Thule Group AB

STO:THULE

Earnings Call Transcript 2018-Q3

[Magnus Welander, CEO & President]

Good morning, everybody. And very welcome to this quarter 3 update and I -- first of all, I have to say it's great to do an update for the most exciting quarter I've ever had in the 13 years I've been in the Thule Group. It's been a truly exciting quarter in terms of all the big things we've done for launching products that will be significant parts of our future in the Thule Group. So if we go to the slide, the slide in presentation, Slide 2. We can summarize that the quarter in terms of the sales in the quarter was solid. We had a growth of 3.8% excluding currency effects and 12.7% as a reported growth. Once again in the quarter driven by a strong performance in Region Europe and rest of world, which grew close to 8%, while Region Americas declined with 4%. I'm going to come back to the region's performance a little bit more later on, so we will talk more about that. If you look at the quarter, as I said, the most exciting since I joined the company and but we've had quite a few exciting quarters, so that of course means a lot. For us, this was a quarter where we came into stores with our fantastic Thule Sleek city stroller. And we rolled it into numerous countries and numerous stores, and of course, there will be more countries and stores opening as we continue into Q4 and into next year, but the reception has been excellent. And we have, therefore, also decided, as we were getting good feedback during the spring, that we had the opportunity in a number of stores, and actually most of the cases, to actually truly take space in these Juvenile stores, by creating shop-in-shops or very clear display areas. We, therefore, have, according to our plans, which we were hoping and now have been given the chance to do, have been spending quite a lot of money and we'll continue to do that in Q4 and getting into next years in truly capturing that space with display -- displays, points of sales material and merchandising materials. So that has partly driven our cost in the quarter as expected and on top of that, we've of course continued as we have already previously communicated, a very heavy development push and that means that on a rolling 12 month basis, we are now at that plus 6% level that we communicated that we would be. And with 2 fantastically important launches in terms of trade launches to retail, in the fairs that was done in the period. And we're talking about our classical category of Sport&Cargo Carriers where we are the undisputed global market leader, but where we still raised the bar significantly with the launch of a completely new Roof Rack generation and 2 new box models shown at the fairs. I'm going to share a little bit more about these products than we normally do at these quarterly calls because they are so important in the future growth of the company so I'm going to come back to those. In top of that amount that we spent, roughly SEK 25 million more than we spent in Q3 2017, connected to these launches, according to our plans, which then meant that the underlying EBIT was a slightly lower margin than the same period last year. We still delivered, however, a underlying EBIT of SEK 267 million versus the SEK 258 million last year. Overall, also, we can say that the cash flow was solid. We have, as you would expect when you are launching a lot of products in a quarter and some of them rolling out a bit late in the quarter and early Q4, we chose to ensure that we could deliver and have been running with a slightly higher inventory with these new launches than we intend to do over the longer period, to ensure that we would capture the upside as we roll new products into the market. With that, if we turn to the next slide, we can look at the performance in the quarter and the performance year-to-date. I've mentioned numerous times in these calls and in various meetings with investors that we will never run this company on a quarterly basis, that our company is, and has been around for 76 years, one of the strengths is that we run the company for what is best for the company. And that means that if you look at it, our performance year-to-date is really the interesting aspect and year-to-date, we have grown sales with 5.6% and we have grown our -- in constant currency, and we've grown our EBIT in a strong way as well, despite our push on product development and launch costs for the future. Year-to-date, we have an EBIT margin of 20.6%, which on a rolling 12-month basis means its 18.4% because I -- as we have always communicated that fourth quarter is our lowest quarter in terms of revenue and our fourth quarter is also our lowest EBIT margin quarter, once again because we do not try to save money just because it's a lower sales quarter, it's in fact often a relatively high-cost quarter preparing for launches for the coming year. And our average margin in that quarter in the last few years is what we're expecting also to have in 2018. If we turn to the next slide, we will look a little bit at these 3 key launches that we have done in the period. So first, we start with the product that actually was rolled into stores as we had in Q3, the Thule Sleek city stroller. And we have previously communicated that entering into a stroller segment will take several models and it will take a number of years, and we have had a very positive journey with our Thule Urban Glide 2 all-terrain stroller, which we did an updated version on -- as of January this year. That has kept on doing really well. That stroller has partly been sold in Juvenile stores, but actually partly been sold in more sport and outdoor and other types of stores as well. But it has partly opened the door into Juvenile channel. What we are now doing, however, with the Thule Sleek 4-wheel city stroller, we are truly hitting straight into the Juvenile channel's sweet spot. And especially for this model and the type of use, it's -- we're talking mostly Central and Northern Europe and North America in terms of where this type of strollers is a big stroller. The Thule Sleek is a fantastic stroller for 1 kid, but what is making it a uniquely good in the market is that on a very small footprint, it can also then be expanded into a great sibling seat stroller as shown in the image on that slide. And it does that in a very comfortable and easy to drive around way.We introduced the stroller at last year's fairs, and then we have rolled it out in store now in Q3 midway through the quarter. We are very positive in the reception that retail has given us. As I mentioned, we have even above our own expeditions been getting the opportunity to truly define our space with a number of leading Juvenile retailers around the world where we have been able to brand shop-in-shops and displays and own concepts to truly stand out versus the many, many other brands that will be in a Juvenile store. And very early out -- sell-out signals because as I said, we are only since mid of the quarter in stores, but the early sell-out signals are very positive and are promising well for the full 2019 season. And that means that if you look at our portfolio of strollers at the moment, we have a pure jogging stroller, the Thule Glide, which is a very niche product. We have the all-terrain 3-wheel stroller, that's the Thule Urban Glide 2, which has been growing very nicely now, and with especially our new Black-on-Black edition has gone very well in Juvenile. And as of this quarter then a premium 4-wheel city stroller with a capability of expansions to follow your family's life. We will, as we've communicated at the big fairs this year, continue to launch additional models to be that big player we intend to be in stroller category in the premium segment, and you will see more new models hitting the market in 2020 and 2021. So definitely a very key and exciting growth category for us at a premium price point and with good margins. If we go to the next slide, we go back to more the history and heritage of the Thule Group, the Sport&Cargo Carrier and especially, the Roof Rack category. We are definitely, in the Roof Rack category, the #1 in every sense of the game, the #1 in sense of volumes, the #1 in sense of price points and the #1 in the sense of technology. We don't only sell the Roof Racks under the Thule brand, we also are the premium car manufacturers' big supplier of new concepts in terms of roof racks, and you can very simplistically say, we are definitely best in class. So when you're best in class, to decide to replace what is already the best in the market is a quite aggressive decision, but a few years ago, we felt that we could take Roof Racks to the next level. Roof Racks is not a product which we will launch a new model or a concept every 2, 3 years, which we do in bike carriers and in other categories. It's a platform technology, which is quite costly to develop, and I'm going to get back to that. But it's also something where the user doesn't get excited by default on just looking at it. It just need to work in an excellent way. As I said, we already had the best. Yet, we have been running the most expensive development project ever, and that project will, by the way, continue, because this is such a large and complex category of Roof Racks, due to the number and models and types of roofs that there are on the cars around the world, that in actual term our Next Generation Roof Rack will be launched in three phases. The first phase was in quarter 3, when we introduced it at the fairs, the whole concept and in next quarter, then this quarter we're in, now Q4, the first two models of the new generation are started to be sold in stores. Then there are further models for different types of car roofs hitting in '19, and then finally all the models will have been updated by 2020. The reason we're doing it this way is because we want to make sure that our retail partners have the time to adopt and in a smart and smooth way make sure they can phase in and phase out products in a smooth way. The fantastic new Thule Edge and Thule Evo Roof Rack generation has a number of huge benefits for their consumers. But they also have a huge benefit for the retailer because we will be serving a very vast majority of all the cars in the model -- in the world, in a much easier way with fewer SKUs for the retailers. And for the consumer, what we're offering is a much faster and easier installation of the roof rack on your car roof, a much easier installation and attachment of various equipment to your roof rack, an increased load capacity and also a nicer look and feel. So it is truly setting a completely new standard of what Roof Racks does. And I think also if you looked at what we've been doing, as I said, it's the single most expensive development project ever in the history of this company. Some -- a big chunk of that cost has been taken in '18 but there will be a big chunk of the cost in '19, and some in the beginning of '20 as well. We have completely changed the structure in our Swedish site where we make all the Roof Racks for this -- for the world, and we have installed a highly automized assembly setup which has been very smooth in operational start, though we feel very good on all the signals we're getting from the market having shown this Roof Rack generation. Now a roof rack is not a thing the consumer will run up and buy just because there's a new product, so you don't expect to see a huge pickup in terms of every consumer now running out to buy a roof rack. The reason why we're doing this launch is just to set us further apart, we were already the best in the market, now we are significantly better than any competitor. And so what this will do, it will help us over time to drive volume growth in the Roof Rack category. In the quarter, we did see, as we expected, some declining of sales in some of those models that are now replaced in Q4, of the roof rack generation due to the fact that we have informed our big retail partners and distributors around the world since late spring that this was coming, although only officially letting it be launched at the big Automechanika fair, which is a biannual fair for automotive accessories, had taken place this September in Frankfurt in Germany. So a slight little pipeline depletion, and that will be something that will continue with both then pipeline fill for some models and pipeline depletion for some models during 2019. Therefore, this is more a launch setting the standard for why we will be growing with Roof Racks in the coming 10 years. If we go to the next page, we talk about the next very important category that made me very excited in this quarter, and that's the Roof Box portfolio. You might be aware that we launched, and might remember that we launched in 2017, what we called Thule Motion XT, which was then the Roof Box that really set a new standard in terms of both physical appearance and look, matching the design language of modern cars, as well as a number of feature improvements for the consumer. What we also did was, of course when we did that, we always want to offer a offer to the consumer at several price points. And with a classical good/better/best mentality, you would place the Thule Motion XT in the better assortment. So a high price point for every competitor in the market, a medium price point for us. We then, at the fair at Automechanika, showed the 2 additional models completing our new modernized roof box portfolio. We showed the good level and the best level. The good level, which is the box in the image that you have on the slide, is called Thule Force XT. And the Thule Force XT, is, for us, at a good level; versus competition, it is at the high level. So for us, it's the lowest price, but if you look at the market, it's at the mid-price level for boxes generally in the market. And it offers a number of