Thule Group AB

STO:THULE

Earnings Call Analysis

Thule Group's Resilient Q3 Amid Market Challenges

Thule Group reports a challenging yet positive Q3 with a 1% sales growth in constant currencies, a sign of resilience in a difficult market. This period marked a return to growth with particular strength in Europe, which contrasts with declines in America. Gross margin saw a significant increase of almost 6 percentage points, resulting in a historically strong margin, surpassing pre-pandemic levels. Operating profit improved to 15.5% EBIT margin, and operational cash flow for the quarter was the highest ever. Q3 sales were up by 8% in reported currencies, reaching SEK 2.3 billion, with a year-to-date decline of 11%. Despite a double-digit fall in the RV product segment, growth in Original Equipment (OE) channels and Thule.com were positive highlights.

Leadership and Performance in a Challenging Market

Mattias Ankarberg has recently taken the helm as CEO of Thule, where he brings over 20 years of consumer industry experience to an already familiar company where he served 5 years on the board. Under his leadership, Thule has navigated a difficult market to report a modest sales growth of 1% in constant currencies, marking a period of recovery with Europe showing strength while America faces a downturn, partly due to diminishing consumer optimism. Remarkably, Thule has achieved its highest-ever operational cash flow for the quarter, highlighting not only profitability but also successful inventory management.

Financial Highlights of the Quarter

Sales in reported currencies surged 8% to SEK 2.3 billion, though there is an 11% decline year-to-date, with sales reaching SEK 7.6 billion. Gross margin witnessed a notable increase of nearly 6 percentage points. Even more striking is the improvement in EBIT margin, which ascended to 15.5%, signifying a rebound above pre-pandemic levels.

Product and Regional Sales Insights

Thule has seen a strong recovery in its premium bike products that exhibited robust growth, instilling optimism for future performance. Despite challenges in the recreational vehicle (RV) segment with a double-digit decline, there is an uptick in orders from vehicle outfitters, offsetting the reduction in aftermarket sales to some extent. Encouragingly, the growth in Europe is palpable—led by its premium product category dominance—especially in Germany and the Nordics, though France lingers behind due to cautious retail sentiment.

Struggle in America Amidst Decreasing Consumer Confidence

Contrasting with Europe, the Americas reported a 15% decline in constant currency sales compared to the previous year, largely influenced by a shift in consumer sentiment which saw a reversal from optimism to caution, directly impacting demand. This stumbling region serves as a stark reminder for Thule to remain vigilant and adaptive in the dynamic market environment.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, everyone, and welcome to the Thule Group Interim Report Q3 2023 Call, and thank you for standing by. My name is Daisy, and I'll be coordinating your call today. [Operator Instructions]

And I would now like to hand the call over to your host, Mattias Ankarberg, CEO and President, to begin. So Mattias, please go ahead.

[Mattias Ankarberg, executive]

Thank you, and welcome, everybody, to this call. I am Mattias Ankarberg, the new CEO of Thule, and I'm here with our CFO, Jonas Lindqvist. We will firstly hold a brief presentation. And as usual, the material is available on our Investor Relations website. And after the presentation, we will hold a Q&A session.

But first, on Page 2, let me take the opportunity to introduce myself. I started as CEO of Thule Group 2.5 months ago, August 9, 2023. My background is from the consumer industry. I've spent plus 20 years in various segments and categories, typically in international roles. I worked for 8 years for McKinsey & Company based in Sweden and the U.S. I was, for a similar time period, at H&M Group in various roles and, lastly, as the Global Head of Sales and Marketing and member of the group management team. And then my last position was CEO of a Nordic DIY retail company called Byggmax Group.

So I am new as the CEO of Thule, but I'm not new to Thule. I have been on the Board for 5 years of Thule Group and, of course, also a big fan of Thule products and person who likes several outdoor activities and have a lot of Thule stuff at home. So I am very energized and very happy to be on board, in addition to having been a Board member, now being on board full time with Thule. So great to be here.

Let's turn to the quarter on Page 3. Overall, the quarter is a good quarter for us. We show good probability in what is a tough market. We have -- we are back to sales growth, 1%, so not a lot in constant currencies, but still growth. We have clearly different trends, which we'll come back to in the call today, between different regions, with good growth in Europe and negative in America still. And we do see that we are operating in the tough market, particularly the previous trend of increasing consumer optimism has reversed during the autumn, particularly in North America. Having said that, what is positive and clear in the quarter is that new Thule products drive growth also in the aftermarket.

We had strong improvement in the gross margin compared to previous year, almost 6 percentage points up. And it is also stronger. In historical context, it is higher than the gross margin before moving into the pandemic, i.e., higher than in Q3 2019. We continue to see positive product and channel mix effects, although we still are underutilizing our own production capacity.

EBIT margin also improved a lot compared to a low level last year to 15.5%. Again, also, that means an operating profit above the level which we were in before entering the pandemic, i.e., before -- about Q3 2019, excuse me.

And in addition and importantly, we have the highest-ever operational cash flow for a quarter in this quarter, with, again, good profitability and inventory levels that continue to decline in line with what we have communicated earlier. So that's the overall summary.

