Thule Group AB

STO:THULE

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, welcome to the Thule Group Interim Report for the Second Quarter. My name is Sophie, and I will be your coordinator today. [Operator Instructions]I'll now hand you over your host, Magnus Welander. Magnus, go ahead.

[Magnus Welander, CEO & President]

Thank you very much. Good morning, everybody, and welcome to the Second Quarter Report for the Thule Group in 2018. And I'm happy to say, another strong quarterly report to report on. So if we go to the first page, we can see that, if we take it from the top line, our net sales grew to SEK 2,155,000,000, which is then an above 10% growth. And if we look in a constant currency, it's a growth of 7%. The growth was driven about by Region Europe and Rest Of World, and I will get back to a little bit more commentary to what has been going on there and why we're doing so well there. While we saw a small decline in Region Americas, and I'm also going to comment on that later on, specifically.If you look at our EBIT performance, we had a strong EBIT margin in the quarter, with 24.3%, despite spending significant funds on our product developments in the quarter as we enter a -- the most busy period we've ever had in terms of preparing and launching new product. So a strong, solid EBIT performance, and a strong net incomes follows of that, of course. I'm also very happy to announce, as has been announced with press releases, that we do have a long-term financing in place, with a more flexible setup and a more cost efficient setup than the old agreements with this 5-year contract with the banks. So we feel very good about that. If we look at the growth numbers by quarter then, a 7% organic constant currency sales growth, which means that we, year-to-date, are at 6.4% in constant currency top line growth and we had a stable, high margin in the quarter, which means that over a rolling 12-month basis, we are now at 18.8% and for the first 6 months, we are at 22.1%, which is then 700 basis points better than the 21.4% we had in previous the first half of the year in 2017. So overall, a strong financial performance. Looking then at the regions, then going to the next page, looking at Region Americas. You can see that we still had a challenging situation in the biggest market in that region, being the U.S. The U.S. is the dominant market, followed of course, by a big market like Canada, Brazil and the rest of Latin America. And if we look at sales for the quarter, the sales was a decline of 4% or 4.2% to be exact. The decline was caused also this quarter by the known OE contracts that we are phasing ourselves out. And we have spoken about these many times, but they're worth repeating, that we have a number of contracts with car manufacturers for some pick-up truck accessories. And we do also have 2 major OE programs for bags and cases as a top supply to OE. And these areas, contracts, are all lower margin contracts that we are continually phasing out and they will continue to also affect as in the coming 4 quarters. What we were not a 100% happy with, we were hoping we could see a bigger growth in the rest of the business, because the decline in this OE business was something we had forecasted. We had an okay quarter in the rest of our business, but we didn't grow as much as we had hoped. And the main reason being that the U.S. markets brick-and-mortar retail sector is still under challenge. And we have seen a number of store closures and a continued wavering confidence level, I would say, in how the markets have performed.So we do believe that there is a market in terms of consumer desire, although not as strong as in Europe, but the retail sector is still balancing itself out, and that affected the second quarter as well. We see a nice growth in luggage and our backpacks for everyday use, which is of course very key, because we still see and will continue to see a decline, especially in the U.S., in what we call the legacy products. The U.S. market has been the market where we historically sold the most of tablet folios and CD wallets and other smaller cases under the Case Logic brand and these categories are continuing to decline rapidly. And therefore, the growth in more high-margin, future-focused categories like luggage and backpacks is very important and it's nice to see that we are now growing those nicely in the U.S. and in Region Americas. In the Region, we have a very small sales of RV Products. And this is, as we have communicated in the past, due to the fact that in the U.S. market, there is a relatively small interest in higher-quality, higher-priced products. There is, however, some niche categories, more in the smaller van segment and we're very happy that in those small niche categories, we have had a very strong growth in the quarter. Still a very tiny product category for the region, but growing nicely with the right type of products. Within Active with Kids, we are performing well and stable and growing as we should expect, so that is also positive. And in the region, the are 2 other major markets, Brazil and Canada, are continuing to be strong. So the challenges we face are the U.S. retail, the combination with the OE products we're phasing out, and the relatively larger amount of old legacy products that we still do have in the U.S. But we believe that we will see better performance going forward in the coming period from Region Americas. And if we then turn to the strong performing Region Europe and Rest of World on the next page, in constant currency, which is of course, very strong. One of the reasons was already hinted at in our quarter one call, where the late spring in Europe also affected, like it did in the U.S., some of the selling in of bike carriers, and also our bike trailers for kids like the one in the image. When the spring is late, these type of products normally will be sold during the spring anyway, but they might be sold a few weeks later, and thereby falling rather into the beginning of the second quarter, rather than the end of the first quarter. That is something that we saw. So we saw a strong effect of picking up these sales in the second quarter and doing very well in both those 2 categories.On top of that, we continue to grow very strongly in our Roof Box category with the Thule Motion XT product line, which was launched in 2017. That has been multiple design award and test award winner, and has continued to take market share in the market. As I already mentioned the bike trailer, I can also mentioned that within Active with Kids, we've had a very strong growth momentum with our updated Thule Urban Glide stroller. So this all-terrain stroller is really targeted to the active parents. You can jog with it. You can also use it as a very practical normal stroller walking around in the city. We did an upgrade in terms of design and tweaked it a bit ahead of the 2018 season, and that has meant a very positive momentum of sales for this in Region Europe. And that is, of course, a very positive signal as we will be now in the coming weeks, launching more strollers that we already have [ an assortment in. ] Within the RV Products category that is significantly bigger in this region, the market continues to be strong. We estimate market growth in RV Products to be around, just below or around, 10%. This is, of course, a combination of actual registrations going on in the marketplace, but it's also how much manufacturers are manufacturing new things and how much of these in new vans and motor homes that are being bought to be put on the lot at the dealerships. So a combination of actual registrations, which were slightly lower in the quarter, but we still believe that the market grew around 10%. I'm also very happy to confirm that we continue to outgrow the market by taking market share. So a very strong RV Product also in second quarter. If you've been watching and looking into other companies in the category, I think you have seen something of that there is a belief that, that might cool down slightly in the second half of the year. And we do share that opinion, that we believe the market will continue to grow, but maybe not at a double-digit pace anymore, but more a mid-single digit level of growth for the market. Within Packs, Bags & Luggage, we've had a solid start to the year. We still have, also, to a lesser extent than in Region Americas, have a decline in legacy products, but we are growing in our growth categories of luggage, smaller backpacks for everyday use, and sports bags like Technical Backpacks. And especially the successful launch of our first ever hydration backpack, the Thule Vital, with a very innovative and patented hose system for your drinking has been a huge hit, and has meant that we have picked up big listings in that category. So overall, very happy with the performance in Region Europe and the Rest of World. With that, I leave it over to Lennart, to discuss a bit about more the details in the income statement.