improvements versus its predecessor and also especially in terms of a design language, it fits with the overall design language of the complete roof box portfolio. That box, the Thule Force XT, was a show and ship box, which meant that we showed it at the fair in September and it's already in stores now when we are in October. The other box model, the best box model, we actually showed also at the fair knowing that it's only going to be available for consumers as of Q3 next year, and the reason for that is simply that the world's biggest automotive fair only takes place every second year and you can get a lot of attention from media, retail partners and others by showing things at that fair. So knowing that it will only hit in Q3, it was still the right time to show it to our trade partners. Both of these roof box models garnered a lot of attention and a lot of interest. The new Thule Vector will be at a significant price premium versus the box it replaced, and therefore, we will truly come with a very strong good/better/best offer fully implemented by Q3 next year, where we already have seen with the Thule Motion XT, launched last year, a fantastic performance in '18 and where we are convinced that the addition of the Thule Force XT, especially for 2019, which is a spring/summer peak period for this type of roof box, will be a very key driver for our 2019 growth. I especially often say to Swedish investors and Swedish analysts that a lot of us tend to believe that a roof box is a ski box. In general, it is not. And especially the Thule Force XT is not. The Thule Force XT is very much a smaller box used by people with smaller cars for a vacation in the summer, where they don't get space enough for their bags and things, so it will be mostly a driver for growth in our 2019 spring/summer season. And after this extremely exciting period of launches, still, let's have a look at what went on in the 2 regions in the quarter. If we turn the slides to Slide 7 and look at Region Americas. Yes, we can say, we've said it a few times, trends are not rapidly changing and the U.S. market is still challenging out there. I think you all know about various bankruptcies, et cetera, shaking still the category. But what is most important to highlight from our perspective is still what are the things that held back and made us actually decline in the quarter. And in real terms, you can highlight 2 things. One, what we've already communicated since long time that we are phasing out the low-margin OE programs, and in this quarter, that was roughly a USD 1.5 million, or SEK 10 million simply, which was not as big in this quarter as some other quarters, but it did impact. And then secondly, unfortunately, some of our best growth markets in Latin America had a seriously tough quarter. We did very well in Brazil as we have been doing for a while, but Argentina, Colombia and Mexico all had very dramatic declines of their currencies and that meant that those markets that are served with distributors, we saw a very, very big pullback on order placing from those distributors. Partly as we would believe that it is, of course, a little bit the effect of consumers in those markets, it's also a lot of effect of those distributors working on their inventory holdings and a little bit speculatively hoping that their currencies will come back. We hope, therefore, and believe that they will turn upwards again, but that did hurt significantly in the quarter with another SEK 10 million to SEK 15 million. Overall, from the rest of the business, it was a very strong performance in the Active with Kids Juvenile. Despite that, we do not have the Thule Sleek in store in U.S. until at the later end because shipment times from Europe meant that we first focus on the European market and then only a number of weeks later on did the stroller hit U.S. stores. So you really can see the rollout happening in the U.S. as of Q4. But still a very strong performance with existing strollers and existing products in the Active with Kids category. We also kept on doing well in what we call the smaller everyday bags and luggage, but we do see in the Region Americas, we have a much bigger exposure to some of those legacy bags and they continued to decline significantly in the period. If we go to the next slide, we talk about a very strong European market in the region, and Europe and rest of the world. And as I said, a 7.8% growth in constant currency is a very strong performance in a very strong year overall. And the main drivers in the third quarter was very -- continued very strong bike carrier sales, good momentum in Roof Boxes, thanks to the Thule Motion XT, and a little bit of a pipeline depletion effect with some of the overseas distributors as they were awaiting the October launch of the new Roof Rack system and, therefore, did not place as many orders as last year on the existing models of Roof Racks. In the Active with Kids category, we had a very fast pace of growth continuing. We continue to do really well in our multisport, bike trailers. We have been doing well and kept on doing really well with the Thule Urban Glide 2 stroller and we also started, as I said in August, rolling out the Thule Sleek in store, and therefore, feel very good about this category going forward. If we then take RV Products, you have surely been listening into other companies talking about the market. We feel the market has been actually quite good. It's not been as exuberantly booming as in 2017 and the beginning of the year, but it was a solid in market, I think most people in the industry speculate it was a growth around 5% in the market of RVs, and as we have been successful in the past, also in this quarter, we beat the market clearly with our performance taking market share. There has been a lot of speculation. We have also communicated about our expectations that there is an adjustment happening in the pipeline. I think that is partly happening, but it's not a dramatic situation. I think we just have to be realistic that there is an adjustment needed in a little bit that pipeline for the coming quarters. But overall, markets are actually positive and consumers keep on buying RVs, so we feel good about the category, and we feel very good about our ability to beat the category. If you look at packs, bags and luggage, there is also, in Europe and rest of the world, although not to the same extent, a mixed situation where we are doing well in the smaller everyday bags, sport and tech packs and luggage, but where we do have some decline in some tablet folios and some camera bags also here. Overall, a stronger performance than Region Americas due to the fact that we have much less exposure then to the declining categories. So overall I'm very happy with what Europe and rest of the world did in quarter and I'm extremely happy where we are for the year-to-date. With that, over to you Lennart, to go through some of the other financials.

