Good afternoon from Helsinki, and welcome to Nokian Tyres Half Year 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 a 100-day 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 EUR 271 million. Remember in Q1, we had about EUR 280 million. Obviously, they are comparable numbers. In Q2, the expectation was higher because the prior year Q2 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 Russia and 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 benefit 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 one.
If I then move to page number three, some key figures to repeat it. So net sales EUR 271 million change in nominal numbers, about 35%, and 32% in constant currency. Year to date, our net sales are about EUR 550 million, which is a 27% change in nominal currencies and 25% in constant currency. Operating profit of the segment, 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 is 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.
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 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 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 at our net interest-bearing net debt, we were on the same level than last year.
The additional benefit that helped our cash flow was the CAPEX that was clearly down from last year. The main decrease, obviously, came from the Dayton factory. Out of this EUR 87 million CAPEX this year, the biggest three items are about EUR 50 million containing Dayton, Heavy Tyres, and Spanish test track.
Thank you, Teemu. And I move to page four and look at the market development. So of course, we have two important drivers for our demand. One is the new car, and the other one is replacement markets. Look at the new car evolution in 2020. The first six 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 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% in the first six months.
Russia, about -33%. Europe, -19%, and North America, -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%-70%. And in some of the light lockdown countries, the car usage goes down less than 30%-50%, and that drives quite a lot about the replacement demand. So consequently, replacement markets in some of the countries went down by 60%-80%, and then some of the lighter countries less 30%-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 that what will happen with the 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 similar, 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 we will start with the passenger car tires.
Yes. So in the second quarter, the passenger car tire 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 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. And then, 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 at our results, 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. The currency impact is about 3% in the second quarter. And then looking at our segment operating profit risk, the two 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 part. Then looking to our SG&A development, there we took all the measures necessary to save costs. And on the passenger car tire level, it is on a level of EUR 7 million, and on a group level, it's about EUR 10 million saving.
And then we increased our bad debt provision due to the situation, especially in 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 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 tires as well, the negative operating profit development was driven by the lower volumes and the factory utilization.
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% or 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. 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, kilometers driven, and so on. But our priority is clear that we continue with our world-class products and services, keeping cost 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 the sense that times like these, it is really important to do the essential actions and then leave the non-essential ones to later quarters and maybe 2021 and beyond. But we are pleased with the achievements in 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 are ready to capture the market, and it's up then to us to make sure that we get most out of them. So that's in summary, Nokian Tyres quarter two, and I hand over to Päivi Antola, 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 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 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 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 customers and consumers get the best out of our know-how. So focus on selling tires, I think, is in summary, if you want, and meeting teams because then it will be important to meet colleagues in various parts of the world.
Really unfortunate that traveling to Russia, for example, is not possible at this point of time, and same 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.
Indeed, and that would also help the replacement market demand because then the studding 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 zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Again, that's zero one on your telephone keypad if you wish to ask a question. Our first question comes from Akshat Kacker, J.P. Morgan. The floor is now open to you.
Thank you. Akshat from J.P. Morgan. Welcome, Jukka. I have three quick questions, please. The first one on price mix. Can you split out the price and mixing back 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.
Yeah. If I broadly comment the price mix, so as I stated in my earlier comment, the mix has been positive in the first half and in the second quarter, and with the actions that we have taken 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.
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 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.
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 have seen in 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 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 layoffs 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. Thank you.
Longer-term actions, I think that 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 the 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. Longer-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 fall 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 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 timeline 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 payment and when the decision will be made on whether to pay out the second installment. 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 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. Another 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 first quarter to repeat in the second half? 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 hit hardest, and we evaluate how the market will develop in the second half, and then we take actions according to the demand.
Okay. Jukka, Teemu, thank you very much.
Thank you. Our next question comes from Kai Mueller, 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 sort of just a pass-through effect on the lower raw material costs?
Teemu, if you take the.
Yeah. 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 third quarter compared to the year-end. And if we compare the stock level in the distribution to the second quarter last year, they are already now 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. Yeah. On the pricing, it was more really pricing within Europe. You obviously commented on it, 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've taken obviously provisions for inventories, but with bad debt, is there more to come in the current situation?
Yeah. Teemu, we'll 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 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 bad debt, yeah.
Yeah, so in the second quarter, we increased our bad 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.
Very clear. Thank you.
Thank you. Our next question comes from Thomas Besson, Kepler Cheuvreux. The floor is now open to you.
Thank you. It's Thomas Besson. 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 run or produce in the second half?
We are on our way working down the inventory. We believe that most of the downtime that needed to be taken was taken in the second quarter. And of course, and hopefully, 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, 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.
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.
Yeah. 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 Nokian needs to spend in 2020-2021 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 out most to see 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 keep 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. 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 growth 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 two, three, four 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's profitability significantly compared to what we would achieve by doing something different, so therefore, we go ahead and wrap up the U.S. plant 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 IFRS. When historically, Nokian has not made substantial adjustments, they become bigger and bigger. And normally, it's not necessarily a sign of quality. Looking at your slide nine, 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.
Yeah. 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.
Wonderful. Thank you very much.