On Page 4, we have the reported numbers also in local currencies. To give you the overview, we have a sale that increased 8% in reported currencies to SEK 2.3 billion, taking the year-to-date sales to SEK 7.6 billion, a decline of 11%. And the EBIT amounted to SEK 359 million in the quarter and a bit shy of SEK 1.5 billion for the year-to-date number.

Turning a bit more into the business side of things on Page 5. I'd like to step back and comment on the sales in the quarter in the light of the developments that have been going on for the last few years. It's, of course, been a lot of variation in the sales pattern during both the COVID period and also with the following post-COVID effect. So let's put the quarter into perspective.

And I'd like to note 3 things. Firstly, we can note that this is the first quarter, Q3 '23, in the year that we are back to growth versus the previous year period. So that's, of course, positive for us. Secondly, if we look at this year, we note that, compared to prepandemic, Q1 was up only 12% in sales, whereas both now Q2 and Q3 have been up 23% and 24%, respectively. So a step in the right direction. And then thirdly, what we see now in the third quarter is a mixed picture in the sales development, with particularly 2 positive and 2 negative factors impacting the sales development.

And if we start with the positive, you can see that the bike products, at least the premium bike products which are so important to Thule, have now returned to good growth, actually strong growth from bike-related, which we are really happy to see and gives us optimism for the future. The second positive point is that Europe, our biggest geographical region, generally performs well across product categories, which, of course, is also solid and positive for us.

The exception -- starting with the negatives to Europe, the exception is the what's called the RV Product segments, so recreational vehicle-related products. We see a decline in quarter in this segment, and we will come back to that in a minute. And the second negative is a decline in North America, which we'll also come back to in a minute. So a mixed pattern in terms of sales development, but the quarter which is growing versus last year and at a 24% higher level than prepandemic.

So with that overall context, I would like to mention a few more details around the 2 different regions that we report: Europe, rest of world, respectively, and America. So we can start with Europe and rest of the world on Page 6.

Europe, rest of the world saw an 8% increase in constant currency sales versus the previous year. And again, we do see strong growth from premium bike-related products in the quarter. We now see that bike-related inventory of, I would say, premium products and Thule products specifically are generally back to healthy levels in Europe. That is not the case for bike-related inventory levels in general or by retail inventories, I would say. But for Thule products, we are positively back to healthy levels. We also see, which is very positive for us, that new products like the Thule Epos that we launched during spring is really contributing to growth, which is very positive.

Secondly, as I mentioned a bit earlier, Europe generally performs well, except the RV side, which I'll get back to you. We have solid performance in Sport&Cargo Carriers, also outside bike carriers, so roof racks, roof boxes, et cetera, performed well. We have good growth in Juvenile & Pet through multisport and bike trailers. Our smallest category in Europe, Packs, Bags & Luggage, continue to see good growth from the Thule-branded collections, also some newness helping to drive growth there. And overall, across Europe, across our product categories, there is a trend that we see the stronger sales performance in the premium segment, which is mainly where we play. So that's also good for us.

So coming to the RV side. We see that the RV Products declined in the quarter double digit. And to nuance that picture a bit further, we actually see continued growth to -- if we separate the sales channels to 2 different areas. We continue to see growth in one area, which is the OE or the vehicle outfitters, where we're still delivering on an order backlog from previous periods. So we actually have growth in that area still. However, we see a decline in aftermarket sales, which is bigger than the growth in the OE side. So net, we see a double-digit decline. And as a reminder, RV Products is Thule Group's only exposure to what is a historically cyclical market segment.

As a last comment or 2 comments, we see that we continue to grow our B2C share, Thule.com share, which is, of course, positive. It is from a small base but show good growth. And in terms of geographical differences, we have the strongest performance in Germany and the Nordics and still a decline in France with retail chains that are clearly cautious.

On Page 7, I'll give us similar highlights to the Americas region, and the Americas region declined in constant currency sales, 15% versus previous year. And I'd actually like to highlight 2 factors. Firstly, the North American consumer optimism that we have seen really improve over a 12-month period, maybe a bit even more, has clearly, first, stalled and then reverted here during autumn, so a less optimistic consumer, of course, impacts the demand. And then secondly, more of a -- maybe more technical note, the comparables are tougher for Region Americas in a historical context. So comparing the 2 regions to the prepandemic levels, Europe and rest of the world, Q3 versus Q3 2019 is plus 20%. So the comparable is '22 to '19, whereas it was 38% for Americas. So it is a more cautious consumer but also tougher comparables.

So with that backdrop, how did the quarter turn out? Well, we'd actually see bike-related products returning to growth also in Americas. It is at a more modest growth than we see in Europe. That's still growth. And in terms of the important topic of bike-related inventory level, we see that the large retail chains are generally back to healthy inventory levels for Thule products. But we do see that many smaller independent retailers, bike retailers still have overstock situations that they need to manage.

All product categories are in decline, if you look at the product category level, except Juvenile & Pet. We do see growth in bike carriers, as we said, but in total, the Sport&Cargo Carriers segment declined. And we do see a lot of nuances within the product categories and also the other categories outside of Sport&Cargo. So luggage and duffels continue to grow within Packs, Bags & Luggage, for example, but we do see an overall decline because we have decided earlier to exit some OE business that was low-margin for us. We do see Juvenile & Pet growth, as mentioned before, driven by the strollers and the child bike seats. And again, the RV side also in Americas, which is very small for us and very niche position, but continue to be weak in what is a very tough aftermarket in Americas.