[Lennart Mauritzson, Chief Financial Officer]

Thank you, Magnus. So looking at slide 9, the income statements, if we first look at the gross margins, and in the specific quarter, we were down with 1.9 percentage point versus prior year, that includes an unfavorable currency effect of 0.9 percentage points. So decrease in gross margins in constant currency of 1 point driven by a slightly negative product mix, continued negative raw material prices and startup costs in the supply chain for the product launches Magnus just mentioned. Year-to-date, however, we are flat versus prior year in constant currency. And as mentioned again, and you see it very clear here, our selling expenses are higher than prior year due to the continued product development and launch costs. Financial net was minus SEK 12 million in the quarter, versus prior year minus SEK 14 million and this the effect of the new more flexible financing we've put in place in June this year. Effective tax rate year-to-date, 25% versus prior year of 24.4%. If we now look at Slide 10, it is the operating working capital and operational cash flow. This quarter, we ended with approximately SEK 1.2 billion in operating working capital, which is 18.4% of last 12 months of sales, that was 16.7% prior year. The increase in absolute number by close to SEK 200 million were, if we adjust for currencies, the increase is SEK 133 million. The net of increase in inventory on accounts payable stands for SEK 111 million of those SEK 133 million and increase in inventory is a conscious choice due to the recent product launches and the startup -- of an early ramp-up of pre-production for the early 2019 sales season start. Activities, we are convinced are the right things to do since our inventory isn't of the nature of becoming obsolete and that we can have a much more cost-efficient build up. It's also enabled us to finalize actually ongoing big layout changes and expansions we are doing in some of our key assembly sites that Magnus will talk about a little later in the presentation. So that means from our operational cash flow, we have generated SEK 787 million in the first 9 months versus SEK 837 million last year, so a small decrease, but all related to the change in working capital, I just mentioned. So...

[Magnus Welander, CEO & President]

