Thule Group AB

STO:THULE

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Thule Group Interim Report Q1 2019 Call. My name is Todd, and I'll be coordinating your call for you today. [Operator Instructions]I will now hand over to today's host, Magnus Welander, to begin. Magnus, please go ahead.

[Magnus Welander, CEO & President]

Thanks very much, Todd.Good morning, ladies and gentlemen. And happy to have you listening in to our quarter 1, 2019 report call. And it's always good to start the year in a good way, which is exactly what we have done with 2019. So if we go to the first slide of the presentation you will see that we started the year with a net sales of SEK 1,834 million, which was then a growth of 13.8%. In a currency adjusted growth, that was 7.5%. And as we did the acquisition of the small company, Tepui, late last year in December we also got some growth contribution from that in quarter 1. So the true organic constant currency growth rate was 6.4% for the quarter.As we had planned and communicated, it was the Region Europe and rest of the world that was in the driving seat and grew with 10.3% currency adjusted, while Region Americas declined with 0.7%. I'm going to comment more about the regions later on. The development was in line with our expectations. So in line with what we thought.In terms of EBIT, we reported a EBITDA of 18.7% EBIT margin and SEK 342 million, which was also in line with our expectations and according to the plans. So totally a solid start to the year in terms of all aspects. And we are off well for the peak season as coming in.If we go to Slide 3 in the presentation you will see a little bit more on the financials. And if you look at that slide, it states the growth, as we once again said, of 13.8% on sales. 7.5% in constant currency and 6.4% in constant currency organic growth. I think it's interesting to look at the EBIT margin because obviously you see a small drop from 19.2% EBIT margin to an 18.7%. You should remember that if you would look at last year's EBIT margin in constant currency it would be instead 18.9% comparative. And that therefore means a 200 basis points drop, which was in line with our expectation. So a solid start for the year with numbers in what we thought.If we go to Slide 4 in the presentation, which is the presentation about Region Americas, we can say that it started slow in the beginning of the year as we expected it would. And there were several reasons as we had communicated previously, with our plans to phase out some business plus some expected tariff impact in some delays.But if we go through it well, let's start with the small acquisition of Tepui. That acquisition has really been quickly and well-implemented in our business, and everything is up and running as it should. So we are very happy to say that that has been quick and smooth. The sales in the first quarter for the rooftop tent product was SEK 18 million, which is also growth in true organic growth versus what Tepui sold in the same quarter last year. So a positive development.We have communicated a long time that we are expecting to see the drop of our lead products that we are phasing ourselves up, which is both some accessories to pickup trucks as well as two bag and case collections to OEs. In fact, the decline was lot less than we thought in quarter 1. So some of that decline effect will instead hit the coming quarters comparatively. It will still by the end of the year be the expected SEK 60 million that we have communicated in the total decline -- sorry, SEK 45 million this year. So we have SEK 45 million as a total, but it was a little bit less decline in this quarter.If you look at the other parts that impacted the quarter, in the U.S. we have a strong channel in the independent bike dealer channel, and we historically have a strong spring with those guys selling a lot of our bike racks. We still expect also 2019 to have a very strong spring. We see good numbers also here in April already you can say. But normally we would have had some preseason orders at the later part of quarter 1. This year however due to those independent bike dealers expected an additional terrorist to hit on the first of January 2019 which was previously communicated. So we had the first tariff impact on Chinese imports in September '18 with 10%. And then previously communicated additional 15% to hit as of 1st of January. What then a lot of the independent bike dealers did since they buy most of their bikes from China, and 15% on a bike is very much money, they decided to buy a lot of bikes at the very end of quarter 4 last year. Then the tariff was postponed in communication by the U.S. authorities, first communicated as a 60-days postponement and then an additional postponement. And now nobody really is sure if it will come or not, those additional 15%. But it means that a lot of the small independent bike dealers tied up a lot of cash with expensive bikes.Since we have a very strong track record of on-time and full delivery performance and we have local manufacturing that meant that we saw less preseason orders than we normally do. And therefore we are feeling very good that we will see some of that pick up as already I mentioned starting to see it in April to those same as the season goes.Secondly, we also saw that for the first quarter in a very