Nokian Renkaat Oyj (OTCPK:NKRKF) Q2 2022 Earnings Conference Call August 2, 2022 8:00 AM ET
Company Participants
Päivi Antola – Head, IR
Jukka Moisio – President & CEO
Teemu Kangas-Kärki – CFO
Conference Call Participants
Giulio Pescatore – BNP Exane
Thomas Besson – Kepler Cheuvreux
Artem Beletski – SEB
Christoph Laskawi – Deutsche Bank
Panu Laitinmäki – Danske Bank
Michael Jacks – Bank of America
Pasi Väisänen – Nordea
Peter Testa – One Investments
Akshat Kacker – JPMorgan
Rauli Juva – Inderes
Pierre-Yves Quéméner – Stifel
Operator
Welcome to the Nokian Tyres Q2 [sic] 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, Päivi Antola. Please go ahead.
Päivi Antola
Thank you. Good afternoon from Helsinki, and welcome to Nokian Tyres Q2 results conference call. My name is Päivi Antola and I am the Head of the Investor Relations in Nokian Tyres. And together with me in this call, I have Jukka Moisio, the President and CEO of the company, and Teemu Kangas-Kärki, the CFO of Nokian Tyres.
In this call, we will go through Q2 results and an update on the progress we see 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.
Jukka Moisio
Thank you, Päivi, and welcome on my behalf as well.
I would like to go through the prepared notes in the presentation, and the heading is, War In Ukraine Overshadowed H1.
And I’ll move to page 2, some quick reflections before I go to into the financial numbers. Exit on Russia initiated, so the Board decided to initiate a controlled exit from Russia as it’s no longer feasible nor 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, an impairment and write-down of about €300 million were recorded in quarter two results. Actions to increase the capacity outside of Russia are ongoing, so we are increasing capacity at the Finnish and U.S. factories for passenger car tires. These programs were initiated already in 2021 and they have continued throughout 2022 and we still include investments and equipment in the latter part of this year, so that they will be used for the readiness for 2023, and also as mentioned about the U.S. factory readiness for 2024, and we are now going to achieve 4 million tires capacity in the U.S. and between 5 million and 6 million in Finland.
Investment in new factory in Europe is proceeding. We also 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 developed. So we look to have alternative suppliers to help us during the time then the capacity is being built in Europe and this outsourcing options are being developed currently as well.
I move to page 3, have a highlight of the numbers of quarter two. Net sales increased by 7.4% in constant currency. So we recorded €482 million in net sales versus €416 million in 2021 in the same quarter. Tire demand continued good and volumes are down to the supply constraints in our company. Operating environment was increasingly more challenging due to the war and tightening sanctions.
Segment operating profit at €86 million versus €89.6 million in Q2 2021. The increased prices to combat cost inflation and that lead to higher net average selling price.
Our team performed extremely well. It was a demanding quarter in terms of the 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. And under these circumstances, I want to thank our team and also congratulate them because it has been a very demanding environment and they did well in that environment.
I move to page 4. We have a strong balance sheet. Cash flow was impacted by our working capital. I callout some key numbers in the financials. Net sales up by 7.4% as mentioned, and year-to-date we are about 14% in constant currency ahead of prior year, so at about almost €900 million in the first nine month — 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 17% versus 18.5% in 2021 and 19% in full-year 2021.
Segments earnings per share so before the write-off and so on is €0.55 versus €0.51 a year ago, and in the first six months €0.93 versus €0.80 in 2020.
Right, 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 macros are impacting that, but nevertheless so 64% equity ratio.
Cash flow was weaker and we incurred higher working capital, both inventories were high because of the more expensive raw materials, also the receivables were higher because of the net sales and also the currencies impacted in our working capital by increasing the absolute Europe amount of working capital.
Gearing at 14.8% and interest bearing net debt at the end of June at €243 million, €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 to incur 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 profitability. Teemu, please.
Teemu Kangas-Kärki
Thank you, Jukka.
Let’s go through some key figures by business units and starting with Passenger Car Tyre. In the second quarter, our net sales was on a level of €335 million net sales increased, and tyre demand continued on a good level. However, the segment operating profit declined partly because of lack of tyre supply impacting, especially our business in Central Europe.