Think you, Lennart. If we then turn to the next slide, we summarize our status versus the long-term financial targets we presented, where we are saying that we want to have an organic growth in constant currency of at least 5% and are trending at 5.6%. We have a midterm target to reach an underlying EBIT margin of 20%, and if we're looking at the rolling 12 months, we are now at 18.4%, so I feel very good on our journey towards reaching the 20% target and as I said, year-to-date, we are at 20.6%. We all know that our fourth quarter is a lower EBIT margin quarter and will be so also this year in line with previous years. If you look at net debt to EBITDA, we can see, we are now 1.3x there so we are actually outside -- in the right end of being outside of our leverage target, and you know that we had an ordinary dividend of SEK 6 per share, meaning a 87% dividend in this year. And if we look at that, that means we feel very good about how we're delivering to our financial targets. And then in closing before the question sessions, a little bit of a summary what's -- of what is it we're focusing on for the coming months. And from a -- so we can turn the slide, if we look from a sales and marketing aspect. Of course, if you're launching such a wide-ranging product like a Roof Rack with so many models, so many SKUs and you're setting completely new standards in the industry in making sure that the phase 1 of this introduction works out well is crucial. We are very happy with how the Hillerstorp plant has efficiently got going with the assembly in our highly automized assembly lines with these new models. We're very happy with having chosen to have a higher inventory than normal so we can enable a quick roll-out around the world, and we feel very good about the market perception of this next generation roof rack. The second part is, of course, with our Thule Force XT roof box, which is for us at a good level, but as I said, a mid-price in the market. Of course, we do want to start taking market share already in quarter 4. But the real volumes of that new model is more a box that will be used in the spring/summer season in 2019. The third step is clearly, to make sure that after what we've seen in the last 1.5 year, a continuous growth of what we call the smaller everyday bags, which means that the laptop backpack that you have for university, or maybe for work and your small bags that you go back and forth to gym, all those type of products has a pretty big impact in the fourth quarter in terms of selling it into the season of gift giving. So we're, of course, wanting to be successful in that. At the same time, we, of course, know that we have some big challenges in some of the legacy categories in that period as well. If we look at the last step with now Thule Sleek rolling into stores all over the world, it is, of course, key that it's being sold out as well and with the same pace, and although early signals are good, we will not rest on our laurels. So there is a lot of work being done from a sales and marketing perspective to generate more PR and consumer buzz around that Thule Sleek. So what we have going against us in the coming months and we highlight that in the quarterly report a bit, is that, as we, for the first time now, highlighted how much we have left of that communicated decline on those contracts we have decided to phase ourselves out from, we have SEK 60 million still to be phased out and majority of that is actually happening in the fourth quarter and especially the first quarter next year, meaning that as we go in finally in the second quarter of '19, you will not need to hear me talking about those contracts anymore. But that is, of course, a headwind we're facing. Then, it's obvious for everybody doing business in the U.S., and the U.S. is a very big market for us that there is a lot of discussion was going on with the U.S. tariffs. So also there in our report, we have highlighted what we expect the effect to be and we have 1 category that is exempt, and it's actually the stroller category, was one of the few exceptions to the new U.S. tariffs, but otherwise, in various extents, our categories are impacted. I noted in the quarterly report that we do not believe that we have a negative, competitive impact. It's the other way around, to be honest, we believe we have some slight competitive advantages. On a -- there is reality that we manufacture more in Europe and in the U.S. itself than most of our competitors do in our categories. So we might have even a slight competitive advantage with the situation now taking place. However, overall, we all know that tariffs are tricky and normally shake the market a bit. So the tariff introduction of 10% in September and the additional 15% in 1st of January, in total then 25%, we have communicated very clearly to our retail partners that we will pass on those cost increases that, that means for us. So there will be 2 price increase steps actually in 2019 for the U.S. market: one which is the traditional normal price increase that we always do due to cost of things going on in the world generally; and one specifically allocated to the tariff impact. We estimate that the tariff components of that price increase next year will be equivalent of SEK 50 million in the U.S. market. It's around that number. It, of course, depends on volumes that we sell, but that's roughly, if you look at the equivalent sales we're expecting in '18. So that means by default, there will be a revenue increase in the U.S. of those SEK 50 million next year. We don't know the impact this will have on potential interest from consumers, and of course, that would be too early to speculate. From a competitive point of view, as I said, we don't see any negative -- if anything, we see some slight positive advantages for us. And generally, in most of our categories, we do not think it will have a significant negative impact. However, in some of the categories, especially the bike segment, which is a big segment for us, a lot of our selling of new bike carriers is associated with sales of new bikes. And bikes is a relatively expensive product, and most bikes are made in China that are sold in the U.S., which therefore means there is a significant impact on those. There might be therefore, at the very beginning of the year, I think, a little bit of settling in before we know what goes on. And then I think in general, with the good underlying trends, that it won't have a long-term effect on the U.S. market. So that was for sales and marketing. If we look at operations. Lennart mentioned that we have been doing some significant projects in our sites. I think it's a sweet spot for this company, that we never talk about this because when a CEO and a CFO don't talk about what you're doing in the plants, it means it runs very smoothly. We have had a very, very busy year in reshaping our production plants and doing extensions of our distribution centers. And we are finalizing all of these projects, either on time or ahead of time. So we feel extremely good when it looks of what that will mean for the efficiency of our businesses going forward. But it is, of course, clear, like if you take a work of changing the entire flow in our German roof box plant while production is ongoing, you will have a slightly higher inventory to ensure you can do that well, and when you build a new expansion of an existing European distribution center, you're building a brand-new small fabrication site next to your assembly site in the U.S., you are for a period of time spending quite a lot of money, both from a CapEx perspective but also from a production overhead cost slightly more, not fully getting the efficiencies until the sites are up. But we feel very, very good about how that is going on in making our sites be the right for the future. We are also, in our Polish plant, ramping up production as we speak of the Thule Revolve hard-case luggage, which is being rolled out in the market in Q1 '19. And then, let's be honest, raw materials are volatile, you can see things happening. We are, as you would expect, hedging aluminum, et cetera. But we do need to stay on top of what's going on in the raw material development. We have assumed relatively high raw material cost developments in our price increases ahead of '19. So we feel good about our assumptions there. And then finally but not least in this company, we will continue a very aggressive push in product development, both in our existing categories, the traditional ones, the heritage ones. As I said, the Thule new roof rack generation is still quite an expensive development project in '19 for the second phase. We are finalizing the Thule Vector roof box in the premium segment. And we're, of course, on top of that, doing a number of new bike carriers, watersport carriers and ski carriers as well. On top of that, we are also pushing very hard for a number of additional luggage collections, the next-generation model of strollers, so we will continue to spend to drive the long-term future growth. And with that, we open for questions.

[Operator]

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

[Daniel Schmidt, Research Analyst]

A couple of questions from me. Can we just start with what you just finished off with in terms of product development spending and launch costs and so on? And you're right that in this quarter, it was SEK 25 million higher than in Q3 last year. And it does sound like that's going to stay quite elevated for some time when you talk about the roof racks and roof boxes and the Sleek and then so on. Are you saying that the product development spending of 6% to sales is going to stay that way also in 2019 and not come down? Or how should we interpret that?

[Magnus Welander, CEO & President]

I think that is probably in the right direction of assumption. It won't come down as much as maybe we thought. We have added some projects, and we also have to be clear to say that if you look at some of the tooling expense -- spend, which we do have on our product development spend, we do not put that on the balance sheet. If you would have talked to any other companies recently, you will know that both plastic injection tooling and aluminum extrusion tooling have seen some pretty hefty price increases in the market price. So yes, I would say slightly higher than we previously thought, still slightly lower than we currently are in '18. So maybe not as a rapid drop as we would have expected.

[Daniel Schmidt, Research Analyst]

No, okay. And does that in any way sort of push your ambition in terms of reaching those 20% on a medium-term level? Given that this is going to be a little bit prolonged, and it does sound like the sales effect are going to be tilted towards second half of '19. Would that mean that the sort of EBIT margin expansion is going to be a bit more back-end loaded in this medium-term target?

[Magnus Welander, CEO & President]

No, not more back-end loaded than I was previously speculating, and I don't know how everybody else was speculating. I feel very good about our margin development because still, even if we will continue to spend a lot, we are also seeing some of those products now, the strollers truly driving revenue and some of the luggage driving revenue. So I feel very good about our midterm 20% target still.

