Thule Group AB

STO:THULE

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the Thule Group interim report quarter 1 2018. My name is Sasha and I'll be coordinating your call today. [Operator Instructions] I will now hand you over to your hosts, Magnus Welander, CEO and Lennart Mauritzson, CFO to begin. Please go ahead.

[Magnus Welander, CEO & President]

Thank you very much, Sasha. Good morning, everybody, and welcome to our Q1 2018 conference call. And as always, it's good to get off to a good start to the year and we have had a solid start of 2018.We have grown our sales in line with our expectations with 5.6%; 5.5% if you exclude the currency effects. And if you look what we have delivered in terms of EBIT, so we have grown our EBIT to SEK 309 million which is then delivering an EBIT margin of 19.2% for the quarter versus the 17.8% we had first quarter last year. So a strong start and the main reason for that pick up on margin is a combination of currency and the fact that we are selling higher margin products, which I will come back to a bit when I talk about Region Americas.And then, as we all know, you've seen our patterns for many years. We are a company that in this quarter will spend a lot of cash because we're building up ahead of the peak season and that is also true and valid for this year. We had a negative cash flow of SEK 214 million. We're ending the quarter with higher inventory than last year and Lennart will come back to that. But in short, you can say that the main reason is we are confident that we will have a good season and we've decided to make sure that on the high volume products we had enough products in stock to handle a smooth peak season.If you go to the next slide, you can then see the numbers in more detail. And as we can see on the EBIT effect, we do see a currency impact there where our reported growth was 14%, while the constant currency growth on EBIT was 8.4%. A strong euro is of course always very good for the Thule Group as we have a lot of our cost in the European and Rest of World category in Swedish krona and zloty, while we sell a lot in euro and that is the main contributor to why there is that currency boost.So, overall, solid start for the year and if we look at the 2 regions, starting with Region Americas on the next slide. We knew that we would decline in some contracts that we have with OE and we have communicated that during last year, in the second half of the year that we decided in 2017 to not actively pursue growth and in fact rather pursue a steady phasing out of low margin OE contracts in the U.S.They are not huge, but they are big enough that the entire decline in the quarter for the Region Americas was due to these contracts being phased out. And they are associated partly within the business -- associated with pickup trucks that was not sold off when we sold our pickup truck toolbox business, but it's also within the bags and case business.As these 2 types of product categories had by far our lowest gross margin, that, of course, means that we have had a mathematical margin enhancing effect of having growth in higher margin products and decline in lower margin products. What is worth to note also in Region Americas, as the rest of the region was flat, is that clearly in the biggest market for the region, which is the U.S. there is still a very cautious retail sector and I'm sure you've heard and listened into and I am sure that will be a theme in many consumer goods companies speaking about the late spring.I know that, for example, [indiscernible] noted and commented on that recently. It is true that a late spring has meant that a lot of retailers were cautious with their purchases at the end of quarter 1. We are generally not worried about things like this because over a total season those 1 or 2 or 3 weeks moving back and forth normally doesn't have a major impact on the business, but it is clearly the case that retail sector is cautious in the U.S. not only due to a late spring but generally, we all know that there has been a lot of turmoil in especially the brick-and-mortar retailer in the U.S. Overall for the season, we are positive and confident that we will pick that up during Q2 and Q3.If we look at the category that we were most satisfied with in Region Americas in the first quarter, it was the Active with Kids category. And if you look at it, a key launch was our upgraded stroller that Thule Urban Glide 2 which has been very successful in both regions. And also in Region Americas, we continue to have a very strong development of our child bike seats business.If we then turn to the next slide and look at the biggest region, region Europe and Rest of World, we continued the very strong momentum we've had now for a long time in Region Europe and Rest of World with a 9% growth in constant currency, so a very strong start to the year. Their biggest category Sport & Cargo Carriers was a key driver in this where we have had both very successful sales growth in our roof rack category and in our roof box category. And some regions that stand out are the Nordics region, France and Australia.As always, this is also partly due to how well they did in 2017 versus 2018. But generally, these are the regions that had showed the biggest pickups with both key new listings and very strong sell-through in the quarter 1.Within Packs, Bags & Luggage we had an okay start to the year. We do know that we do have some legacy products here, but they have been offset by growth in our growth categories luggage and smaller everyday bags and technical packs. Now we enter the much bigger season for those types of products, so the year is still exciting.As I mentioned, Active with Kids did very well in the U.S. and in Region Americas overall. It was the same case also in Region Europe and Rest of World. And also here, it was the successful launch of the new stroller -- upgraded stroller Thule Urban Glide 2 that was the biggest driver, but also the launch we did last year of the Thule Chariot bike trailers was continuing to deliver a good growth and even here the very broad portfolio of child bike seats continues to develop well.Especially we saw, which is something we always like when media does; there was a very big test done in the biggest market in Germany on child bike seats on how safe they were. And our child bike seats were the clear winners and some of the large players in the market actually came out as not recommended to be used due to unsafe conditions. Those type of things, especially in a market like Germany, helps your sales.And then finally, on RV products, I think it's worth mentioning and clarifying something because at the Capital Markets Day last autumn, we commented to the fact that in general, this is one of the few categories where you can track the development of the overall market by looking at the registration statistics of motor homes and caravans. That's normally the case, but actually in quarter 1 in 2018 if you would have tracked those numbers, you would have been amazed how fantastic the motorhome vehicle market was because there was a registration growth in the high '20s.In reality though, what has taken place during the first quarter this year was that the extensions that had been given for registering and selling vehicles of an older emission class, an emission class actually called 5b+ where light commercial vehicles had already had to move to emission class 6. This sector of RV was given an extension period as they are rebuilt vehicles and that extension ended at the end of February this year.That meant that a lot of dealerships that had purchased vehicles in the past needed to either sell them or they would not be allowed to sell them at all. They needed to register them before the state. So what a lot of dealerships did around Europe was that they registered these vehicles in their own name rather than selling them to a consumer, and thereby they can now sell them as a secondhand vehicle, although not driven to a consumer during the year or they can, as in some cases are [ done ] start renting them out for rental vehicle.That artificially, in a more administrative way than inflated the registration numbers significantly for motorhomes. Our estimations is that it is around a 10% true consumer sell through growth, which is still a very good number and we continue to outpace the market.If we then move over to the income statement, I'll let you talk about that, Lennart.

