Thule Group AB

STO:THULE

Earnings Call Transcript 2022-Q1

[Operator]

Hello, everyone, and a warm welcome to the Thule Group Q1 interim report 2022. My name is Emily, and I'll be coordinating the call today. [Operator Instructions]

I now hand the call over to our host, Magnus Welander, CEO. Please go ahead.

[Magnus Welander, executive]

Thank you very much. And good morning, everybody. Yes, it's been a very strange first quarter for the world. We have lived through things I think nobody would have expected around us. But at the same time, I'm happy to say from a company perspective that for the Thule Group, it's been a very good start to the year.

So if we turn to the first page, and look at some of the key financials of what we delivered in the first quarter, we can see that we grew sales with 13% currency adjusted in the first quarter. And I think it's important to take a step back and realize that that is a 64% growth on a currency adjusted basis versus what we did the first quarter before the pandemic in 2019. So a very strong result indeed.

The region that grew the most was Region Americas with 27% growth, and Region Europe and Rest of World grew 9%. I'm also very happy in these times with rushing and raising prices and costs across the board and many complexities in a global supply chain, we were able to also deliver that growth at a very high margin. So our gross margin was 40% in the period, and the price increases we implemented at the beginning of the year has, of course, been a key contributor to being able to deliver that margin.

We do see continued higher raw material cost, continued high freight expenses, and that has further been impacted by the Russian invasion of Ukraine. So what we can already say at this early point of the call is that we will install further price increases midyear also in 2022 as the costs continue to raise.

If we look at our EBIT margin, I'm very happy to say that we deliver a EBIT margin of 22.8%, which is actually an improvement on a currency adjusted basis versus last year. So a very strong result on an EBIT margin level.

As we had already indicated well late last year that we would be seeing a different cash flow pattern than we did in 2021 of Q1, and that was first and foremost because 2021's first quarter was exceptional. It's been the only quarter in the 17 years I worked in the company that we were cash flow positive because normally in the first quarter we have a negative cash flow.

On top of that, what normally would be our patterns, we also decided late in 2021 during autumn to ensure that we would be able to meet the On-Time-In-Full delivery expectation that we've always been so good at historically, but that we struggled with during pandemic, we needed in an erratic and longer supply chain to build up inventory. I'm very happy that we've been able to do that so that we once again can service our retailers at a better level, and we have therefore clearly seen an inventory buildup ahead of the peak season.

If we turn to the next page, we take a look at those quarterly numbers that we've seen over the last few years, because I think it's so easy that you get stuck with only comparing with 1 year back and a previous year period. But if we look then of what the expectation that we have as a company is that we have a more similar pattern in terms of seasonality in 2022 to what we had before the pandemic, which in this graph is represented then by the 2019 gray numbers in the graph. So a pattern of a stronger first half and then a slightly slower second half is natural with the type of products we do.

Now being able to have a better fulfillment of our supplies and being better at supplying to our customers and to the consumers when they want it, we believe therefore that there will be that logical phasing again.

When we look at it also, we have to admit that there is a lot of uncertainties in the markets over the 2 coming quarters. We all are realizing that there is still lots of challenges left in the supply chain with very long lead times and a lot of disruption. It is clear, as I mentioned, that costs continue to increase, and we therefore will pass on those cost increases with price increases.

There is, of course, a general situation also with retailers now having come back to a normal stock level after having been -- for 18 months having too low stock levels, and therefore, being in a slight backlog. We also see, as we'll come back when we talk a bit about the European region, that European motor home manufacturers are struggling to get enough chassis from the chassis suppliers to be able to meet the current demand there is in motor homes. And then, of course, we have a general inflationary of what's going on in the market.

So it is relatively uncertain terms in that short term perspective, but what is very positive to know that on a more long term perspective and even for '22, we still see a very strong local staycation and local travel trend. We still see a big interest in the type of products we do, and we are therefore comfortable that we will see a pattern of behavior similar to what we have been seeing before the pandemic with a continued interest of pursuing those types of activities.

If we go to the next page, we will talk then a little bit about the biggest region, Region Europe and Rest of World. As I said, a 9% growth in constant currency. This is, of course, from a sales point of view, the region that is impacted by the Russian invasion of Ukraine and our decision to cease business in Russia and Belarus. And of course, the consequence that our Ukrainian partners are not purchasing the product from us. On a group level, that will have an impact on around 1%, so slightly more than 1% for the region.

Of course, if we take those markets aside, we're very positive to see what's going on in all the other countries. We have a solid start and strong performance in the Central European markets and we saw a very strong ending of what was the summer season in the southern hemisphere in Australia, New Zealand and South Africa.

As I'm sure you're all aware, there's still a lot more of pandemic-related limitations in Southeast Asia and Asia than there is in Europe. So here we have markets, if you take South Korea and Japan aside, where we see less strong results, but still a solid performance also in the Asia markets.

In terms of categories and subcategories, we see that roof racks and roof boxes have been very strong in the period. And there is a natural logic for that with a better winter holidaying opportunity in the holiday season of '22 than there was in the first quarter in '21 in some of the Central European markets.

The bike category. As we all expected when the season started, we now have had a slower start to the season versus last year. Last year that was because there was a backlog of us not having been capable of fulfilling all the demand during 2020, and therefore, filling up inside stores with some of those bike carriers, bike trailers, et cetera. That we are now capable of having a good On-Time-In-Full, and therefore, retail are commonly waiting for the real spring season to come.