[Lennart Mauritzson, Chief Financial Officer]

Thank you very much Magnus. So if we look at Slide 6, income statement. Gross margins were flat in the quarter versus prior year, only 2.2%. However including unfavorable currency effect of 0.3 percentage points. The improvement [ stands in ] the gross margins of 0.3% were driven by a positive product and customer mix, combined with our normal price increases that we are doing mainly with Sport&Cargo Carriers, somewhat muted by continued headwind from commodity price developments.Looking at financial net, as Magnus said, we were going into a new financing arrangement. And in the quarter, we had to post the onetime hit of the disposed [ old ] financing cost of SEK 4 million. Good to see that we could offset that, by there was a positive FX effect on the revaluation of FX accounts for loan and cash in local entities, which means that we had a minus SEK 30 million impairment [ commercial methods to ] prior year of minus 12. As noted, our selling expenses are higher than prior year, approximately SEK 25 million. Those are driven by higher product development expense as we have communicated, and we are now at this 6% LTM ratio sales. And we also have a lot of marketing activities during this quarter, due to the upcoming Q3 product launches. Finally, looking at taxes in the quarter, we had efficient effective tax rate of 24.5% versus prior year 24.7%. If we turn page to Slide 7, looking at the operational working capital and operational cash flow. This quarter, we ended with approximately SEK 1.5 billion in operating working capital, which is 24.3% of last 12 months of sales versus 23.3% prior year. The increase in absolute number is SEK 157 million, but if we adjust it for currency, the increase is SEK 95 million, whereas, account receivable stands at SEK 22 million of those, which is basically driven by the sales growth. So looking at net increase in inventory and accounts payable, that is SEK 74 million. And the increase in inventory as we had a slightly later ramp down in high seasonal production this year. And even more importantly, also as we are preparing for the Q3 key product launches.So that means that for the operational cash flow, we saw as expected, an uptick versus the Q1, which always is a little lower, but slightly less than prior year in Q2, which is all related to the change in working capital, I just mentioned. So going back to Magnus.

[Magnus Welander, CEO & President]