We are happy 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 Tyre business on a higher level than in the comparison period in order to safeguard better supply in the second half. As we all know, now we cannot get any buyers 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 callout post 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 our bridges and focusing to the segment operating profit part, here if we look at the price mix component, we see that we have had positive development of €87 million precious 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 least ships and full trains. So therefore, on top of the cost inflation that cost level has been on a extraordinary high level, which then should benefit us little bit in the second half in order to sell the volumes.
Then moving to the Heavy Tyres performance in the second quarter. There you can see that our net sales for the Q2 was on a level of €74 million and our segment operating profit close to €16 million. And if you then also look at relative profitability that was on a level of 21% a increase from the comparison period. It is the performance is a result of strong demand in all product segments. And we have been also — been able to improve our production efficiency and therefore, the profit development was according to the numbers that I highlighted earlier. In Heavy Tyres, the inventory levels are on low-level unlike in Passenger Car Tyre business and this is the indication that the demand has continued to be on a good level and we haven’t been able to increase the inventory levels in the Heavy Tyres.
Lastly, the Vianor business unit, the second quarter had a good season sales which lasted longer than normally, therefore the net sales was on a level of €99 million and the segment operating profit little bit below €10 million. Because of the longer season, it also increased some of our cost and therefore, and it has an impact on our profit and profitability.
Moving to the assumptions for this year. As we have been communicating already earlier, the control 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 second half. Nevertheless, the demand for Passenger Car Tyre and Heavy Tyres 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.
Jukka Moisio
Thank you, Teemu.
And moving on, it’s important that we continue to build the new Nokian Tyres, so something old, something new. The old and important thing is that we have a strong innovation pipeline for the future because some of the key products on Page 12 that we launch. Hakka Blue for summer in Nordics Nokian Tyres Outpost AT also introduced R5 Hakkapeliitta friction tyre and new Nokian Tyres Hakka Truck Coach. And these are following a succession of a product launches last year like Nokian Tyres Hakkapeliitta 10, Seasonproof, et cetera, et cetera. This is something important, something old, and this will continue to review our protocol for our product pipeline.
This coming season, coming autumn, so we will have Hakkapeliitta 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 tread compound renewable and recycled materials. It also has Hakkapeliitta R5 SUV with Aramid Strong Sidewalls and Hakkapeliitta R5 EV with ultra-low sound level silent drive with SilentDrive technology. This product will come at 160 SKUs and available to consumers as of fall 2022 and the main markets are will be Nordic and North America and this product will be made in Nokian.
Priorities for the coming quarters, something new, we will build new capacities, so we are working on the final site selection, final engineering and also preparing ourselves for the starting the project and starting the actual building. We will continue to exiting Russia, so the process will continue with our external advisors and potential candidates. We will also keep cost in strict control and protecting our cash flow temporarily especially in quarter two because of the extraordinary measures we took and also that we build inventory sort of ready-made products, we had a high working capital, we expect that step-by-step we will use money from the working capital.
Business units and areas to implement their specific plans, in Nordics, North America, Central Europe and Heavy Tyres 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 Tyres.
These were the prepared notes for the presentation. Päivi, over to you.
Päivi Antola
Thank you. Thank you, Teemu. And now operator, we would be ready for the question from the audience, please.
Question-and-Answer Session
Operator
Our first question comes from the line of Giulio Pescatore of BNP Exane. Please go ahead. Your line is open.
Giulio Pescatore
Hi. Thanks for taking my question. The first one on your profitability in — for the car segment. Can you give us an 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 color 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 that at this moment. But can you help us maybe bridge, maybe what we should expect for the full-year, should the working capital reverse or are we — should we anticipate in H2 and how much should the increasing CapEx be? Any color on that would be super helpful. Thank you very much.
Teemu Kangas-Kärki
If I start with the cash flow and there we need to bear in mind at least two topics, first of all is that normal seasonality, which means that we are burning cash into — in the first nine months and then the cash is coming 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 logistics out of Russia, and therefore part of that is already visible in our profit. And the second part is that, which 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 raw material part, we will consume that in the coming quarters being on a more normal level then, after then year-end.
Then your question regarding the Russia and profit and profitability, as I showed in the net sales average by quarters, there 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 the — in Russia, and then these extraordinary logistic measures that we took those costs are visible outside Russia. So those are maybe few comments to give you some color.