Within RV products, where we had a very strong first quarter as well, there is a clear situation, if we look at quarters ahead, that although optimistic views from the motor home manufacturers -- and there are several publicly listed companies that I'm sure the investors have listened into and looked at their reports. They all indicate a good demand, but some struggle to get enough chassis, as I mentioned. And that will be part of the challenge in that category. Luckily, we have a very strong position with the dealerships, and therefore, we sell a lot of products to the RV dealers as consumers come to them.

We continue to do well in Juvenile with stroller sales. And from a then lower level but finally picking up, we see Packs, Bags & Luggage growing in, especially, what I would call, daily commuting type of products, so laptop bags, laptop backpacks, et cetera, for people going back and forth to university or to work. We all know that international air travel is still significantly more limited and especially so in the Asian region, but, of course, from the very low levels of previous year, we are growing within the luggage category as well.

If we then turn to Region Americas on the next slide, there we saw a very strong performance for another quarter with 27% growth. All markets are growing in the region with the Canadian market being the star performer with a very strong result. Here, we see strong growth across all the sporting cargo carriers categories, and it's similar to what we mentioned in Europe that roof racks and roof boxes are doing well.

Here, in Region Americas, we also had the fact, as we have mentioned before, that we had a longer time to catch up with demand on bike carriers and bike-related products. We did do that during the period. So that has also helped the quarter, and we are now at more normal inventory levels within retail similar to what we are in Europe in terms of products in retail.

If you look at Packs, Bags & Luggage, that is the strongest quarter ever. And that should be the case, because we see now that domestic travel is picking up significantly in North America. It is the region where both air travel for work and air travel for vacationing is growing the best. Still not back to the pre-pandemic levels, but significantly better than Europe and significantly better than Asia. And we're taking nice share in that growth.

And we continue with a solid and strong growth momentum in Active with Kids. You also know that, although our RV product category is dominated by sales to European markets with more than 95%, we have since 3 years entered into the North American market with some niche products for vans and some other things, and we are continuing to see a very fast growth momentum within that niche. So nice to see that performed. With that, I leave it to Jonas to talk a little bit about the financials.

[Jonas Lindqvist, executive]

Thank you, Magnus. We are now on Slide #6. We are looking at tough comps from the same quarter last year. Despite the fact that it was the first quarter of the year which normally has somewhat lower sales, it was at that point the strongest quarter in the history of Thule. I am saying that because we are now back to the seasonality Thule had before the pandemic, and I would like to remind you that the second quarter is the strongest followed by the first and third and the weakest quarter is normally the fourth quarter in a normal Thule year, so to say.

Sales for Q1 this year are organically 13% above last year, despite all the uncertainties and the general market conditions. There has been growth in all product categories. And for example, the market, as Magnus mentioned, for Recreational Vehicles is very strong, with long lead times for customers wanting to purchase a camper van.

The gross margin is 40% to be compared with 41% in the same quarter last year. This, despite the higher cost for components, raw material and freight. The successful implementation and price increases have offset the negative effect coming from the higher costs.

Operating expenses have increased from SEK 456 million to SEK 522 million, but as a percentage of sales, it is lower and has gone from 18.0% to 17.2%. Selling expenses have increased primarily because of variable costs relating to the increased sales. And as you can see, administrative costs are virtually on the same level as for the same quarter last year.

The EBIT margin is 22.8% to be compared with 23.4% in the Q1 last year. But if we apply the exchange rates for the current period on the first quarter last year, it is in fact on the same level or even an increase of 0.4 percentage points.

The finance net in the quarter is slightly lower than Q1 last year because of high utilization of our bank facilities. And the tax of SEK 155 million corresponds to a tax rate of 22.7%, which is within the lower part of our guided range of 22% to 25%.

We now move to Slide #7. And looking at operating working capital, it was SEK 3,460,000,000 at the end of Q1 '22, which is considerably higher than in the previous year and relates primarily to the increase in inventory. Last year's level was too low to meet the demand, and we decided to go into this year with higher inventory levels. There are challenges and uncertainties in the product supply chains, and to avoid being exposed to shortages, we have sourced bigger volumes.

We have increased our inventory levels of the products that are sold in large volumes and that are not exposed to obsolescence. And Q1 is always a quarter of increased inventory. Magnus will talk more about the inventory and the reasons for the decision to increase it in a minute.

The accounts receivables have also increased in the first quarter like it always does as the season starts to pick up momentum. The operational cash flow for the quarter was negative by SEK 610 million, driven, of course, primarily by the increase in inventory. Negative cash flow in the first quarter is the norm.

The capital expenditure was SEK 148 million in the quarter to be compared with SEK 56 million for the same quarter last year. The capital expenditure relates to investments made to increase our production capacity. Thank you.

[Magnus Welander, executive]

Thank you, Jonas. And as Jonas said, we thought it would be good to talk a little bit more about our inventory and what we're doing and why we're doing it. So if we turn to the next page, you will see a graph showing our inventory situation by quarter and our rolling 12-month sales as well.

And on top of that, there is an arrow indicating green and red. And the green periods in that timeline is the timelines when the Thule Group has been delivering to what we historically have had as a very key strategic focus, is to be a very high On-Time-In-Full delivery performance with next day deliveries to our retailers.

We've always said that to service a retailer, it's great that you start with the market's best products, which we do in the category we play, but also another key factor is to make the retailer's lives easier by not having to forecast -- spend a lot of time thinking about what you need to have on stock from Thule, knowing that Thule can make it available for you in a very short notice. So we have always built on that parameter.