Thank you, Lennart. And I think, it's key to note that, of course, it is a very fresh inventory we're holding. As Lennart mentioned, it's a model inventory related to the ending of the season coming slightly later this year in the summer season. And so very exciting product launches that we're just about to do. So we feel very good with having that inventory on hand.If we go to the next page, summarizing our performance versus the financial targets, we are year-to-date growing with 6.4% versus our target of minimum 5% every year, excluding constant currency, excluding acquisitions. So a good start to the year. In terms of our tracking towards our 20% EBIT margin target, we were, for the first 6 months, at 22.1%, but more importantly, looking at their last 12 months, we are running at 18.8%. So tracking well towards that target. We are at a net debt EBITDA leverage of 1.7x. And we have as announced previously, there was an approval at the AGM of an 87% dividend payout of the net income. So overall we feel very good about how we're tracking to the financial target. If we go to Slide 9, and talk more about what's happening in the coming months, I often say this, that we have some of the most exciting periods, and I can assure you that internally in the Thule Group, we will have the most exciting months ever since I joined the company in the coming months. And the reason is simple. We are in a very busy normal season, because this is still peak season, so busy times, and good to see all the positive of the products we've already launched to the market. But we're also doing a very big launch of the Thule Sleek city stroller, which is shown in the image. So rolling is out to the major retailers around the world during the quarter. This is of course, very exciting. I have announced a number of times that we will not judge the performance of the stroller in how it does in the first quarter, that you can do after one full season and a bit more. So by the end of 2019, but it is still very important to get the first steps right when you launch something. So getting it into all those key retailers in all those markets, getting the market perception, getting the media attention is, of course, something that we are very excited about. We are also going to a number of key fairs in the coming few months, where we will display the products, what will be up for sale in 2019. And especially in our traditional Sport&Cargo Carrier category, this will be by far the most exciting launch year ever with some very large key announcements taking place in a few weeks time. So exciting times also for the products to hit the market in 2019. On top of that, we continue a very focused approach, of course, making sure that we can deliver on time in full for a very strong season, especially looking at what we've seen in terms of growth numbers in Europe and being able to meet those type of growth numbers. We are in the new factory that we finalized at the very end of last year in Poland, in a full production ramp-up for the Thule Sleek launch, which is of course, a big undertaking and very exciting. We're also finalizing a major investment and layout production setup change in our Swedish roof rack plant, which is also being finalized this quarter. We are well into the building works of an expansion of our Eastern European distribution center, with the growth we have seen in the Eastern Europe over the last few years. We are now taking the step to expand that distribution center, actually, 1 year earlier than anticipated, to be able to serve those markets and the expected continued growth. We are, of course, as any company at the moment, tracking and working very closely and staying in the top of what is a still volatile raw material market. And in that, it's obvious that also some of the statements being done by the presidency in the U.S. in terms of what potential duties that we'll be hitting on various product is something that we're tracking closely. It's too early to be able to say what the effects will be exactly, but we are working very detail on it to see what the final outcome will be truly decided in the U.S. And then, as we are spending, as Lennart commented on, around 6% of sales now on product development, it means that we have more people than ever and more projects than ever underway. Some being finalized for launches as we speak, many being for products that will hit the markets in '19, some for '20 and '21 even. So very exciting times for all those efforts as well. With that, I leave it to the host to take over to organize the Q&A session. Thank you.

[Operator]

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

[Daniel Schmidt, Research Analyst]

I just wanted to touch on two subjects, the Americas, and then RV. We'll start with Americas. And you right yourself, and you sort of now talked about it on the call today that you're a bit surprised by the sort of not having a stronger growth in this more regular areas that you expected. When you sort of look back at what you said in connection with the Q1 report and the fact that sort of many retailers went into Q2 with very low inventories, you were quite sure that they would need to restock. And I also got the impression that the portfolio pruning that you're conducting would be slightly less visible in Q2 versus Q1 on the back of seasonality, and still you are ending up with the same sort of organic deterioration year-on-year. Could you shed some more light on what happened with the retailers? Because you sounded a bit more optimistic by the end of April. And what sort of gives you the confidence that you will perform better in the coming quarter or quarters?

[Magnus Welander, CEO & President]

So I wouldn't say surprised, I'd say disappointed. There's a subtlety in that word, so I will go back to it. The disappointment is actually not in those retailers we mentioned, which did have low inventory, and which we've grown it. The disappointment has come from the fact that some of the retailers that were less performing already in the previous period have being closing down stores and struggled more than we expected. So we have a number of retail customers that we have grown nicely with exactly due to the reasons we expected, that is they had relatively low inventory. We had a strong portfolio. We have been growing with them, but we have been hurt by a number of retailers that especially focus a lot on brick-and-mortar stores that have taken decisions and communicated late in during the year to close down further stores. As soon as that is being done, there is, although limited, stock holdings, because we have physically large products, and of course, it still means that there is a little bit of pipeline when stores like that stop taking orders. So that is the disappointment, not the actual general performance in those categories where we do our core business, but there has been some of the legacy parts of the business and some are more low-end categories where there has been store closures. That has affected. The second part was that, we hoped, and believed that we would see a better pickup of the bike and paddle sport industries in the U.S. than have been seen in the marketplace. So generally the paddle sport category, which is globally relatively small, but in the U.S., relatively seen bigger, had really had a very weak first half of the year. We were expecting that pick up a bit more in terms of marketing. So overall, I wouldn't say surprised. I would say disappointed. If you look at what the effect of the category of those OE, we do say all the time that it should have a certain effect. Sometimes they also do worse than expected. So already knowing they were going to decline, they sometimes decline even more. That was the case in the quarter. So although we do have a strong insight into the ordering of these large RV contracts, they can also change their ordering pattern and the fact was that they -- the decline in that group was even bigger potentially than we had expected, so that was also a disappointment. Not a huge disappointment in terms of EBIT because they're not contributing a lot on that, and we know we're phasing them out, but the effect was bigger in the quarter than expected. So those were the main reasons. Due to that -- due to that, we still have a more positive view on the second half of the year in Region Americas, more specifically U.S., than we've had for the first half. But I don't think, as we already said in Q1, that it will go from a decline to a fantastic growth. We do expect this to grow, and now the key challenge will be to prove that in practice and make sure that we do see the pick-ups of some of those key launches we're doing. Of course, a launch of a new stroller, a category where we are adding a product into 4-wheel stroller will be pure additional growth. So expectations are more positive, but I'm also convinced that Europe will still have to be the engine in the second half.

[Daniel Schmidt, Research Analyst]

All right. And have you seen any signs of any improvement? It's been a very sort of short period into Q3 so far, but is that anything you want to comment on with regards to some of Americas spend?

[Magnus Welander, CEO & President]

It's too early to tell, actually.

