfortunate delay, most of that caused by the crisis, 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 time frame.

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, at least on a [indiscernible] course, to repeat in the second half? How many of -- how much of that EUR 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 second half, and then we take actions according to the demand.

Our next question comes from Kai Mueller, Bank of America.

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? That's 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 what is -- or is it really just a pass-through effect on the lower raw materials costs?

Teemu, if you'll take that.

Yes. If I take the inventory 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 that -- 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, so far so good. And we took significant downtime in our operations in the second quarter. And there was another question about the pricing environment and so on.

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

Yes, Teemu will take the bad debt discussion, and I comment about the pricing, especially in Russia. So clearly, there are actions in pricing, which are market actions, competitive actions in order to make sure that we keep our market share increase. 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 bad debt? Yes.

Yes. So in the second quarter, we increased our bad debt provision because of the market outlook, especially in Central Europe. So we haven't record 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 half, rather than what has been actually already happening.

Yes.

Our next question comes from Thomas Besson, Kepler Cheuvreux.

It's Thomas Besson. I have a few questions to ask. 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 not 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, you -- and I hope you appreciate the fact that we will need to look into the season, of course, also when it comes to the latter -- 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 is significant downtime in our operations coming from the inventory distribution channel reduction. So actions that needed to be taken have been taken.

And just to always be clear when we are talking about our own inventories and when we are talking about inventories in the distribution in Russia.

Sure.

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 3 years. Could you give us an idea of what you believe Nokian 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. We would be below 2020 level in 2021. And indeed, we have plenty of capacity and capability installed, which is ready to be used.

Okay. Very clear. I have a last question and a comment. So I start with the 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 wrap up the U.S. plant now. Have you effectively made the comparison between effectively freezing this U.S. plant for 2, 3, 4 years, if necessary, and maximizing the use of your Russian plant and doing that slow ramp of the U.S. operations?

I know the calculation. It's been assessed and so on. At the same time, we've chosen to wrap up the U.S. plant because it's part of our strategy and long-term ambition. And that does not hurt the company profitability significantly compared to what we would achieve by doing something different. So therefore, we go ahead and ramp up the U.S. plant now.

Okay. 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 IFRS. And historically, Nokian has not made a substantial adjustment. They become bigger and bigger. I that it's not necessarily a sign of quality. Looking at your Slide 9, I have the impression that you're going to focus on the cash and returns. So I guess they are going to converge, but that was my comment.

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

Our next question comes from Henning Cosman, HSBC.

It's 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. So 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- to long term for Nokian looks like. It's sort of looked like you were becoming more a normal tire company, 5%, 6% top line growth, driven by volume. And once you utilize that spare capacity, you'll also have to keep spending. So a little bit similar to Thomas' question, but different time frame. How do you see a sort of post-COVID midterm state for Nokian? 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 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 yes, apologies for the long question, but I just have the one.

No issue. And I understand what you are asking. And 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 mainstay. So 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 to markets where we can have good profitability and where our know-how and our brand is valued. And so that's been one of the key topics. And so I've been working quite a bit in that and talking to our innovation team and so on as well as in Heavy Tyres. And I'm pleased that -- where we are right now. I'm not saying that it's good, it's best. I'm saying 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. And -- but the start is, because the capacity, capability is out there, the money has been well invested. So the most important thing is now to make sure that we have 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.

Our next question comes from Artem Beletski.

This is Artem Beletski from SEB. A couple of questions from my side. So maybe continuing on strategic theme and overall, your mentioned about, sort to say, focusing on premium brands and so on. How crucial for you to basically fill the excess capacity what you have currently out there? I guess, markets will be recovering, but still, I should say, you have a lot of premium, a very efficient capacity in Russia, which is not really utilized for the 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 Tyres. How do you see the demand outlook for second half of this year? And is there signs 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 in -- from our point of view, for example, in Central Europe, we don't see similar kind of inventory headwind that we have in Russia. And therefore, we are optimistic, I would say, both 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 is, obviously, we took downtime in the second quarter and now going ahead. The important thing to keep in mind about Russia is that the 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 if we can run them well, we see that the loading is relatively okay in coming immediate future. So therefore, yes, we have open capacity in -- or had open capacity in the early part. Let's see how the demand evolution goes, but we see relatively strong operations in coming weeks and the quarter. But clearly, of course, then we come back to that COVID. 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 Tyres, it's an 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 holidays 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 Tyres performance so far. And obviously, even there, we have a new capacity, capability coming on stream in latter part and next year.