When we had this situation in the spring of 2020, it was natural that with, first, demand plummeting in March 2020 when the first initial signals of the pandemic coming and plants being closed, et cetera, we could, of course, deliver, because the little things we had orders for we could deliver. But then came the situation of plants closed, distribution centers closed. So we started to have low delivery performance.

Then when the pandemic, sooner than most expected, started to ease up and we started to pick up orders already as back of the second part of Q2 in 2020, our delivery performance started to be challenged because of the high demand versus the situation we were in.

And then we have to admit that for the entirety of the rest of 2020 and the first half of 2021, in both regions, we were simply not as good a On-Time-In-Full delivery performance. We've managed, as you've seen our sales numbers and as you can see on the graph over the rolling 12-month sales, we managed to produce more than ever in a very strong way and we managed to capture more of the demand out in the marketplace than our competitors. But we're far away from the levels of On-Time-In-Full that we prided ourselves with before the pandemic.

It was only towards the end of the third quarter last year, 2021, that we in Europe started to be at the same type of levels of delivered performance as we want to be and as we intend to be in the future as well.

While in North America, as we mentioned, we still struggled into -- well into and throughout the fourth quarter with stronger delivery performance. And it's only been now in the first quarter this year that we're starting to have what we would consider better delivery performance On-Time-In-Full again.

That then has been happening at the same time as our sales have grown very significantly over the period with approximately 60%. And therefore, we have also, of course, done a lot of work, as you can understand, where we actually are very proud of what the supply chain team has done in being able to handle all the complexities in a struggling global supply chain.

But what is the case is that just normal lead times at the moment for components are significantly longer than they were before the pandemic, partly due to longer freight times, but also partly due to suppliers struggling with being able to capture the global demand, not only from Thule, but from other growing companies.

With longer lead times and on top of that more erratic situations and more disruptions with already longer lead times, we took a conscious decision in 2021 to, as Jonas mentioned, allocating best in our capital expenditure in our plants to enable better flexibility and higher capacity, but also actually on inventory of components and sub-assemblies so that we can service with a high On-Time-In-Full.

We've decided strategically that we will have to maintain higher than historical inventory levels in order to have this great service of On-Time-In-Full with a longer and more disruptive supply chain going on.

As Jonas mentioned, we feel very comfortable that these products and components that we have on stock are not fashion items. They do not pose a significant obsolescence risk in any shape or form. It is just a way of ensuring a better delivery performance in a more uncertain supply chain reality, and with, once again, giving retailers the opportunity and not needing to order long in advance with us. So returning to that strong performance of next day delivery On-Time-In-Full approach. So we feel very comfortable with the decision in holding those higher levels to capture the long term upside.

If we then go to the last slide before the Q&A, we are looking a little bit ahead for what is the focus for 2022 and the rest of the year. It's always easy to say that we remain very following our plan, but it's the truth. We haven't changed our approach of driving a growth-focused strategy, that is unchanged. What we've had to do in the meantime is, due to what's going on in the marketplace, we've had to implement price increases to offset cost increases.

And as I mentioned at the beginning of the call, we will implement another price increase in July because, once again, we have to admit that we underestimated the cost developments and the price increases we did at 1st of January will not be enough. We will do additional price increases 1st of July.

Our focus also is to continue to have those great products, come up with new products. We're winning constantly new awards for our new stroller, Thule Shine, that has been launched in Q2 for the child carrier backpack, Thule Sapling, and for many other products. And that remains a great focus going forward.

We will continue to strengthen the Thule brand in all the way we communicate with the marketplace. We are utilizing the strong back end organization to handle that growth in a cost efficient way. And we are continuing to support our retail partners with better solutions across the board. Product portfolio approach and product development is crucial to this company. It's always been that.

Of course, now coming up to a Capital Markets Day on 11th of May. And I can already say, I hope as many as possible can join us either physically in Hillerstorp or digitally for this event, because we will talk a lot of our products. In a company that product is king, you wouldn't be surprised with that. Specifically, this time, we will share news about both the existing categories but also the fun thing of launching into 2 completely new product categories.

We have just opened in the last few weeks the new expanded Thule Test Center. So those that will be joining us or of the ones watching the digital event will see a fantastic world-class state-of-the-art facility for testing all our products and our new development center as well as the world's best by far roof rack plant.

What we are also doing in the meantime is we are continuing our big efforts to improve our supply chain setup. We still are doing significant capital injection into our plants to be able to handle capacity. We are doing that with more automation focus than ever. And therefore, as we've already announced, we will be running at the higher CapEx level this year and the coming 2 years in order to both handle the new categories we're going into and the capacity increases for the current categories.

And although you might not believe so, after the first quarter, we will be generating strong cash generation in the company throughout the year as well.

So you can conclude by saying, yes, the world is definitely an uncertain place around us and there's lots of things happening, and we will need to be very agile and quick on the feet. I think we've proven that extremely well during -- the dynamic that we are. But on a more long-term basis, we feel very comfortable with the efforts we are doing and the markets we are in as being positive for the growth of this company. So with that, I'll leave it open for questions.

[Operator]

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

[Daniel Schmidt, analyst]

I hope you can hear me. A couple of questions from me. And coming back to what you talked about, Magnus, on a couple of slides, the inventory buildup of around SEK 500 million quarter-on-quarter. And you got this question last time as well and I just wanted to ask it again.

I know it does sound like this is more sort of critical components that you've sourced to have a bigger safety stock and maybe not as much finished goods. But has it had any impact on sort of absorption of fixed cost during the quarter or rather the opposite like you saw in Q4?