Operator
Our next question comes from the line of Thomas Besson of Kepler Cheuvreux. Please go ahead. Your line is open.
Thomas Besson
Good afternoon. It’s Thomas. So I have a few questions, please, if it’s okay, I would like to go one-by-one. First, could you help us understand into timeline for the board decision and the communication of your strategy ahead?
Jukka Moisio
Okay. So the timeline of the strategy and the decisions will be such that we are working right now on these initiatives and we expect that tight third quarter results, immediately after third quarter results, we will have a — the financial targets that we will — we can talk about, most likely. And then by that time we have a plan and decision to invest and also people can 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 the 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.
Thomas Besson
Maybe I think you had record inventories at the end of Q2. It’s been discussed in the prepared remarks, and in also, sort of, previous question, but in the extent of the increase in terms of I wanted to ask whether you have eventually overproduced in Russia in the second quarter or you could still use that asset to secure potential revenues in H2 or it’s — it’s not the case and are your activities fully rely in H2 on your capacities outside Russia?
Jukka Moisio
It’s our capacities outside Russia mainly serve the markets in Western Europe, North America, and so on, also off take, and so on, will then help in 2023, so the Russian capacity can operate introduced for Russia.
Thomas Besson
So in the second quarter you have not overproduced in Russia for sales that will take place in Q3, you had — you have already good outside profile that you can use for sale outside Russia?
Jukka Moisio
Yes. We have brought readymade goods outside Russia to European and North American inventories.
Thomas Besson
Okay. Can you give us an idea of the magnitude of the number of start-ups that have been effectively already taken out of Russia for being sold in H2?
Teemu Kangas-Kärki
Not to be precise but just to give you some color, we have increased inventories with, in a way that it will give us some benefit in the second — in the third quarter. But it doesn’t change the overall picture that we lack buyers in the second half.
Jukka Moisio
Yes. 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 point of the announcement, the production volumes were up in the first half.
Thomas Besson
Yes, that was understood. When will — until you take the decision, can you help us in understanding what you’re going to privilege between Passenger Tyres and Heavy Tyres because it’s going to be difficult for you to make both in sufficient numbers. So are you going to continue to make Heavy Tyres because right now they are considered some plus margins or are you going to privilege studded winters tires. How do you effectively assess priorities?
Jukka Moisio
When we have an ongoing growth plan in Heavy Tyres, so that will of course continue. And then the most important priority at this point of time is to ensure that the Passenger Car Tyres will get new capacity both in those plants that are already ongoing but also to new factory, and then complemented by off-take in coming years.
Thomas Besson
Okay. Thank you. I have a last question. I mean, you have seen some operations in Russia receive receivables in Russia. How do you effectively pay in Russia on one side? And how do you get paid for your tyres in Russia given the sanctions?
Teemu Kangas-Kärki
So now that the Russia business needs to operate in itself. So we cannot do any payments or receive money from Russia. And then how to get the money out of Russia, it’s part of the control exit process how we structure the possible deal to get the money out of Russia.
Operator
Thank you. Now, our next question comes from the line of Artem Beletski at SEB. Please go ahead. Your line is open.
Artem Beletski
Yes. Good afternoon and thank you for taking my questions. Actually, we’ll ask one by one and one element, of course exit in Russia. And maybe you could provide us with some perfect color relating your cost structure, and in fact, 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.
Teemu Kangas-Kärki
So as you know, the cost level, and then now if you talk about excluding the production cost of the SG&A breakdown, if you were asking that one, so majority of our cost are outside Russia. So the Russia SG&A level is clearly on a different level than outside Russia, so majority of the cost are in the rest.
Artem Beletski
Okay. And maybe the other question is really you spoke about team mentors and growth on this side. Could you also maybe comment on trade receivables? It goes there was some 40% year-over-year. Do you see some sort of elevated level of uncertainty relating to this kind receivables? Or do you see the situation is as normal as during previous years?
Teemu Kangas-Kärki
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.
Artem Beletski
Okay. That’s clear. And then maybe last one from my side, just sort of thinking about your guidance this year. I think last quarter you provided some sort of additional color in terms of segment EBIT declines for this year and making some comparison towards the levels what you made in 2020. Could you provide color around, the full-year earnings outlook also at this stage?