DTC continued to grow also in Americas. And within the Americas, as mentioned, it's the North American markets, U.S. and Canada, that drive the decline, but there's still good growth in Brazil.

With that, I turn to Jonas to go through some of the financials, starting on Page 8.

[Jonas Lindqvist, executive]

Thank you, Mattias. Like Mattias s said just now, we are on Slide #8. And I will concentrate on the quarter as always.

The sales of SEK 2.311 billion in the quarter was 1% above the sales for the same quarter prior year, excluding FX effects. In particular, bike product sales were higher in the quarter, and the product categories, Sport&Cargo Carriers, whereby bike carriers is the biggest category, is now back at the same share of sales as before the pandemic. As Mattias said, most of our customers have reduced inventory of Thule products to a normalized level, which means that our sales more closely reflect the end user demand. As Mattias also mentioned, the RV business is coming down after an extended period of strong growth, and we see a subdued demand in the North American markets.

The gross margin of 39.7% is 5.8 percentage points higher than the same quarter last year, which was a weak quarter, as primarily the demand for bike-related products saw a substantial reduction with large inventories at our customers. The increased gross margin level now comes from lower transportation costs, which was very high last year. These have now gone back to the levels that we had before the pandemic. The material cost has also continued to come down from last year, primarily on aluminum and plastic components. The product mix has been favorable in comparison to Q3 '22, with a higher share of bike-related sales and continued growth in our direct-to-consumer business.

The smaller share of RV sales also has a positive impact on gross margin since RV has lower gross margin, but it is, at the same time, leaner in overheads. We have still delivered a substantial part of sales from our inventory. That has continued to go down, which I will come back to when we look at the cash flow. But it also means that we have cost for unutilized production capacity that is impacting gross margin negatively.

Operating expenses, SG&A, have increased from SEK 531 million to SEK 559 million. But excluding FX effects, it's only an increase of 1% or SEK 4 million. Worth remembering is that we continue with our ambitious product development plans and that the overhead cost for this will remain on a high level, which, in particular, impacts the smaller quarters when we compare development to sales. The operating expenses as a percentage of sales are 24.2% compared with 24.8% prior year Q3.

The EBIT margin of 15.5% is 6.5 percentage points higher than last year's 9.0%. And in third quarter, it is 0.7 percentage points higher than before we went into the pandemic. The finance net in the quarter is lower than the same quarter last year because of higher interest rate since the borrowing is lower. The tax, and this is year-to-date, of SEK 314 million corresponds to a tax rate of 22.6%, which is at the lower end of our guided range of 22% to 25% and on the same level, 22.5%, after 3 quarters last year.

I would like to turn to the next slide, working capital and cash flow, that is Slide 9. Operating working capital was SEK 2.874 billion at the end of Q3 '23. Excluding currency effect, the inventory has decreased by SEK 861 million compared with the same time last year. The reduction has continued during the quarter and contributed to the cash flow by another SEK 360 million. We are now leaving the bike season, and other products now gets a bigger share of our sales. These will not reduce inventories further this year. Examples are roof racks and roof boxes.

Accounts receivables are on a similar level as the same time last year. As a percentage of sales, the operating working capital is down by 3.2 percentage points. However, the calculation is based on an average of 4 quarters, which lags behind in this time of rapid reduction of inventory. If we look at inventory at the end of the quarter and compare this to the rolling 12-month sales, we see that it is 25% to be compared with last year at the same time when it was 30%. And I also want to add that the inventory levels we saw during the pandemic, as you can see still in 2021, they are no -- by no means sustainable.

The operational cash flow for the quarter was almost double the amount from last year. And as Mattias said, it is the best cash flow quarter in the Thule history. The major contributor is, of course, the reduction in inventory levels. But worth noting is that we have also reduced our capital expenditure compared to the levels in previous years. Capital expenditure in the third quarter was on half the level from last year, SEK 59 million, now to be compared with SEK 116 million for the same quarter last year.

That's it from me, Mattias. Back to you.

[Mattias Ankarberg, executive]

Thank you, Jonas. We can move to Page 10 and turn to the forward-looking comments. Let's start by commenting on the world around us before we get to the priorities for us internally to the group.

We overall expect to see a continuation of this mixed picture in the market dynamics that we saw in Q3. On the positive side, and this is an important positive for us, is that bike retail in particular Europe is back to healthy inventory levels of Thule products. We do see a long-term positive trend for bike. It is a high share of Thule Group's total sales, and it is very positive to see that inventory levels of premium products are now where we would like them to be.

On the negative side, we cannot ignore the market dynamics that are going on around us, in particularly 2 areas. We expect to see a continued challenging RV market in the coming year. This is historically cyclical segment. And we also, of course, note that the North American consumer is less optimistic for the future. Very short term, the Q4 2023 -- sorry, the Q -- is historically -- in general, Q4, I should say, is historically seasonally our smallest quarter in terms of sales and also had a higher share of sales from RV and lower from bike-related.

