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Edited Transcript of THULE.ST earnings conference call or presentation 25-Oct-19 9:00am GMT

Q3 2019 Thule Group AB Earnings Call

MALMO Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Thule Group AB earnings conference call or presentation Friday, October 25, 2019 at 9:00:00am 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

* Mats Liss

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Stellan Hellström

Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods

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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 for Q3 2019 Conference Call. My name is Jordan, and I'll be coordinating your call today. (Operator Instructions) I'm now going to hand over to Magnus Welander, CEO, to begin. 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 and happy to talk about our third quarter of 2019. And as the first slide headlines says, it was a very good quarter in all markets, except our biggest market, the U.S. So, of course, the call will both deal with what's going on in all the other countries outside the U.S., but, of course, also why we didn't perform as we would've liked in the U.S.

So if you look at net sales. We have a net sales of SEK 1.682 billion, which meant a 7.7% growth. And excluding the currency effects, a 3.9% currency growth. And there, the Region Europe and Rest of World grew with 6.7% excluding currency while we saw a decline of 2% in Region Americas. Fully contributing the negative effect was the U.S. market.

If we look at (technical difficulty) million and an underlying EBIT margin of 16.3%.

For you who also read the report, we have also announced the fact that we have initiated a product recall of 2 types of motorized awnings in our RV Product category. So EBIT effect as we have made a SEK 25 million provision for that product recall is then that we -- our EBIT is SEK 249 million in the quarter.

And from a net income perspective, we earned SEK 181 million.

Good, solid cash flow in the quarter and the cash flow from the operating activities was SEK 571 million as compared to the SEK 499 million for the same period last year.

If we turn to the next page and look a little bit what this quarter versus that year-to-date performance has been, you can see that on a year-to-date performance, we are growing in our sales of 9.4%, that's 4.6% excluding the currency effect. So we are still doing a solid growth. Our growth of EBIT year-to-date is 6.8%, and year-to-date, we are then at a 20.2% underlying EBIT margin versus the 20.6% in the last year.

If we then jump into the regions. So we start with Region Americas. We can clearly say that it was a tough quarter in the U.S. market, which is our biggest market. So net sales were SEK 494 million, but it was a 2% decline excluding the currency effect. And year-to-date, we have a 0.1% growth excluding currency effects.

If we look at it, there are some good things in the region, and then there are some tougher things in the region. So if we just highlight in regards to the acquisition we did in December last year of the Tepui-branded rooftop tents where the cusp of that market is in the U.S. It is very nice to say that, that is tracking according to our plan. Sales from Tepui was in this quarter SEK 14 million. And year-to-date, we have sold for SEK 61 million, which means if you would compare to what Tepui as a standalone was doing in that same time period, a 24% growth versus previous year.

We have already announced that as of 1st of January 2020, we are rebranding this product to Thule so they will Thule Tepui rooftop tents with the Thule as the brand and we are also bringing them into a global scenario. So it's very nice to see the strong performance of that acquisition continue.

We've also mentioned for an 18-month period the choice we made to phase ourselves out some low-margin OE programs in the U.S. market specifically. The impact negatively in this quarter was [up] SEK 10 million and year-to-date, we've had a decline of SEK 39 million. We are finally coming to an end of this phase out. So if we look at it in the fourth quarter, we are expecting a decline of -- a slightly bigger decline than we had in Q3, which then, of course, will impact that quarter more proportionately as that is a smaller sales quarter. But it also means that we are finally coming to an end of something that over a long period of time has been a drag on the U.S. sales performance.

If we look at then that U.S. market, taking these things into consideration, the U.S. market specifically declined 6% in the quarter. I think all of you that are following consumer goods companies and especially seldom purchased consumer goods companies in the U.S. market, know that the communication in regards to tariffs has been erratic over the year and unclear at times. But to remind everybody a little bit on what has happened, we had a tariff communicated September last year, late September last year. And that tariff was then announced to be a two-step affair with first tariffs implemented at the very end of September '18 of 10%. The additional 15% were initially planned to be implemented in January. That did not materialize and it was then later on postponed and announced in late May for a true introduction in July. So in the third quarter, the additional 15% tariff. And then after that fact, there is additional tariffs on some of the products that initially were not included in tariffs on these Chinese produced goods.

On a total scale, we have more local U.S. production than our competitors have in these niches where we do. So it's not that we have a competitive disadvantage. If anything, the opposite is true. But what absolutely has happened clearly in the period is with the confusion and the concerns in the marketplace, it's clear that several retailers have both worked on their inventory levels further. There has been clearly some impact also on consumer confidence, especially related to the bike category, where sales numbers as officially reported in the U.S. market are very disappointing on sales of bikes. And the reality is this, bikes are a great majority in the U.S., made in China. And if you look at a tariff impact, then in the third quarter as of July, of 25% on a relative basis has declined that has meant that a lot of U.S. consumers, I think are partly tax clear and this is my hypothesis together with our U.S. sales team, are maybe hoping and holding on and waiting for some end-of-season discounts or some changes potentially to tariffs before they commit to buy new bikes.