[Lennart Mauritzson, Chief Financial Officer]

Thank you very much. So looking at Slide 6, I will comment on some of the items in the income statement. So gross margins were at 41.6% versus prior year 40.9%; helped by favorable currency development which was 0.4 percentage points and the remaining improvements in gross margins of 0.3% were driven by positive product and customer mix as Magnus mentioned, and combined with normal price increases we're doing mainly within Sport & Cargo Carriers, somewhat muted by continued negative raw material prices in Q1, primarily plastics for us.Financial net was minus SEK 16 million in the quarter versus prior year minus SEK 11 million. Negative FX effect or revaluation on FX accounts for loans and cash in local entities is the reason for the higher financial expenses this year. If we look at our pure external cost of debt, the expenses were actually slightly lower than prior year, so we had SEK 10 million versus SEK 11 million.If we look at the SG&A, we are slightly higher than prior year, but it's driven by higher product development spend, as planned. And as we have communicated, we will have an increased effort on product development during this year. The effective tax rate in the quarter was 25.1% versus prior year 24.2%.If we look at this next Slide 7, on the operating working capital and operational cash flow. This quarter we ended with approximately SEK 1.3 billion in operating working capital, which is 21.4% of last 12 months of sales versus 22.7% last year, so a decrease in percentage. However, as Magnus mentioned, we have an increase in inventory as we follow the plan to smooth out our seasonal ramp-up and enter Q2 with more finished products in order to meet expected sales growth.If you look at our operational cash flow, we do have the same pattern as prior years, for many years, with the buildup of working capital preparing for the high seasons in Q2 and Q3. So we had a negative cash flow in the quarter of SEK 90 million versus prior year minus SEK 69 million. But, as I said, we will see an improvement during Q2 along what seemed for the year. Thank you.

[Magnus Welander, CEO & President]

