European sales up 8.8%, accounting for 43% of total revenue

High-inch tires reach 41.5% of sales mix

Rising raw material costs and freight rates weigh on margins

The Nexen UniverCITY, Nexen Tire's central research institute. [Nexen Tire]
The Nexen UniverCITY, Nexen Tire's central research institute. [Nexen Tire]

Nexen Tire maintained sales above 800 billion won ($596 million) for a fourth consecutive quarter in the third quarter of this year, driven by strong demand for winter and all-weather tires in Europe, but rising raw material costs and maritime freight rates sharply eroded profitability. Operating profit fell more than 60 percent from the same period last year.

Nexen Tire disclosed Wednesday that it recorded sales of 814.8 billion won and operating profit of 18.1 billion won in the third quarter of this year.

Sales rose 4.4 percent from the same period last year, when the figure stood at 780.7 billion won, extending the streak of quarterly sales above 800 billion won to four consecutive quarters since the fourth quarter of last year. Sales did, however, fall 8.6 percent from the second quarter of this year, when they reached 891.3 billion won.

Operating profit dropped 61.1 percent from 46.5 billion won in the third quarter of last year, and was down 47.2 percent from 34.3 billion won in the second quarter of this year. The operating profit margin came in at about 2.2 percent, down 3.7 percentage points from 6.0 percent in the same period last year.

Europe was the primary driver of top-line growth. European sales reached 349.1 billion won in the third quarter, up 8.8 percent from a year earlier, accounting for 43 percent of total revenue — the largest share of any region. North America made up 21 percent of sales, while South Korea and other regions each accounted for 18 percent.

In Europe, sales of tires suited for winter driving and all-weather tires increased. The company has also been shifting its product mix by expanding supply of high-inch tires, which command higher unit prices.

In practice, tires of 18 inches or larger accounted for 41.5 percent of total sales in the third quarter of this year, up 3.4 percentage points from the same period last year and 2.7 percentage points from the previous quarter.

By region, the share of high-inch tires in Europe rose to 32.2 percent, up 7.3 percentage points from a year earlier. In the United States, the company expanded the range of high-inch products supplied to key customers, pushing their revenue share into the 50 percent range.

Sales of products targeting seasonal demand also expanded. Cumulative all-weather tire sales for the first nine months of this year rose 31.3 percent from the same period last year, while winter tire sales grew 11.7 percent.

The company said the launch of a new winter tire, the Winguard Sport 3, in Europe and the introduction of the all-weather tire N'Blue 4Season 2 in South Korea and the United States contributed to the sales increase.

Nexen Tire is also expanding its supply of original equipment tires to global automakers.

The company began supplying its high-performance N'Fera Sport tire for Audi's new mid-large sedan, the new Audi A6, and is also providing original equipment tires for new models of the Hyundai Motor Company Avante and Tucson and the Kia Sorento.

However, the expansion of higher-value products did not immediately translate into improved profitability.

Geopolitical uncertainty, including the war in the Middle East, pushed up raw material prices and maritime freight rates, increasing cost burdens. A stronger won also weighed on the won-denominated value of overseas sales and on margins.

The cost of sales ratio in the third quarter rose to 74.0 percent, up 2.6 percentage points from the same period last year. Although sales increased, production and logistics costs grew at a faster pace, pulling down operating profit.

Rising raw material prices could remain a burden for now. The Association of Natural Rubber Producing Countries said in its September market report that weather conditions in Southeast Asia, supply disruptions and geopolitical uncertainty in the Middle East had all contributed to higher natural rubber prices.

Shifts in the European trade environment add another variable. The EU imposed definitive anti-dumping tariffs of 4.3 to 45.3 percent on passenger car and light commercial vehicle tires from China in July. With Europe accounting for a large share of its sales, Nexen Tire must factor these trade policy changes into its production location and product supply strategy.

Nexen Tire expects that once the burden of raw material and logistics costs eases, expanding sales of higher-margin products such as high-inch and all-weather tires will help improve earnings.

The company is also stepping up its response to global environmental regulations. It is managing its raw material supply chain in line with the EU Deforestation Regulation and the Green Claims Directive, and is reviewing compliance with relevant rules across its production and marketing processes.

"It is meaningful that we sustained top-line growth centered on high-value-added products and the European market despite an unfavorable external environment," a Nexen Tire official said. "We will improve our product mix around all-weather, winter and high-inch tires and proactively respond to global regulations to restore profitability."


kwater@heraldcorp.com