So there is a tough market for -- in the U.S., there is a general retail concern. What is also the case is that every time when you have an outsized performance that is not promising to quickly change into the better, U.S. organization have to challenge if you have done everything in their power and with the right ways in the organizational setup that you have. What we have decided to do is that we, together with the U.S. management, are going through a detailed review on our commercial organizational setup for the U.S. market specifically and we'll be announcing some changes to that setup during the fourth quarter.

To give you an indicative thing, because that easily sounds like we're doing major restructurings, that is not what we are doing because we have a lean and well working overall organization. But at the same time, as some flows of who we sell to and where we sell and to whom we sell, we work with, as often is the case in the U.S., a combination of own salespeople, major national accounts, combined with independent sales rep groups for specific smaller shops around the U.S. market. And as flows and growth rates change between these type of accounts, there is opportunities to reorganize and reshape the organization.

At the same time, we also are in the final phases of an implementation of one global ERP system, where we, by quarter 1 next year, will be ready with that implementation. And that, of course, also enables some synergistic efficiency gains in how we operate the company globally. That will impact the U.S. setup.

So what we're talking about, to give you a sense of scale, this is a rough number, but it's a sense of scale of a one-off cost hitting in the fourth quarter around SEK 15 million. And with an assumed annualized savings when fully implemented of around SEK 20 million. So it's not -- the focus is not, as you can hear in those numbers, the financial as much as the operational efficiencies of a slimmer, better operating setup in the -- structure that we are after. So that's for the U.S.

If you look for the rest of the markets in the Region Americas, Canada kept on performing really well. Brazil, which is the third market where we are integrated forward to sell direct to retail, continues to perform well, which is very nice. And as many of you will have remembered, in the rest of the Latin American markets and the Central American markets where we operate with distributor setups, has been quite erratic performance during the first 2 quarters of this year. It was therefore very nice to note that we had a growth in the rest of Latin American markets also in Q3. I personally still believe that the Latin American markets will continue to be volatile, but it's nice still to see that we have a strong Q3. So overall, outside of the U.S., a strong performance.

If we then go to Region Europe and Rest of World, there we can clearly say that our performance was very solid in the ending part of the season in Q3 as well. So we had a sales of SEK 1.188 billion, which was a 6.7% excluding currency effect. And year-to-date, we, therefore, have a 6.4% growth excluding currency effects. And what is nice to note here clearly was that this really applied to all major markets and then generally to all markets actually.

And especially here, once again noting to previous quarterly calls where we have communicated a weak start in the Nordics region and in the Russia region in the first part of the year, it was nice to note, as we had expected, that Nordics returned to positive performance. And it was also good that Russia did the same. So we saw a good development in both those 2 regions as well.

We have also commented previously in the Roof Racks, where we, I remind everybody, that we are doing a very big generational shift that we have commercially decided to make life easier for all our retail customers around the world, being the undisputed market leader globally on roof racks, which is a very complex category to serve all the different car types and car roof types and car models. We did that launch -- or decided to do that launch in 3 phases. We are just about to go into Phase 2 in this region, and the Region Americas will follow soon. And as the keen observer of the Thule Group will remember, we have announced that the phase out of the old systems, or Phase 1, was slower and with bigger inventory stake holdings in some of those distributor markets that we had expected, which therefore, dented our sales in the first half. That's why it is nice to see the confirmation that, that hypothesis that we said that, that would be mostly a slower and slightly larger pipeline depletion of the whole, it was nice to note that we started growth again in the third quarter of Roof Racks.

Then finally, the category that we also have discussed a lot in the past calls where we will probably be accused of cry wolf syndrome, is that we have been quite cautious for a number of quarters in a row on the RV market. And then, as you may remember, that we commented that the second quarter started well for RV Products after a strong first quarter. But then ended abruptly at the very end of the second quarter with clearly a lot less production from the RV manufacturers. We were a little bit positively surprised how strong the RV market continued in Q3 after that rapid decline in Q2. So it is not nearly as bad as we had expected. In fact, it was pretty good. So that means that some of the manufacturers started in Q3 to get some of the capacity limitations they have had on the new Euro 6D chassis and engines, the new eco confirmed engine set up. They must have been getting slightly more than we were expecting.

However, if you look at reports on the various companies in the sector and commentary, there is probably still some concern definitely in Q4 on -- that all of them will not be getting all of the quantities that they may have even consumer orders for those vehicles. So I don't think it will be a very strong Q4 but still surprisingly holding on well in Q3.

If you then look at the remaining 2 categories, the newer categories that we are having a long-term ambition to grow in, it's nice to know that Active with Kids continues to perform well and that we now saw a very good growth in Packs, Bags & Luggage. We are a very small player in a huge market in luggage. And when you're a very small player, you have to realize that it takes time to do things. But you have to have wins all the time. So it's very good to note that in the key Asian market, which is steady, of course, a very small region for sales of the Thule Group but where, in the global sense for luggage, it is a very key region. It is nice to know that we're getting a lot of good listings, both at airport stores, department stores and luggage specialists. It is from a very low base so we shouldn't prefer ourselves blind on percentile growth, but it is good to see that we have a good traction with those bags. And we are, of course, continually broadening our assortment. So in the third quarter, we launched our third collection, which is called Thule Crossover 2. It's a soft luggage collection with various types of both rolling bags as well as smaller bags. What is also meant was our first soft bag luggage collection with what is called spinner wheels, so 4 wheels, which is a key category.

