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Edited Transcript of THULE.ST earnings conference call or presentation 18-Jul-19 8:00am GMT

Q2 2019 Thule Group AB Earnings Call (Swedish)

MALMO Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Thule Group AB earnings conference call or presentation Thursday, July 18, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lennart Mauritzson

Thule Group AB (publ) - CFO

* Magnus Welander

Thule Group AB (publ) - CEO & President

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Conference Call Participants

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* Daniel Schmidt

Danske Bank Markets Equity Research - Research Analyst

* Fredrik Moregard

Pareto Securities, Research Division - Analyst

* Gustav Sandström

SEB, Research Division - Research Analyst

* Peter Reilly

Jefferies LLC, Research Division - Head of Capital Goods of Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Thule Group Interim Report Q2 2019. My name is Breeka, and I'll be coordinating your call today. (Operator Instructions) I will now hand over to your host, Magnus Welander, the CEO. So Magnus, please go ahead.

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Magnus Welander, Thule Group AB (publ) - CEO & President [2]

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Thank you very much. Good morning, everybody, in this lovely moment, sunny weather day, where we are reporting our second quarter report. And if we go to the first slide of the presentation, we can sum up that the quarter was another quarter of profitable growth for the Thule Group.

I would summarize in saying that it was an okay quarter in our view. We had a 7.3% growth, 3% in -- excluding the currency effects. And if you look at it, we grew in the biggest region, Region Europe and Rest of the World with 3.2%. And I will come back to that. We did mention already in the quarter 1 report that we had some phasing in sales early -- or late into Q1 that would impact somewhat in Q2. So I'm going to come back to that. Region Americas had a growth of 2.3% excluding currency effects. We delivered an EBIT of SEK 558 million, which meant that we had an EBIT margin of 24.1%. So we continue to be a highly profitable company. Our net income was SEK 419 million, and the cash flow from our operating activities was SEK 431 million. So a good solid quarter of performance.

If we go to the next page, you can see that we look as we always say, this is not a company that manages its business on a quarterly basis, we manage it more long term and I, therefore, I think it's always well worth looking at the year-to-date performance. And if we look at year-to-date, we are -- have a 6.6% EBIT -- sorry, a 10% sales growth or a 4.9% growth in currency adjusted, and we are delivering a 21.7% EBIT margin. We have already discussed in terms of EBIT margins that we have a long-term ambition for a 20% performance. And of course, in Q2 and Q3

(technical difficulty)

come back to what our expectations are in terms of our rolling 12 months. But overall, a solid quarter and a strong year-to-date performance.

If we look at the regions, and we start with our smallest region and the one that we have had the most challenges with historically, Region Americas. We had a 2% -- or actually 2.3% growth, excluding currency effect, and which means that year-to-date we're at a 1.1% growth excluding currency effects. But what is clear is also that we had the announcement in late May that there would be the implementation of the 15% additional tariff on Chinese-imported goods, which took effect in the beginning of July. And it's clear from the feedback we have seen on retailer's purchases that, that truly dented the confidence among retailers in the U.S. And you can say, as we expected, we started the quarter strongly and we mentioned in our Q1 call that we had some orders that were slipping into April, and that was a strong month. May was also a good month, while June was clearly a big slowdown versus what we would have expected.

If you look at that, we see mostly that being a retailer and -- effect rather than a consumer behavior, but it's clearly the case that there was an impact on retailer confidence there. In addition, we have already communicated to you several times that we are in the ending part of phasing out some low-margin OE programs, and they had a negative effect in the quarter of SEK 17 billion. So that's 2.6% decline in the quarter due to those. What is positive to note is that the Tepui acquisition has been very well, very smoothly and very quickly implemented into our company. And at our big outdoor show that this year happened already in June, normally happening in August, June this year, we announced to the market that we're rebranding those kind of rooftop tents to Thule globally as of next season. But it's nice to note that the contribution year-to-date has been SEK 47 million. That acquisition -- but more importantly, it versus what Tepui was managing as its own entity, that's a 38% organic growth by rolling it into the Thule Group's performance-enhancing network.