[Daniel Schmidt, Research Analyst]

Okay. And then another question. On the portfolio pruning that you've been conducting now for 3 quarters, and it does -- you're saying it's going to go on another 2 at an accelerated pace. It is quite a step-up if I get it right here in terms of the pruning versus what you had on average for the first 3 months, correct?

[Magnus Welander, CEO & President]

The logic -- yes, you're right. What happens is these are OE contracts, right? So they are not a retail classical where you sell in a season. It is much more of you deliver large quantities into a specific partner for a specific order. And specifically in this case, there was the large orders in the first quarter that we are not going to have this first quarter next year. So the impact due to that is higher in quarter 1 than in other quarters. Also due -- that's an impact partly on how big the quarter is. But you're right, quarter 1 is when the last phaseout is happening, and therefore, you're seeing there were some big orders in the previous year comparative.

[Daniel Schmidt, Research Analyst]

Yes, all right. And would you dare to quantify any margin lift from the fact that you're exiting these contracts?

[Magnus Welander, CEO & President]

I wouldn't communicate any margin lift, but I think it's pretty obvious since we've said it's seriously low margin, that if you dropped there, it will improve your margin in the quarter.

[Daniel Schmidt, Research Analyst]

All right. and then just finally on RV, did you see any changes to the demand during the quarter sort of leaving Q3?

[Magnus Welander, CEO & President]

No, we didn't. I think if you look at it -- and I know you were at the big RV fair as well. If you look at the market, it was generally a positive fair. It was very good reception, more young consumers than ever, still very -- more visitors than ever. And what we have speculated in, as I think everybody else in, is that there is slight overload in the pipeline. We didn't see anything major in our business shifting dramatically over a specific month. We had a very strong quarter still in a relatively good market.

[Operator]

The next question comes from Stellan Hellström from Nordea.

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

I'll start just to ask, yes, the increase in tariffs here. First, in Q4 then, the increase here, will that be compensated as well? Or is it in Q1 that you expect to compensate through higher pricing?

[Magnus Welander, CEO & President]

It's Q1. We have communicated this a few times before, that we hate to do a shift during a season since we're selling to retailers, and retailers would then take it in their teeth. If you look at the impact, as you can then calculate, on an annual basis with only SEK 50 million in impact, we have to be realistic. Even if it is a 10% plus a 15%, it's only on what we're bringing in from China that we need to compensate. And therefore, the total -- the increase isn't that high as a percentage. We have therefore chosen to a little bit, from the 24th of September as the first 10% was implemented then, have a little bit of a small negative impact in the sense of not shaking up our retail partners but passing it all on from the 1st on January.

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

Very good. And as you say, the price increase you need to do seems to be on an average like low single digits. But are there any categories here that are more severe that you will need to do significant price increases?

[Magnus Welander, CEO & President]

If you look at it, you can generally say that we are not sourcing so many finished goods from China, aside from some of the smaller bags and some of those things where we do have a pan-Southeast Asian sourcing but also China. So when you look at it, the impact is slightly higher in a category like packs, bags and luggage. While of course, since there is no import duties at all on strollers, there is no impact on that. And by the way, the Thule Sleek is anyway made in Poland, so we would almost have liked there was an impact. It would have been a competitive advantage for us. But if you look at it, small impact in Sport&Cargo Carriers on some components that we are bringing in from Asia but not bringing so much a full product.

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

All right. Just final one on retail maybe, but do you expect prebuying ahead of these price increases?

[Magnus Welander, CEO & President]

I think everybody at the moment is speculating a little bit about potential prebuying versus a huge challenge to bring things in physically because here is the difference, is you need to have it physically on the ground in the U.S. before the end of the year. We know that normally, the last 2, 3 years, there's been huge struggles to just find shipping quantities late in Christmas ahead of New Year because the Walmarts of this world have more or less chugged up the entire system. I think brands like that, huge retailers like the Walmart that are buying a lot of cheap crappy stuff from China in huge quantities where this tariff impact of 25% will be significantly more impactful are more likely to be the guys trying to bring huge quantities in. So although some people would like to try, even us potentially, I don't think it will be physically possible to do very much due to how late it came and how long lead times you have and due to the last recent years' struggles to physically get additional shipments just ahead of New Year's into U.S.

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

Okay. Just finally then, I mean, the U.S. market for you hasn't -- or the North -- the Americas market hasn't been growing very well, and you talked quite a lot about that. And the core sports, cargo carriers business in North America, how is that progressing at the moment? Is that also affecting by some... pipeline.

[Magnus Welander, CEO & President]

It's growing. Yes, it's growing, but it's not nearly growing as much as we would like. And one of the big reason is we were a little bit overoptimistic on the bike market as a whole into this year, and the bike market has declined a little bit in the U.S. And you can also say that this is -- the U.S. market is actually the only market where watersport market is relatively big for us. We sell a lot of surfboard carriers, kayak carriers in the U.S. And also, the paddle sport and watersport market has been slightly weaker with a slight decline. But those 2 markets haven't been as good as Europe, especially not bike. But we are still showing, if you take away these OE businesses, growth in the category.

[Operator]

The next question comes from Gustav Sandström from SEB.