In quarter 4, we will be broadening that solution with spinner wheels, 4 wheels, also to our best performing luggage collection, Thule Subterra. So later on in Q4 now, there is coming also spinner solutions into the success of the Thule Subterra collection. And that means that we are starting to really truly be able to offer 2 full soft goods collections with spinners, 2 wheels, smaller bags and larger check-in bags as well as the Thule Revolve hard case collection. And finally, by that, we are starting to be a real player, not an army of 1 or 1.5, but really start to have a broader assortment in luggage.

If we then move on to start the financials, I lead the word to Lennart who will walk you through that.

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

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Thank you very much, Magnus. On to Slide 6 where we have the full income statement. You can see that gross margins declined in the third quarter, FX adjusted versus prior year, we [bumped 0.2] percentage points. Decrease in the margins, driven by the negative effect of impact across the bar of the Chinese tariffs with U.S. purchases equivalent to approximately 0.2 percentage points. Primarily driver was the under absorption in our spending units due to lower production volumes. We did see, and it's good to note that we did have small favorable push price barriers on commodities as we have estimated to come beginning in the second half of the year.

Looking at our SG&A expenses, they are higher than prior year in absolute numbers. But if we exclude negative currency effect with the fact that we acquired Tepui last year, the organic increase in the quarter was SEK 11 million, and that is due to the Product Development and acquisition of (inaudible). As you can see, we are still very lean from the tariffs with this expense line. Also the line items, selling expenses. Worth mentioning is that in here, you see the hit of the SEK 25 million of products recall provision that we have mentioned.

Financial net minus SEK 12 million, that's flat versus prior year. However, this year, we have the IFRS 16 accounting rule change, which broadened the expansion that began in the (inaudible) SEK 3 million in the expenses (inaudible) actually. Like-for-like we would've been SEK 3 million less. And mentioning them, the IFRS 16 impact, as well we also have several times mentioned, there is almost no fixed amount on our income statement. Matter of fact, in this format it's 0. The EBIT help we got the SEK 3 million, we don't have the financial expenses of SEK 3 million.

Effective tax rate for the quarter, 23.7%. So year-to-date, we are at 23.3%. If we then look at the next slide which is operating cash flows and operational cash flow. We see that operating working capital, we ended the quarter with SEK 1.446 billion, which is 20.7% of SEK. As we said in the Q2 report, we expect that inventory, because it's the main driver for this, to be reduced in Q3, and we did decrease it between Q2 and Q3 with SEK 144 million. If you now look at the currency adjusted increase of inventory of SEK 70 million, which means half of that is SEK 35 million is because of the acquisition of Tepui, which we did this time last year, and the tariff impact of Chinese purchases. That means that we had a very good operational cash flow for the quarter so we reached SEK 600 million versus SEK 515 million the prior year and year-to-date, we are close to SEK 1 billion cumulated versus SEK 800 million last year. So improvement due to reselling, improved working capital and less capital expenses this year.

Thank you.

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

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Thank you, Lennart. If we then look at our performance versus the financial targets, we are constant currency net sales, excluding the Tepui acquisition, at 3.5% versus our target of about 5%. And considering that the fourth quarter is by far the smallest sales quarter, it is clearly the case that we will not be able to reach the 5%. We believe that quarter 4 will be in line with roughly what we did in quarter 3 in terms of sales growth.

If you look at underlying EBIT margin, we are at a rolling 12-month basis at 17.7% and year-to-date, 20.2%. And so, therefore, it's worth noting and reminding that the fourth quarter is not only our lowest sales quarter, it is also clearly the one with by far our lowest EBIT margin. So if you look at that, that's also where we believe from an EBIT margin point of view, we'll be in line with what we did EBIT margin wise in 2018 in the fourth quarter.

If you look at the leverage, we are at a net debt-to-EBITDA at 1.4x, and we've, of course done the dividend of the SEK 7 per share this year, which is then 86% of net income.

So if you then look forward to the coming months, the commercial focus for the coming months, it is, as always, for ourselves to make sure that we support our retailers to get the true sellout traction of those new

(technical difficulty)

And I mentioned in the broadened luggage portfolio, we have the Thule Crossover, so our 2 soft-sided luggage collection. That started coming into stores already in Q3 in some markets and it's continuing to roll in and hopefully then roll out of the stores as well in Q4. We have now in Q4 the launch of our new premium rooftop box, the Thule Vector, so that is a positive to bring into the fourth quarter. And we are in the European region, doing the Phase 2 of our new roof rack generation.

If you look at it from a peripheral view more of midterm of what we have shown because quarter 3 is still the biggest quarter for us showing to retailers what will come in the 2020 season, we have a number of both fairs and open events as well as customer meetings showing a lot of new products.

And the image on the slide shows the new Thule Spring Compact 3-wheel city stroller, which becomes then our first stroller in the stroller category, which we showed at the world-leading Kind & Jugend Fair and it's currently showing in the U.S. at the U.S. leading ABC Kids Show. That stroller has garnered a lot of positive attention, so it will be a key addition to our stroller portfolio. We will start launching some new, as always, bike carriers, et cetera, and here I think worth noting is that U.S. targeted Thule Helium hitch-mounted bike rack I think will be a key addition in a challenged and tough bike carrier market. We are also launching a number of updated and refreshed backpacks and luggage in the next year. So if you look at it, continuing a very long term focus of bringing great product to market also now as we speak looking for the coming months.