If you look at what we also have as a positive aside from the strong performance of Tepui has been the fact that our second biggest market in the Region Americas, Canada, returned to growth in the second quarter after what was flipped several years of strong performance in Canada. We had a weaker Q1, but it's nice to see, as we expected, that it returned to growth in the second quarter. Brazil continues to perform well. Brazil is the only market in Latin America where we have our own sales team and our own company, and we are continuing to do very well in Brazil. So that's very nice to see as well. What is a more challenged reality in Latin America is almost all the other markets, but especially Argentina, Chile and Mexico, which are big markets, has a tough economy and there is quite a lot of instability, and we did see some sales declines in Latin America also in Q2.

So when I summarize the quarter and year-to-date, more importantly, I can see that Canada and Brazil are doing well. We have some challenges in some of the smaller markets in Latin America, and we continue to have a relatively shaky reality with U.S. retail. We're more positive in terms of consumer confidence than maybe the numbers were for the second quarter for U.S. because we believe it's mostly a retail-oriented worry, but we, of course, need to see that confirmed in true sales growth in the coming quarters.

If we look at the bigger region, Region Europe and Rest of the World on the next page, you can see that the headlines says, year-to-date performance very strong despite the slower Q2. And I think it's very important to remind you what we actually stated on our quarter 1 call, where we pointed out that we had seen early spring sales phasing of our single biggest category, Bike Carriers, into March and we mentioned that, that would impact clearly our Q2 sales. We've mentioned an endless number of times that we will not judge the company on a quarterly performance and that we will see, due to earlier spring weather or later spring weather, sometimes a shift between weeks, which impact exactly around quarterly closes. That was an impact that would have reduced roughly 2% our sales growth in quarter 1, thereby, roughly increased it with about 2% in quarter 2. So in a true comparative way, it would be more an 8% growth in quarter 1 and a 5% growth in quarter 2. Year-to-date, we're at 6.3% excluding currency effects, which we still feel is a very solid and strong performance.

We're delivering that performance despite that we did see some headwinds in some markets. Most markets actually in the region are doing really, really well, but we had clear headwinds in the Nordic and Russian markets. And in the Nordics, it's related to a number of major retailers that have been going through some challenges and quite a lot of reorganizations and other things and maybe not necessarily focused as much as we would have loved to on driving sales in our categories. And in Russia, it's related to a general shaky situation in the financial markets and in some of the retailers there with some of our customers.

In the Nordics, we also on top of that have had a -- very tough comparables because, as we have mentioned a few times during 2018, we had a very large Roof Box campaign with a major car brand that had heavily PR and media and advertising for a campaign where if you want one of their 4-wheeled drive cars, you also got a Roof Box from Thule included in that purchase. That drove significant volumes that specific year, and therefore, it makes also for a difficult comparison.

We believe Nordics will pick up in the second half of the year, while we have to say that difficult to say how Russia will behave as a market in the second half. The other challenge we had in the quarter was that we are now doing a completely new generation of Roof Racks, and we estimated when we went into that very large project that we would see some pipeline effect while we saw distributors and retailers selling out, and therefore, reducing their stocks of older models before bringing in the new one. We have to say now then when we are a -- 9 months into these 3 phases of launches with the first phase done and 2 phases just to come, that we probably have underestimated the stock levels, both at major international distributors but also out in retail, of how much of the older generation Roof Racks they have. The Roof Racks are outdoor hubs and Sport & Cargo Carrier products, and the most easy to stock up in a store or in a warehouse. They're quite space efficient while a Bike Carrier and a Roof Box are not. So clearly, we have underestimated that and that has impacted our first half sales. We definitely expect to see that improve in the second half of the year as we now see and get confirmation from our distributors and customers that they have started -- they have depleted for the phase 1 and they're starting their depletion for the other phases. So a pickup definitely in the second half for the Roof Racks and going into 2020 as well.

The third matter in terms of impacting the quarter rate of growth, which is still a very solid growth, but slightly lower than Q1 was that we, as expected, finally did see the pipeline cool down in RV product from the OE manufacturers. So if you would look at registration and purchases of RVs from a consumer perspective, that's still doing really well in Europe, but there has been a pipeline that needed to be cleansed. This has dragged on much longer than we thought, in fact, strong sales performance all the way until Q2. But if you look at some of the reports of some of the companies in the RV sectors like the French Trigano and others, you will have heard them already mentioning that for the first quarter we're really seeing manufacturers in Europe reducing inventory levels and production, therefore, impacting sales. That's only a minority of our sales to RV products luckily, so we are not seeing this same type of effect, but it did slow down. And more importantly here, we have to mention, as has been presented by others as well, that the European RV manufacturers are now both doing pipeline depletion of the older models they have, which is really good, it's a good cleansing. But they are also struggling a little bit as all indications are for Q3 to get new chassis with the new motor and models that are improved for driving in various conditions, the Euro 6D engines, so to speak. There is a struggle for the motorhome and the manufacturers to get enough chassis, so we will probably see a weaker Q3, where after a pickup in Q4 and beyond because consumer interest in acquiring these long term is still very strong.