Thank you, Lennart. If we go to the next slide and look at then the financial targets and our performance against those. As I have already mentioned, a solid start to the year with an organic constant currency sales growth of 5.5%, which is higher than our 5% target. We had a strong improvement of our EBIT margin, where we moved from 17.8% to 19.2%. And more importantly, maybe just to look at then the rolling 12-months, which means that we are now at 18.6% rolling 12-months EBIT margin.Our net debt-to-EBITDA is 1.6x, which is well in line in the -- our span that we have set as a target. And later today, we will have our Annual General meeting where the Board has proposed for approval at AGM a SEK 6 per share ordinary dividend to be split out in 2 payments, which then equals 87% of our net income. So overall, moving very well with our long-term financial targets, as presented.If we then look forward to what's a very few exciting months coming ahead. As we understand from our business and looking at next slide, you can see that we are now in the peak of what this company is at most busy. We're starting to have peak output from our plants. Sales are really starting to kick in as the spring season comes. And we are in the last few months ahead of showing new products to all the trade fairs for 2019 launches. So I can promise you there is a lot of busy people in Thule Group at the moment.We also on top of that, of course, have launched a number of new products that are really starting now to be hitting consumers, being shown in stores and being purchased online in online stores. And now we will really see the key telling points of how well those new launches truly sell-through. We have a good feedback initial early days, but very positive feedback on the 2018 launches and especially we have, of course, a very exciting launch coming out later on, where the first Thule Sleek strollers will be hitting the shops in quarter 3 in this year and that will be a key addition, of course, in our product portfolio going forward.So we are working, as I said, hard in all the factories in ramping up production. We have a continued focus on a high on-time and full delivery performance. We know that with a cautious retail sector, not wanting to have things too much on stock. One of the ways we can secure that we do pick up all the opportunities that are there is our capability of serving them well with next day deliveries. We are working hard in our newly opened plant in Pila in Poland, where we will do the Thule Sleek assembly. And we have started our building works on a CapEx investment of expanding our Eastern European distribution center in line with the plans that we communicated in the past.Of course, also, I think all of you will have noticed some very volatile raw material developments in, for example, the aluminum considering some of the things that have happened in that market. And of course, key for us is to keep on top of that and track what's going on. We are hedged in aluminum, so we're not too worried but it's, of course, something we need to be looking and tracking. And generally, it is a high raw material cost structure we still see, we are therefore confident and happy that we did the necessary price increases and also that we have a good product mix as we grow with high margin categories and reduce and decline in low margin categories.And not to underestimate, we are now at those levels, as communicated in the Capital Markets Day, of around 6% of our spent on product development. And we are hiring more new engineers than ever. We're tooling up to more new products than ever.It is a buzzing, exciting feeling in the company, working on products in all the new product categories. Therefore I've some very exciting months ahead and look forward to have some new cool stuff to show you at the next quarterly call.With that, we leave the floor for questions.

[Operator]

[Operator Instructions] The first question we have comes from Daniel Schmidt of Danske Bank.

[Daniel Schmidt, Research Analyst]

Alright, a few questions and I think, Magnus you mentioned that when it comes to the decline in the Americas, it was entirely self-inflicted on the back of the phasing out of these contracts. And so, first of all, you're basically saying then, and excluding those phase-outs, you are trading sideways in Americas. And secondly, what should we expect -- should we expect the same impact in terms of phase out for the coming quarters as we saw in Q1? I think we'll start there.

[Magnus Welander, CEO & President]

Yes, you're right. We were flat if you excluded those conscious decisions of phasing ourselves out of low margin products and the main reason was, as I mentioned, there has been a very cautious retail sector in the U.S. with the late spring. If you look at the effect of what you should be expecting, as communicated, we will be phasing these out until the beginning of next year and the monetary amount of that decline similar to -- what was the decline, it is relative similar, not exactly, but relatively similar by quarter until we can say quarter 2, 2019 when they will be fully phased-out.

[Daniel Schmidt, Research Analyst]

And you do sound, even though you had, of course, a poor quarter in Americas, there you've been excluding the phase-out, you sound a bit optimistic and of course, you had a late spring issues and cold and so on. Does that mean that you've seen any sort of change to the retail environment for your sake entering so far into Q2?

[Magnus Welander, CEO & President]

We never comment looking forward. But generally, you're listening to my voice and saying that I feel relatively confident, I do feel relatively confident. We have to say, we have an extremely short order book and we always comment on that as we sell things for the next day, which is a lot of benefits. There is also then that we don't have a brilliant -- exact track record on what we will be able to say we can sell. But we have good confidence that our new product have hit off well. We don't believe the cautious U.S. retail is really matching what the retail -- consumer in the U.S. is looking at. So we are hoping and expecting that that should materialized in growth also in Region Americas.

[Daniel Schmidt, Research Analyst]

And then just finally on RV, where it sounds like you were maybe up 14%, 15% or something like that in the first quarter. And as you know, there's been a lot of concerns when it comes to RV demand especially in the U.S. and you have most or almost entirely your operation in Europe, and given the visibility that you have and what you hear in the market, is there any sort of feeling out that that would be something similar happening in Europe that we have in terms of figures when it comes to the U.S. market, sort of any general reflections on RV in Europe?

[Magnus Welander, CEO & President]

I think the general reflection of RV Europe is that it's a very healthy market which we say, if it's 10% or 11% or something like, it's that type of range in our estimate, if you take away this artificial effect. And there is still good confidence. If you look, the large RV manufacturers have very nice order books. They are optimistic. My view is that and talking to my experts in our team that work with these big manufacturers all the time, it's clearly the case that I think everybody in the industry is expecting a very good market at least until after this summer season. And then, that's the time when I think a lot of people in the market will step back and look at did that nice very strong growth pattern continued throughout the season or did there start to be some people starting to canceling orders? There is no signals of that yet, but I think everybody is cautious of seeing that -- will it continue into the latter half of the year.