From a more purely operational focus, we have already mentioned that the U.S. restructuring program. So I'll remind that it is not a huge endeavor. It is more of a targeted for the flexibility and the new setup we have from a customer point of view and combining that with the goal of having one common global ERP system, enabling some synergistic savings with one-off costs speculated around SEK 15 million and then annualized savings around SEK 20 million after that.

If you look at it, it is clear also that we have a continued push for big product development efforts both for those products that are hitting in 2020 but also for those products that will come in the years after 2020. And we continue to do lots of effort there. We can, therefore, be happy to say that we are doing a big effort and a big growth effort in our Hillerstorp product development facility where we all will be expanding over 2020 and 2021 as well, to handle all of those growth initiatives projects.

In our factories and our 9 assembly plants around the world, we have communicated over the last 2 years a number of major initiatives where we have focused on more efficient assembly setups. And, of course, we are aiming to start really capturing some of those efficiency savings that those type of investments should be giving as long as we see that volume growth that we are targeting.

So with that, I'll leave you to the operator to open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Daniel Schmidt of Danske Bank.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [2]

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A couple of questions from me, starting with the cost side. Selling expenses in the quarter were up by 19%, and I assume that, that's been pushed by product development spending kept elevated.

Given what you said on the last final slide in terms of product launches in the coming quarters and years, should we expect selling expenses to stay elevated also for the coming quarters, i.e., product development spending, is that going to be above 6%? Or where should we -- how should we pencil in that in the coming quarters into 2020? Start with that one.

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

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So if we start with, I think the most important thing, as Lennart did mention and I want to point it out, selling expenses in the quarter specifically that is where we have the provision of SEK 25 million for the product recall. So, of course, if you then take away the SEK 25 million, you do an FX adjustment which is the key because that happens. In addition, we have now the SG&A or selling expenses of the acquired Tepui organization, which is roughly SEK 5-ish million. Actually the true organic, so to speak, FX-adjusted SG&A increase in the quarter was only SEK 11 million. So that is just to clarify a little bit of what the reality was for Q3.

If you look on your more long-term midterm question in terms of are we starting to spend more than 6% on product development, no is the answer. We feel very good that we are going to make sure, as we've seen already with growth in the newer categories, we will continue to do big product development efforts of our luggage and strollers. But like what happens always, when that proportionately starts growing, your percentage proportion becomes more normalized. At the moment, we have clearly a overspend proportionally by running several parallel stroller project and luggage products versus a relatively small revenue. Luckily, those revenues are constantly growing. On top of that, we have, of course, a continuous spend in other categories but also there, the revenues are growing. So no, it will not go above 6%, it will slowly but surely decrease rather than increase.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [4]

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And sort of -- this is, of course, changed over time and a lot of things that maybe sort of been altered since you had the CMD a couple of years ago. And you've been very clear that's going to stay elevated for this year. But when you say decreased, is that sort of looking a couple of quarters ahead that we basically in the second half of 2020 then or how do you sort of -- how do you look at it?

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

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Yes. Since we don't run the company, which we've repeated a few times, on a quarterly basis, it means, of course, there is no rapid change of this because it is a phasing in of various projects. But you're right, slowly but surely you will see it. It won't happen in in Q4 because by default with Q4 also being such a small revenue quarter. So it's more when you come into the bigger revenue quarters in Q2 and Q3 next year. At the same time, as we will continue to -- in a like-for-like sense, in pure money spend more money, I am sure that with the growth, therefore, you will start to see the percentage slowly declining as you say versus the second half of the year.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [6]

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Okay. Good. Second question on Active with Kids. You mentioned it on the call and you said that you did well. You stated in Q2 and Q1 that there was sort of -- you were lagging slightly behind schedule or plan when it came to Europe in Q2 and the U.S. in Q1. Are you feeling that you're catching up on your sort of targets when it comes to Active with Kids in strollers in the Thule Sleek?

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

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Yes, if you look at it, I think very simplistically, we had a clear mention of something, which was the child bike seats in one specific market, which has dented a little bit our performance there. And if you look at it in the Region Americas, we did have a very weak quarter 1 in Active with Kids, where we didn't see with some of the existing stroller models that's observing lag too, et cetera, with some of our competitors being extremely aggressive price pitches, we didn't see the performance we would like. That has already turned. So in Europe, the performance is slightly better but it was actually quite good already, while in the U.S., it was a bad start of the year and it has been better since. So yes, slowly but surely, we are getting towards where we want to be.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [8]

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Okay. Good. And then finally on the recall. Could you say anything more? You're stating there has been no accidents. Has there been any backlashes in terms of the brand and the consumer perception of the brand in any way on the back of this recall?