[Daniel Schmidt, Research Analyst]

All right. Okay. And then a second subject, which you touched upon yourself and, RV is of course, maybe a concern in general and not a big exposure for you guys, but I think you said that, in your opening statement, that you do expect a slowdown in the second half versus the first half. And if I read you correctly, when you say that the market growth has been 10% and registration data seems to be up by around 3% for the second quarter in some of the bigger markets at least in Europe, and then you combined that with the manufacturing pace that you've seen in the quarter. Does that mean that there is some sort of inventory buildup in RV in Europe going into the second half? And is there any risk, if growth slows, but still grows, that is -- that there will be some sort of inventory correction in the coming months? Or have you seen that during the quarter, I think Dometic mentioned that yesterday?

[Magnus Welander, CEO & President]

I think overall, first of all, the underlying market trends in terms of a consumer group with younger consumers, they're never buying RV vehicles and buying smaller vehicles more like vans. That's a positive underlying market trend with motorhomes growing. The caravan market is not growing, but the motorhomes market, especially the lower priced ones and smaller vehicles is growing. So there is a positive underlying trend. What we saw and that you need to be careful a little bit with their registration date, I think it was June date that isn't in, so it's up to May, and there can be fluctuations. And we commented to some of those fluctuations, which were a bit abnormal in Q1 in the beginning due to legislation on emissions. There can be similar things going on sometimes with seasonality things and packaged deals also in a specific quarter. We, therefore, think that there isn't a huge inventory buildup in Q2. There might be some inventory buildup, which is why we're estimating that overall market could or probably would not grow with the double-digit in the second half. We, of course, discussed with a lot of manufacturers and a lot of players in the industry, and we have a general feeling, which is ours, but our interpretation is that, it's more of a mid-single-digit type of growth in the second half of the year. It's still a nice growth. So I don't see a huge challenge for the category, I'm quite opportunistic about RV category, but it sometimes -- you have to just be realistic that when you go from 12%, 13% growth, 6%, 7% sounds terrible all of a sudden. It isn't. It's still a very nice growing market. Therefore, we don't foresee huge corrections. I think there will be specific dealerships and specific manufacturers that have -- might have overstretched in their efforts to win market share this year. But that's more a normal thing in the market, because it is a market where players have to commit very early, and there is always somebody making a mistake. If they don't make the mistake, to leave money on the table by not ramping up. Somebody will have to make the mistake of having done a little bit too much and ramped up too much. And I think some natural core correction, but that's included in our assumption of a mid-single-digits second half of the year.

[Daniel Schmidt, Research Analyst]

All right. But -- I think that's a good answer for me. But does it entail in any way, a higher volatility in your sort of sales to this industry, if we would see sort of some corrections here and there, when it comes to the inventory and the underlying demand, you think?

[Magnus Welander, CEO & President]

No. We don't think so. If we look at it, we have a very broad customer platform. So even if one dealership or one manufacturer of a specific brand struggles a little bit, thanks to our very strong positioning in the niche categories we are in, we supply them all, more or less. So therefore, for us, it has lesser of an impact than maybe we'll have some of the brands since we are much more an aftermarket player as well. We are not there for 100% depending on manufacturer a being successful versus b, because we play with them all. So, therefore, I don't see it having a major impact. We are seeing a growth continuing in our expectations. We are running our production accordingly and we feel very comfortable with the inventory levels we have in this category.

[Operator]

Our next question comes from Gustav Sandström from SEB Equities.

[Gustav Sandström, Research Analyst]

If I might start off with a follow-up on the inventory. Inventory up 21% local currency. It was also up if I recall high single digits in Q1. And obviously you stated clearly that this relates mainly to new launches, but could you please give us a breakup of how much of the inventory actually stems from new baby stroller category and luggage, please? And how much is something else? And on top of that, if possible, could we get a geographical breakdown of where this inventory is physically located?

[Magnus Welander, CEO & President]

The answer is no. It's just that we won't disclose details on the categories because it's actually would be slightly too indicative only on separate products. But what we can say is that, as we are planning to sell thousands of these strollers over the coming months, it's quite obvious as we're ramping up, that's a very significant amount. And if you add it together, we can say the majority of the growth is, by far, in the new launch. So if we would take away the products that we are launching this autumn on our inventory holdings, we wouldn't have been growing. Secondly, if you take it by geography, since we are manufacturing all of the strollers in our Polish factory, and since we're just into the mass manufacturing, if you look at the closing of Q2, all the inventory was held in the European part of the business, geographically. But since we don't report that setup specifically but if physically, geographically located, the majority of the buildup is physically located at the end of Q2 in Europe. It is being shipped to some part, as we speak, to the U.S. markets and the other markets around the world. But if your physical location-wise, it was associated with plants in Europe.

[Gustav Sandström, Research Analyst]

That's very clear. And regarding retail listing on Thule Sleek, first if you could give us some comment on the development there, would be discussions with retailers? And secondly, if you could give us some hint on when we should anticipate a some second launch within this category. I would assume that, that may be something without the [ DMC ] thing varieties, is something to expect, please?