Our next question comes from Pasi Väisänen, Nordea.

This is Pasi from Nordea. 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 of which is the inventories compared to the net sales, so that we would have something to work with for the second half? And secondly, about this date of ramp-up, just to kind of cross check, so when the breakeven result is going to be reached for this U.S. plant?

Okay. Teemu, inventory.

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

And just the date of ramp-up.

And the date of ramp-up so far. Pasi, that's an important question. So what we do now is that we go to 2 shifts. And obviously, we hope that then by the end of 2021, we are running that, we're very utilized. And then we believe that the profitability can be achieved, and we are moving closer to 3 million tires in terms of continuous production. That would be 2.5 million to 3 million tires. And we believe that, that can be achieved in certain time frame, maybe not next year, but we hope that we are moving towards that target. And we are closer towards that target and 0 in 2021, at the end of the year.

You mean run rate on annual basis or that roll on for the full year '21.

Yes. Run rate on an annual basis at the end of the year, we are, hopeful, 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 million to 3 million tires, we hope that profitability is breakeven or positive breakeven. This is depending on cost and the mix and the raw material cost and production efficiencies and many other things. But that's what we work towards.

Our next question comes from Panu Laitinmäki, Danske Bank. Okay. Our next question comes from Victoria Greer from Morgan Stanley.

Could you -- would you 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 revenue is only down 5%. The market is obviously down much more and then Russia pricing on top of that. And yes, 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 Vianor business is how we manage our seasonal employees because that's the key to maintain or destroy that profitability. And in that area, we were able to manage that well on top of all other cost-cutting activities that we have done in the Vianor business in the second quarter. Or 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 areas, the demand was better than we expected in March. So the demand surprised us positively even though it was negative.

Season was slightly delayed also. The season was not as early as you would expect because there was lockdown measures and things. So the people purchased tires 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 Vianor is -- 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 what -- when and how that happens.

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

[Operator Instructions] Our next question comes from Panu Laitinmäki from Danske Bank.

It's Panu Laitinmäki from Danske Bank. I still have 3 quick questions. Firstly, can you comment on early Q3 trading? So what have you seen 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?

If I start with a couple of those questions and the last one can be -- then to you, Jukka. If I 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 2 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 relates to the non-IFRS exclusions that we reported in June. So that's the main reason for the increase, about EUR 30 million.

Thank you, Teemu. I can comment the early Q3 trading. Obviously, when you work in the recovery market, then the people are coming from lockdowns and so on and need to potential recovery in the second half. So both in the replacement market as well as in 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 do not happen, it's bound to have a clear 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.

Our next question comes from Henning Cosman, HSBC.

Yes. I'll just take a follow-up. And 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 and 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 that'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 3 numbers, please?

I think those numbers are in the 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 over time and so on. Those numbers are, in macro level, are pretty much in the ballpark.

And 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%.

Yes. So we took significant downtime in the second quarter and that in the interest of helping the inventory situation in Russia, as we talk about the distribution -- in 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. Now we are getting close to 4 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.

Our final question comes from [ Jussi Gunsanan ], private investor.

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, Nokian Tyres 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, I didn't -- 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% ballpark.

22%.

And my question was, if there are any reasons that could us, prevent returning to that level?

I think it's a good ambitional 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. 22%, difficult to comment we will be exactly that. But we'll come back to that target setting once we are through this crisis.

Thank you. And maybe just as a reminder, Jukka, the short-term focus areas, what you mentioned in your last comment.

Yes. The short-term focus areas are really that we will make sure that cash is important. So in terms of investments, working capital, that's quite important. Also make sure that we are quite sharp on costs. And so whether they are temporary in terms of regulating capacity or they are longer-term structural, if needed, so that we will need to assess when we get towards the end of this crisis or the other side, if somebody might call. And then most important is that we focus on the essentials, which is 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, we'll get back. It's the 70th day for me, so too early to make that kind of long-lasting comments.

Good. Thank you, Jukka. Thank you, Teemu. And this ends today's conference call. Thank you for participating and...