Thule Group AB (publ)

Good morning, everybody, and welcome to this 2023 Q2 report for the Thule Group, which is also my final as a CEO, the 35th quarterly call since top listed and actually my 50th quarterly report I realized. Time flies when you're having fun. So let's go to the first slide. And when we look at the summary, of the second quarter, I think we can happily say that what we expect to happen has been happening throughout the quarter in terms of sales. So as you will remember, when we summarized the first quarter in late April, we also informed the market that we would have a slow start to the quarter, partly due to the high inventory levels in bike retail and partly due to a late bike season start due to weather. And that was true. We did have a weak first month in the quarter. April was clearly very weak. May got clearly better and June was strong. So in total, we end the quarter with a 15% decline currency adjusted. We're helped a little bit by currency, so it's only 9% down when it comes to reported currency, but 15% down currency adjusted. That is still 23% growth versus the pre-pandemic second quarter in 2019 currency adjusted. And as I said, the monthly trend is strongly positive. When we look at what makes me most happy in the quarter, it is our very strong gross margin at 43.6%. Not only was that a clear improvement versus last year, but it was also the strongest we've ever had. We have never historically had any quarter such a high gross margin. And that was, as you are aware and naturally can consider, done when we had very low production overhead absorption, because not only did we sell less, we continued to reduce our own inventory levels according to our plans. So the positive factors that made us deliver the best ever gross margin was, most importantly, as we already communicated in conjunction with the Q1 report, the mid-year 2022 price increases are still, of course, impacting us positively. We still see very significantly reduced freight costs. And what was very positive to see is the continued positive channel mix that we see in the quarter. I'm going to come back to a little bit of what we see in the growth of our direct-to-consumer, but there were a general positive channel. We still do have the negative economies of scale and there is still with reduced bike carrier sales versus historical past in the quarters, some negative product mix effect. However, some of the new products like the Thule Epos bike carrier on the image are coming in with good volumes, very strong sales of that product and at very good margins as being a new best in class product. What was also good, we kept our SG&A cost steady despite a very aggressive product development push as we continue to do. In fact, on a rolling 12-month basis, we are now up to 7.1% spend of sales on product development. So we're pushing very hard for the future growth and then to be able to still hold on to that same level, in fact, a small decrease, even when you look at it in constant currency, is strong, also considering some of those senior management changes impacting costs in the quarter. EBIT margin therefore landed at a very strong 23.5%, which was a little bit down versus the extremely strong 2022 second quarter, but a very strong result overall. and an EBIT of 711 million krona. As I mentioned, our inventory reductions are following to our plans and even slightly ahead, considering that some of that inventory value is also a currency effect. We are currently reducing inventories in line with the plans that we presented already last year. So a reduction of inventory of 308 million krona in the quarter. So a very good plan. followed there and a very strong cash flow as we have already communicated we would have throughout 2023 if we go to the next slide we can then see a little bit of the performance on a quarter by quarter basis and what goes on in our business and when when we look at the performance on a continuous basis it is easy to do the classical mistake to only compare with the previous year period that's why we're showing a few years because we've had as you are all aware some very weird swinging quarterly performances throughout the pandemic and also now then due to the bike inventory situation in the beginning of 23. So when we look at the start of the year, we saw a big gap versus 22 and we have to remind ourselves then that in 22 bike retailers were very, very optimistic in the beginning and ahead of the season ordering significant quantities after having had very good sales in 21 and many players then slightly or significantly overestimating how much they would need in the season. That impacted our start of the year. And now in the second quarter, as I mentioned, we were 15% down, currency adjusted versus 2022 Q2, but still 23% up. The second quarter was the second most difficult comp quarter. The first quarter was exceptionally challenging because we had a fantastic preseason sell-in. We saw some of that, especially at the beginning of the quarter in 2022 as well. So a difficult comp. And now we're coming with a very positive monthly trend with April being very weak, May being better and June being strong. And we're now facing, as you are aware, a very weak comp period in the third quarter where we saw the handbrake being pulled by the bike retailers in July and August last year. and therefore our profit warning that we did in September as a consequence, knowing that that would impact us for a number of quarters going forward. So now we're starting to see easy comps. I therefore urge you all not to get too excited that we will be beating our 22 results. I think it's more important to look at the continuous performance of 23 versus a more normal season pattern, which you can see in the yellow columns on the 2019 is a more normalized pattern of how our sales should pan out. So a very positive view on a strong second half of the year