long time we had -- did not have growth in Canada. We had a slight decline. That was very much due to a phasing versus last year where we at the very end of quarter 1 had some big load-ins to 2 big retailers in Canada. We are very calm about our continued total growth rate in Canada being similar to in the last few years where Canada has been the strong performer in North America. So no worries whatsoever in terms of total performance.Thirdly, we have some challenges in the overall economy situation in some of our midsize Latin American countries like Costa Rica, Colombia, Argentina and Panama. And that is a reality of a tougher economy there. But we are doing well in the biggest market, Brazil. So we are still positive overall for Latin America.If you look at the commercial launches, the key launches for the period. This was really the first big quarter for the U.S. organization and the North American organization for the new roof rack generation. And that has been very well received in the market and is rolling out well. And then in this region as well as in Europe and rest of world, we hit the market with our first hard-case luggage collection ever, the Thule Revolve. And that has been very well received in the market.And also in terms of Thule Sleek, the four-wheel stroller which was launched later in the U.S. as we initially last year focused mostly on Europe. It's starting to get really good listing in various department stores and Juvenile stores. So the listings part are rolling out well. We now need to see during the rest of the year in terms of the true sell-out in the North American markets.If we turn to the next slide and look at the strong performance of Europe and rest of the world where we had a 10.3% constant currency growth. You can say that in general we had a very strong start to our Sport&Cargo Carriers. And part of that is a phasing situation a little bit the other way around than we just mentioned in the U.S. When we talk about our bike racks, which is our biggest category in Sport&Cargo carriers in Europe we have mentioned many years that we are a little bit dependent on how quickly the spring season comes, not in total sales over a year but in will some of that sales come late Q1 or early Q2. This year the second half of March had some great weather, spring weather was tempting for a lot of consumers, and we had a very strong start of the season. A few weeks earlier actually than we had in 2018. So we are very confident over the bike rack category's total growth. But it was a little bit exceptionally strong at the very end of Q1 as well. So a little bit of phasing effect. But generally, aside from that, a very strong performance in Sport&Cargo Carriers.Also in Packs, Bags and Luggage, a solid start with nice growth. And the big growth driver being the Thule Revolve hard-case luggage launch which is going as well as we plan, which is very nice to see. Production in Poland is running well. And we're getting very good orders. And early to tell as often is the case in so early in the year how well it will sell through. But in terms of orders from retailers' listings, a very solid start. Also, the Thule Revolve has helped to create momentum in the Thule Subterra soft luggage, a little bit what we internally have joked about saying it's difficult to win when you have an army of one in a store. And in some stores, we've only had the Thule Subterra luggage and therefore maybe not this impressive presence that you would want as a brand. When you now add in the same stores a hard-case collection as well we start to become more of a brand in the stores and has actually also helped our Thule Subterra luggage.And then in this region as we know, similar to the U.S. but with less impact, we also see a shrinking legacy product category. But that is becoming smaller and is shrinking a little bit less in quarter 1 than we did last year.In the Active with Kids category, we continue to grow at a very fast pace. The multisport/bike trailers category is doing great, going very well for us. Child bike seats is chugging along very nicely. And we continue to grow in our Thule Sleek rollout in the stores. So we are seeing good communication and good throughput there.Finally, in this region we do sell a lot of products to the RV market, awnings, bike carriers and few other things. And we have communicated it for quite some time that we believe there is an adjustment necessary in the market. That adjustment is happening a little bit above. It's coming a little bit later than we thought initially. So it was actually a relatively okay quarter 1 with less impact than we thought from the market perspective. And we are doing very well outpacing the market significantly. So we had a very strong start for RV products, stronger than actually expected with a market that is flattish in terms of registrations if you take all over Europe but with the core markets for the Thule group which are the German market and the central markets in Europe doing better than the Nordics and the Brexit-exposed U.K.So we are in a slightly better situation than we expected. We still expect the market to be slightly cooler for the full year but feel very confident about our growth ability in RV product as well.If I then leave it Lennart to talk a little bit more about some of the other financial numbers.