On a positive note, having said that mixed market dynamics with positives and negatives, it is clearly positive to see that new Thule products drive growth also in a tougher market. We see that in Q3. We also have more new products than ever before coming to retail in 2024. So we are internally very excited about that. And we are both updating some of our best-selling products in several product categories and bringing -- entering 2 new product categories for the first time.

So calling out a few, if we start with mentioning our updated generations or our new versions of bestsellers, we are, during the first half year, launching several. So Thule Urban Glide generation 3 is our best-performing all-terrain stroller. New version coming out. Thule Verse is replacing our current best-selling U.S. bike carrier. New version, new product. We are refreshing our leading luggage family Thule Subterra, with the second generation. We are delivering a third generation of Thule Chariot, which is our and we think the world's best child bike trailer, which gets even better and got really positive reviews so far when released to trade. And we are updating our leading roof box, Thule Motion, also that's the generation 3. So several bestsellers that are getting new versions or updates, which we are very positive about.

We are also entering 2 new product categories completely, with the first one is dog transportation, Thule Allax. Our first car drunk -- car trunk dog crate, excuse me, where we really have focused on maximizing safety for both the dog and the person or the passenger. It's coming in Q1 2024. And Thule Bexey, our first dog bike trailer is coming in Q2 2024. We are also launching car seats in Europe during Q2 2024 as communicated earlier.

And then in addition to that, we are bringing some innovations. We are launching what is the world's first tow bar-mounted tent, called it the Thule Outset, which it was personally part of the release of that product at the event where we released it. It was very positively received. It's very exciting to see actually. And then on the RV side, despite the negative market dynamics, we have no less than 5 new products coming out next year, and 2 of them are Thule Veloswing, which is a tow bar that swings aside, so you can easily access the back door of the RV. And the Thule Sidehill, which is the first removable awning in the market. So a lot of new great products coming to retail in 2024, which we are, of course, very excited about.

On the last page, Page 11, I would like to conclude the presentation part of this call by sharing a few reflections from my first months as CEO. I'd like to call out 3.

Firstly, it is clear that Thule's really in a favorable market position that gives us tailwind. And that's very, of course, positive for us. Consumers increasingly want to live active lives. We are making more and more very good products that enable an active lifestyle. We are a global market leader in many categories with specific positive trends, in addition. And we have a premium brand position with the Thule brand, which we see as a strong segment in the market. So tailwind long term, trend is our friend, and we are very fortunate to start from that position or to be in that position.

Secondly, I am personally a big proponent of the build-on-your-strengths principle. And fortunately, Thule has a lot of strengths to build on. To mention a few, we have, in my view, world-class product development capabilities, which we, I think, have proven again and again. We have a very strong Thule premium lifestyle brand. We have a flexible supply chain of a lot of in-house manufacturing capacity. We are -- have high ambitions for sustainability and work with sustainability and integrated way in our operations. And last but definitely not least, we have a lot of engaged Thule colleagues with this to the spirit that I was -- I would summarize as never settling, always improving, celebrating but -- quickly and then moving to the next improvement. That's really struck me during these first months, very positive.

So going forward, we will continue to focus on product development and also focus more on the end consumer. Product development is the foundation of our strategy. We have a long-term approach of investing in product development to drive profitable organic growth and a strong track record to deliver that growth, and we see that it works also in tougher times. So that will be the priority #1 for us.

Secondly, we will force more on the end consumer. Thule is and, in my view, should first and foremost be a product company. But we do see opportunities to benefit from direct-to-consumer sales and marketing to a higher degree.

And then lastly, we also need to -- and always need to ensure we are cost-efficient. And as a second adjustment or as a priority, we will focus on reducing what is excess supply chain capacity. We have a lot of own factories that utilization in those will increase over time when we grow more. But what we're seeing now is short-term opportunities to reduce, for example, external warehousing services that we may not need for the coming period.

So overall, that concludes the presentation part of this call. So I will turn to moderator for Q&A and ask moderator to take questions.

[Operator]

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

[Daniel Schmidt, analyst]

I hope you can hear me. A couple of questions from me. And starting with the quarter, and I think you touched upon it a few times, Mattias, the trend shift in terms of the U.S. market and also European RV on the AM side. But just trying to sort of get a feel for the level of change because you also said that leaving in Q2 that you're entering Q3 very strongly, and it sounded like you were in double-digit growth in the beginning of Q3. Does that mean that you were basically 10% down leaving Q3 heading into Q4? Is that a fair assumption?

[Mattias Ankarberg, executive]

Daniel, I hear you loud and clear. Mattias here. I think the question is best answered in terms of the category dynamics and geographical dynamics that you presented before, the sort that you commented on. Of course, bike-related products are very strong in the beginning of the quarter, particularly that for where the retail hit the brakes last year in July. So I think we don't see a major shift between months that is not reflected in category performance, if you see what I mean.

[Daniel Schmidt, analyst]

Okay. And just on the U.S. market, which is, of course, down a lot still, although bike is up slightly and some other smaller products categories, roof racks and roof boxes, unlike in Europe then, has to be down quite a bit in order to get this minus 15% for the entire sort of continent. Is that a fair assumption?