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

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I think, first of all, a product recall is never good for anybody. So that we need to state. The decision that we have taken to do a product recall is because of our very high focus on safety. There's been very, very few incidents. But due to the fact of how those incidents in an absolute worst case scenario could mean something, it hasn't meant any accidents, we have decided to take the most stringent thing you could decide to do, and that is the product recall together with then our RV manufacturer and RV dealership customers and offering the consumers an upgrade to make sure that, that risk doesn't continue. I think if you do that well as a brand and you have a fantastic historical track record, it will not damage you. If you wouldn't do it well and didn't manage it and work -- or therefore, having snuck away to get away from it, I think that would have potentially definitely damaged it. So it's never good. Product recall is always bad. It takes time, it takes focus, it costs money. But from a brand perspective, I am not worried because we have done the exact thing that anybody would expect from a super professional, high-quality company.

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Operator [10]

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Our next question comes from Gustav Sandström of SEB.

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Gustav Sandström, SEB, Research Division - Research Analyst [11]

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If I may start with a quite simple question. Did you have volume growth in Q3 excluding Tepui?

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Magnus Welander, Thule Group AB (publ) - CEO & President [12]

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Yes, we did.

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Gustav Sandström, SEB, Research Division - Research Analyst [13]

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Perfect. And then did you -- did you engage in any price initiatives in Q3 in Europe related to roof racks and roof boxes? If so, does it refer only to your old models or also to new launches?

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

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The answer is no, we did not.

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Gustav Sandström, SEB, Research Division - Research Analyst [15]

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Perfect. And also could you remind us now for -- in Americas, what your -- how big of a share Case Logic and camera bags make up of your U.S. sales and what the year-on-year decline is in Q3?

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

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Yes. So I wouldn't call it Case Logic because to simplify it, what we had called legacy and OE bags because we do sell also Case Logic newer backpacks and other things which we do not consider to be declining categories. So if you look at it, what we call then the legacy and OE bags are those categories which simply are shrinking away. And you are right, Gustav. They are, by us, today sold under the Case Logic brand in that sense. But we do also sell the Case Logic brand and product in some of the growth categories. But if you look at legacy and OE, we had as a total last year, and we said it was roughly about 40% of the U.S. business, and much, much, much smaller in the rest of the world, where we haven't historically had historical success with those categories. They have now declined clearly and I think by the end of the year, it will be more around 30% of the business. So that means for the total Packs, Bags & Luggage, we're now down clearly to a lot less than -- we're probably around, yes, less than 20% of the -- clearly of that business to finish.

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Gustav Sandström, SEB, Research Division - Research Analyst [17]

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Perfect. That's helpful. And referring to Daniel's question on the stroller side. With Thule Sleek, are you now on par with the Glide series in terms of units sold, would you say? Or are you still catching up to that number?

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

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Yes. We don't disclose numbers of units of anything. So I can say that and that's not the case that we disclosed. But no, we are not at the same level as (inaudible)

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Gustav Sandström, SEB, Research Division - Research Analyst [19]

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Okay. Perfect. Lastly on capital allocation, as you mentioned in the report, you're trending below your target range for indebtedness. How do you think about capital allocation? You mentioned some initiatives internally, which I guess also would imply some CapEx going forward. But (inaudible) versus acquisitions, et cetera?

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

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I understand your question as -- with the low leverage rate of 1.4 that we have, which is below the range we've communicated, will we see some differences in our approach? We have communicated that our first and foremost focus is to clearly work with making sure we drive organic growth. There is no need to do anything dramatic there because we continue to do that. We have then said we have some opportunities with M&A. We've constantly looked at that. And then, of course, we have the third, which is how much do we dividend out? That is going to be communicated in conjunction with the Q4 report, but it is, of course, clearly the case if you see our strong cash generation leverage ratio. Unless we have some bigger news on some acquisitions, it looks promising for what will be proposed by the Board in terms of dividend.

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Operator [21]

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Our next question comes from Stellan Hellström of Nordea.

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Stellan Hellström, Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods [22]

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Just a question on the -- Magnus, you mentioned that you see the sort of same development in sales in the fourth quarter as in the third. And just looking at the comparables here, you had quite a little bit weaker sales growth in the third quarter last year and stronger in the fourth quarter -- quite strongly actually in the fourth quarter last year. So that seems to indicate a sequential improvement quarter by quarter. And I was wondering what do you see there? What areas do you think will do better in the fourth quarter?

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Magnus Welander, Thule Group AB (publ) - CEO & President [23]

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Well, actually you're right. And to clarify it then, that is on top of them having actually a bigger proportional impact of those OE contracts that are hurting us more proportionally with -- in quarter 4 than they did with the SEK 10 million decline in quarter 3. So you're actually right. And the reason is that we do have some launches specifically in quarter 4 this year, which are products that we didn't have at the same time last year. And that, of course, helps. So if you take, for example, the Thule Vector premium roof box line, is a real strong addition that we're expecting to have and boost our performance in that category. We have then, as I mentioned, just launched our third luggage collection line, the Thule Crossover 2, into stores, and we are doing some extensions to our best-selling luggage collection line, it's the Thule Subterra, with some spinner wheels. So the reason for that is mostly associated with some of those new products that we did not have at the same time last year, helping.

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Stellan Hellström, Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods [24]

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Okay. Good. And then I was also just wondering on the gradual launches here of the new generation of roof boxes. I take it that you think that the biggest impact of those inventory reductions happened in the first phase and won't really recur in Phase 2 and Phase 3, is that correct?