[Magnus Welander, CEO & President]

First of all, extremely happy, in terms of listing. Listings isn't sell-through though, so you always have to be a bit cautious with this, but it is the first step to being able to achieve sell-through to consumers. So the listings have been one, with all the key retailers in all the key markets. So we are feeling very comfortable in terms of having the right retailers, showing the products to consumers. Feeling very good stepping into it [ for sure. ] Then it still is, we need to convince consumers that when they go to these world market-leading juvenile stores, where there is a very competitive reality, as you all analysts and we ourselves had commented on several times, we still need to win the battle in the stores and on the online platforms, but the reality is, at least we will have very good listings to be able to fight the battles there. So I feel very good about the listings. If we then take the second comment on, will there more strollers? No doubt, there will be coming more stroller models. But as this model, as we knew, would only be really starting to roll out as of Q3 this year, we're talking about future years, not in the near present. The focus will be on the Thule Urban Glide 2, which is growing fantastically as an all-terrain stroller, and for the Thule Sleek, which is just about to go to sale in terms of sellout in the coming 18 months. But if you look in the future, yes, we are developing additional strollers as we speak.

[Gustav Sandström, Research Analyst]

Excellent. And then, lastly, some consumer product peers of yours have experienced a bit of shortage on the logistic side of the business, with truck drivers strike and so forth. In the quarter, it doesn't seem like it has affected you, but could you -- have you seen any things like this in your business or do you expect any hurdles going forward of this nature?

[Magnus Welander, CEO & President]

I think what, you're absolutely right, because one of the biggest challenges that we see globally is that, there is a huge overall global challenge in the last mile. So it's not about the logistics of sending large quantities between plants, each other in large, large trucks, that part or on ships. That part is relatively mainstream to solve, but there is more and more growing challenge of reaching that last through small retail even directly to the consumer in terms of finding the small band deliveries for the last mile and making it both cost-efficient enough, but actually just simply basically finding the volume there. So it's something our logistics team is [ budgeting ] and is working incredibly hard on. I think we're doing it better than many. We still will have some challenges, and as we also sell to 140 countries, we have to be realistic. At times, there are strike and issues. There was recently been a big strike in Brazil in all the harbors. That hurts our Brazilian business, no doubt, as anybody else shipping into Brazil, for example. Last year there were some issues in the U.S. harbors. And generally, you can say it's not easy. I don't think anybody will claim it is easy logistics at the moment, with more and more parcel shipments and more and more pick and pack, and more and more consumer demands of getting it home to the front door. I think it's a natural challenge that all us consumer goods companies just have to work through. I don't think any of it is big enough to dent our numbers, but it sure makes us work hard. That's for sure.

[Operator]

So our next question comes from Peter Reilly from Jefferies.[Technical Difficulty]

[Magnus Welander, CEO & President]

Excuse me Peter, I had difficulty hearing you there.

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

Is that any better?

[Magnus Welander, CEO & President]

Yes. Thank you.

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

I've got 3 questions please. Firstly, I was interested to hear you talk about Sport&Cargo Carriers having the most exciting year ever as a new product. You've launched quite a lot of new product in that market recently. So maybe you can give us some more color about what's coming and why you're excited about it. And secondly, I'd love to know a bit more about what's happening with the Urban Glide 2, particularly in the States. You talked about it being very successful in Europe, but is it going well in the States as well? And who's buying it? Are these traditional overachievers jogging? Or are they normal people, and therefore, is it positioning you well for the slate? And then, lastly, on Packs, Bags & Luggage, you said earlier this year, you still hope to grow the business in 2018. I think that's probably looking a bit more challenging now, given what's been happening. So do you reckon you can still grow PPL for the -- for Thule?

[Magnus Welander, CEO & President]

Thank you for those questions. I have to disappoint you on the first one because we haven't shown it to retail yet, and I want to -- there will be, I can tell you, at the morning of the big shows, a significant PR event with all the people from that industry, trade media will be there because there are some huge launches. So you will see it on our homepage when we announce it to the marketplace, but they are very significant launches that really should shape the category going forward. So I'm sure you will be happy to see them when they come. In regards to the second one, on the Thule Urban Glide 2, it's performing well in the U.S. as well. Historically, we have -- from a historical perspective, outperformed in the U.S. versus Europe actually on the Thule Urban Glide first generation. And the reason was that you are absolutely right, Peter, that in the U.S. it was an overachiever. It was the training people. It was the people doing their triathlons, their runs, and really was being used, very, very much as a jogging stroller. That category had been big. Historically, there was a competitive product, which was called BOB, and they had a big marketplace. We came in and grew the market and took significant share very quickly in the U.S. And we continue, if you look at it in the U.S., to see that stroller mostly being seen as a jogging stroller. The success we've had in Europe, where we've had a very, very fast growth in the last 9 months, especially in the first 6 months of this year as we launched the Thule Urban Glide 2, is actually positioning is different. It is being sold much more as an all-terrain, very easy to use comfortable stroller for everyday use. And part of that's our positioning, where we did a black and black model and we tweaked it a bit and we made it easier to put in the bassinet and we made it easier to use as an everyday stroller. But partly it's also that consumers have formed how super practical it is, even on cobblestone streets or just walking on the beach or something like that. So in Europe, it is more positioned as an urban stroller for everyday use. And it's also growing much faster as we've gained more listings of that kind. Therefore, by default, you're right, in that it's helping us more in Europe as being positioned already as one type of urban stroller, now we get a second type with the Thule Sleek. Well, you're going to find them next to each other in similar juvenile stores, right? So therefore, a slightly easier ride in Europe, therefore. Also, specifically, the type of stroller we're targeting here with a sibling, stadium seating premiere stroller is more of a European type of product anyways. So in our expectation, we should sell a lot more of the Thule Sleek in Region Europe than we should sell in the U.S. And then thirdly, on Packs, Bags & Luggage, you are right. There is always -- if you haven't grown in the first half, as we have seen a more rapid decline in the legacy categories, and a more rapid decline in some of those OE contracts for Packs, Bags & Luggage, they are definitely holding us back more than we thought, both of those 2 things. So we're, therefore, by default, putting significantly more pressure on how much we can grow in the growth categories of luggage and of every backpacks. I'm not sure that we will grow. We have an ambition. The ambition is definitely more difficult, and you're absolutely right, purely mathematically we will have a bigger challenge of how much we will need to grow it. So slightly less optimistic, very optimistic on growth in the second half, but can we fully overcompensate for the decline in the first? That's still to be proven.