Thank you. Our next question comes from Henning Cosman, HSBC. The floor is now open to you.
Yeah. Hi. Thank you for taking my question. Jukka and Teemu, 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 US 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'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 Tommy's question, but different time frame. How do you see a sort of post-COVID mid-term state for Nokian?
Is it fair to say you want to keep growing 5%, 6%, which will then also require 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 in an already competitive European market. So if you could just have your strategic comments in that sense, please. Yeah, apologies for the long question, but I just have the one.
No, it's you. I understand what you are asking. And obviously, a lot of the time in the past weeks have been on technical 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 the 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.
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 where 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. 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. That's where we aim to work. The start is because the capacity capability is out there and the money has been well invested. The most important thing is now to make sure that we have content and the product accordingly.
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 Beletski. The floor is now open to you.
Yes, hello. This is Artem Beletski from SEB. A couple of questions from my side. So maybe continuing on strategic theme and overall, Jukka mentioned about, let's say, focusing on premium brands and so on. How crucial for you to basically fill the excess capacity of what you have currently out there? I guess markets will be recovering, but still, so to speak, you have a lot of premium, 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 tires. How do you see the demand outlook for the second half of this year? And whether there are 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 from our point of view, for example, in Central Europe, we don't see a 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 that we can run them well, we see that the loading is relatively okay in the coming immediate future. So therefore, yes, we have open capacity 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 in 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 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, ship 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 heavy tires' performance so far. And obviously, even there, we have a new capacity capability coming on stream in latter part and next year.
All right, gotcha. Thank you.
Thank you. Our next question comes from Pasi Väisänen, Nordea. The floor is now open to you.
Yes, thanks. 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, or 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 Dayton ramp-up, just to kind of cross-check, so when the break-even result is going to be reached for this U.S. plant? Thanks.
Okay. Teemu, inventory. So I would say that I would put 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.
The data ramp-up.
The plant ramp-up. Pasi, that is an important question. What we do now is that we go to two shifts. Obviously, we hope that then by the end of 2021, we are running that plant fully utilized. Then we believe that the profitability can be achieved when we are moving closer to 3 million tires in terms of continuous production. That would be 2.5-3 million tires. We believe that that can be achieved in a certain time frame. Maybe not next year, but we hope that we are moving towards that target. We are closer towards that target than to zero in 2021 at the end of the year.
You mean run rate on annual basis, or the volume portfolio 2021?
Yeah. Run rate on annual basis at the end of the year, we are closer to the target of making break-even positive rather than negative. And then obviously, full year 2021 is still ramp-up time. And then when we get to 2.5-3 million tires, we hope that the profitability is break-even or positive break-even. This is depending, of course, on the mix and the raw material cost and production efficiencies and many other things. But that's what we work towards.
One question. Thanks. I'm happy with that one.
Thank you. Our next question comes from Panu Laitinmäki. 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.
Good 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 revenue is 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 Vianor 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 Vianor 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.
For the top line, as you said, declining, but declining much less than the surrounding markets. 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 a lockdown measures and things. So people changed the 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, 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.
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.
Great. Thank you.
Thank you. Just as a reminder, if you do wish to ask a question, you can type 01 on your telephone keypad. Our next question comes from Panu Laitinmäki. The floor is now open to you from Danske Bank.
Yes, thank you. It's Panu Laitinmäki 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 a 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 to you, Jukka. If I start with the raw 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-cash exclusions that we reported in June. So that's the main reason for the increase about EUR 30 million.
Thank you, Teemu. And I can comment on the early Q3 trading. Obviously, when you work in the recovery market and people are coming from lockdowns and so on and into potential recovery in the second half, so both in the replacement market as well as in OE market, there are 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 bigger 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 be cut as easily as they come if there are significant changes in the COVID or lockdown situation. But so far, so good. Cautiously optimistic at this point.
All right. Thank you. Thank you. Our next question comes from Henning Cosman, HSBC. The floor is now open to you.
Yeah. Thank you. I'll just take a follow-up, Ben, 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 I was 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 it's 17 in Russia, three in Finland, and four 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 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 overtime and so on, those numbers are in the macro level 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. You could assume that if our top line net sales was going down 45%, the production volume was going down even more than 45%.
Yeah, so we took significant downtime in the second quarter and that, in the interest of helping the inventory situation in Russia, as we talked about the distribution channel, but on top of that, also not to make too many products in the inventory in anticipation but now it's a clear run for the second half, and then it's based on the demand expectation.
Okay. Thank you very much, Both.
Okay. Now we are getting close to 4:00 P.M. 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 Jussi Kangasinen, private investor. The floor is now open to you.
Hello. We are aware of certain reasons impacting on profitability like coronavirus or capacity in tire manufacturing, ramp-up of US 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. 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.
The question was, is there any long-term reasons that could prevent 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. 22. Difficult to comment. Will it be exactly that but we'll come back to that target setting as we are through this crisis.
Okay. Thank you very much.
Thank you, and maybe just as a reminder, Jukka, the short-term focus areas, what you mentioned in your last comment.
Yeah. 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. 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 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 the most important is that we focus on the essentials, which is then 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.