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Magnus Welander, Thule Group AB (publ) - CEO & President [25]

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Roof Racks, not roof racks -- but you're right. The logic is this -- yes, but those 3 launch phases were built on the logic that launch Phase 1 roughly represented, roughly half of our revenue was those models we replaced of the traditional historical revenue in total in roof racks was that first launch. Those were also the most complex roof racks. So these are the roof racks with a lot of special adaptions for very specific car models, where you need a lot of SKUs to cover those type of cars with all those different connections you need to. Launch Phase 2 and 3 jointly then represents the rest of the half, so 1/4 for each roughly of our historical sales. But they are also representing that with many fewer SKUs, so significant reduction in number of SKUs needed to serve those models there. If you then have fewer SKUs, at the risk (inaudible), the less risk, they are just sitting on a lot of old ones for some specific car models.

Secondly, of course, with some learning -- we do learn as we go, we have been communicating very, very extensively now with all those distributors in regards to making sure that they have continuously made sure that they are not sitting on too many of these racks that we are now replacing at 2 and 3. So that's why you're right, our assumption is that the most significant of these negative pipelines, in fact, was associated with the first phase that we now, when we look at a growth in Q3, seem to be out of. There will still be pipeline depletions of the old generation also for Phase 2 and 3 up to a smaller effect and that's why we believe we are, so to speak, through that part of the change.

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Stellan Hellström, Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods [26]

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Good. Then also a question on the margin decline in the third quarter here. If you can maybe elaborate a little bit on the various items here, the mix should be under absorption on the -- what was it now?

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

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Yes, the third one is that there is a negative impact due to simply only tacking on the tariffs in play in itself without a margin on top of the tariffs. So as Lennart mentioned, that was 0.2 of the minus 1.2. That means there's is minus 1 point left. And the vast majority of that is under-absorption in our 9 assembly plants. And the logic for that then, any analytical mind like yours, Stellan, will quickly jump to the conclusion that -- probably that means that you saw a later than you could act on in getting rid of people in your factories or a combination of that and the fact of saying if we don't believe it's a long-term decline but rather a dip, are you going to fire people to hire them a few months later on? And it's a combination of those two. We are convinced that these volumes will be coming. So we're not going to take stupid short term measures with that structure, et cetera. And secondly, the performance was weaker in some of those volumes than we quickly could have reacted on anyway. So it is very much dominated by that under-absorption. And then there is a little bit of product mix effect as well. But the majority is clearly under-absorption.

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Stellan Hellström, Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods [28]

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At this under-absorption, that's related to that, it has nothing to do with the new facilities and the efficiency gains that you expected there are not coming through as expected?

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

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Actually, you are of course right, that if you've done new facilities, that cost you money because that's a fact. Then if those new facilities are very efficient, which they happen to be, so that's good, but it still costs you money. And if the top line doesn't happen as much as was expected, then that is part of that. So it is an under-absorption partly driven by a few years of expanding, putting those in place, et cetera that didn't materialize. But still, the majority and the big chunk of our cost is associated with things we've had for years, the staff levels that we've had for years. So that's where the biggest money comes from.

In terms of how efficient the plants are performing, I feel very good about that. I see the new roof rack assembly, I see the new lines that we have done in [Norway], we feel very good. But at the same time, if our total volumes do not come in, there will be some under-absorption. And as we believe, the volumes will come, we have not taken rash -- quick to make a specific quarter look better and then throw cost on taking in the same people somewhat later on. That's not how we act as a company.

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Stellan Hellström, Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods [30]

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Good. Then just finally on the product launches that you have been announcing this autumn here. Are there any of those that you expect to be volume products going into next year?

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

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Yes. If you look at some of those key bike carriers, et cetera like -- that are by default since we are so big in these categories and these are coming in, we -- clearly we'll see some big volume drivers in those. But also we clearly believe that adding a third stroller in with the Thule Spring, it is -- versus the other 2 categories -- the 2 strollers we have in the category, it adds another step in something where we now already have distribution. So we expect that we will gain some good volumes with that stroller model. The same applies to the some of the new luggage collection. Once we now have opened a lot of doors with luggage, it is easier to quicker get up some volume growth with additional collections that move into maybe not all of these stores, but to many of those stores where we sell other luggage. So I think across several of these categories, it is clearly product that we expect will have some significant input. But we are not a company, in general I can say, where it's 1 product that makes a huge difference for our total revenue. We have a lot of different product that have to deliver to make up those numbers.

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Operator [32]

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Our next question comes from Carey Winter of Handelsbanken.

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Unidentified Analyst, [33]

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I wanted to start with the U.S. and you made a reference to the bicycle sales. So do you have a -- sort of a fresh number that would capture what has happened since the tariffs were raised? And then a follow up on the -- on sort of changing channel landscape in the U.S. Am I correct in assuming that, that you would be sort of retargeting your efforts more towards the smaller independent retailers and away from large sort of centralized chains? I would like to start with that.