If we then talk about the positives because as you would expect, there's a number of positives, and one of them is that we continue to grow well in our Active with Kids categories where both our multi-sport trailers and strollers continue a very strong development. We did see some challenges in the smallest of the 3, the Child Bike Seats. And one of the markets, the Netherlands, which is the biggest, has some very price aggressive competitive offers, which has dented a little bit and we have in the quarter lost some market share. We're convinced that our market-leading test-winning product will gain back in the future, but it did truly impact some market share in Holland in Q2.

And finally, if we look at Packs, Back & Luggage, the growing categories, Luggage and Sport Bags, developing really nicely and continuing a solid growth as we are hoping and targeting for. So overall, if you look at it once again on the Region Europe and Rest of the World, year-to-date is 6.3% growth excluding currency effects. Taking into account the phasing we already mentioned in our quarter 1 reporting, it is more fairly an 8% roughly growth in quarter 1 and a 5% growth in quarter 2 performance we have.

And with that, I leave it to Lennart to go through some of the balance sheet matters.

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Lennart Mauritzson, Thule Group AB (publ) - CFO [3]

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Thank you very much, Magnus. So starting with Slide 6, the income statement. You see that the gross margins were down in the second quarter. CapEx adjusted versus prior year with 0.7 percentage points. The decrease is driven by the negative effect on the Chinese tariffs for our U.S. purchases, equivalent to 0.2 percentage points and an under absorption hit in our production due to the lower production volumes.

Our SG&A expenses is higher than prior year in absolute numbers, but if we exclude the negative currency effect and the fact that we acquired Tepui in December last year, the organic increase will be totaling SEK 75 million (sic) [SEK 5 million] despite the continued product development promotion initiatives primarily for the new categories.

Financial net minus SEK 10 million versus prior year minus SEK 13 million. External borrowing costs slightly lower than prior year. This year, we are also negatively affected by the new IFRS 16 accounting rules with SEK 2 million sales tax charge in our financial expense this quarter due to that. On the other hand, we had a onetime cost prior year when we put the new financing in place, an amount of SEK 4 million. So as you can see on the right-hand side, we have a very little effect on our income statement due to IFRS 16 as we commented on the last quarter. Effective tax rate for the quarter is 23.4% and year-to-date, we are at 23.2%. So nice to see that the tax rate is slightly going in the right direction.

If we take Slide 7, looking at the operating working capital and cash flow. You see that in the quarter we ended with SEK 1.7 billion in operating working capital, which is 25.3% of sales versus prior year, 24.3%. Inventory levels are at a higher levels than our plans, especially due to the weaker sales here in June. You should also notice that after the currency-adjusted increase year-over-year by SEK 170 million in inventory, almost SEK 50 million are connected to the impact of the U.S. tariffs and actually also the addition of Tepui.

We expect inventory to be reduced in Q3. That means that we had a positive cash flow in Q2, as expected, and we reached SEK 471 million in the quarter versus SEK 341 million prior year. And year-to-date, we are now at SEK 396 million in cash flow versus the prior year of SEK 272 million. Thank you very much.

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Magnus Welander, Thule Group AB (publ) - CEO & President [4]

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Thank you, Lennart. So if you look at our performance versus financial targets, you can see that excluding the Tepui acquisition and currency effects, we are at a 3.7% growth. We are on a rolling 12-month basis at a 17.9% EBIT margin. And we have a leverage of 1.8x in terms of net debt to EBITDA. And as we've already announced, there was an 86% dividend approved for at the AGM this spring.

So overall, some challenges on the growth, but otherwise, a strong performance on profitability as well and cash flow. If we look at the months coming ahead and what we're focusing on, on the last slide, you can really say simply, as you would expect at this time of the year, we are in a very strong sales and marketing focus and we are having a lot of exciting projects that we are driving for our long-term profitable growth.