[Lennart Mauritzson, Chief Financial Officer]

Thank you very much, Magnus. So we are at Slide 6, the income statement now. The gross margins were down in the first quarter versus the prior year with 0.9 percentage points, including an unfavorable currency effect of 0.4 percentage point. Decrease in the gross margins in constant currency then of 0.5 points driven by the negative material price development we had communicated that we will see the beginning of this year at least year-over-year, not yet fully compensated by our ordinary customer price increases that we do implement in the first quarter and also the fact that the Chinese tariffs for U.S. purchases implemented during the autumn with the first 10% increase where we only do a like-for-like price increase to our customers, hit our gross margin as well.Our selling expenses, higher than prior year in absolute numbers. In percent of sales, we ended the year -- the quarter at 17.8% versus prior year's 17.6% due to the product development push and commercial initiatives primarily in our new categories. The financial net was minus SEK 13 million in the quarter versus minus SEK 16 million last year. This year we had no unfavorable currency impact, while prior year we had a minus SEK 5 million on that. External borrowing costs, slightly lower than prior year. And this year we also have a negative effect by the new IFRS 16 accounting rules implemented from January 1 with SEK 2 million extra in our financial expenses due to that. Though as you can see on the right-hand side on the page that we had a very little effect on our income statement due to the IFRS 16 change. So we have a favorable impact of SEK 1 million on EBIT in the quarter and a negative SEK 1 million on the net income. Effective tax rate for Q1 was 23%.So if we turn to the next slide, 7, the operating working capital and operational cash flow. This quarter we ended with SEK 1.6 billion in total operating working capital, which is 24% of sales versus the 21.4% prior year. As communicated, [ as reports ], increase in levels of especially the inventory is in line with our expectations and plans. And we do not expect the inventory levels to go back to more normal levels until the second half of this year after peak season is done for our biggest category. Therefore it follows the pattern for the operational cash flow where the build-up of working capital preparing for the coming sales in the much larger sales, Q2. We had a negative operational cash flow by SEK 75 million versus prior year SEK 69 million minus. But we will see a significant improvement in Q2 and Q3 following.Thank you very much.

[Magnus Welander, CEO & President]