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

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Sure. Yes. So if we take the first question, no, there is no official data yet for details fully for the third quarter, that tends to comes in 2, 3 months delay. So if you look at how bike sales are captured in the U.S. market in the official data, there are 2 different ways of looking at that market. One is what is captured by the Biking Association in the U.S, which mostly only captures a part of the market because it focuses on the independents and on more expensive bikes. It doesn't fully cover the typical family line for kids than others. That was -- for the first 2 parts of the year was already down 15% on sales. So that has been a very tough sharp -- start. We, of course, talk to all the big bike brands in the U.S. and you will see differences between them, et cetera. But indicatively, I don't think you've seen any type of more positive view that it has been a very tough year. My expectation more or less in line with a weak overall performance in bike also in the third quarter with those type of numbers.

I think it will be double-digit decline. Exactly how much more than that, difficult to say, we'll see.

If you look at then how we are retargeting our efforts. I would actually say that if you look at the independent retail structure in the U.S., that's not where we're going to focus a lot more essentially. We already have a very good attention. And as I mentioned briefly, as most major brands operate in the U.S., you focus on independents in that very large U.S. market where California alone is bigger than any European market. You look at that by starting it with very professional, independent sales rep structures, which you, of course, need to manage. So we do have people that manage that. But that is where you work with those in the terms of retail structure. It is more between and within the major national accounts and it's, of course, also in the U.S. specifically our continued fast growth on our own B2C online channel that is partly shifting what's going on there. So it is more about which one of those major national accounts, the combination of omnichannel players, pure online players, our own B2C, those realities are making us make some moves and allows us to make some changes to how many people we have operating with those partners.

So it is a classical tricky game to try to be with winners for the future, not the winners of the past. And in that, we see some changes that are good to do now.

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Unidentified Analyst, [35]

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Good. That was a lot to digest. Shifting gears to the RV market in Europe. There seems to be that there's some OEMs that are more optimistic than others and then some of your peers are somewhere in between. But what are your thoughts on Q4 and assuming that these are of the short term capacity model next year? How should we think about 2020 in Europe?

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

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Yes. This is probably the only comment in my entire life that I am being accused for being the most pessimistic and that has been about the European RV industry. And I've been wrong all the time so far, so you probably shouldn't trust me too much. But I have been more pessimistic than many others. I have to admit that I've been wrong constantly, that it hasn't been as bad as I thought. What has been the main reason for why I have been wrong is actually the consumer purchasing has been more positive in some of the very big markets. But you have to remember that it's easy to talk about a pan-European thing and you add all the numbers together. But if you then look at the biggest market by far being Germany, and Germany doing much better than the average, you might be slightly fooled. So the question is more about what will go on in Germany.

If you break down the European market, you see some very bad performances in Sweden and some weak performances in the U.K. due to tax in Sweden, due to Brexit in the U.K. Then you see a lot of other countries where it's quite good, and then you see in Germany where it feels very good. My mistake has clearly been about the German market. So I think if you look at the manufacturers, the reason why you will see differences is you probably have read the Trigano report, is my guess and some others. And they will be tainted by which country they mostly serve. And it's clear that again, it doesn't serve us as much in the German market as they did other markets, so they will have a softer view than somebody who serves the German market like the (inaudible) Group does. Now if you put all of that together and knowing and admitting that I've been clearly wrong so far, I am not super positive. I haven't dramatically changed my view, but I think Q4 will be relatively shaky but not as bad as I thought only 1 quarter ago. And if I look at 2020, I will probably join the people that believe it will be a low single-digit year.

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Unidentified Analyst, [37]

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Great. That was very, very helpful. Then finally on the Revolve luggage collection and the -- so what have you learned because it's a bit of an outlier with being hard case and so forth? So what have you learned so far from entering this category? Any sort of adjustments that you have made? How successful you have been compared to your sort of your softshell collections? So I guess the question is, are you happy with Revolve so far?

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Magnus Welander, Thule Group AB (publ) - CEO & President [38]

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Yes, we are happy with the overall performance so far and yes, we are constantly learning on all the collections and doing step changes and adding things and taking away things and adding more collections. But yes, happy with Thule Revolve so far. There is a constant learning which we knew when we stepped into a completely new category, both in terms of sales channels, consumer perceptions, focus areas, supplier challenges, et cetera. So there is consistently some bigger learnings in a new category than anything else. But what we are clearly saying is that we are on a good path. It is happening a little bit as we've been saying. It's going much faster than -- in some countries than we thought and much slower in some countries that we would like. That reality is still valid, and that also applies to the Thule Revolve as it has to other of our collections. But overall yes, we're happy with the start of the Thule Revolve. We are happy with the feedback on the newer collections that we are now launching and it will be a long haul bumpy ride but the direction is good in luggage.

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Operator [39]

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(Operator Instructions) Our next question comes from Mats Liss of Kepler Cheuvreux.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [40]

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Well, first, I mean, the organic growth of 5% I guess just to get the feel of the -- feel you have of that going into next year, I guess you have the product launches will be quite supportive. Then again, I mean, market conditions might be somewhat softer next year, who knows? Well, could you give me a feel about that? Could you reach the target in spite of the softer economic growth next year?