If you take sales and marketing, it's obvious that there is a lot of attention at the moment in -- especially if you look at some of the more shaky situations like in Latin America and in the U.S., but also in the markets where we're doing really well, but there is a lot of work working with retailers as we are in the peak summer season in helping them to sell-through our products in various ways. We also are prepping for some in-store launches that are happening at the very beginning of quarter 4. So we're ramping up production of, for example, the Thule Vector, a completely game-changing Roof Box in the premium segment that is coming in the very beginning of quarter 4. We will also do phase 2 in our new Roof Racks generation that is coming, and then quickly thereafter phase 3 at the very beginning of the next year. So that's, of course, a big focus as we speak.

And also happy to see the broadening of our luggage portfolio, where we now will launch our third full luggage collection, the Thule Crossover 2 with spinners, carry-ons, check-in bags, duffels, et cetera, which is hitting the market in quarter 4 this year. So a lot of new products hitting stores in the end of the year.

And then, of course, as we are in a number of our chapters and the image shows one of those fairs and events. This was from the Outdoor ISPO in the Munich some weeks ago, where we are in the midst of going to all those fairs to show the 2019 product offer in what we would show to the market. And there, of course, we will be bringing the now Thule branded rooftop tents globally in 2020. And if you are a keen observer, you will see quite a few new bags also in that image that will be hitting the market in 2020 as well.

We also, of course, do a lot of things in a pure operational way and in the coming months, we have a very high focus on delivering On-Time-In-Full. And of course, as we did end the -- June with slightly higher inventory due to the drop in sales in the last few weeks, we are very confident that we will be able to deliver on a very high On-Time-In-Full to our retail customers. We are in the phases of finalizing our global roof rack plant in Sweden, the investment for those final rollouts for the second and third phase of the new roof rack generation.

As you know, we have done a number of major projects in our sites over the last 18 months and what will be a key for our ability to deliver strong profitability in the second half of the year and beyond is, of course, that we are now seeing some of those efficiency gains of those investments and changes in layouts, et cetera, we've done in the plants, which were really done late '18 and early '19, so we will see a pickup in some of those effects in those plants in the second half.

As always, you never know with the raw material market, but we expect with everything we see and all the numbers where there are and trending, the purchase prices that we will see some positive tailwind helping us in the second half of the year. And on top of that, you can rely and trust us that we are very clearly continuing our long-term ambition and focusing a lot on an aggressive product development push for both 2020 and beyond. And in the report, I did mention one of those key new projects is the presentation at the fairs this autumn and then the roll-up next year of a third stroller model that I think is one of those many examples.

So with that, we leave it for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question from the phone line today comes from Peter Reilly from Jefferies.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [2]

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Can you give us a bit more color on what's happening with the seats? You haven't really talked about the seat in the presentation, and in the report you talk about importance of the new third model coming, I guess, Kind&Jugend in September, and you -- I get the impression overall you're a bit behind where you're expected to be on seat. And previously, you have talked about the first year being a sort of consolidation year with maybe an acceleration in the second year because you start to get word-of-mouth referrals and we're only a couple of months away from the anniversary of the launch. So can you help us understand what's going on? Whether you're ahead, behind and what you think -- and what you see coming as the model gets more established in the marketplace?

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Magnus Welander, Thule Group AB (publ) - CEO & President [3]

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Yes. Yes, I can. We are behind what we would have liked to be, which so you're getting the signal right now in your [overall model stats]. We are, of course, growing very fast as you would expect, since we didn't sell it before. And we are in some of the regions doing very well, both in terms of listings that we're getting it into and sell-through in those settings. While in others, we are not getting the same traction as we would have wanted. That doesn't mean luckily for us that retail is as frustrated as we are with our sales numbers. They are actually more saying that, that was in line with what they would have expected and seen for a newcomer in a city stroller segment. So maybe it is us being slightly too over ambitious and/or over positive in us feeling that we're not fully up to track. But we are a bit behind where we would have liked to be, despite it developing very strongly in month-over-month growing, it's not growing as fast as I would have liked. That's also why we're mentioning a lot of the feedback from those retailers where we are feeling like we would want to see more sell-through than they are happy with is their reference and that's why we are mentioning the importance of a third stroller. The second stroller, although more typical city strolling type of reality. They're just saying that the brand has to be out there more and the more models you have, the more names you get out there, every new stroller sells 2 more strollers 9 months later on and so to speak, when people have seen them and planned for them. And that, I think, is a valid point on getting more space. We have had an army of one in a jogging stroller, but really we have an army of one in terms of city strollers at the moment with Thule Sleek. We will add them an army of two and then hopefully combining that with a good pickup is what we're hoping. But we're slightly behind plan, that's the fact.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [4]