Thank you, Lennart. So overall if you look at Slide 8 and our performance versus financial targets, we feel very good that we're tracking to our plans with a solid organic constant currency growth boosted with the small acquisition of Tepui in total growth. We are tracking to what we expected in terms of our EBIT margin. And we see that we are with new rules of IFRS 16 at 1.9x net debt to EBITDA leverage, while if we would exclude the IFRS rule it would be 1.7 comparably to what we've presented historically. There is an annual general meeting today where the proposal of a dividend of SEK 7 per share is being presented. And that would mean a net 86% dividend then to net income.If we turn to the future on this last page for the coming months on what we focus on, on Page 9. First of all, it's great to sit with great products, a production setup that is working very well. We have done major projects in all 6 out of the 9 plans without any disruptions. We have shifted our Western European distribution center without any disruption. And we expanded our Eastern European distribution center without any disruption to our business. That means we sit with full inventory levels. We have some great new product launches. And we have a good performance in our plans which make me very confident ahead of the peak season.In terms of sales and marketing, a lot of focus is going on of course as you would imagine in truly both establishing ourselves and also driving sell-through in our 2 additional focus categories so to speak, the new ones of Luggage and Strollers. And that has of course meant that we have hired some new people in the bigger markets where it merits own dedicated sales forces, generally key people from the industry with good experience to be added to our own internal competencies.It also means that we are doing a lot of initiatives at various smaller fairs and events locally, especially inside the Juvenile. And we think these are keys to drive the long-term growth.And in terms of product development, we are running a number of parallel big projects. We have just started sales on a number of very recent product introductions. But more importantly the fairs, the annual fairs are coming earlier and earlier every season. So many of the fairs that historically would have been at the later end of Q3 are now even at the very beginning of Q3, or some of them even at the very end of Q2 in June, which means that our product development efforts are pushing very hard to be ready with all those new products that we will be showing retailers in June, July and August for them launching them to consumers in 2020. We feel very good about all our projects. Some very exciting products to come. And we have decided to continue at the high development spend level, which is around 6% of sales.Then finally, in an operational way it's of course a huge peak season for us and now we are at the very moment with the most people that we will have any time during the year in our plants.We are running several shifts in most of our plants. It's a very exciting peak period. In that peak period, there is of course also focus of having done a number of major investments in our plants in 2018. We're starting to see, and what is a big focus, is to capture some of those efficiencies and those big investments and layout changes to the plants should deliver on.And then we are in the finalization stages, especially in our U.S. site in Seymour where we have constructed a additional building with a fabrication plant next to our assembly plant, where we are in the midst of the last phases of that, which will be ready in May. We are also needed to expand our Belgium RV product site after those years of fantastic volume growth. And we have therefore also the last phases of that startup of that additional small plant. And then finally, we are in phase 2 of our big roof rack generation rollout, which means that the Swedish plant is still going through some major innovation in terms of assembly lines. But we feel very good on the performance. And I have to say that the operations team in the company and the supply chain team has done a tremendous job to run so many plants, so many major projects without any issues in terms of disruption of delivery. So a fantastic job of that team.With that, I leave the floor open for questions.

[Operator]

[Operator Instructions] So our first question today comes from Daniel Schmidt from Danske Bank.

[Daniel Schmidt, Research Analyst]

Just the first question, couple of subjects. I'm going to start with RV and what you said on Europe. And it sounded like you were outgrowing the market quite a bit. And you also said that you were a bit surprised about the fact that the market impacted or the slowdown in the market was implicitly, it sounded like it was less than you expected. Would you say that starting sort of Q2 has been a bit more like you see it at the start of the year? Or what's the trend currently in RV when it comes to production? I think I'll start with that one.

[Magnus Welander, CEO & President]

I think if you look at it, we see a trend. We thought the RV manufacturers would have gone more aggressive, like they've done historically sometimes in the past of extending Christmas holiday breaks, not getting so many back when they were now doing this pipeline adjustment. So maybe more of a stop-and-go type of thing and then be more calmer in Q2, Q3. But it seems more like they've done a more balanced way, which is actually better for everybody I think. And are not taking a big hit, so to speak, in Q1, but rather balancing it out, spreading it thinner. So it's not like there is a dramatic change in our expectations for Q2. It's more of that it will be more slightly slower the whole time. We were more fearing a very aggressive turning off the switch almost completely for a period in Q1, they didn't.

[Daniel Schmidt, Research Analyst]

All right. But is it fair then to say that this inventory correction will be going on a bit longer than you expected at the start of the year? Or are you seeing retail demand in your markets improving going into Q2 and sort of taking the edge off the need to destock?

[Magnus Welander, CEO & President]

I think the need to destock is there. We are not changing our opinion on that. What we are seeing is less of a step quarterly effect that we maybe thought. And it's going to be more a consistent. We don't -- we haven't changed our mind on what we believe roughly that destocking is. But actually if you look at, Nordics is a very specific market. U.K. is a specific market due to other reasons. U.K. due to the Brexit, Nordic due to some of those emission rules. But if you look at the big markets, Germany is doing well in registrations. So some of the other central markets are doing really well on registrations. If you look Trigano's recent report, if you look at some of those caravan's statistics, it's not doing that badly. It's tainted a bit about the Nordics and U.K., luckily not our most key markets for our products. We are more Central Europe. So overall, it's roughly in line with our expectation as a total but more smoother.