Jukka Moisio
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 similar year to COVID year so.
Operator
Thank you. Our next question comes from the line of Christoph Laskawi of Deutsche Bank. Please go ahead. Your line is open.
Christoph Laskawi
Hey, 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’s 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? And 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 comments you could currently give on what the potential size after the exit, might look like on the Passenger Car Tyres? Would it be fair to assume about 30% of the capacity and how big could outsourcing would you mentioned on the slide really be given that there’s not that much available capacity I think to outsource too. And lastly, even though I appreciate you might not comment just the margin profile of the PASCAR [ph] plan in the U.S. and Finland to give us a rough proxy. Thank you.
Jukka Moisio
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, and that could be one and might be one parameter that we factor into the deal including also as Teemu asmentioned about cash repatriation on that. So obviously there are multiple ways of working on the deal and you will see how 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 topics, appreciate your question — asking and so on, but many moving elements at this point in time, we would want to come back when we have more clarity about the — excuse me, the site selection, the outlook and long-term plans of our volumes. And then we have all that available, then we would love to come out and talk to all the investors about that. And as I said, by the end of the year, hopefully after quarter three and 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 the many moving elements at this point of time. Teemu, any additional comments you have?
Teemu Kangas-Kärki
May be to that, the instauration of the cash, I think that’s one of the fundamental element in structuring the possible transaction, and so far what we have been seeing and hearing it should be possible.
Christoph Laskawi
Thank you. Just one follow-up if I may on suppliers of yours and I mean, in general, you have been sourcing for 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 actually 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?
Jukka Moisio
So far, no major changes, things continue quite normal with except some Russia of course which is not normal as maybe unnecessary to say here.
Operator
Thank you. Our next question comes from the line of Panu Laitinmäki of Danske Bank. Please go ahead. Your line is open.
Panu Laitinmäki
Yes. Thank you. I have two questions related to your plans on new capacity. So first, can you give any color on the shortness of options that you have? I understand you haven’t made the decision about any color on product whether you would think it’s a Greenfield or an active system or what size are 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 U.S. 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.
Jukka Moisio
Okay. So let me comment about the options and Teemu will talk about the cost and expected investment now. So options we have 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 few — into few. And out of those few, we are doing deeper [indiscernible] but now, and we have essentially 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. Teemu?
Teemu Kangas-Kärki
And then in terms of financing, the investment my current view that we can do the investment without new equity. And then the U.S. factory is a good proxy for the total investment amount. And in U.S., how we are doing it is two plus two million phases in the new CE factory. We are currently planning to do it in three plus three million tyre phases.
Panu Laitinmäki
Thank you. That’s very clear. Can I just ask one follow-up? So can we use the U.S. kind of building of the factory as a proxy of how long will it take competition to getting cars out from the factory?
Jukka Moisio
Yes. The concept is slightly different because we go with the ambition that we start producing as quickly as possible. So therefore, we change a little bit the order of equipment and we start with — without mixing department. And so we actually build with the tyre building and we start with that so that we get tyres faster to market. And then we bring a mix from Nokian and build the mixing department concurrently when we are in the factory. So that gives us best time to market from the factory.
Teemu Kangas-Kärki
And that is the playbook that we used in Russia. So we make the mixings in Finland and then move then to Russia site.
Jukka Moisio
America is too far away from doing that, but Europe is close enough that keeping the mixes from roughly originally and have a faster time to market.
Operator
Thank you. Our next question comes from the line of Michael Jacks at Bank of America. Please go ahead. Your line is open.
Michael Jacks
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 just stop there and I’ll ask my follow-up after that.
Teemu Kangas-Kärki
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 in inventories. Then just basically in finished goods and raw materials there, I would say that that a good proxy is some somewhere between 50:50.
Michael Jacks
Okay. Thanks. And maybe just as a follow-up to that and how has that split changed relative to the prior quarter?
Teemu Kangas-Kärki
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 in the — at the end of Q2 effect both raw materials and finished goods inventories are on a high-level compared to Q1.
Michael Jacks
Okay. So the proportion between finished goods and raw mats is similar in other words?