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And is the main issue not so much what consumers think of the product, it's more a case of getting listings with retailers because you also mentioned in your report that you've seen, I guess, what's -- maybe it's a heightened level of competitive activity with more new products coming out from competitors to say. Is it mainly a listings issue or because the retailers want to have a wider range? Or is it also a competitive issue where consumers have got maybe a slightly wider choice than they anticipated 6, 12 months ago?

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Magnus Welander, Thule Group AB (publ) - CEO & President [5]

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It's a combination of both, I would say, because in some countries we have got fantastic listings and distribution and fantastic sell-through. In some countries, we have good listings, but not enough sell-through. And in some countries, we haven't got enough good listings. So it's a little bit of a combination of all factors. And the reason I do mention the fact that there has been a very significant amount of activity, and that was to be expected 18 months after Bain bought Bugaboo, you would expect them to come with new strollers and do more aggressive marketing activities and other things to gain back some of their momentum that they lost and there are some other brands that have done some good stuff as well. So I think it's a positive growth. We're doing really nicely. We're just not doing as nicely as we ambitiously had hoped that we would have.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [6]

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And if I could switch track and ask about Sport & Cargo Carriers and particularly bicycle carriers in the U.S., you've been talking about the impact of the U.S. tariffs, and you were talking previously about one of your fears being that bicycles would become a lot more expensive because of the tariffs that would hit your roof rack sales. The tariffs are now here. Are you getting any indications from the -- your channels about what you think might happen to bicycles sales and hence, bicycle rack sales as the tariffs hit fully?

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Magnus Welander, Thule Group AB (publ) - CEO & President [7]

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Yes, you can say that. If you look, there is a statistics official in the U.S., which is partly only covering actually bike sales. It's all the independent bike dealers in the U.S. have a wholesale organization where they track exactly the number of bikes sold in that channel. Nowadays, you have to acknowledge there is also bikes sold in -- more online and other realities that aren't fully captured. So it's not a 100% correct mirror of the bike industry overall, but it is the best statistics that is readily available. And we have to say, it was a very negative quarter 2 where we had -- May was 15% down in bike sales versus May last year. And May last year wasn't fantastic either, to be honest. So in that channel, which is the hardest hit channel there because there they do the more expensive bikes, it has had a very tough ending of the spring and especially May and June were not strong at all. There are some pickup in other channels. But generally, the bike category in the U.S. is one of the ones actually used as an example in various presentations towards U.S. government on what the tariffs does impact in terms of retail sales for consumers.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [8]

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And...

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Magnus Welander, Thule Group AB (publ) - CEO & President [9]

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Luckily, we are not doing nearly as low in that I can tell you, but it is still -- because there is, as I said, some pickup on direct-to-consumer sales and other channels, which aren't captured in this statistics.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [10]

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Okay. And then lastly, you were talking already in the third quarter last year about the potential impact of the new roof rack range where you thought there might be some excess inventory, which would take time to clear out and we're obviously 9 months later now and you've been taken a bit by surprise. So what's happened over the last 9 months that, firstly, you got taken a bit by surprise? And how confident do you feel you've got a handle on what's going on? I guess, it must be very difficult to work out what's out there when you've got lots of small retailers, but I'm slightly surprised that you were surprised at the issues cropping now and I'm wondering what your real visibility is like for the second half?

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Magnus Welander, Thule Group AB (publ) - CEO & President [11]

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As you look at it, we have 35,000 doors in the end, and what I think is the case here is that these have relatively low value per unit if it's a specific adoption of a model, for example, for a specific car. So they might not even have always disclosed those things for us in details and they wouldn't have. But what we have, it's not significant percentages here, I want to point that out, but it's a few percentage points on a large category like Roof Racks makes a lot of dent in the growth ambition. So it's not like we've seen huge drops or anything, it's just slightly lower than we would have expected. But slightly is a lot of money if it's Roof Racks. We see from our order patterns for the second half of the year for the major distributor market, and we see all the indications having dug deeper with a number of these shops that we will see a pickup in the second half already, which means that the majority of the cleansing has already happened. There is some cleansing going on now for the second and third phase as we already mentioned we were expecting, and we have now taken a more conservative expectation on how long those cleansings will be. But despite that, due to the size of the first launch, we are confident that we will be growing the Roof Racks in the second half of the year.