[Mattias Ankarberg, executive]

Yes, that is a fair assumption, clearly so. And then the only comment I would add to that is that the comparables are different between Americas and Europe. I think the most interesting discussion is the forward-looking. So I think the consumer optimism point is more important to consider. But as I accounted for earlier, the comparables are tougher in Americas, specifically in this quarter, which also explains the drop in boxes and racks to some extent.

[Daniel Schmidt, analyst]

Yes. Okay. And I think, Jonas, you mentioned that sort of for the last quarter of this year, we shouldn't expect any further lowering of the inventory. Does that indicate that you will be producing more in line with demand? Of course, depends on whether demand is going, of course. But is the sort of the structural need to take down inventory over as we get into Q4 and hopefully into next year?

[Jonas Lindqvist, executive]

To take the first part of the question, yes, we will produce more in line with the demand because it goes into a part of the year where roof boxes, for example, is a bigger part of our sales and we don't store them to more than a very small extent. Structurally, I think we have a bigger ambition than settling at the current level. We will maybe not come back to the levels that we had before the pandemic because we have more product categories now, but going down from the level that we are, I think we can expect that in the coming year, yes.

[Daniel Schmidt, analyst]

Of course, I also recognize that you said that you were expecting SEK 600 million in inventory reduction for this year, and I think you've already done SEK 800 million. But we should expect more sort of structural change to the inventory in 2024 is what you're saying still?

[Mattias Ankarberg, executive]

Yes. Mattias. I'll comment also, so we get the message from 2 sides. I think what you see is also partly a seasonal effect that Jonas was alluding to. Typically, with Q4 being a smaller sales quarter, you don't see continued drop. And as you said, Daniel, we are -- the goal was to reduce SEK 600 million from year-end last year to year-end this year. And so we are very much trending towards that, as you said. Already achieved, so to speak. But we do see, as Jonas said, also an opportunity to, next year, continue to reduce inventory levels a bit more.

[Daniel Schmidt, analyst]

And that is despite the fact that you are adding to your portfolio quite a bit, not only 2 new categories but also further line extensions. So you still see that you can sort of balance that simply.

[Mattias Ankarberg, executive]

Yes, it is. And one of the things we've done here during my first 2 months is to look a bit at the supply chain situation. And we see that there is opportunity to reduce inventory further and also to work where we can in the short term with reducing some costs from excess capacity.

[Daniel Schmidt, analyst]

Yes. Okay. And then just finally, sort of looking at the EBIT margin performance, 15.5%, it is above the reported margin that you had in Q3 '19, as you mentioned. But you did have a recall cost of SEK 25 million back then. And if you adjust for that, it's actually 80 basis points below. And it's also lower than what you have in '16, '17 and '18 for Q3. And it does look like selling expenses is the line that sticks out a little bit and also admin compared to back then. Is that something that you feel that you need to address going forward? Or is that a function of product development spending as you've talked about?

[Mattias Ankarberg, executive]

Well, good to speak to some of these -- on top of these numbers, always a good discussion. You are right on the back, of course. I think this is a quite -- a bit of a nuanced answer. I think the big picture, of course, comment is that it's very good that, comparing to where we were in the last year, for example, we are now back to -- in line with, let's call it that then, the level where we were before the pandemic. Then you are right on the specifics. And the big portion, which is higher than we was from prepandemic is, of course, the share of sales. So the big increase in the cost base measured as share of sales is, of course, a product development spend, to your point. It's almost 7% in the last 12 months, and we used to be at 5%, 5.5%, as you know. Then there are some other smaller opportunities, I would say, smaller in the scale of 7% being R&D, like external warehousing, as I commented on before.

[Daniel Schmidt, analyst]

Yes. And do you see that PD spending being down to 5%, 5.5% next year given what you think about top line for next year?

[Mattias Ankarberg, executive]

I think that we should get back to 5%, 5.5%, as we've commented before. This is the way we should go. I think it's -- at this stage, with the market situation that we see, that will impact top line. We are still optimistic for next year. But I think it's wiser to speak about the ambition over time than to tie that number to a specific year.

[Operator]

Our next question is from Carl Deijenberg from Carnegie.

[Carl Deijenberg, analyst]

So 2 questions from my side. Very good picture on Slide 10 on the upcoming product launches, quite detailed and easy to understand. I just wanted to ask here, I recall here on the Epos launch previously this year, initially you started off releasing it to a selected number of retailers and -- while later in sort of following up on a more broad-based launch. Is that a sort of general strategy that you will sort of utilize for these -- some of these new products that you show in this list? I guess that maybe goes more to sort of entirely new products like the child car seats, with the sort of iterations that you talked about of the bestsellers being sort of launched broadly directly. Is that a fair assumption or...

[Mattias Ankarberg, executive]

That's an interesting business-related question, Carl. And it is true that we will use that strategy for several of these products. Not for all. When we are -- I mean, for example, when we are refreshing a luggage family, that's easier for us to access. We already feel comfortable about the premium distribution. It's easier for access, a lot of it at the same time.

But what we will do for several of these products is what you described. And to give you maybe an example or 2, when we are bringing the car seats to the market, we think it's important that we start with the right distribution, the retail that is also a bit of a stakeholder in the market, so to speak. So we will partner with those first and allow them to -- or enable them to sell our products before we move it further to more distribution.