[Daniel Schmidt, Research Analyst]

Okay. Good. And then just very briefly on the portfolio pruning. The rest -- the remaining SEK 33 million, is that going to be done in Q2? Or is that sort of slipping into Q3 as well?

[Magnus Welander, CEO & President]

You're right. Our expectation now is that they will actually slip in, spread out also longer. It's the same amount. But it will probably spread out longer into the second half as well. We see it unlikely that it will all happen now in Q2. It probably will be spread over the whole year.

[Daniel Schmidt, Research Analyst]

And then thirdly, raw material was negative, it was a headwind for you in Q1. Is it fair to believe that raw material will turn gradually to be a tailwind by the end of Q2?

[Magnus Welander, CEO & President]

It's definitely going in the right direction. Tailwind is always a questionable thing. It will be less negative initially, we know that much. And it will go in the right direction if you compare then of course with the price increase implemented as well. So you have to do both the comparisons so to speak. But yes, it's improving in the right direction.

[Daniel Schmidt, Research Analyst]

And then a last one for modeling. You said the product development, you're pushing product development very hardly -- very hard right now and some of the fairs have been sort of brought forward compared to a historical date. Are you implicitly saying that Q2 will be more heavily burdened by product development spending but the overall figure is going to be 6%?

[Magnus Welander, CEO & President]

No, the reason is mostly at the fares we will be showing very professionally made but still prototypes, which is not the heaviest impact cost. When you do things you have various things impacting your product development. So it's going to be spread very similarly to previous years. It's more of a time pressure, let's put it like this, where if you look at it this year, the guys have had a little bit shorter time than normally between the previous year's launches and this year's launches to get them ready and to show them to retail. But from a cost perspective, no.

[Operator]

Our next question today comes from Peter Reilly from Jefferies.

[Peter Reilly, Head of Capital Goods of Equity Research]

Could we talk a bit about what's happening with Packs, Bags & Luggage? You say in the release that it grew in Europe. I guess it's still shrinking in the U.S. because you've got the bigger impact from legacy products being phased out. But overall did PB&L grow in Q1? Are you on track to grow for the full year? And in particular, can you talk about whether the Revolve had any significant impact or whether it's just all very small numbers currently because of the initial stock orders. So maybe you can help us understand what's happening with PB&L, please?

[Magnus Welander, CEO & President]

Yes, we actually were flat in the U.S. So that means since we grew nicely in Europe and rest of world. We had and growth in Packs, Bags & Luggage, not a big growth, but we had a growth. We are still being pulled down in Region Americans as you mentioned, by having a significantly larger share of those legacy things. But overall that is of course shrinking as we go. Even in Americas where it's much bigger share of the total business with more old case logic stuff. It's dipping fast there as well. So that's good. The key contributor for that was Thule Revolve and some of those what we call everyday backpacks. So the Thule backpacks that you would use to work or to go to school with, university with, those are the two strong performers. But actually, we're doing really nicely also in the small niche categories of tech packs and sports-specific bags. So overall, I think a promising first quarter. Volumes are not huge in Thule Revolve in quarter 1 because we only started selling it as of February, mid-February, right. So you've only had 1.5 month. So impact will be more positive in Q2 and going forward with Thule Revolve in terms of volumes.

[Peter Reilly, Head of Capital Goods of Equity Research]

And also in terms of mix. Obviously, you had a small margin decline in the first quarter for reasons you talked about, but should mix still be getting better as the year progresses because you'll have the legacy products phasing out? Hope you've got rising contribution from newer higher-margin products. So do you feel confident that you should have a steadily improving mix as the year progresses?