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Operator [12]

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We now have a follow-on question from Fredrik Moregard from Pareto Securities.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [13]

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A couple of questions from my part. The -- we touched on it just briefly with Peter's question, but returning to the inventory and your visibility with regards to that, I was also a bit surprised that you had -- of your visibility into dealer inventories. How are you working with dealers to ensure that you have a correct or as a correct view as you can, on what inventories they're having?

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Magnus Welander, Thule Group AB (publ) - CEO & President [14]

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Yes. We have represented, I think, all along, every single time we've discussed about inventory clarity that for major international large chains, we have a very good feed through on inventory levels. So if you take any of the major U.S. customers, we even have their sales through data, we have an exact situation where we stand. But when it comes to all the smaller distributor countries and we are #1 in Roof Racks in the entire world, in 140 countries, and it is the category we sell most spread geographically in all those 140 countries. So what we don't have is a dealer detail in countries where we go via distributors to a lot of small dealers in Chile, Taiwan, Philippines or anything like that. And as we are mentioning, it's not in the markets where we are forward-integrated that we're seeing this effect and we're honestly only talking about a few percentage points here. So it's not like we completely guessed wrong, but a 1% or 2% growth not happening is more significant. So honestly, if you look at inventory holdings in all major international large customers in all the forward-integrated markets, very good understanding what the inventory levels are. And as we've openly said numerous times in small faraway distributor red countries we do not have that detail or clarity.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [15]

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Okay. Great. That's helpful. And you also touched upon the order book indicating that you will have sort of a turning situation in the second half of the year. How far ahead can you see it with regards to your orders? And what is the -- how reliable are these order books?

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Magnus Welander, Thule Group AB (publ) - CEO & President [16]

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Once again there, it's the same thing there. For the major international large customers that dominate our sales, we are in forward-integrated markets where honestly our order book is 1 or 2 weeks out. But for the international distributor countries, so if we are going to ship a full container load of something to a Chilean distributor, a Filipino distributor, we, of course, want to work with them to do that, both as cost efficiently and as environmentally friendly as possible by packing full containers, which means we plan much further ahead to discuss exactly how many bike carriers, how many Roof Racks, et cetera, in a much longer planning horizon because we want to make sure that happens. So if you look at our order book for the majority of our sales, it's extremely short because we are a next-day delivery to retail in all the major countries. But if you look at our order book for those markets that we specifically were taken by surprise for the Roof Racks, there we have a longer order book, which is why I can say that we see a much better order book specifically for those markets where we were surprised so far on Roof Racks.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [17]

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Okay. That's helpful. Moving over to Tepui, you mentioned that you will have the -- you will do the rebranding of Tepui with the Thule brand in 2020 and you say that there will be a global rollout. I was curious to know about what global plans you have for the brand and/or for the product? And are you able to gain any new listings outside the U.S. for this product category?

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Magnus Welander, Thule Group AB (publ) - CEO & President [18]

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Yes. Of course, we have said a few times, that this is a relatively niche product in every country, but specifically it has some major volumes only really in North America, Australia and South Africa. Then there is a niche market opportunity in lots of other countries. You have Swedes buying these products, you have Germans, you have Koreans, you have Japanese. So there is, of course, a small volume in a lot of countries. Our plans are, therefore, that the majority of sales would definitely come from the U.S. and North America there going forward. But having a very cost-efficient ability to distribute this product into other countries, we will be differently from what Tepui ever could do, able to offer this product to a number of markets and, therefore, grow more than we would if we only concentrate on North America. It will not have a significant impact on our growth numbers, but it will be a nice addition in bringing a limited assortment. We will not offer all the models that we offer in North America because it would not make sense for a market where we might sell 50 or 100 of it. So it will be a more curated assortment than we offer in North America, but that curated assortment will start hitting the market as of February 2020 under the Thule brand.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [19]

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Okay. Interesting plans. And lastly, on the Thule Revolve, what is your -- or how is that product developing in the Americas and Europe or Rest of the World compared to your expectations? And are you still seeing positive spillover effects for the Thule Subterra you talked about having an army of one in that category also before?