[Magnus Welander, executive]

Yes. Daniel, not any effect on our absorption cost because it's -- if you look at our mix of what we hold, it's mostly components and subassemblies. We do have finished goods, of course, as we always have. So no, it hasn't impacted in any shape or form our margin performance or absorption.

[Daniel Schmidt, analyst]

Okay. Good. And you do mention sick leave or sick absence as a negative. I assume that that's related to the pandemic. And so if that's true, was that mostly at the start of the quarter? How is that looking entering Q2?

[Magnus Welander, executive]

Yes, you're absolutely right. It was that we had at a number of our plants relatively aggressive Omicron spreads at some of the plants. And with -- it's not always necessarily your own staff at your plants, but maybe their children at their schools. And they then with the rules that, of course, applied, needed to stay home. So we had at a number of our plants in Central Europe, both in Germany and Poland, a relatively high sick leave due to those reasons of Omicron pandemic in the beginning of the quarter.

[Daniel Schmidt, analyst]

And did that coincide with sort of the end of government support when it comes to sick leave?

[Magnus Welander, executive]

If you look at it -- I think if you -- it looks very different in different countries on what worked out with --- in terms of sick leave and support, et cetera. So it didn't -- wasn't a direct cost due to people being sick in that sense. It was an inefficiency impact that happens when you have to bring in temporary staff, et cetera, for the ones that are not coming into the offices or the plants.

[Daniel Schmidt, analyst]

Okay. But would you say that that sort of leave number is back to normal now entering Q2?

[Magnus Welander, executive]

Yes. Yes, it is.

[Daniel Schmidt, analyst]

Yes. And then just moving on to the next topic. And I heard you mention in Swedish media this morning that, of course, like every other -- every year before 2022, this is going to be the best year ever. And that you should be at least in line with your long -- sort of long-term financial targets when it comes to top line growth, which is at least then 7%.

And at the same time, of course, we've had quite a lot of price increase in January, and you have been stating that you have sort of further price increases at the start of July. Could you give any indication of the magnitude of those price increases? And how do you see the profile given those price increases? And how should we relate to the 7% that you sort of mentioned this morning as some base line or sort of maybe the floor, I don't know? Could you shed some more light on that?

[Magnus Welander, executive]

Yes. It was a long question, but I'll try to summarize.

[Daniel Schmidt, analyst]

Yes, it's a difficult question.

[Magnus Welander, executive]

Yes. So if you look at it, clearly is the case that we have a long-term target of 7% to cover over a long period of time. And we believe that we should be -- to deliver on a target over a long period of time, it's better to deliver on it every year.

And therefore, the significant impact of this year we have already communicated before would be -- price increases is going to be a big contributor because we're coming after a fantastic growth year. So 2022, the actual growth was always expected to be a price-driven growth more than a normal year.

And we've already indicated that it's high single digit. So you're right, the majority is price. I can't announce on what we're doing on prices because I haven't told my customers yet what we're doing on prices on 1st of July. But it won't be as significant as what we did in 1st of January, and it will be more specific by product because there are very different behaviors on what cost patterns are going on with the material costs.

[Daniel Schmidt, analyst]

Yes. And although we don't know sort of what the price increase will be, but do you see sort of -- do you expect volume growth throughout the quarter -- throughout the year?

[Magnus Welander, executive]

I think if you look at it mathematically to say that there will be hopefully some volume growth. It's never -- our expectation was not that it would be a significant volume growing year in 2022. We have a lot of new products coming in '23 and beyond. But in '22, it's mostly the same products we had. And we had a fantastic '21. So relatively limited volume growth is what we've expected all along for '22.

[Daniel Schmidt, analyst]

Yes. Okay. And sort of coming back to the price increases and the need for further price increases comes back to, of course, the situation that we have in the world and the war that has been breaking out in the past 6, 7 weeks -- or it's 2 months, actually. And which has, of course, taken everyone by surprise, including you.

And I guess that's the reason why you're seeing the need to further increase prices. And that's as of the 1st of July. Does that in any way mean that entering Q2, that you will have sort of less of a neutralizing effect on input costs over a very short time period?

[Magnus Welander, executive]

Yes. I think, yes, that's a natural thing. Of course, we will be more challenged towards the end of the quarter as we are using up materials that we bought and components that we bought. That's clearly the case that you're more challenged. But at the same time, we're, of course, working hard on our way to meet that with efficiency gains and other measures.

Overall, I think we have to admit for the third time in a row we were not pessimistic enough despite believing we were, which is why we are then adjusting on some products as of 1st of July. So that -- there is an impact on that, that we're trying to offset as much as possible with efficiencies.

I think also need is a bit of a -- it's a nice way to tell your customers I need to do it. We decide to do it, because we are a market-based pricing company. We're not a cost-plus company. When the markets move on, and the markets are moving on, in some categories, we are the one triggering the market to move on. In others, we are actually following the market that is moving on. It's more a decision than a need, to be honest. It's a decision to [indiscernible]

[Daniel Schmidt, analyst]

Yes. All right. Right. And then the final one from me. And you did mention it: "We'll sort of meet this with further efficiencies." Operating expenses as a percentage of sales came down quite a bit in Q1 versus Q1 last year. Was that exceptional? Or is there anything in that number that you can't extrapolate?

[Magnus Welander, executive]

No, that was not exceptional. We are and have always prided ourselves to be having a very efficient back end of our business to handle when we have volume growth. So no, that was not anything specific in that quarter.

[Operator]

Our next question comes from Gustav Hageus from SEB.