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

That's great. And just if I come back on the Sport&Cargo Carriers, I understand you aren't going to tell us before the product launch, but is this -- it sounds like it's very material in terms of the breadth of products you are talking about and so it's not just a couple of niche products here or there. Is that a correct assumption?

[Magnus Welander, CEO & President]

It's the correct assumption. And as it's categories where we already are very, very strong and absolutely global market leaders, I don't think it's so much -- our focus isn't on the immediate pick-up or additional sales. It is that we're redefining the platform for us to build on for many more years to come and be the undisputed market leader as we are today, also in years to come. So that's why we're not talking so much to U.S. investors and analysts about, oh, this is going to do fantastic things for us in pick-up of sales. It is just, more importantly, redefining and repositioning us even further ahead of our competition in the categories where we are undisputed market leads.

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

And this is very much a '19 and '20 story, I guess, a bit like the fact that the growth you're seeing currently is the product you launched, maybe, 2 years ago?

[Magnus Welander, CEO & President]

Yes. That's really the effect. You're right.

[Operator]

Our next question comes from [ Per Johansson ] from [ S&P Asset Management. ]

[Unknown Analyst]

Magnus, your thoughts about the U.S., has that made you change, maybe not your strategy, but maybe more short-term where do you want to put in your resources? Maybe put them more into the European market than the Rest of the World market? That's my first question. My second question, on maybe more on insourcing, spare parts and things like that for your strollers. Do you see any problems with getting these products to your assembly line in Poland? That's my third question -- or my second question. My third question is, all these operation focused on Pila, on Hillerstorp, and so on, will that be able for you to maybe increase your gross margins a bit more in the coming years or in the coming period, as we have seen lately?

[Magnus Welander, CEO & President]

Yes, if you look at the first one, I think we have the strength and capability of focusing on Europe and Rest of World, like what where they are doing. And we do need to focus on the world's biggest market for us, which is the U.S. anyways. So it's not changing our view of where we should focus resources, money or efforts. We need to continue to do both. Of course, we share our best practices across the world. So for example, at the moment the biggest fair in the industry is happening next week. We have our biggest annual sales meeting over in the U.S. as we speak. And we have some of our European colleagues that are over there to speak about different ways we have done things over here that might help the U.S. team to get things more going. So I don't think it has changed our view at all. It's just that we need to acknowledge the fact that the market has been stronger in Europe, and we have been outperforming Europe. We need to do it in both regions. If you take on the -- a second part of insourcing and ensuring that we can take care of everything when it takes into account of a stroller with all the accessories and spare parts and everything, it's a big undertaking, no doubt. It's a complex product, the stroller, we sell a lot of accessories. If you are a premium stroller company, you expect to have a significant share of sales in additional components and accessories. You should, of course, not -- hopefully, if you manufacture the right type of stroller need too many spare parts initially, but we already manage that type of spare part handling for other products. So we are not worried about how we would set that up or how we would do it. We feel we have that well under control. If you take the third question about our investments in the plants, it's a type of investment that is actually a twofold: one is, very much a capacity into new product categories. So we're investing in a factory in P1, Poland where we are both doing strollers, which we never manufacture ourselves historically, and where will be doing hard case luggage, which we never manufacture. So that capacity expansion into new categories, strategic and capacity. If you look at the Hillerstorp plant, it is major investments for future efficiencies. If you do future efficiencies right and you combine it with top line growth, it should long-term help you to get better margins. But I wouldn't say that any of these major investments are of the type where you will see a step change to our margins, it's more of a continuous -- you can call it almost boring nitty-gritty work of every year trying to squeak out a little bit better margin, which is part of our long-term 20% EBIT margin growth.

[Operator]

Our next question comes from Stellan Hellström from Nordea.

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

Yes, I'd like to ask about Sport&Cargo Carriers in North America. I mean I reckon there were tough market conditions in this quarter. But if you can comment, maybe, that your performance in Europe, you're taking quite significant market shares continuously. How do you feel this is developing in North America? Any reasons for, [ you know, ] any differences?