Another example is the Thule Outset, which is the world's tow bar-mounted tent, where we have had a lot more interest actually so far than we are able to produce for next year. So for that reason, we need to limit the distribution. So we will do it when we think it makes sense or when we need to ramp up production capacity over time.

[Carl Deijenberg, analyst]

Okay, very well. And maybe following up on that, you talked about the Epos carrier previously, and that obviously seems to have been a quite significant success for you this year. And I just wanted to ask, and I'm maybe not expecting a material answer on it, but would it be any way sort of possible to quantify sort of the contribution here in Q2 and in Q3 from Epos isolated? How much has that contributed to the sales in rough terms?

[Mattias Ankarberg, executive]

I'll ask a lot of understanding for that. We would love to have that specific number, which unfortunately, we will not provide. We will keep the reporting structures we've done previously. But we can say that it's been significant for us. And it's also a product which is pretty sweet spot in many sense. It is in bike carrier, which is big for us. It is a premium where we are at our best, and it comes with real innovations. So I think it's been a really great example of sort of materially adding to growth in a big category for us. But unfortunately, I will not share the exact numbers.

[Carl Deijenberg, analyst]

Yes, yes, yes. Understood. And maybe just finally from my side, on this list that you're sharing on Slide 10. You obviously commented on that some of these are already bestsellers sort of iterations that you're launching. But are any of these that you would sort of highlight that you see having such potential as, obviously, as the Epos have shown you this year?

[Mattias Ankarberg, executive]

Well, bike carriers is, by far, the biggest category. So -- and bike carriers in Europe is bigger than Americas, as you are aware. So Epos, it's both the biggest category and the biggest market. So I think the honest answer is that there's not a single one, which is exactly up to that level.

But there are several that would be in that range, I would say. So Thule Verse is the best-selling U.S. -- replacing sort of the best selling U.S. bike carrier, which we have high hopes for. I would like to call out also the Thule Chariot, which is a big and important product for us, when we come with basically a better product across a number of features that's been very well received. And then, of course, roof boxes, the Thule Motion next generation is also going to be good for us.

So there are a couple of biggies here, maybe not up to the Thule Epos level. Maybe there were -- maybe they will surprise us positively, Jonas, but there are some important products and best-selling products that will get new generations or new versions next year.

[Operator]

Our next question today is from Adela Dashian from Jefferies.

[Adela Dashian, analyst]

Just following up on the questions earlier about current market dynamics and how that's expected to impact your results going forward. We keep seeing the weak signals from some of the big retailers and then the one big e-tailer filing for insolvency. And I do understand that you have a very broad and diversified customer base, so that supports you to some extent. But then as you look at the expected development of bike-related products into next year, how confident are you in your current ability to keep this recovery going now when inventory levels have normalized and you have a weaker consumer?

[Mattias Ankarberg, executive]

Thank you. A multifaceted question, we'll try to give our best answer. I think if you look at the dynamics of that or the components of that question, so to speak, what is clear is that we feel very strongly, first of all, about our own offer. We talked about the Epos just recently. We are coming with Thule Verse next year. We feel we are -- have a very strong portfolio in general on bike-related products. So -- and we're making it even better. So we are happy with that.

Secondly, if you talk about inventory situation at bike retail, I think 2 bullets below that message. First one is that, yes, for many, the inventory levels is a little high in general. But the good news for us for Thule products and premium products, the inventory level is healthy. It is in Europe, and it is with the big retail chains in America. So there, we also have a good situation. And then lastly, I mean, the consumer demand. And of course, here, we don't have a crystal ball, but we do see good long-term trends for bike. And we do see now in this quarter when the inventory levels have been more healthy, that we do see good growth again.

So lastly, I would say there are comparables. And we know that for the first part -- first half of '23, bike-related products were not selling as we would have hoped before due to inventory issues. So that means comparables are easier for bike-related products during the first half of next year. So overall, we feel clearly optimistic about the opportunities in bike-related products going into 2024.

[Adela Dashian, analyst]

All right. Got it. And then moving gears to your strategy as the new CEO. I do appreciate the comments about prioritizing direct-to-consumer, and I don't think that's too surprising given your background. But maybe if you could give us some more color on how impactful that initiative will be and if we should expect your own sales channels to represent the significant share of sales going forward. Or will retailers and distributors still take majority?

[Mattias Ankarberg, executive]

Happy to. Let me first say that having been on the Board for 5 years, I have, of course, been part of many of the decisions and the discussions that have been Thule's strategy during these years. So I think Thule is a great company, has developed very well, and I think there are clear strength here that we should continue to build on. I think it's almost strange to think otherwise given my background.

I'd really like to call out the strength within product development and our ability to bring innovation and sort of lead the market in the categories where we are strong. I really think this is the foundation of our strategy. We are investing long term even if the market has a bit of headwind in that category or a year or so, we're still thinking long-term developing innovation. So that will be the #1 priority also going forward. Let's just be clear about that.

Then I do -- to answer your question, that we do see opportunities within both selling and communicating more directly with the consumer. We are a product-driven company, but we do see that -- and I see that across categories also outside Thule. There are -- when there are -- when the brands have fans, and I do believe Thule have a lot of fans, customers actually want to both shop from and communicate with the brand directly. And here, I think we have more opportunities.