[Gustav Sandström, analyst]

I have 2 follow-ups. Firstly, on this debottlenecking of the -- primarily the U.S. production footprint, as I understand it. Was that at all a limiting factor this quarter that you had not yet debottlenecked that production? Or -- and do you expect volume growth sequentially in U.S. from these levels following expansion of production? Or if you can comment on that, that would be good.

[Magnus Welander, executive]

Yes. I think we're now in line. And we mentioned a few times during the autumn last year that we were about 6 months behind Europe in North America and catching up with capacity. We are caught up. And I think, therefore, you can say that what we have seen being helped partly on the results in Q1 in Region Americas was a later catching up with some of that demand that was there than we did in Europe, which was why there was a difference in terms of growth numbers.

If you compare -- instead take a big step back and look at '19 performance versus now '22 Q1 performance, the 2 regions actually performed quite similarly. It was just that Europe had been catching up a bit before. So we're going into Q2 with a relatively, I would say, balanced inventory levels, logical inventory levels with retail in both regions. And aside from some very specific products, we feel good about our capabilities of delivering On-Time-In-Full overall in both regions.

[Gustav Sandström, analyst]

Okay. And regarding volume growth, you say you hope for some volume growth in this year. Is that also true beyond Q1? Do you see volume growth Q2 to Q4? Or was this what we got do you think in terms of volume growth for the year?

[Magnus Welander, executive]

I mean -- I have -- yes, I've said a few times here, we struggle to give forecasts to anybody generally. Even in good times, we don't do forecasting on a quarterly basis. To do that at the moment, you would be mad because the world is so wild. What we believe is that there is a strong underlying global trend for our categories. What we have said is we believe that underlying trend is not a trend different from what it was before pandemic, with a few percent growth.

The big challenge in that period will be defined over the second half of Q2 and the first part of Q3, which is when the peak season happens. Honestly, talking to even retailers, they don't know very much about what will happen truly this summer season. So that's going to be the big question mark.

[Gustav Sandström, analyst]

But when talking to retailers, do you get any sense of shifting consumer sentiment on the back of everything that's going on with energy prices and the invasion and all that? Or...

[Magnus Welander, executive]

No, actually...

[Gustav Sandström, analyst]

Do you get any sense of mixing down or...

[Magnus Welander, executive]

No. I think the only strong signal there is – [ that there's ] still very positive signals that people are planning to do their local vacation and are planning to be active also this summer and planning to do things. I think the single biggest change is more – [ realizing] that some of them were so strapped with capacity from their various brand suppliers that anything sells.

So if you would ask a sport and outdoor or bike retailer a year ago or 9 months ago, they could have sold any bike from any brand at any time. It's starting now finally becoming more normal again. It's the right bikes from the right brand at the right time. So it's becoming a more normal situation.

There was a little bit of an opportunity for retail to sell anything. That is not going to be applicable when we talk to them. They feel that consumers, again, will be more picky. They want the right bike. Not any bike of any color with any gears from any brand, but the right model with the gears from the brand they chose, et cetera. So that's more a normalization of behavior, but with a general positive outlook.

[Gustav Sandström, analyst]

Yes. Okay. And just to double check. There's no element of your new categories in the working capital, right? You haven't started producing those?

[Magnus Welander, executive]

Correct.

[Operator]

Our next question comes from Mats Liss from Kepler.

[Mats Liss, analyst]

A couple of follow-ups I guess. First -- I mean, the inventory buildup here in Europe compared to last year when you lost [ pace ] because you didn't have sufficient inventory to do sort of -- well, to keep some play there, about those 2 components, I mean, to get a [indiscernible] potential year-over-year growth.

[Magnus Welander, executive]

I think generally when you look at that situation, Mats, it's a question about -- often in a category it's you versus others, you might not even lose sales if nobody else is doing it better than you did. And last year, we did it better than our competitors in terms of supplying to the demand that was out there already. Even if we were not capable of doing it with the same high On-Time-In-Full as we normally do, we did it better than most of our competitors.

What we are wanting to ensure is that, that happens also in 2022, which we are convinced it will because we now have a very good capability of supplying On-Time-In-Full. What that gives us is, of course, if the season is positive, we sit in a very good situation to capture those upsides.

But I wouldn't say from a competitive point of view that we see any difference or losing sales last year or winning this year. It's just more of expectations on any brand is to do a better job in supplying On-Time-In-Full with short lead times in 2022 from consumers and from retailers than it was in 2021. We have prepped ourselves to be able to meet up to those higher expectations. That's what we've done by building up the inventory.

[Mats Liss, analyst]

Great. And then -- I mean, Europe is maybe somewhat at this -- well, high -- some more -- much more is happening in Europe compared to the Americas. Could you sort of reposition the inventories towards the Americas at this stage or it is too late?

[Magnus Welander, executive]

I think if you look at it -- as I said, our inventory situation is strong in North America as well. What we generally do, so to be clear, is there are a certain amount of products that we manufacture in Europe -- all roof racks were, for example, made in the Hillerstorp roof rack plant where we were holding the Capital Market Day, also the ones that we're selling in North America.

Of course, while that is components, we don't have them shipped over there. They are still sitting in European manufacturing facilities as components. Some of the bike carriers that we sell in North America are assembled in our Polish assembly plants, et cetera. So there are some aspects on that. But aside from that, our inventory is, in a positive sense, built up in both regions now.

[Mats Liss, analyst]

Okay. Great. And well, coming back to the price increases also -- I lost you a bit there. Did you say that price increases you plan or need to do at midyear, it's more limited than the ones you sort of made at year-end?