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

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Yes. I think we would not have put in a 5% growth target if we didn't truly believe we should be delivering it every year. So clearly, we're not happy with not delivering it this year. There are some very key drags that we will not have entering into 2020. We have to remind ourselves that we have SEK 50 million drag that we will have had by the end of the year in those phased out OE businesses in U.S. That drag we will not have in 2020. On top of that, we will not have the drag that we saw with the pipeline depletion of the first phase of the roof racks. And on top of that, we have entered successfully and as we've mentioned what is not calculated in our organic growth rate because we just acquired a company in December. But if you look at that acquired rooftop tent business in a true like-for-like, that has been a 24% growth, a small significant piece of business but still 24% growth year-to-date. So with those things combined, we still believe the 5% target is definitely achievable in 2020.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [42]

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Okay. Great. And secondly, I mean the changes you make in the U.S. organization, is that something that you could sort of, if successful I guess, apply in the European market as well, where it's just totally a different story?

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Magnus Welander, Thule Group AB (publ) - CEO & President [43]

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Yes, if you look at it, every organization -- I mean, we constantly do staff changes, organizational set of changes as realities change in every market. The reason why the U.S. organizational change will be happening now is that there has been bigger shifts and higher uncertainties on the players in that market, plus the combination with a finalized ERP system implementation with a lot of advantages in data sharing and other things. There is a much more obvious to do it at 1 go, which is why we're announcing it in Europe. That has been a more continuous journey along -- constantly doing. So no you will not see a similar program being launched anywhere else. This is very small and specific associated with the U.S. And the whole reason why we're mentioning it is more about professional versus those people involved that this is one of those things happening.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [44]

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Great. And then coming back to the recall, could it be so that the -- those problems are traced back to the supplier and maybe you can pass them on or is it, well, your own costs?

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Magnus Welander, Thule Group AB (publ) - CEO & President [45]

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I think as always when you look at a product recall, that will be a long story of who's to blame for what and how is the cost. We would not have been put in provisional SEK 25 million if we didn't think that provision was roughly right. Will we know exactly how right it is and what it will be, that we will know when the product recall is closed, it's just been initiated.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [46]

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And if you are caused, I mean, it's not the supplier then some...

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Magnus Welander, Thule Group AB (publ) - CEO & President [47]

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Considering that we have put an accrual provision in, that's the provision we think the cost potentially could be for us.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [48]

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And finally about -- I mean raw material seems to be well, somewhat -- giving you some tailwind going forward, I guess, is the driver.

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Magnus Welander, Thule Group AB (publ) - CEO & President [49]

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Yes, as Lennart mentioned, we believe and with current trends of what's going on in the marketplace, that we should be seeing some help from our cost setup versus what we have had and that is, of course, what we are seeing as one way of hopefully performing stronger as we move into 2020 on our margins.

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Operator [50]

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Our next question comes from Fredrik Moregard of Pareto Securities.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [51]

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Just a couple of questions. On the luggage business mainly, I mean, obviously, you're having success with the luggage in Asia. But I was also wondering how is that progressing in the U.S. and how should we think about the growth profile of Packs, Bags & Luggage, or assuming at least that luggage will be the fastest grower across those regions?

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Magnus Welander, Thule Group AB (publ) - CEO & President [52]

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Yes, if you look at it, it's clearly the case that luggage will be the key driver for the growth across all parts of the world, including the U.S., where we are getting good listings and are selling out luggage. So that is not only in Asia. The reason why we highlight Asia more is that Asia is so tiny in the traditional categories if you look at our regional splits and as we present them. And it cannot be that in luggage if we truly want to be successful because the world market is roughly 1/3 of luggage sold in Asia, 1/3 in Europe and 1/3 in the Region Americas. And should we then want to become, over long term a player, we need to be more successful in Asia, and that is why I'm mentioning it, that, that is nice to see. We are having traction in Europe and we are having traction in the U.S. as well and luggage will be a key driver for the entire Packs, Bags & Luggage across all those 3 regions. The difference is, as asked by -- before by Gustav and some others, it's clearly the case that we haven't

(technical difficulty)

will continue to be legacy businesses that decline in the U.S., so there is more of a drag there than there is in Asia, where we didn't sell any of those. So that market then -- that total percentage number for Packs, Bags & Luggage in the U.S. but there is no doubt that the luggage percentage is strong also in the U.S.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [53]

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And also did you manage to grow that, or the Packs, Bags & Luggage business in the U.S. this quarter?

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Magnus Welander, Thule Group AB (publ) - CEO & President [54]

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Yes.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [55]

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Okay. Perfect. And just a final one on the under-absorption. You say also that in the report that you were -- or that under-absorption was higher than you had expected heading in the quarter. What took you by surprise on that?

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Magnus Welander, Thule Group AB (publ) - CEO & President [56]

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What took us by surprise was the weak performance in the U.S. market. No doubt we did not expect the U.S. to be a minus 6 in this quarter.

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Operator [57]

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(Operator Instructions) We have no further questions so I'll hand back.

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Magnus Welander, Thule Group AB (publ) - CEO & President [58]

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Thank you very much then. Thank you there for all the interesting questions. I wish you all an exciting autumn period with lots of traveling, having a lot of use of Thule luggage in airport stores and around the world, and I look forward to talking to you again when we do our full year report in the beginning of 2020. Thank you.

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Operator [59]

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Ladies and gentlemen...