because bike retail is now back to a more normalized level and we will be seeing a much more normal performance on a seasonal basis. If we then go to slide four and look from a more regional perspective, you can see that the performance actually was relatively similar between the two big regions. But as always, there are some differences. If we take Europe and the rest of the world, then first, what was similar in the two regions was it started weak with bike retailers having stock still. That is applicable in both regions, so that has been exactly the same performance. What we see also is generally, as we already mentioned in conjunction with the Q1 report, is that generally in sporting cargo carriers, the retailers are cautious. They're not placing big orders. They're taking smaller orders with more frequency rather than aggressive bigger orders. That is also similar across the two regions. What starts to differ is, of course, a little bit the exposure we have due to historical reasons between the product categories. So as you are aware, in the biggest region, Europe and rest of the world, the RV product is a significant part of our business because we are the market leader in the niche categories we play. Here we have one further solid quarter thanks to that the motorhome manufacturers are still catching up with some of the order book backlogs they've had now for several years. And everybody in the motorhome industry is very much anticipating the big question mark that will be more clear in conjunction with the Caravan Salon in Dusseldorf in September is how many new orders will be filling into the system. What is clear, consumer interest is high in going with motorhomes and doing that flexible vacationing. But we also, it is clear at the same time that the cost of these vehicles have gone up significantly. And there is, of course, a concern with some of the inflationary pressures and higher interest rate logic of how many new orders that will be signed. I discussed in the last two, three quarters, the risk that people would be stepping out of line so that they had committed to buy a motor home some years ago. But when the cost went up and the backlog finally was starting to be Filled up that they would step out. That is not a pattern what we're seeing, which has been good for the industry and for Tula. But it will now be more of a question mark for the 24 season. How much new orders that are signed, so to speak, by the European motorhome manufacturers in conjunction with the caravans along. In juvenile and pet, which is also bigger in this region than it is in region America, thanks to our strong bike commuting trend with children in Europe, and it's specifically then the German market, Germanly Switzerland, so to speak, and the Benelux and the Nordics where people commute to kindergarten with their kids. That is a significant chunk. And here we're very happy to say that We saw an earlier normalization than in any other category in terms of the bike trailers where we are the European market leader. So already in Q2, we saw growth in our bike trailers in the region because there was an earlier normalization than there were some of the other bike related categories. which is also a sign that the trend that young parents want to bike commute with more and more commuting opportunities done in municipalities around the world with all the investments is definitely a trend that will continue. In the PaxPax and Duffel luggage category, it was the luggage and Duffel that were the best performing subcategories. From a regional market perspective, we saw France being our weakest of the bigger markets, And the main reason here is we have a few very large retail chains that are positioned slightly lower, some more mid-priced products. And they are still comparatively the most conservative and also sitting on slightly more inventory in the quarter than in other markets. The best performing markets were the UK and Poland. As I mentioned, direct-to-consumer, nice to see from a very small base in this region, but a very strong growth. And now in the quarter, it was 6% of sales. You have to remember that we do not ever consider to do the RV product sales direct-to-consumer because the consumer won't be buying those products that way. So as a share of the possible business, it's still growing very nicely. If you go to slide five and then look at region Americas, as I mentioned, many of the patterns are the same. So the picking up month over month is absolutely the same. The high inventory levels in bike retail at the beginning of the quarter, exactly the same. But then we, and also what is similar is this general cautiousness of placing large orders for sporting cargo carrier products, but with this lot of continuous smaller orders. What differs a lot is this exposure to RV products, where it's a significant category in Europe, while it's a tiny niche category for us in regional markets. And in this case, that was lucky because if we talk about the European motorhome markets being stable, by catching up with backlog. As I'm sure you've been reading a lot about the North American motor market was weak. And so we had a similar performance with our niche category in our new product. Within Packed Spice and Luggage, we took a decision some time ago, as you know, from years ago, but also specifically now some quarters ago that we had still in our legacy categories that we play in. Some OE business where we do direct business to business of other more simpler bag solutions. We decided to step out of this business and phase it out. That is impacting us quite significantly in this quarter and will impact also the next quarter. What is good about that is that that was very low margin business. So from a mixed point of view, it helps us from a mixed margin point of view. And it isn't the business we want to be in long-term, but from a sales perspective, it did