Teemu Kangas-Kärki
I cannot recall by heart what was the level in — at the end of Q1 at the moment so sorry to comment.
Michael Jacks
Okay. Thank you. And 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?
Teemu Kangas-Kärki
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.
Jukka Moisio
So it’s also important to keep in mind that we have relatively new product also now for the winter season both the friction tyre R5 as well as Hakkapeliitta [indiscernible] was launched last year. So therefore that allows us to look at the pricing.
Michael Jacks
Okay. Thank you. That’s clear. Last question from my side. Just on Dayton, are there perhaps any thoughts as you’re potentially converting some of the capacity there to into tires?
Jukka Moisio
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-take to other customers, but now we introduced more our own tires to-date, and then ramp it up that day. But these are tires so far we’ll be been making in Nokian and that capacity is sufficient at this point of time to service Nordic and the North American market, especially for studded winters. Friction tires it remains to be seen, we will see how that, the starting technology, starting equipment to move Dayton to North America at this point of time is not operationally clever. It’s better that they stay where they are and are fully addressed in the current location.
Operator
Thank you. Our next question comes from the line of Pasi Väisänen of Nordea. Please go ahead. Your line is open.
Pasi Väisänen
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 kind of coming out in the coming months before the third quarter earnings announcement. And are you still thinking about the subcontracting model, which actually could affect the missing European sales volumes for a period you’re building up your own plant, because you actually say that you have selected Greenfield, not the joint venture, but does that exclude subcontracting? And if you’re using the, kind of, a capital breaching for the European production, are you targeting at the full €5 million to €6 million for that breaching? And what could be the profitability that possible outsourcing there? Thanks.
Jukka Moisio
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 in before the year Q3 earnings. And then about the update, 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 clever 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 update and we will bridge the gap as much as is financially justifiable. So all the plants that we talked about are very much valid and continue as planned and as announced or as discussed.
Pasi Väisänen
So you are able to keep up your market share and your prevalent market share with your profitability in that sense?
Jukka Moisio
We want to remain relevant in the market because it’s important that Nokian Tyres is relevant and a brand that people recognize and value, and therefore, it is important that we do that work while we are building new capacity and capability because then launching something back into the market is far more easier then when there is recognition and important market positions.
Pasi Väisänen
You guys put [ph] it nicely. And what was the target a year or date for this three plus three model in this new Greenfield. So what’s the year we are talking about to reaching €6 million cash?
Jukka Moisio
We will come back to that when we talk about the, financial targets, 2023, 2024, 2025 and the investments in CMD really CMD if I miss targets, hopefully soon after Q3 results.
Pasi Väisänen
Oh, then it must be 2025, because if it’s included in your, kind of, [indiscernible]?
Jukka Moisio
That’s your conclusion. Yes.
Pasi Väisänen
Okay. Yes. Thanks.
Operator
Thank you. Our next question comes from the line of Peter Testa of One Investments. Please go ahead. Your line is open.
Peter Testa
Hi, thank you. Maybe just following on from Pasi’s question. Can you talk a bit about the practicalities of getting high volume outsourcing, thinking about molds, the quality of your product versus the outsourcing available and maybe whether they’d have to come from other regions, just to, sort of, kind of, understand the framework around that, please?
Jukka Moisio
Again, maybe if — we would leave that to CMD in after the third quarter, then we have the plans and volumes and expectations available. And then, we would be far more qualified to talk about these expected volumes and profitability. It’s very much we can’t talk it right now. We have internal information, but this is not the time to disclose.
Peter Testa
Yes, okay. And then, in the late, in your release and it’s by your part you talk about the investment has been substantively cement. I was wondering if you have already ordered equipment or signs, the necessary equipment for molds, I mean, maybe mixing facilities. Have you already made those decisions and then started ordering or is that supposed to come?
Jukka Moisio
So we have already made the first steps, and during the balance of the year, in our CapEx, it will be visible, our downtown payments in order to accelerate the recent deliveries.
Peter Testa
And then, just a question on, just so we can maybe get some understanding of profitability in your existing organization. And if you look at labor, a direct labor as a percentage of sales, plus logistics comparing Nokian to Russia, can you just give us some sense as to what the difference is between those two in a normal year?