[Magnus Welander, executive]

Yes. I do point out need is mainly not the word I would use. We decided to implement price increases because need seems a little bit greedy when you're a 22% EBIT margin plus company. But we decided to implement price increases from July 1 as well. They will be less -- clearly less than what we implemented from 1st of January.

[Mats Liss, analyst]

Then about the supply of bike maybe and RV vehicles also, you mentioned the problems with the RV manufacturers having and producing and you're sort of more exposed to retailers. But do you experience the same situation with bikes? I mean, the lead times to get a new bike, if you like, have a specific one, it could be long. Is that also [indiscernible]

[Magnus Welander, executive]

Yes, the bike industry is more interesting there, Mats, because what you can say in general that has happened is that the more simple basic low-end bikes, the bike industry caught up with earlier in terms of capacity because they were easier to ramp up capacity for.

So I would say that there is no bike retailer around the world that is lacking cheap entry-level bikes. There's plenty of those in store across the board wherever you go now. So it's not the basic most simple bikes that is a challenge in supply chain at the moment. It's actually at the other end of the scale.

So the more premium e-bikes, the more premium downhill bikes, that's more premium mountain bikes, the more premium road bikes, where they are still not fully meeting the capacity and where you're correct. If you would go into some of those bike retailers today, they might give you still a very long lead time for some of those top-end bikes still today.

So I think it's not nearly as bad as it was a year ago, where the bike industry was incredibly far behind. They are in a much better situation and have completely caught up with the cheaper bikes. But there is still some way for them to go to create normal lead times for the more premium bikes.

[Mats Liss, analyst]

Great. And just about the RV vehicles, could you remind me the mix there between OE production and retailers?

[Magnus Welander, executive]

Yes. So if you look at it, you can say that historically we've had slightly -- 55% roughly to what I would call not retailers, to be honest, it's dealerships which sell motor homes. And they're often actually even associated with the same manufacturers that is more than the OEM, where somebody orders the vehicle from the manufacturer with some of our equipment on it.

Since our equipment is mounted on the outside of the vehicle, that's a relatively late process even when it's an OEM product. But then what happens often is that you go to an RV dealership. You point out which [indiscernible] [ euro ] mobile, motor home you want to buy. And then you tell them: "I want that Thule bike here and that Thule [ warranty ] on it." And that's when then that split happens of what percentage goes to both.

In a period where motor home manufacturers have been having very strong order books and putting out a lot, they've tried to standardize their manufacturing lines by designing from the beginning what a vehicle should be equipped with, because that way they could standardize and make their planning easier.

Now when they have been struggling to get enough chassis, what is positive for us, as we have such a strong dealership relationship and sales channel as well, is that we haven't been as dependent on motor home manufacturers deciding what equipment to put on. Instead, we've been able to sell to the dealerships and still had a strong performance.

Of course, over time, if it takes too long for the motor home manufacturers to get their capacity up and getting chassis, at a certain point of time, also the dealerships will be starting to lack too many vehicles. But at the moment, we have seen that we've been able to compensate, supplying products to those motor homes and vans and caravans that were already at dealerships.

[Mats Liss, analyst]

Okay. Great. And just finally about CapEx guidance. You mentioned that there are lead times for sort of getting the machinery needed to upgrade the production and of course more automation is sort of getting longer. Will that sort of push forward the CapEx into next year? Or will it -- well, could you give some guidance on CapEx?

[Magnus Welander, executive]

No, I -- we were lucky or correct or a combination of both. We felt there was a risk already in late 2020 and early '21 that there would be a lot longer lead times on automation equipment, on larger CNC machines, et cetera, and on even building materials. So we committed quite early, which is meaning what realistically is the case.

If you have a comparable automation robot or a comparable thermoformer or bending robot or whatever, I would argue that lead times have been extended quite significantly. We have already, in that CapEx plan that we presented, what we would have as CapEx levels of '22, '23 and '24, we've already taken that into account. So there is no major shift in our CapEx spend. We're running according to plan despite that there is those longer lead times that we've taken into the plans.

[Operator]

Our next question comes from Karri Rinta from SEB (sic) [ Handelsbanken ].

[Karri Rinta, analyst]

And not surprisingly, I would like to ask a few questions about the inventory. Firstly, this year-on-year growth that we have seen, can you help us understanding how much of that is volume and how much of that is value? I'm mostly interested about the value part. So how much have the increase in costs contributed to this inventory increase?

[Magnus Welander, executive]

I think you have to do 2 things. I mean one part of -- as always, Karri, you have to step back and say we had far too low inventory entering into Q2 last year. So first, before we talk about -- it is -- we are normalizing what would be the right type of levels, which therefore, by default, means units, because that unit -- you need to have more units of components on stock to be able to fulfill a greater sales out there. So the vast majority of our growth is units of components.

Then there is, of course, as we mentioned, since we're needing to implement significant price increases, there is a cost increase on those components that we have, which is then matching in a logical way, as you've seen, with our gross margin that you can guess what we have done to our prices we needed to do because the costs have gone in a similar way, right?

[Karri Rinta, analyst]

Okay. Fair enough. And then the composition of your inventory? Because if I look at the annual report, it says that at the end of last year, 70% of your inventory was finished goods. Is that still the case? Or has there been a tilt towards components and work-in-progress in the first quarter?

[Magnus Welander, executive]

There is more components and work-in-progress in the quarter, which is natural as we're stepping up. Some of those finished goods that we have at the end of the year are longer lead time finished goods from Southeast Asia, where we always have historically -- even long before the pandemic, we had some worries about start up after Chinese New Year, situations around that. So we have some of that.