hurt the Pax Pax and luggage category in Q2, and we'll do so partly in Q3 as well. What is going well is very similar to Europe. It's the luggage and duffel bags, especially that continues to grow nicely. From a geographic perspective in this region, the two big North American markets of the US and Canada had a similar performance while we strongly grew And it was nice to see some growth in Latin America. So here, clearly, Latin America, the better performing on the geographic spread. Here, direct-to-consumer continued to grow at very strong pace. And in the quarter in the region, it was now 16% of our sales. So as you understand from that, from a gross margin percentage point of view, the strong growth of direct-to-consumer, of course, continues to help us. If we go to slide six then and look a little bit more on what's going on in our business. In general, as I said, many patterns are similar across the regions and also patterns in terms of what's going on in our trending on things. So if you look at the financials on an operating working capital point of view, is the key message, the inventory reduction. Despite a currency effect of making the inventory being 186 million SEC higher purely due to currency, we are now seeing that planned reduction of inventory as we announced already late last year. In fact, we would be slightly ahead of plan if it wasn't for those currency effects. From an accounts receivable and an accounts payable, if you look at from a trending point of view, obviously, as we mentioned with a slow sales start in the beginning and then stronger and stronger, we see an accounts receivables going in the right direction. And what you can see is also key that on an accounts payable basis, we are still not buying a lot of product and components in. thanks to the fact that we still are planning to reduce our inventory also clearly throughout the third quarter of the year. So overall, I am happy with what we've been doing in terms of reducing the inventory. And that is what the key contributor to what we knew would be a very strong operational cash flow in the period. And as you see, a lower capex in the period than the previous period. but that is not just the previous year. We are in fact doing things over time to get back, as we said, after a heavy investment phase to a more normalized investment phase. If we go to slide seven and look at how the business unfolds, as I said, some strong positive trends and some good things happening. And when you look at what this company, first and foremost, does great is new products. So, of course, it's important for you to realize how many new products we are coming with in the 18-month period that started more or less from April this year. So we've already... This spring helping us, especially in the Q2, but will be helping us also throughout Q3 and 2024, is a number of key launches that have already taken place. You've seen the fantastic Thule approach rooftop tent. You've heard about our brilliant Thule Arcos rear or car box solution with very good energy efficiency. You've seen the very cool Thule Caprock premium lifestyle roof platform. And you will definitely be hearing a lot more over the coming years about world's best rear of car bike carriers. So we launched the European version of tow bar mounted in the second quarter. And now in the third quarter, we're going to start to see volumes also in North America for the hitch mounted version. Telepos has already won multiple awards and won also a gold award at a recent Eurobike event and is clearly already taking a clear place as the best in the market. We have also since we announced the Q1 report had a number of other trade introductions and We are seeing some of those that will be hitting sales already positively in the autumn. The Tulle Alex, the world's safest dog crate for the car trunk, is coming into market at the end of the third quarter and it's in the upper right corner of the image. I'm sure that will be a significant contribution. And at Eurobike, where we in June showed all our new bike-related products, we also launched a second dog transport product, the Tula Beksi dog bike treaders, which is shown in the top left image. So with those two, we'll start to have two big products in dog. The Tula Beksi comes at the beginning of next year, while the Tula Alex dog crate comes in the end of the third quarter. We have also in the autumn launches of a number of very nice bag collections that I feel very strongly about. We are hitting it spot on in terms of design and recyclability and sustainability on those bags. And styling is, as I've joked a few times, it's always good when my daughters and their boyfriends steal the bags that I have at home for testing. And so it looks very, very positive. But what is also important to know is that we sometimes do more money than anything else with an upgraded generation of a key volume product. And at Eurobike, we launched Thule Chariot Generation 3. So Thule Chariot is the world's most sold premium bike trailer for children. And at Eurobike, we launched an even better version. with the same iconic design and look, but with multitude of big improvements that got raving reviews from all our importers. As I mentioned, we already saw bike trailer sales starting to grow in Q2 and with the trend that is in the market and this fantastic new product, I see very positively of this high volume product having a significant impact in 2024 as it hits the market at the beginning of 24. And what is also nice to say is that when Mattias Ankerberg, who takes over as CEO, will be doing the quarter three update, he's going to have a lot of cool news to tell you about in that quarter three update as well, because there are some still upcoming fairs and events. And as we've always said, we don't tell you investors before we tell the retailers and consumers that will buy it. But at those upcoming later in