Teemu Kangas-Kärki
So to give you a flavor about the impact of our Russia factory versus other, so we have been discussing the recent causes that €10 rough difference per tire produced in Russia or outside Russia. So that gives you a high-level indication of the headwinds that we are carrying when we now have lost supply from Russia to other markets.
Peter Testa
And would you expect to be able to do better than Nokia in a new ramped up facility or at least similar because Nokia’s being more depreciated or how would you think about a new facility versus Nokia?
Teemu Kangas-Kärki
There — I would like to go back to CMD from 2018, where we put to the scale the three factories, Russia, Nokia, and Dayton, because that is a 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 sold, and then on top of that, nowadays, the electricity or the energy has a factor. And let’s see how that will develop impact in the coming years.
Peter Testa
Okay. Then last question, please, is just if you could maybe give us a split between next working capital in total between Russia and outside of Russia even in order of magnitude?
Teemu Kangas-Kärki
So before the crisis, our main finished goods warehouse, or one of the main was in Russia and then the raw materials were in Russia in that order, Russia played a significant role. And going forward I would say that the working capital component naturally, we don’t have that in Russia anymore. And that is been split short-term between two location. And then in the future between three manufacturing locations on top of the normal space warehouses in selective markets.
And then if I continue with the trade 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 cost of 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.
Peter Testa
And is there a split of current receivables in Russia so I just have both [ph] Finnish comment on working capital?
Jukka Moisio
Can you repeat?
Peter Testa
Is there a split of the current account receivables between Russia and ex-Russia, just meaning that that kind of concept on inventory and how things are — how I was wondering about big picture in accounts receivable currently?
Jukka Moisio
We haven’t been disclosing that information, but Russia has been a significant area where we have a slight receivables.
Operator
Thank you. Our next question comes from the line of Akshat Kacker at JPMorgan. Please go ahead. Your line is open.
Akshat Kacker
Yes. Thank you. Akshat from JPMorgan, 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 all of that 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 fleet? And where do you expect this to be at the end of 2022? Thank you.
Teemu Kangas-Kärki
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, our — my current view is that we don’t need any new equity in order to finance the cash flow. And therefore, maybe that’s the to comment I want to make at this point and let’s come back to that after Q3 in our mini CMD.
Jukka Moisio
And then went 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 million to €6 million in 2023 and 2024, and we are heading towards €4 million in Dayton and we said that about €million in last year and then linear into €4 million as we said more equity, looking on that line still the same plant.
Operator
Thank you. Our next question comes from the line of Rauli Juva of Inderes. Please go ahead. Your line is open.
Rauli Juva
Yes. Hello, Rauli from Inderes here, actually my original question was well covered earlier, but maybe a better one on the Heavy Tyres. Can you — maybe if that’s running on full capacity utilization at the moment, then how’s the CMD growth investment proceeding there. Thanks.
Jukka Moisio
Yes. It’s running at full capacity at this moment is very low. So we actually, whatever we make, we sell the capacity increases new lines are coming as we speak, so we are preparing and installing them once they will help step by step the volumes — our production volumes.
Operator
Thank you. Our final question comes from the line of Pierre-Yves Quéméner of Stifel. Please go ahead. Your line is open.
Pierre-Yves Quéméner
Yes. Good afternoon. Pierre-Yves Quéméner with Stifel. 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 should significantly go down in the third quarter, but once you exit from Russia would that region completely disappear and out of our disclosure? Thank you.
Jukka Moisio
Yes. The — what will happen with Russia is that as we work on the localized, and the operations continue, but this Russia and then when we get to a point that the process comes to a completion in terms of signing on close, and then obviously it’ll disappear. It’s very difficult to say when that happens and so on, but until the transaction is being made, Russia, localization will continue running in the coming months and quarters.
Pierre-Yves Quéméner
Okay. But you won’t be able to monetize anything since the region is under clear sanction so that we are appear in revenues possibly in third quarter, but you won’t be able to challenge cash out of Russia, right?
Jukka Moisio
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 receivables so on is one element in that discussion. And as Teemu saying, appears to be possible to monetize it through that kind of a transaction. And so this is what we work on.
Operator
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.
Päivi Antola
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.
Teemu Kangas-Kärki
Thank you very much. Have a good day.
Jukka Moisio
Thank you.
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