Then also at the very time of ending the year, we have quite a few winter products that are ready to just go out in that peak winter season. So there is some of that. And then naturally, due to the seasonality we have for the bike-related categories in order to be able to cope with the growth that we have in the first half of the year, we do have some finished bike carrier products also.

So there is a shift more towards components in the quarter as we sold out some of those finished goods that we had as a percentage at the end of the year.

[Karri Rinta, analyst]

And then finally, on inventories, given that typically you see a sequential decline in inventories in the second quarter. And now since the -- as you say, the start to the bike season was maybe a little bit later. So you would expect inventories to come down sequentially in the second quarter.

[Magnus Welander, executive]

You're right. We are saying that what we have to do is -- we've taken a conscious decision in -- and that conscious decision is to make sure with the longer lead time items and with many disruptions in supply chains, we see the peak season as the one where we want to be able to get the confidence back from all retailers that On-Time-In-Full next day delivery Thule is back to what they've always done so well.

To do that, we are going to be focused on not trying to reduce too aggressively to just show a good quarterly report, which means the normal summer season -- if we go back to that normal pattern we want to see -- is ending late August, which means it's really in quarter 3, as historically it has been the case, where you will see the true sequential drop of inventory levels.

Because we don't want to jeopardize of trying to be goody goody 2-shoes on inventory reductions and then finding ourselves with still long lead times and potential disruptions in a peak season, and thereby, frustrating consumers and retailers, once again, with not good enough delivery performance. So it's more Q3.

[Karri Rinta, analyst]

All right. Fair enough. And then finally, does this have any implications on your own direct-to-consumer efforts? Given that you now have the inventory, do you see yourself being more aggressive? And more specifically, are you planning to launch or open new countries in 2022?

[Magnus Welander, executive]

So I can take the last question first. No, we're not focusing on new countries. We will focus on having just -- during the pandemic period, opened quite a lot of large European markets and, already being in North America and Brazil, we feel comfortable that the focus is on ensuring a stronger growth performance in those.

And yes, you're right. We have already communicated that we expect as of 2022, which was the case already in 2021, that the fastest growing channel to sales will be our own direct-to-consumer. But not specifically because we are pushing it as our effort. More because it's a natural thing from a consumer trend.

And as you pointed out then, Karri, is that we penalized ourselves a lot as we did last year of not having that performance. So over time, we believe we will more than have our fair share of growth and the fastest growth in our own D2C.

[Karri Rinta, analyst]

Perfect. Then my final question is related to selling expenses. Pre-pandemic, they were about 18% of your sales. Now they are 14% even in the first quarter. So how should we think about this going forward? Is this the new normal? Or are there some costs that will creep back up once the trade shows and the like -- and physical events of that pipe are fully back on?

[Magnus Welander, executive]

We are at the type of levels we expect to be. We have always said that when we now have been seeing that top line growth, we have a lot of selling expenses that are back end related functions. Yes, there are -- already in these numbers, there's been quite a lot of local fairs. I've mentioned a few times we do not believe that the return of big global fairs will ever happen even post-pandemic. That's all the indications we are seeing that those really big global fairs probably will never come back.

What is taking place is a lot of local events. That's already taking place in Q1. We've had a lot of stroller and bike events locally in markets taking place already in Q1. And I think that will continue. And in the meantime, we have seen that with the growth that we've seen on top line, we will be managing at these type of selling expense levels.

[Operator]

Our next question comes from Peter Testa from One Investments.

[Peter Testa, analyst]

I just wanted to come back -- one question following up on the inventory cost part. I mean your inventory lifted in Q4 first, and then it stayed high in Q1. And you've had material increases coming through that period. So I was just trying to understand, are you trying to say that your inventory as a value component; i.e., the price component is roughly similar in Q1 and Q4? Or is there still an increase coming through in the price component or value of inventory?

[Magnus Welander, executive]

I'm actually not sure I understood your question there.

[Peter Testa, analyst]

Okay. I mean, say, if your cost of goods were 100 and then 110 and 120, it should be working its way through in time. And your answer to your earlier question suggested that there wasn't a significant price component in the inventories. It's more reflecting the volume need. And I was trying to understand was there any sequential value or price component in there between Q4 and Q1?

[Magnus Welander, executive]

Yes. I mean, there is a continuous value as -- if any cost increases as time goes by, by quarters the value -- of course, there is an impact over time. But what I was saying is it's not a significant difference. That was already happening as we were pursuing throughout the autumn and throughout the beginning of the year.

[Peter Testa, analyst]

Right. Okay. And can you please give some context of what you're understanding from your supply chain about their own inflation pressures and how they may be -- may have evolved or changed since the last couple of months has turned on as we've seen certainly on raw mat, but maybe labor and just complexity? Just any comments you can give on how that's evolving compared to what you've seen thus far to give it a benchmark.

[Magnus Welander, executive]

I think, in general, there is no surprise since we are very standard, I would say, raw material components in aluminum, plastics and steel. There is a very good indication historically on what those levels have been. And those you can track and follow yourselves. You see that those are not dramatically changing. But when Russia invaded Ukraine, you saw some pickups on some of those materials, especially aluminum, for example.

When you look at labor rates, there was an expectation already from our side that we would see some of those increases. In some countries, they are actually slightly higher, which is one of the reasons why we're saying we will be -- have decided to implement further price increases.

And then on freight, you've seen some cooling down of the absurdly high freight expenses to the North American markets from Asia, but not any significant reductions. So that's the situation we see. It's mostly the raw materials and in some countries some wage inflation there.