this quarter, quarter then events we will be announcing some other key volume driving product launches for next year so not just niche little product launches but some serious volume launches with brilliant new products so we feel extremely strong about our product launch assortment coming for the coming 18 months if we go to slide eight look at what this of course means it's a not always completely free of charge to drive for future growth and when you do that you will need to invest and spend but it keeps the focus going in the long run so our focus for the second half is a strong growth focus strategy that remains unchanged we are pushing new products and new solutions to the market for a good reason. We are convinced we will be able to drive growth. From a pricing point of view, we are keeping the prices stable after those multiple increases we did in 21 and 22. So it will be by new units, new volumes that we will generate top-line growth coming into the near future. We are also doing that by continuing to strengthen the very strong global lifestyle brand to look We are going to see now, despite doing a second or continuous phase of inventory reduction also in Q3, we will now start to see, as we produce more, the possibility to utilize a very well-invested backend to drive cost-efficient growth in the coming quarters. And we are continuing to boost our direct-to-consumer sales, and that will, of course, drive a margin improvement as well. But it's not only around direct consumer sales. Our big improvements that are noticed by retailers as well is on, for example, our Tiddler.com solution and our other merchandise solution is to generally drive growth across all channels. The product portfolio push I've already talked about. The fact is that we will continue with extremely lower levels of production staffing throughout 2023 Q3. because we are reducing inventory levels and it will only be when we start to be into 2024, we will see a more normalized levels. We have been continuing our investments as you are aware of high heavy investments in automation and efficiency gains for our plants. So when the volume comes, I feel very confident we will be able to meet those capacity demands and we will be able to do so in a very efficient manner. And the strong cash generation will continue throughout the year, which is always good because that enables us the freedom to spend where we should. So all of that is the focus going forward. A reminder is, of course, also that we will now face some very easy comps, especially Q3 is very easy and Q4 is also relatively easy. Shouldn't get too carried away internally or with investors because we should be beating and will be beating those quarters. But it's nice to see that we have that momentum. And we have to remind ourselves, the world is the most uncertain in many ways. There's many things going wrong. So our ability that we've proven once and again to be flexible will be key. And we have proven that throughout recent years. If we go to slide nine, one of the questions we've been getting quite a lot from investors over the last few months or since beginning of the year has been around how much are you really spending on product development and when will it normalize and how much have you been spending on CapEx and how will that normalize? So looking a bit on those two things. You are completely correct that we have had an extremely aggressive product development push. That was already planned. When we then saw bike retail slowing in sales and us seeing them reduce sales, we were faced with the choice of pulling back on some very good product development initiatives that we were sure would drive future growth or take, so to speak, the rolling 12-month hit of increasing our R&D spending. We correctly, I'm convinced, chose to be pushing very aggressively for future growth and future performance with fantastic new products to hit the market. That means with the reduced sales we've been seeing as retailers were selling down inventory, that in fact, on a rolling 12-month basis, we are now up to 7.1% of sales in product development. Now, I won't be running this company in the future, and you all know that I'm slightly a glorified product developer and product manager, but even I would not consider 7.1% at the right level for Thule in the future. I think, as I've said a few other times, that the level should be normalizing somewhere in the range of slightly above five over time. So that, of course, will happen for two reasons. One, this has been an extreme push with loads of new products. But two, we will see no doubt a pickup on rolling 12-month sales as we're now facing several quarters in a row with very weak comps. Q3, Q4 in 2022 and Q1 especially, but partly also Q2 in 2023 have been weak. So the rolling 12-month sales will be stronger, but also the absolute spend will be more normalizing. So we will be going down from these extremely high levels. When we do that, we will also do that partly because once you start actually selling in new categories, and as I said, we start selling dog products at the end of Q3, beginning of Q4, you start to see volumes hitting. And when you roll into 24, you will therefore see a natural offset to our dog spending, so to speak. And the same will happen for the car seats in the second half of 24 and beyond. You will get a offsetting of actually doing revenues in categories where we have been hitting the P&L with heavy development spend. From a CapEx perspective, we told you several times throughout the autumn of 20 and 21 and 22 that you would be facing, or we were facing, a number of years, three, we in fact said, of significantly higher than average CapEx revenues. 