[Gustav Sandström, Research Analyst]

If I may start with a question regarding Thule Sleek. You stated in the report that Thule Sleek contributed to strong growth within the category. But could you please give us some ballpark figures, what range addition you got from Thule Sleek in the quarter, please?

[Magnus Welander, CEO & President]

If you look at it, a monetary amount is relatively small in the quarter. And I think if you look at it, the first time when we can really talk about how many Thule Sleek strollers we'll be selling is when we have a full year. But it is indicatively -- if you look at a Thule Urban Glide 2 we're selling around 35,000 of those on a yearly basis. Of course, that's the least we would want to do with the Thule Sleek when it's fully rolled out and up and running. So we will be seeing a few thousand this year being sold, but the big year is in 2019 when you have a full season in.

[Gustav Sandström, Research Analyst]

All right, that's fair. But -- and on accounting, do you recognize the full impact from sales of Thule Sleek as you sell into the stores? Is there then a pipeline inventory effect in the quarter and perhaps also in Q4 as you're allowed in the U.S?

[Magnus Welander, CEO & President]

I mean, of course. But when we sell something, we account for it. We don't have any type of consignment stock or anything. So when we sell it to the retailer and it enters into the store, so by default, there is a -- if you didn't have anything before, there is always a pipeline fill. What we have to be realistic about is that those stores are not filled up with hundreds of strollers because we have next-day delivery. So in fact, in many of the stores, they will only show maybe 2 colors, and then they will have the opportunity to show other colors in a nice way because we have given nice color patches, et cetera. So you fill up with a relatively few strollers. Still -- so the pipeline effect is relatively small, I would say, versus what the sell-out has to be to be successful.

[Gustav Sandström, Research Analyst]

And how many -- just to get a sense of the magnitude here, do you have a feeling of how many Urban Glide strollers that are currently in inventory amongst the retailers?

[Magnus Welander, CEO & President]

Yes, we do. It's not a lot.

[Gustav Sandström, Research Analyst]

Okay. And then on the European organic growth, it was just shy of 8% in the quarter. You mentioned in the report it was obviously supported by a strong RV markets, and I think German registrations were up 14% or so in Q3. But if we were to exclude the RV from European sales, is it fair to assume that your organic growth for the remaining portfolio was somewhere around 5% in the quarter?

[Magnus Welander, CEO & President]

You can actually say that's a pretty good guess. It was slightly above, but it's a pretty good guess.

[Operator]

[Operator Instructions] We have a question from Peter Reilly from Jefferies.

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

You may not want to answer this, but I was hoping you could give us some more color on the SEK 25 million annual increase in your expense. Because clearly, some of that's product development, some is going to trade shows, some is merchandising. And I'm interested to know a bit more the breakdown because some of those costs are temporary and some are more permanent. And related to that, how that rolls into the fourth quarter because you said earlier this year you're hoping to deliver a year-on-year margin improvement. You've got a flat margin year-to-date. It sounds like your discretionary costs are higher than you planned because you're, I guess, more excited about some of the opportunities. But it sounds like it's going to be quite difficult to deliver a margin increase this year if you've got these costs rolling into the fourth quarter as well. So maybe you can help me with the understanding of those issues.

[Magnus Welander, CEO & President]

Yes. I would say, if you take those SEK 25 million, and it's always above and beyond what we did in the previous period, you can say majority of that, more than half of it is still product development. And you have in the quarter specifically, because of the decision to roll out displays and even complete shop-in-shops in some of the leading retailers, then we are taking a significant part of that cost. So if we talk about it, you can say that roughly 65%, 2/3 of that additional spend is product development, and 1/3 is the display, pushing it into the market aspect. If you look at that, we have, of course, targeted in Q3 in Europe the best retailers to do this with. And we were positively surprised how many gave us even the chance to build fill -- full shop-in-shops. So that was slightly more than we thought we would spend, but we thought a fantastic opportunity to occupy space in the best retailers of the world in Juvenile in Europe. So we will not see the need in Europe to spend the same type of amounts now because we already have built those shop-in-shops in the BabyOne, baby-walz, Baby-Dump and all of those stores. Once they are there, you're not adding more just because you start selling more strollers to those same people. So if you look at it from a point of view of saying what's going on, we will continue as we roll into more countries, and we hope to do the same in more countries, winning serious space and digging up -- getting the chance to actually occupy that space. But Europe is the big market here for this type of stroller, so a pretty big part of that initial display push costs actually happen in Q3. There will be some of it continuing in the U.S. and Canada, a bit in some smaller European countries in Q4. Then specifically, if you look at it from a margin expectation level, we -- I think we've discussed that, and you asked me once in '17 at the Capital Markets Day, is 2018 the year where you will do the big step-up? And I said no, it's not the year when we will do the big step-up. It's going to be more in '19 and '20. So in our minds, we're actually tracking quite nicely to what we said and expected. And there might have been different perceptions from the market than ours, but we are actually tracking very nicely to what we expected, and we actually also expect that we will do that well in quarter 4. Quarter 4 is a low-margin quarter, has been in every single year I've been in the company due to the size of sales and the fact that we do not hold back our development efforts or marketing effort just because we sell a little bit less since we don't base it on a quarterly basis. I think we'll be running roughly the same type of EBIT level, so no, not a big pickup in Q4, but that wasn't expected either.