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Magnus Welander, Thule Group AB (publ) - CEO & President [20]

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Yes. If you look at Thule Revolve, that is developing to our plans, which is very positive to see and it is helping still to drive sales of Thule Subterra as well. So in addition of coming now with a third and we are hoping, of course, that there will be a recognition factor of seeing more and different levels of different versions, so to speak, of luggage, because it has a brand on it. So, yes, that one is developing very well according to our plans.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [21]

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Okay. Does that mean that you're seeing actually growth then in Packs, Bags & Luggage in Americas?

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Magnus Welander, Thule Group AB (publ) - CEO & President [22]

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Yes. If you look at luggage, we're seeing a fantastic growth. But then, as you know, in Americas, we both have some OE very basic bags and we have a relatively large legacy. But if you look at luggage, we see a very big growth in Americas as well.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [23]

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Okay. So positive for the category as a whole?

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Magnus Welander, Thule Group AB (publ) - CEO & President [24]

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Yes.

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Operator [25]

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We now have another question from Gustav Sandström from SEB.

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Gustav Sandström, SEB, Research Division - Research Analyst [26]

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Sorry for being a little bit late to enter the call, so I apologize if you already answered this, but my question relates to raw materials. Did you mention the impact if it was positive or negative in the quarter year-on-year to your margins from raw mat? And is it a fair assumption that it should be a material impact on a positive matter for the remainder of the year?

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Magnus Welander, Thule Group AB (publ) - CEO & President [27]

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We didn't go into deep detail on the second quarter, but it was flattish. And you're 100% right, it will help us definitely in the second half of the year.

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Gustav Sandström, SEB, Research Division - Research Analyst [28]

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And -- perfect. And looking at mix, how much of a mix impact did you have from sort of new product launches this year? And should we see that also being sort of a second half story where you have a lot of new launches coming into the market sort of Q3, Q4 this year? If you could just elaborate a bit on this.

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Magnus Welander, Thule Group AB (publ) - CEO & President [29]

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Yes. If you mean mix impact in terms of average margin, there is a lot of factors, of course, in margin happening. And generally, you would say that a lot of our new products are high-margin products, but also it's always comparable to other high-margin product maybe in a different category. So in total mix there, I think, most people realize, for example, if we're not seeing the same growth we would have liked in Roof Racks, that's not going to be great for our gross margin. I think most people would realize that being the undisputed global market leader, we have a pretty high gross margin on Roof Racks. So there are effects like that also playing in. But generally, if you look at mixed effects, one that is obvious is, of course, as we are phasing out some low-margin OE business and they are starting to disappear, and as we, unfortunately, have to realize that some of our legacy categories in Packs, Bags & Luggage will continue to decline and are declining and they are low margin, hopefully with some of the other things not happening. So if we do pick up in Roof Racks, et cetera, it should help our gross margin in that sense also for a mix effect.

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Gustav Sandström, SEB, Research Division - Research Analyst [30]

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Yes. I was mainly referring to perhaps some price increases through the new product categories and the renovation of the Roof Racks, but I get your answer there.

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Magnus Welander, Thule Group AB (publ) - CEO & President [31]

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No more questions, I assume operator?

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Operator [32]

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Sorry, there. My line was on mute. We now have a question from Daniel Schmidt from Danske Bank.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [33]

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Sorry, I was sort of kicked off of the conference call, so I might have missed this, but the sort of the situation in European RV that you write about that we also heard about yesterday from [Ambatik]. And what is the -- again, you might have mentioned this, but did you continue to grow in the quarter despite what happened in the market? And what are you seeing going into the sort of the third quarter?

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Magnus Welander, Thule Group AB (publ) - CEO & President [34]

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Yes. Small growth in the quarter, still growing, small growth though and mostly driven by the fact that we sell major share to a dealership structure and not to manufacturers, which is the smaller part of our business because in the manufacturer part, it wasn't growing in the quarter. But if you look at it, due to the Euro 6D engine chassis issue, they are not getting chassis enough from TS and others at the moment to be able to manufacture as many as they would want of the new types, which I think approximately might be only good for the industry because they're going to cleanse out better the pipeline of the old types, which is necessary. But that will definitely impact the whole category in Q3. I hope still that we will be able to at least be flat or a small -- ideally, some small single-digit growth, but it's going to be a tough Q3. Once they start to get those chassis, there will be -- have been a pipeline depletion effect because over in this quarter and next quarter there will be more purchases of RVs by consumers than there will be manufacturing. So very differently from the U.S., where there was an absurdly high pipeline still. Here it was high, but not as absurd. So these 2 quarters alone will definitely be quite a lot in bringing it in line, while already Q4 should hopefully be picking up a bit, but definitely from 2020 beyond.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [35]

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Okay. So you're basically saying that because you probably had a fairly good start to the quarter. And then it sounds like you were flattish towards the end in your business and that's where you enter the Q3, is that fairly well understood?