21 and 22 partly also because we did very large investments in a completely new development facility that some of you saw and visited at our capital markets day in 22 but also a fantastic state of art new test center so those two above and beyond investments that we don't do very often came at the same time as we needed to do significant capacity investment, having gone from 7 billion second sales to 10 billion in a very rapid rise. And then on top, we did investments to be able to optimize more in some of our high volume products. And then finally, investment to prepare for production insights in our own sites of these new categories. As you can see on the rolling 12, we are now starting to normalize. So we are already on a clear downward trend and I'm sure from 24 and on to a normalized slightly above 2% type of capex spend in the group. If we then go to the final slide, slide 10, and look at something, I take this opportunity, 35th time I do this. So I've always been and will continue to be a forward-looking person. But sometimes when you're told to leave, you can also look a bit backwards. I've taken the liberty to do a bit of backwards looking. And I can tell you that I'm a very proud person in what we have achieved, my colleagues and myself, over the 17 years I've been at the company. And having been a CEO since 2010, I can strongly say that Thule is today a stronger company in every single aspect than it was when I took over. We have successfully divested a number of underperforming car industry sub-supply divisions. Most of them were actually divested even before we got stock listed and a few after. We've changed from a complete wholesaler model to retail oriented sales. And as you've seen in our last few quarters, an exciting quick growth of our D2C journey. We have no doubt a true world-class product development with more design and test awards than any other player in our sector. We have a modern and very well-invested supply chain with capacity expansion opportunities. And what is in these days so important, we have a true sustainability mindset with very high ambitions, both science-based targets and net zero, and also a very strong track record on actually delivering those plans, not just talking about them. What I'm extremely proud of is also that Tudula is today a very well established global lifestyle brand. I noticed that wherever I travel in the world and the difference is phenomenal versus when I go back to 2010 traveling the world. Happy to say we've done this while delivering very strong financial results and also with very big dividends paid to you investors if we include The October dividend payment, in fact, we will have paid in dividends as much as our total market cap was when we got listed in 2014, 7 billion. We've also, what I think is very important now, as we have a new CEO taking over, we've had very strong internal people growth. And we have a lot of internal promotions of people that have done a phenomenal job. We have some people that have for various reasons left and have had fantastic and are having fantastic careers at other companies. And we are today a very attractive employer in all our markets. You have seen and heard about all the new great products coming the next two years. And what is good is they're coming in sectors with long-term positive market trends because it's always easier to sail with the wind in your back. So with all of that, I feel very proud. But we know in the end, especially you analysts and investors will judge a CEO mostly in the end, almost solely on how the investment has grown under my or their management. So I have to say I'm also proud there. We have created a fantastic return on investment, both as an unlisted entity and since 2014 with an impressive share price development as a public company. So a little bit as I joke with my friends being an ex-soccer player, it feels like in the 80th minute we get a penalty and you're looking up because there is a substitution. You are surprised that it's your number coming up on that board and You look around and you go like, okay. Then you go around, realize, yeah, they decided, they replaced you. You go on, pat the back of all your teammates, pump them up. You go out, you take off your captain's bundle and you give it to the new guy. You pep him up and you say, you go in and put that penalty in. Let's make a fantastic future for this company. So in closing, I want to give a huge thank you because I do know that there is a lot of colleagues that are investors as well in the company and are listening into this call. I want to give a huge thank you to all my fantastic colleagues. There is a great team at Thule and it's been a pure pleasure with working with you for the 17 years I've been here. I am also convinced that with your help, Mattias will, in the same way, contribute to the successful future Kuzzle journey. So I wish you all the best. And although I normally don't single out persons, I want to do one singling out now because it is an investor and analyst call. I want to thank specifically Fredrik Erlandson, our head of IR, who is a brilliant IR person. I know you know that as investors and analysts. but who has made my life extremely easy to work with all of you investors and analysts. I send him a special thanks also for being a very fun person to work with. And with that, we open up for questions.

Thank you. Our first question is from Daniel Smith from Dancy Bank. Please go ahead.

Yes, thank you. Good morning, Magnus. A couple of questions from me. And starting maybe with sort of tagging on the commentary that you had when it comes to bike retailers' inventories, which has been a big, big, big focus over the past 12 months and also during the spring. And you're saying that you're more or less seeing a normalization of those bike retailers' inventories as we go into the second half of this year. Could you shed some more light on what you've seen? I think you mentioned that trailers are ahead of carriers and so on, but also from a geographical perspective and also maybe on a bit more product perspective, what you're seeing.