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

And in terms of the working capital inventory, maybe I'm wrong, but it seems like you've decided to invest a bit more working capital than you anticipated maybe 3, 4, 5 months ago. And in the Page 2 of the press release, you use the phrase, "Generally, we are very pleased with the response from customers about the Thule Sleek." And maybe it's just a language thing, but the "generally" seems a bit softer than I expected compared to a much more upbeat tone in the presentation you've given. So can you talk about where the -- what you're doing in inventories versus your order expectation and therefore, by implication, whether you're actually pleasantly surprised or disappointed by the way the Sleek is going initially?

[Magnus Welander, CEO & President]

So that's the mother tongue of English helping you there, Peter. I'm not mother tongue English. My "generally" was actually in Swedish, very much more positive than that. We are very happy -- in general, means in the Swedish way, I'm going to say, "Across the board, we're happy with the reception." So I feel very good about the reception of the Thule Sleek, and maybe my English choice there was not the right with "general." Very happy with the reception, it's very positive. I feel very good about having decided to have relatively high inventory levels to get that cracking. So the worst thing we could do would have been to launch a fantastic stroller, get all those space in those shops, putting in all the displays and then say, "Sorry, we can't manufacture enough," that would have been stupid. But I am not worried at all in any form or shape that we're sitting on too much inventory, not in any form or shape on the Thule Sleek. I'm 100% comfortable that all of those will be sold out, and we are continuing to manufacture a lot, by the way, because next year, we will sell even more. So very calm about that. If you look at it, what is, of course, tricky is a little bit when you talk about inventory, we're not so focused about where we end inventory in a specific quarter because it moves in the weeks. You can imagine what happened in the 1st week of October and 2nd week of October when we started shipping out the Thule Force XT boxes and large orders of the new roof rack generation. Just a few weeks after a closing of the books since the first orders were in beginning of October, the inventories changed. And therefore, from a perspective overall on inventory, it's not that we have changed our overall view on it in total. It's just we have to report on the 31st of September, and the first shipment date of 2 of the big launches was the day after.

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

Okay, that's much clearer. And moving on, is there anything else you can tell us about the Revolve luggage? You said you're now already building it in your factories, it launches Q1. Do you start to get actual sales in Q1 or -- next year? Or is it much more of a sort of slow phaseout because you have to deliver initial display stock, and then you see what the sellout is? And so I'm just trying to get a feel for where we are in that process and when we're going to start noticing some net impact in your revenue line.

[Magnus Welander, CEO & President]

You'll see some net impact in Q1 absolutely. But the major of the impact is actually, for travel luggage in general even if you're not launching it in the second quarter when people tend to buy more of it. But clearly, there will be some impact already in quarter 1 as we roll it in. It's still the same logic as for the strollers. It's not sending in 3, 4 bags to a retailer that will make the difference. It's when they start selling out a lot of bags from their store. So the major impact is in quarter 2 and 3, but there will be some positive impact already in quarter 1.

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

And then lastly, on packs, bags and luggage, you said at the start of the year that you'd be very disappointed if you weren't able to grow the category this year. And my -- and obviously, you haven't given us an update at this stage on where you are organic growth in PBL year-to-date. But my guess is that's now looking quite challenging to grow the business given that's where the legacy products are and given some of the other weak trends you talked about in Latin America and U.S. retail and so forth.

[Magnus Welander, CEO & President]

Yes, you're right, you're 100% right. I feel good about that we will see -- the growth categories are doing well. The declining categories have declined more than we expected when we stepped into the year. And we've taken some conscious choice above and beyond what we'd done to move away from some lower margin than we actually thought a year ago. And actually, the -- specifically, as you mentioned, the Latin America is big market for us actually for bags. So for example, Argentina has been one of our best bags market. If we get 0 orders from our Argentinian distributor in any entire quarter, it hurts us specifically in that category. So unfortunately, that is the one that is the high likelihood that I will be disappointed in.

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

Okay. Well, I'm -- well, sorry to end on a low note, but at least it sounds like the rest of the business is doing well.

[Operator]

Our final question comes from Tommy Ilmoni from Carnegie.

[Tommy Ilmoni, Financial Analyst]

My question was already answered partly, but I was wondering if you could give us some highlights or comment how your growth per category is year-to-date. I know you provide us these numbers on a full year basis, but I guess if you could give some indication of the growth...

[Magnus Welander, CEO & President]

Absolutely. I mean, yes, if you look at it -- if we look back at 2017 and then you deploy the 2018 logic, trends don't rapidly change, so to speak. So our [ category ] is actually relatively similar to what we had in 2017, with a slightly less buoyant RV market but still a very good performance because we're significantly beating the market, and faster growth in the Active with Kids category, very stable growth in the Sports&Cargo carriers business and a more troublesome than we want it legacy part of our packs, bags and luggage. So very much in line with the previous year.

[Operator]

We currently have no further questions. So I hand it back to you, gentlemen.

[Magnus Welander, CEO & President]

So thank you very much for listening in to this third quarter call, the call for the most exciting quarter ever, for the Thule Group since I joined it, that is 13 years ago, in terms of shaping the future. So very exciting time ahead in 2019, and looking forward to have you listen in when we summarize the year after quarter 4. Thank you very much.