Nokian Anticipates ‘Market Headwinds’ to Continue

Sales at Nokian Tyres decreased 34.6 per cent to 346.7 million euros in the half year between January and June 2009, and operating profit went down along with it; the company reports a 86.4 per cent decline in operating profit to 17.5 million euros. Net income during the half-year amounted to just 346.7 million euros, supported by a more robust second quarter in which profits of 191.1 million euros were generated.

In releasing these half-year results, Nokian notes that its sales and operating result did improve in the second quarter of the year, but were still “significantly down” compared with a year earlier. According to the company this decline took place because of lower demand, devaluation of the Russian rouble plus the Swedish and Norwegian krona, and the delay of pre-season winter tyre sales until the second half of the year.

During the six-month period the restructuring of Nokian’s operations and manufacturing structure, along with cost cutting measures, were reported to have “gained momentum.” Inventories were reduced by 31.6 million euros compared with year-end 2008. Personnel costs were reduced by 19.1 million euros compared with the same period last year. The company’s cash flow began to improve during the January to June period, particularly during the second quarter.

Nokian’s expectation for 2009 is that market uncertainty will continue. That said, the manufacturer identifies that “underlying drivers for demand” in its core markets show signs of stabilising. “Market headwind will continue all 2009 but the winter tyre season, improving sales mix, restructuring and lower raw material costs are expected to improve sales and operating margin clearly during the second half compared to the first half of the year,” Nokian Tyres reported in a statement. “Cash flow is expected to be significantly better than in 2008. However, the net sales and operating result for full year 2009 will be significantly lower than in 2008.”

“Market changes which started during the second half of last year have continued to hit hard Nokian Tyres’ core markets in the Nordic countries and Russia. Currencies have devaluated and GDP and consumer spending for consumer durables such as cars and tyres have declined significantly,” stated Nokian Tyres’ president and CEO Kim Gran. “The level of demand seems to have hit the bottom, stabilised and some signs of improvement can be seen. We however base our actions on a gradual rather than rapid recovery. The changes in demand have left the market and tyre producers with carry-over inventory and receivables which during this year require special attention.

“We at Nokian Tyres have taken decisive actions to streamline our operations and cost base to the new market challenges,” Gran added. “The results of our actions are not yet fully visible but will have a stronger impact during the second half of this year and for years to come.”

Gran states that the company’s focus this year is to provide a “clearly stronger cash flow by reducing inventory and receivables by more than 100 million euros and cutting investments by 96 million euros compared with 2008.” He states that Nokian’s overdue trade receivables have approximately halved compared to year-end 2008.

“In sales our focus is to defend our price leader position on our core markets and continue to compensate for exchange rate changes by improving sales mix and by implementing price increases,” Gran continued. “The launches of new products such as Nokian Hakkapeliitta 7 for this year’s winter season are vital and preseason orders are promising. The share of Russian and CIS sales in our portfolio will fall this year and is partly compensated by increased sales in North America and in Central and Eastern Europe. This will have an adverse effect on average sales prices in 2009.

“In terms of production, we responded to the weakening demand already in late 2008 and have continued to do so during 2009,” said Gran. “The streamlining measures aiming at a lighter cost structure and full utilisation of a lower cost production in the Russian plant have been implemented and will be fully completed during 2009. Our cost saving program of annual sustainable savings of approximately 50 million euros is running as planned.

A strong distribution, good seasonal logistics, local low cost production inside duty borders and new products will give us a good chance to strengthen our market leadership in the core markets and to return to profitable growth as soon as markets start to recover,” the company president and CEO noted.

Nokian’s half-year figures were generated during a time in which the “sharp downturn in the global economy” that began towards the end of last year was further escalated.” The tyre maker thus notes that vehicle sales and machine manufacture clearly decreased in key markets. The passenger car tyre aftermarket declined an estimated 12 per cent in Nordic countries and six per cent elsewhere in Europe. Furthermore, tyre deliveries “shrank drastically” to less than half in Russia and the CIS countries.

A drop in the number of cars manufactured led to an excess supply of summer tyres. According to Nokian, this resulted in price erosion for some volume sizes. Winter tyre prices have faired better. While tyre manufacturers implemented what Nokian refers to as “significant price increases” in Russia, the Ukraine, Sweden and Norway to offset currency evaluation, these increases did not fully compensate the effect of the devaluation during the reported period. Passenger car net sales decreased 36.5 per cent year-on-year between January and June, and amounted to 245.0 million euros.

The truck tyre market declined in Europe by more than 30 per cent, Nokian adds, and the demand for special heavy tyres shrank to less than half of the previous year. Overall net truck tyre sales dropped 22.9 per cent to 9.6 million euros.

Sales of heavy tyres decreased 57.4 per cent during the reporting period, to 22.7 million euros. Heavy tyres sales decreased in all product categories, with exceptionally low volumes of machine manufacture particularly curtailing the demand for forestry tyres. The demand for harbour and mining tyres, as well as for various special machinery tyres decreased by more than 50 per cent, a decline Nokian attributes to the global economic slowdown. Orders, however, started to recover gradually at the end of the second quarter, due to customers’ low inventories and a rekindling of trust on the markets.