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Magnus Welander, Thule Group AB (publ) - CEO & President [36]

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Yes. It's a good interpretation, yes.

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Operator [37]

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Our final question comes from Peter Reilly from Jefferies.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [38]

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Just 2 follow-ups, if I may. If I take you back to the Capital Markets Day, at the time you were saying, if I recall correctly, that you saw near-term faster growth opportunity in strollers, medium-term luggage was maybe a big -- was the bigger market and it was going to be slower to take off. And if I look at what's happened since then, the impression I get is that you've become a bit more cautious about strollers and a bit more optimistic about luggage. You haven't given us the actual growth numbers for the precise categories. But unless -- is it fair to say that you're getting structurally more optimistic about luggage and a bit more cautious or less bullish about the stroller category?

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Magnus Welander, Thule Group AB (publ) - CEO & President [39]

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I wouldn't say that in the long term. We always said it would mean a number of stroller models and a number of collections in luggage and a longer period of time. I haven't changed my overall opinion. I think we're coming with a cracking new stroller that we'll be presenting at the fairs this autumn, that I'm sure will drive volume. And in general, we are showing strong growth, both at the previous launch of the Glide stroller and of the Thule Sleek. So it's not that I've changed my overall opinion on total long-term plan in strollers, I'm convinced that we will get consumers to pay for our strollers and win share there over time. So not an overall change, but sometimes it goes slightly faster some quarters, slightly slower some others. And if you look at luggage, same thing there. I do not change my mind in terms of underestimating some of the huge behemoths of the Samsonite Group and all the money from the LDMH Group behind RIMOWA and lots of up and coming direct-to-consumer brands like Horizon and Away and others. It's -- luggage is a huge category, but it is a very challenged category and it takes time to get into retail. I'm still confident that we will have some countries where we are incredibly successful with Luggage and some where we'll be okay, and some where we will be mediocre to embarrassing also in a few years' time. So I haven't really changed my mind there. I think some collections will pull, some will not. It's going to be a bumpier ride. It's -- over a few years, I'm convinced of both of them actually. But in terms of global success, there is a higher likelihood that, that will be strollers, but that is a significantly smaller category.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [40]

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And then lastly, an unfair question, but I -- so I apologize in advance, but you talked earlier in the year about having a much stronger second half because of the timing of product phaseouts, new products coming through and so forth. And obviously, you've had a pretty weak development towards the end of Q2 and you've now got quite a few headwinds, I think, going into the third quarter. So I guess, you must be a bit less positive about the growth in the second half of the year? And in particular, in the third quarter than you were earlier in the year?

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Magnus Welander, Thule Group AB (publ) - CEO & President [41]

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I'm still convinced that the second half of the year is our stronger and more balanced year in 2019 than it has been historically in the last few years in terms of growth during the year. And there are a lot of logics due to what we're launching and when we're launching that, we should see a more balanced growth throughout the year. So that opinion hasn't changed actually. We see some of -- some very good products that we're launching. What you are right with is that it is erratic a little bit in the U.S. with the tariff announcements and what it does to consumer confidence, we don't really know yet. So far, it's mostly retail confidence. And so in that sense, you're right that there is maybe one more worry on it. But otherwise, I'm still positive that Q2 is a strong growth -- second half of the year is the strongest half of the year of growth for us.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [42]

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Okay. Well, I look forward to seeing the new stroller model in September.

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Operator [43]

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(Operator Instructions)

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Magnus Welander, Thule Group AB (publ) - CEO & President [44]

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And there seems to be no additional questions. I know you are all incredibly busy and all the reports coming out. And I know you will be incredibly busy using Thule product during your vacation period. So I truly look forward to having a catch-up with you after the Q3 report, and wish you a great summer. Thank you.

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Operator [45]

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Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.