We will definitely work on rolling out and improving our D2C offer, which is clearly one. But I also think just communicating and being more present with the consumer, we see several examples of that being also positive. So I don't think we should expect that Thule will be a very high-share D2C company, but we should expect that it will clearly grow from the levels it is today. And we could also expect that having more direct communication with the consumers will help us to introduce, for example, new product categories.

[Adela Dashian, analyst]

Great. And then just finally on your other big priority right now, which is continuing to launch new product categories and also developing new products. How do you view that in the current environment? Should we perceive it as a risk or an opportunity when maybe some of your competitors are pulling back on investments? How do you think about that?

[Mattias Ankarberg, executive]

We think about that as an opportunity, actually. I mean it's really comforting and positive to see that even in this quarter where the market is tough, we see that new Thule products really performed. We talked about Thule Epos. It was the same for our refreshed bags assortment, which is the same in child bike seats, for example. So we see that -- I mean we operate in premium where people are willing to pay a bit more for quality products. Maybe have less of an impact of a tougher macro, I guess that's up for debate.

But anyway, we see that new products work. So we see that as an opportunity to, of course, drive growth for next year. We will probably drive more growth if the market had a tailwind, but still so. And then secondly, we would like to be long term about things. Some of these product development cycles are multiyear cycles. And we are -- happen to be in the fortunate situation to be a profitable company. We generate a lot of cash, and we can continue to invest for the long term even if there is a little bit of a bump in the road in the market for a year or 2. So both as an opportunity and a long-term thinking, that's where we continue.

[Operator]

Our next question is from Mats Liss from Kepler Cheuvreux.

They have removed their question. So I'll move on to the next question. Our next question is from Karri Rinta from SEB.

[Karri Rinta, analyst]

Yes. Karri Rinta from Handelsbanken. I wanted to expand on Adela's question on direct-to-consumer and, Mattias, your comment about increased communications. So how should we think about the selling expenses for the next few years? Because I can see that you've had a record year in terms of new product launches, but at the same time, your selling expenses are pretty much flat compared to last year. So do you expect selling expenses to increase both in absolute terms and as a percentage of sales in the coming years and then maybe few years down the road, that will then pay back in higher gross margins when direct-to-consumer has reached a higher level? Or how should we model these numbers in the next few years?

[Mattias Ankarberg, executive]

I think if you think about it, I think you should think about it in a few different areas. So firstly, selling expenses has gone up and will continue to go up mainly because we are driving into new categories. Of course, that costs money. And then, of course, that is outside the R&D part, which we talked about before in terms of SG&A. In terms of the -- which I guess is what your question is more alluding to is more consumer-oriented or the direct-to-consumer approach, my experience is that you can do quite a lot with quite limited resources, and that's where we will start to do.

We already have a DTC setup. We would roll it out. It will cost a little bit more, but we can work on things like social media and partner with retailers to be present at events and things like this, so with fairly limited amounts of money. So that will be the route that we will take. But then of course, over time, Karri, to your point, we hope that we will build a stronger link directly to the consumer, have a higher share of DTC. That will cost a bit of money, but that should also be reflected in both sales growth and gross margin.

[Karri Rinta, analyst]

All right. And then maybe a few words about Germany because that is your largest market in terms of individual country. And you said that I think you are the only company so far that has commented on Germany in a positive fashion in the third quarter. So is it easy comparables from last year? Or do Germans tend to be early adopters and they have been sort of embracing your new products? And so what is explaining the strong momentum that we have had in Germany? And how sustainable is that?

[Mattias Ankarberg, executive]

Maybe they are particularly interested in premium quality Thule products. To be honest, I haven't spent much time reflecting on other companies' performance in Germany in the last quarter. What I see is that we have had good progress or good momentum in our core categories. So bike-related, for example, Germany is our biggest market. To your point, bike carriers, our biggest category, we see a very good growth there. So I think you have quite a good portion of the answer there. And then in general, I would say we continue to see solid performance in Germany also across other categories. So actually, I don't have much reflections on other companies' performance in Germany, but we are happy about the performance.

[Operator]

Our next question is from Andreas Lundberg from SEB.

[Andreas Lundberg, analyst]

Can you hear me?

[Mattias Ankarberg, executive]

Yes.

[Andreas Lundberg, analyst]

Cool. Gross margins, Jonas, you talked about key drivers there in the third quarter, and you're around high levels. What do you see for these drivers going forward into 2024 and also if you take the expected product mix into account?

[Jonas Lindqvist, executive]

Yes. the driver, it's transportation cost that was boost during COVID. We are back to levels before the pandemic, and we don't see any major increases going forward regarding transportation. Normally, we don't even talk about transportation as part of our cost, but we had to do it during the pandemic, especially the later part of the pandemic. So we don't see that coming back up. And when it look -- when we look at material costs, that will -- as we can see now, it's on its way down. We don't see any dramatic increases there either, or rather, we see continued pressure on prices like aluminum, plastic and, to some extent, steel as well going forward. So we don't see that part change either.

When it comes to the mix between the product groups, I think it's very difficult to say, like Mattias has mentioned already, to say when it -- these will change. It's more a question of the market sentiment. But in the short term, I think there is not going to be a huge change also in the product mix.