[Magnus Welander, CEO & President]

We -- all the data that we have and the information we're getting from our retail customers is that we continue to take market share also in North America. Not at the same pace as we're taking it in Europe, actually, but we are taking market share also in a much more tougher market in North America. In Europe, we've had a number of very key trends that are helping us. And there is a trend, generally, that is in Sport&Cargo Carriers to move, to carrying your bikes much more back on the back of the car at the towbar, with, therefore, more expansive and more practical solutions, tiltable with backlights and everything. That is perfect for us at Thule, and a heavy e-bike, which is much more difficult to load on than an 8-kilo bike because with 23 kilos, with batteries, et cetera, you need to technically have done a much better product to convince a consumer that they can load it in the right way or several of those heave bikes. So that trend of heavier bikes more, more expensive bikes, more moving to the back of the car, and with a very tricky thing of applying that to a spherical towbar have made that -- the trend fits us. We are just simply much better than everybody else doing that, and therefore we are picking up more market share. In the U.S., there is a similar trend to move to the back of the car, but they have a significantly, technically easier solution because they have a square, a hitch hole as they call it. And technically, it's easier to do a square thing that you put in the square hole than catch around a spherical thing. So I don't want to go into the technicalities, but it is easier for other brands to compete, to do an okay solution. We still have the best ones there as well. But not with the same distance, I would say, to competition. So there is a little bit of that going on, and then there the general market trends is less positive, but we do take market share also in U.S.

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

Very good. Maybe a question also on your OE business. I mean, you've given up or you've discontinued some for the pickup industry, truck industry. Can you share light on why the remaining OE business in Sport&Cargo Carriers and RV, is that more attractive? Or your market position better?

[Magnus Welander, CEO & President]

Yes. The main reason is, similar to what I just mentioned, if a product is technically more complex to do really well, you can position yourself also to the large OE manufacturers with a technical competence of building something -- developing and manufacturing something that is complex. And if you can do that, and they can still benefit and sell it and make nice profits because it's a more expensive product, you should be able to withstand and hold up to a better margin. So a higher margin performance. We are the #1 provider, both in the North American market and in the European market, to premium car manufacturers that want to have these type of old solutions. But when it is more advanced solutions, because to be honest, those pickup truck accessories solutions were very basic type of accessories. We -- if you do a very basic type of accessory, you will be under completely different type of pressure from the purchasing organization, because you add relatively little value with your strong competency. In the other categories, we are adding significant value. We have insights that none of these manufacturers have about these products. We have test records. We have proven performance things. We can really coach them how to do it better. They therefore think it's worth paying for. So we can have better margins. That's a big difference. So it's more about the complexity of product, rather than having done the right negotiations or anything like that. It's the reality that, we -- as we go with the business, and that's why we're phasing ourselves out of this business. We need to play in categories where people are prepared to pay for quality and competence. If that is then an OE player or if it's a retailer or even if it's a consumer, we want to be in categories where the skill set and product development competence is getting paid.

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

Good. Then, finally, on the launch here of Thule Sleek, I take it that you have great expectations for this product. But is there any chance here that -- or should we expect that the sort of launch costs will rise the percentage sales for the group in the third quarter?

[Magnus Welander, CEO & President]

No. I would say that if you look at it, a lot of these costs have already been seen in Q2, because as we -- similar to an inventory buildup in terms of procuring all the marketing material, the displays, dressing up shops and already that, since it's happening in the next few weeks, we've taken the major efforts of those costs already. So no, it won't continue to grow. It will be relatively higher in terms of product development cost, but specifically launch cost, no, you shouldn't see it pickup that much from Q2.

[Operator]

Our next question is a follow-up question from Daniel Schmidt from Danske Bank.

[Daniel Schmidt, Research Analyst]

Just coming back to product development spending. I know you are right, and you also said at the call that you're at 6% of sales now. And could you just update us on how we should model this cost item in the second half of '18? And also, to the start of '19, maybe, I know that you've said that this is the peak year, and so on, but is it going to go above 6% in Q3 for instance? Or is it the opposite? Some guidance on that to start with.

[Magnus Welander, CEO & President]

Yes. At the guidance we said that the full year '18, you should expect us to be on a 6% level, right. So that means by default if we're trailing 12 months at 6%, you should see it being similar to what you've seen right? We're going to maintain it around 6%, not exactly, but around those levels, right. So not going down fast or not increasing, it's going to be kept around a 6% level for a rolling 12-month for the full year as well. Then, if we...

[Daniel Schmidt, Research Analyst]

And as we enter '19 -- yes?

[Magnus Welander, CEO & President]

Yes. And if we look when we go into '19, what we've said is that, overtime, it will slowly move downwards as revenues grow in those new categories where we are spending a lot of money. That doesn't happen over one month or one quarter, it will take some time. So it will be slowly going down from the 6%, you won't see a rapid step down. What we're saying is more of that, it won't grow, and if anything it will slowly start to move downwards after we go into the 2019.

[Daniel Schmidt, Research Analyst]

All right. Good. And then, just also a follow-up on RV, again. When it comes to the aftermarket, what is sort of your experience going back in history if we would see a decline in the OE business, has the aftermarket been able to hold up? Or has it been gradually affected also by the slowdown in the OE? Or what's your experience?