[Peter Testa, analyst]

Okay. And then just to try to understand your comments around volume. I mean there's clearly been some benefit, as your customers or retail customers have caught up on inventory, that's helped volume. Are you able to track what you see -- how important that's been and maybe what you can see on a sell-out basis as well?

[Magnus Welander, executive]

Once again, I think what's important to take a step back is that since 2019, we're 64% up, and the majority of that growth over this period has, of course, been on top of what was already strong categories. We have been amplified by a situation of people staying at home and doing things. We have, therefore, not caught that at the normal timing in a season over the year, because we couldn't simply cope with that type of capacity growth.

So we have had a delay impact of the growth that we have captured later. And as I said, a good indication is Region America is catching up later because we had a longer lead time to get the capacity up. So Region America is catching up, doing 27% growth versus Region Europe or Rest of World, where we're already more in line.

So if you look at that, we feel that Europe already as of quarter 3 had the right inventory levels at retail. There has not been any type of stock filling or filling up in stores during that period, while North America still had some of that impact. So there has been a delayed reality in North America, leading all the way into Q1. That's not the case anymore. We are very nicely filled.

We, of course, have very good track record with all our major retailers on sell-out, and we feel comfortable that, as we've said, sellout continues to be strong. Otherwise, we wouldn't be selling 64% more than we did 3 years ago in the first quarter. But clearly, there has been a catching up especially with North America catching up later on now in Q1.

[Peter Testa, analyst]

Yes. I was just trying to understand maybe on the sell-out. Maybe -- you say Europe is probably a cleaner understanding. But at the same time, you sell different products this time of year than you would be necessarily have been stocking in Q3. And you were low stock last year going in that period of time, so you lost some sales. Just whether maybe if you could give any sort of view on -- and what we're seeing now is basically a sell-in equals sellout? Or is there some category mix effect in Europe? And is that a good indicator right now?

[Magnus Welander, executive]

Well, it's sell-in and sell-out definitely in Europe.

[Operator]

Our next question is from Stefan Stjernholm from Nordea.

[Stefan Stjernholm, analyst]

This is Stefan from Nordea. I have a question on pricing. There's been quite a few price increases and another one is coming up now in July you say. How do you view the risk for volumes given that end demand seems to slow down a bit?

[Magnus Welander, executive]

I think, once again, it all depends on how you look at your prices versus competition and how you look at what is market-based pricing. And also, in terms of how you look at: Is this a type of activity that people will want to do this summer as well and how high do they rate the importance of doing those type of activities that we provide products for.

If you look at it, we're not doing anything extraordinary in the market-based pricing reality. We are not shifting our competitive position in any direction. We're not becoming significantly more expensive versus competition than we were before. But not the other way around: either we're not becoming significantly less expensive than the competition than we were before.

So we're -- on a market-based comparison basis, we're not going to lose or gain anything by doing these price increases. If you look at it from a consumer behavior and consumer purchase behavior, I think -- we have said a few times that we feel confident that the type of consumers we service and the type of interest they have in those activities and wanting to do them that we provide products for makes us very comfortable that there will be many other things that they will start to reduce on before they choose to reduce on this type of activity on going on their long weekend with their family, biking somewhere or taking a trip with their friends somewhere during the summer vacation. We believe that those categories and those things will continue actually.

[Operator]

Next, we have a follow-up question from Daniel Schmidt from Danske Bank.

[Daniel Schmidt, analyst]

Yes. Just a short follow-up from me. And coming back to what we talked about in terms of the investment plan that you are some way into and the automation of production, when do you think that the -- sort of this will bear fruit in terms of increased production efficiency? Or is it already doing that? Or where are we in that process?

[Magnus Welander, executive]

Yes. And you're absolutely right. It's not a -- this is not a binary. It's in digital. Now the investments are in place and it becomes brilliant. There is a continuous rolling in of better production of various product lines and various categories as it constantly is happening. So that is much more continuous.

It is clear that if you look at -- some of these things are for those big launches we're doing next year. So there will be bigger impacts in 2022 than -- 2023 than there is in 2022, because we are doing these big automation in essence, as we speak. They will then be better utilized when we do mass manufacturing of those products in those automated lines next year.

So there's -- some of these that are already happening, and there will clearly be more of that are happening in '23 and beyond.

[Daniel Schmidt, analyst]

All right. And then maybe a second topic that we -- maybe you're not -- sort of you're quite agnostic, I guess, when it comes to sales channels. But looking at Europe especially and maybe also the U.S., there's quite a shift now back to off-line. Is that in any way sort of impacting your sales you think or -- in either direction?

[Magnus Welander, executive]

You're right, Daniel, that I am agnostic in the sense that we make good profit margins with whichever channel we sell in and whichever type of channel that is. We believe that this type of product that we do, which is then a clearly physical item, is relatively large, where you truly understand how much better our product is only when you really touch and feel it compared to some of the [ slims ] -- your not so good competitive product.

There is good importance for us that people can return into stores. It's easier to make a product look good on a digital homepage than it is in a physical store. So we think it's very good for the long term that there is this healthy omni channel mix.

From a profitability point of view, we're agnostic because it doesn't matter that much for us in which channel it's sold. In terms of strength with supply, we are equally strong in supplying both. So our market share and our position is equally strong there. So we feel good about that as well.

[Operator]

Those are all the questions we have for today. So I will now hand back to the management team to conclude today's call.

[Magnus Welander, executive]

Then I want to thank you all for having listened in to what was a very strong start of the year with a very strong performance, and we look forward to hopefully hosting you all for our upcoming Capital Markets Day on the 11th of May. Thank you very much.

[Operator]

Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.