[Andreas Lundberg, analyst]

Cool. And then what is the unutilization of capacity, I mean, factories? How you see that factor?

[Mattias Ankarberg, executive]

Mattias here. It is clear that we are not producing to full capacity, quite a bit from it. And of course, that is putting a drag on the gross margin. Over time, as we continue to grow, we will fix that situation, of course, and that would help the gross margin going forward. Depending on market situation, as Jonas alluded to, that can also help us for 2024. So that is an upside if we get the growth that we are hoping for.

[Andreas Lundberg, analyst]

And then lastly, on -- you talked about R&D to sales before. But could you perhaps give some flavor on the R&D in absolute numbers where you're heading into 2024?

[Mattias Ankarberg, executive]

Yes. We are at a level now where we -- we have some big projects that cost a lot of money. Of course, car seats is such a project where we are launching next year. So we will remain at a high level also next year in terms of absolute terms. But we don't see an increase from this level in money. We see a complete -- we see a need to -- we will complete the big project that we have going on. So we'll continue to be at the high level like that for 2024, specifically, to your question.

[Operator]

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

[Daniel Schmidt, analyst]

Just wanted to follow up a little bit on the discussion on the cost lines and especially COGS. And you talked about it, Mattias, just now in your comment when it comes to '24, depending on demand, you hope to have better sort of capacity utilization in '24. And that's, of course -- it would be nice. But also coming back to the investments that you've done in automization, shouldn't that sort of -- once you get that more normally utilized given the investment that you have done in the production, shouldn't that be sort of an extra kick?

[Mattias Ankarberg, executive]

Yes.

[Operator]

Our next question is from Mats Liss from Kepler Cheuvreux.

[Mats Liss, analyst]

Two questions, please. First, I guess you indicated you have all these product launches, I mean. Is this something that you plan to ramp up production for? Or are you already sort of ready to launch them? Could you say something about that?

[Mattias Ankarberg, executive]

Yes, happy to. In terms of capacity or structural setup, we don't need any further investments. We are ready to move into 2024. And then in terms of actual production starts for different products, of course, there's a whole number of launches here, and they started at various time points. Some have started already, and some will start during -- particularly in the first part of next year.

[Mats Liss, analyst]

Okay, great. And then maybe more philosophical one about M&A opportunities. And I guess in maybe slower economic conditions, even if it don't affect the premium segment, do you see opportunities to grow through acquisitions to sort of use opportunities popping up? Or is it more products and the similar strategy that remains the same, more bolt-on? That's all.

[Mattias Ankarberg, executive]

Well, I think, first of all, I'm a big fan of organic growth. So that is the foundation, and very product-led, product-driven growth, we talked a bit about earlier this call. So that is the sort of foundation. I like the bolt-on acquisition strategy that Thule has done previously. I mean we've seen some really good examples of the child bike seats, the rooftop tents, the Chariot. The multisport trailer is back. It's almost more than a decade ago. But the approach has been finding really great products that have traction, fits with Thule brand, get it into the Thule family, and we can both improve the product and provide global distribution.

So those opportunities we are interested in, and I actually think that the market environment is not hindering or sort of enabling it so much. It's more about finding the right opportunity. So we will keep our eyes open for that also in a more challenging market environment.

[Operator]

[Operator Instructions] Our next question is a follow-up from Carl Deijenberg from Carnegie.

[Carl Deijenberg, analyst]

Yes. I had a follow-up also, and that is with regards to pricing, you talked a little bit about some promotions here in certain markets in Q3. I recall that your price dynamics have been -- or that you've been raised -- raising prices subsequently throughout the pandemic. And I think previously, you've been quite clear that there will not be sort of downwards adjustment. That's at least what I recall. So I just wanted to hear sort of your view on the pricing dynamics going forward. Will the sort of new launches that you're talking about here coming into the market from next year be used as a way of sort of increasing prices, for example, through these iterations? Or what's your view and the feedback that you hear from customers around this?

[Mattias Ankarberg, executive]

Yes. It's an important topic. We have done a lot of price activities, of course, in the last couple of years. And we are, for sure, not seeing a need for decreasing prices in general. Having said that, we also are not pushing for a general price increase. What we do is, which is maybe what you alluded to, Carl, always see opportunities for increasing prices with new products. We see that new Thule products are well received, and the new features and elements that come out to our products, people are willing to pay for. So given the launch calendar for next year, which is very full, we will -- the new product will, of course, drive average price up for the company in total.

[Carl Deijenberg, analyst]

Okay. Very well. So you don't see or hear anything from sort of competitors pressuring prices given that the market dynamics have deteriorated slightly there. And that's nothing that you sort of [ decided ] back that you're hearing?

[Mattias Ankarberg, executive]

Well, we see in here a lot of things, and has been in that area. I think on the retail side, the promotional activity is quite high, to be honest. But we do see that -- we play particularly in the premium segment, and there, the pricing pressure is less, and we see that newness is performing. So we are positive and confident in that pricing situation that we have and also confident in the ability to increase average price through new products.

[Operator]

We have no further questions. So I'd like to hand back for any closing remarks.

[Mattias Ankarberg, executive]

Thank you very much, everybody, for joining this quarter's call. And have a great weekend and look forward to speaking to you again in a quarter's time.