[Magnus Welander, CEO & President]

Yes. We saw a big decline in 2008. So that's pretty easy to come back. That's the only time it's declined in the last 15 years, but it was a very rapid decline. Let's remind ourselves that at that huge decline for the RV category, it was a combination with the financing from consumers not being able to secure financing. That's not what's worrying people so much for this downturn, right? So there is still an underlying consumer trend that is more positive. There is an underlying consumer financing that still looks more positive. So an adjustment this time isn't of the same size, not nearly, in anybody's expectation. And it's not even of the same kind because the likelihood of an adjustment, if there is one, is that what will happen is that some manufacturers have over expanded their manufacturing, tried to push out too many of their models to specific dealerships. By default, some dealerships will have then been sitting on too many vehicles. When that happens, there are 2 things that can happen: one is they're trying to get rid of their vehicles that they now sit on and are tying up significant funds on their lot. A typical way that, that happened last time was they started to throw on lot of accessories extra on them and hey, you get a fantastic deal, so if you take it off my hands. It is like the business package with the extras on the car, right, when they're trying to get rid of them from their loss. That's easier to do in the RV industry than it's in the car, because the car you more get what you get. But on an RV they can add things to it afterwards, and you get this, and you get the bike carrier and you get that. That means that our type of industry is less immediate than if you would be, for example, making something like a toilet or something either that is more installed with a vehicle. And by default if you look at what happens with a manufacturing trend, as a manufacturer has a more, I would say, defined production planning setup, normally their decisions are more binary. You're saying, am I going to hold open my vacation production? Or am I closing production for 4 weeks? So what happened in 2007 and '08 was dramatic longer closures of manufacturing facilities, where they said, we're going to have a Christmas break this year and the break is 9 weeks, and we're not going to produce anything. So it becomes much more binary, while the dealership will continue to sell in an aftermarket world, in a slower, more gray type of decline than that binary decline. If you are a supplier to a lot of brands and manufacturers, even if one of them is binary, maybe the whole market isn't binary. It actually became the whole market in 2008. The whole market grew binary for a long time, and then, it declined binary for a period of time. I don't think that will happen now. I think we will see some manufacturers and some dealerships starting to hold back. But it won't be the same effect.

[Daniel Schmidt, Research Analyst]

All right. Okay. So you're basically saying there's no heart attack to the system. The aftermarket will do better, and the OE could be impacted to some degree, like you said earlier today. So okay.

[Operator]

Our last question comes from Peter Reilly from Jefferies.

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

I just wanted a few more issues to talk about, please. First, I'm wondering if you can give us an update on the headcounts in your factory in Poland? I think you said at the last call you had 100 people working there. I'm just interested to see where you are with that. Secondly, I'd love to know more about what's happening with Subterra, how that product is selling? And whether is there anything you can add about the Revolve range? I know it doesn't go into sale until early next year, but whether there's any additional color you could add? And then, lastly, you mentioned that you are launching some niche RV products in the U.S., and I'm just curious to know what they actually are? So if you wouldn't mind sharing that with us?

[Magnus Welander, CEO & President]

Absolutely. So if we take first one, we're roughly 60 people more than we were last time when we discussed, so 160 now in Poland in that specific factory. So that gives you an idea and about how many more, we are currently in P1. If you then look at Thule Subterra luggage collection continues to sell well, continues to gain listings, continues to be doing well in both department stores and airport stores. It's being sold in more than 85 countries, and in more than 70 international airports, and it continues to sell-through well, which is of course, key in terms of confidence. That confidence has helped the type of listings we are getting commitments for, for our new hard case Thule Revolve range, that as you said, is coming at the beginning of next year. So in many of those, not all of them, but in many of those locations, we will have also the Thule Revolve range. We will have the Thule Revolve range in some locations where we do not have the Thule Subterra range. And in some cases, they will both be coming at the same time as we become a more complete supplier with 2 types of collections with both hard and soft in the beginning of next year. So once again, as we said many times, listings is only one thing. It's actually sell-through that is key, but in terms of listing for the Thule Revolve that looks very promising after the fairs and after our consumer -- sorry, retail meetings. And then, finally, the niche products that we're doing in RV products is in the core category what we are very strong at. So what has happened in the U.S. market over the last few years, you've seen a growth of the smaller vans, what normally would have been ridiculously small for a U.S. motorhome buyer has started to grow as the motorhome category also there. And there, we are then doing our both our awnings and bike carriers. And then, on the top of that, we have launched a type of awning for the U.S. market, which in a category which doesn't really exist in Europe, which is this overland vacation, where you take your big SUV, you drive it out, you bring your bikes and you bring your stuff, and you do one, two nights out in Utah to go mountain biking or something like that. What that, then means is you use your normal very large American SUV, but as you're going to have it for maybe 2 days out there, you want some shade. You want some stuff to throw out your big Yeti cooler with your ice box in it and some stuff. And there we've actually launched a specific model of an awning that is being a client to large SUVs. So in the bordering country so to speak, between the Sport&Cargo Carrier customer of ours buying those products and an RV customer. Those 2 categories are doing very nicely, but they're very small niche categories.

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

And are you selling those as after-market products? Or as OE products?

[Magnus Welander, CEO & President]

They are sold as aftermarket. So if you're look at it for the last part product we mentioned, the one that is more hooked on your SUV, that's a pure aftermarket product. If you talk about the first one, it's actually a combination of an OE product with one of the large U.S. manufacturers, and an OE product -- an aftermarket product.Thank you. And since that was the last question, I then want to wish you all a fantastic summer vacation with tremendous use of Thule products. And we will speak to you after the Q3 report. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines, and have a lovely day.