[Operator]

The second question we have comes from Gustav Sandstrom of SEB.

[Gustav Sandström, Research Analyst]

My first question is regarding the Urban Glide 2 launch, which apparently was a major success driving that category. Can you draw any conclusions from this when looking into your next big launch, being the Thule Sleek and do you have discussions with retailers already regarding volumes for Thule Sleek so that you already know any type of volume impact we should expect from stocking up Thule Sleek in this year?

[Magnus Welander, CEO & President]

Thanks, Gustav. Generally, you can say what was key for us is due to the positioning of the Thule Urban Glide 2 as a much more urban position both in styling, but also in some of the feature sets. It was, of course, a good indicator of getting into the right juvenile channels and a door opener -- a precursor to what is definitely a stroller that really only fits in the juvenile channel, not [ ready for ] the Sleek. So what it has done for us, it's shown that the brand carries in a more urban stroller, it has enabled us to get some very strong listings with some of the key retailers around the world, actually all the key retailers we targeted in the major markets. But that, once again, doesn't mean that we get huge orders. As I said, one of our key things is what we do now is we're going to get listed and we're going to be shown in a lot of cool stores all over the world. That's a great start but then consumers need to buy it to create any significant volumes that have any impact on our numbers. But what the good thing is, a very good listing reality has been a little bit the consequence of the success of Thule Urban Glide 2 and of course that the Thule Sleek stroller is a fantastic looking stroller. But that combination makes us more confident now when we look at which type of listings we will start with in Q3.

[Gustav Sandström, Research Analyst]

So, no material impact from stocking that you now have today that we should look forward to in Q2 and Q3 from Thule Sleek, is that correct?

[Magnus Welander, CEO & President]

No. You should look at -- what will have any material effect is actually the sell-through that we, of course, hope to generate already some -- the starting points on that in Q3 but which really starts happening as you come a few months into the whole. So it's the sell-through that will generate significant numbers.

[Gustav Sandström, Research Analyst]

And similar question regarding the [ Rebel ] hard case luggage that you're about to launch too. Are we look -- is it the same story there that we shouldn't expect any de-stocking and do you have any discussions on that end with retailers that you can share?

[Magnus Welander, CEO & President]

Yes, same thing there. The success which we definitely have had with Thule Subterra which continues to do really well is, of course, a key then to open the door to say here, we have another collection. So we feel better than when we entered with just Thule Subterra because then they were completely new door to open. Now many of those are already opened to us and they will list a second collection. So that means -- easier is maybe the wrong word but it's definitely makes it for a higher likelihood of rollout effect. But it's the same thing actually also there that it's really the sell-through that drives significant numbers for us, it's not pipelines filling thousands and thousands of shops that comes. It doesn't come with one go. I mean it's spread out over time, so it will be also there in 6 months to 9 months into it, you can start to see significant volumes from those new collections.

[Gustav Sandström, Research Analyst]

And regarding the Pila factory in Poland ramping up, could you share how big of a fixed cost base you have there and if utilization rate was a factor in this quarter or will be going forward with the [indiscernible]?

[Magnus Welander, CEO & President]

We normally don't comment on specific fixed cost by plant, but you're very astute in getting Gustav that we have been very inefficient from a costing structure in that factor because we have, of course, had all the senior management in place for some time. We have purposely brought in all the shift leader and train people and we are plus generally not nearly upped volume utilization of that -- capacity of that plant yet. We are on top of that doing 2 brand new assembly lines for 2 completely different products from the past, which we, of course, want to ensure we get off the ground really well. So we have started very early to spend a lot of time and money on that. So it's an inefficient plant from that perspective at the moment and will really be so for quite a long time, which is included in our estimates going forward, because it needs to get up to those bigger sell through numbers of both the new stroller and the new luggage to start compensating for the fixed structures we took on already as of Q4 last year.

[Gustav Sandström, Research Analyst]

And then finally from me, are you confident now that the U.S. retailers are low or perhaps too low on the inventory and there is a less likelihood of them destocking also for the remainder of this year?