[Magnus Welander, CEO & President]

Yes, we have absolutely in our plan a mix improvement as you mentioned for these reasons. What we have also made clear is that versus last year we do have a tariff impact on the gross margin. So indicatively, the tariffs in itself since we just decided to pass on the exact cost increase not with a markup on it on the tariffs, that means if you take that effect, that was about a 200 basis point effect in quarter 1 just from passing on only the cost increase. So if you take away the FX-adjusted part of what happened to our EBIT line and you take away that margin impact of only passing on the cost, actually the rest of the mix is already -- was flat in Q1. Which means by default, as you mentioned, less of legacy, less of OE, some better products, yes, we should see a positive development.

[Peter Reilly, Head of Capital Goods of Equity Research]

And then lastly, and you may not want to answer this, but can you give us any hints about the new products that are coming later in the year? Obviously, you won't talk about the details, but in terms of the scale and importance, is this -- are these minor infills or are these relatively major launches that will create a meaningful impact in years to come?

[Magnus Welander, CEO & President]

So if you look at it in the classical category Sport&Cargo Carriers, we have launched the big things just end of Q1. They're going to have their big numbers in Q2, Q3 due to the fact that that's when people buy those products. And there is generally, as always, some very good nearby carriers. We are coming this autumn with an additional thing, what we've already communicated, a new top-of-line roof box which is only coming in the second half of the year, the Thule Vector. Even if the most premium roof box is not the one that creates the biggest volume that will be of course a meaningful impact in the second half of the year with a new premium roof box. Then in the categories where we truly see some products that will generate, if we are as successful as we hope with them, some meaningful impact is within Packs, Bags and Luggage, where we're launching an additional luggage collection in the second half of the year. And we have -- we are just launching also ahead of the back-to-campus season and the next winter season a number of new backpacks and models. So our hope is that those will be significant for the future as well, second half launches.

[Operator]

Our next question today comes from Gustav Sandström from SEB.

[Gustav Sandström, Research Analyst]

Most of my questions have been answered, but I have one question that I'd like to ask regarding the Thule Sleek. Could you give us some indication on? You've had it obviously now in the market for some time. The run rate or the development for that stroller. And if you could put it in reference to perhaps your Chariot or Glide categories in terms of units sold or trajectory?

[Magnus Welander, CEO & President]

So we never talk about units sold about anything. I won't do that. But I can give you an indication. We are seeing a -- in a number of the Central European countries, Benelux especially, the type of sell-through and the type of effects we wanted. We have seen a slightly slower start than we wanted in North America, partly because we came a lot later. So it's going to be very telling now, Q2 and Q3, how U.S. does. If you look at the Northern Europe, the Nordics, we're more or less in line with what we thought. So I would say it's better in some Central European countries, it's worse in the U.S. and it's more or less in line in the Nordics on what we expected. And if you look at that, it's a very -- as I said, very different type of stroller. So it's not comparable in that sense to other things. But it's roughly a little bit behind plan due to the U.S. But otherwise, it's doing really well in the countries where it was launched first in, so the Benelux and Germany.

[Gustav Sandström, Research Analyst]

Okay. Great. And referencing to your saying of the army of one. Is it fair to assume that Thule Sleek will have a companion or two before or the year-end in the more broader stroller category?

[Magnus Welander, CEO & President]

Not in stores, but we will be showing, that's not a secret. We've told the market that we will be showing a brand new stroller model at the fair this autumn. That will be in store as of 2020, which was a clearly mainstream stroller in that sense not an additional jogging stroller, it's going to be typical, core volume-driving mainstream stroller, that with of course Thule's touch to make it better than most.

[Operator]

[Operator Instructions] We have no further questions. So I'll hand back to you back then.

[Magnus Welander, CEO & President]

And I want to thank everybody for taking the time and listening in. And looking forward to catch up again after the Q2 in July. So I hope you have a very active spring, travel a lot, do a lot and buy a lot of the Thule products. Talk to you soon.