[Magnus Welander, CEO & President]

I'm very confident that they are too low at the moment. We -- our sales team in the U.S. have a lot of discussions with some of the retailers and this is something we have to say that, we are always worried when they get a little bit too low, because although we have a fantastic track record of high on time and full, if they're very low that still might mean that they leave money on the table at times when the customer came in and I wished I could love to say that everybody plans their purchases of their next Thule [indiscernible] months ahead. Generally, it isn't like that, they come in and they realize they want it on the Saturday. And if in that case that retailer had sold the few they had in the store and haven't ordered a new one, we potentially left money on the table. So we are not a 100% happy with that, I have to say. I cannot see them restocking more from that perspective, because then really they are jeopardizing, which I think they realize, to leave too much money on the table. So I don't foresee and logical reason why there should be a de-stocking in the U.S. retail.

[Operator]

[Operator Instructions] The next question comes from Stellan Hellstrom of Nordea.

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

Wanted to ask, just looking at your OpEx relative to sales, going down in the quarter. Just in perspective of your increase in product spending, how that is possible and what you've done?

[Lennart Mauritzson, Chief Financial Officer]

If you look at it, we -- as always, there are some quarterly phasings at times depending on which fairs you go to, which products you launch within marketing spend. I wouldn't say that that is true saving. There is a little bit of phasing effect and if you look over the year, that's going to smoothen out. So from a perspective of that, that's more of a quarterly small phasing effect on marketing.

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

Okay. Then just, also your favorable deck here of currencies, I would think that given the weakness of the Swedish Krona, you are in a favorable position also when we look at coming quarters, given that you produced a lot in Sweden, have a lower cost base in Sweden.

[Magnus Welander, CEO & President]

You are absolutely right. If currencies stay as they are at the moment, we will definitely be seeing a positive FX effect for us.

[Operator]

The next question we have comes from Daniel Schmidt of Danske Bank.

[Daniel Schmidt, Research Analyst]

Yes, Daniel Schmidt from Danske here again Magnus and Lennart. Would you -- given that we already -- sort of you alluded to sort of the RV growth in your statement, could you give us some sort of a ballpark figure when it comes to the development of the other 3 segments in Q1. It sounds like packs, bags & luggage were down in the quarter.

[Lennart Mauritzson, Chief Financial Officer]

You astute -- clearly have mathematically tried to create a model while we were discussing. So yes, I think if you look at it and listened to our comments, you will understand that due to the OE projects and contracts that we are phasing out in the U.S, that is pulling us down in packs, bags & luggage, because there are some cases and bags we do there. And on top of that, we do have still the decline, we have to admit, in CD wallets and other things that continues. And as we didn't have the same type of growth in luggage like we had in -- because we really did a big launch last year, we do continue to do well. That was a small decline in packs, bags & luggage. We have highest growth rates in Active with Kids and we have a solid growth in Europe and Rest of World in Sport & Cargo Carriers while relatively flat if you exclude the OE contracts in the Region Americas.

[Daniel Schmidt, Research Analyst]

Alright, but given that mix and what we've talked about in terms of FX and your sort of manufacturing base in Sweden and also in Poland and sort of the currency has continued to weaken, of course and the mix between the segments, is it sort of ruled out in any way that you would be approaching your 20% EBIT margin sort of maybe a bit quicker than what you alluded to in connection with the CMD in September?

[Magnus Welander, CEO & President]

I think the key thing is, we don't do the currency aspect when we talked about our 20% margin because that would be highly and difficult speculation work. So when we presented the 20% margin and when we presented the fact that 2018 would not be the year that you should estimate that we should do the biggest pick-ups to reach to 20%, we didn't speculate on currency. If then currency comes in and helps us, that will, of course, move us up -- move us closer. Potentially currency could come in and be detrimental. But that statement then in the Capital Markets Day was associated with assuming that the currency didn't help us. And if you take that, it might be what makes the difference then this year. If the currency continues to help us, yes, we would, by mathematical point, so to speak, move forward to it.

[Daniel Schmidt, Research Analyst]

And adding to that, has anything sort of changed in your view in terms of product development spending. Are you -- have you changed your plan in any way? If you look ahead in the coming couple of quarters in '18, will you go above the 6% for some reason in some quarters or is there any reason to change the modeling around that?

[Magnus Welander, CEO & President]

I mean, it's not an exact 6% that we have defined, it's around 6%. And we feel very confident with that plan. If you look on a rolling 12 months, we are around 6%. You can be slightly above or marginally below or -- it's going to be around 6% now for a few quarters to come as we said during '18. So I think in modeling, 6% is the correct number to use.

[Operator]

We currently have no further question. I hand back to over you.

[Magnus Welander, CEO & President]

Then I thank you all for listening in and wish you all some fantastic spring weather, which has come to Europe at least and some super active vacations with lots of Thule products. And we will talk again in July. Thank you very much.