Thule Group AB (publ) (THULE) Earnings Call Transcript & Summary

Thank you very much. Good morning, ladies and gentlemen. As was announced, it is a trading update, and what we're talking about here in this trading update is what has been happening in the bike retail sector as the third quarter has initiated. As you all will remember that when we did our 2022 Q2 report in July, we announced the fact that we saw some trends in the bike retailers with too much inventory of some low entry-level and mid-level products in general, both specifically on the bikes themselves, but also in various forms of bike gear. And we said that, that could potentially impact the situation for the product sales. This situation has clearly amplified as the quarter has started and we have seen markedly reduced sales versus the exceptionally strong record year in 2021, which is why we do this trading update now. So logically, what is key for us is, of course, then to look at the situation, what it means short term and what we believe it could potentially impact in the mid- and longer-term. First of all, I think what is key to repeat is that we do believe very much so that the long ongoing positive trends for bike as a means of transport for commuting and as a means for having fun and recreation is definitely positive long-term trends. There is more investments being done in infrastructure for bike commuting than ever. There are more investments being done in mountain bike parts, mountain bike trails and other activities than ever. There is a strong interest in activities and events and general consumer participation is high in these categories. But what we are seeing is a combination, in our view, of 2 very obvious bullwhip effects hitting at different times and therefore, creating an extreme comparative period. As you will most likely remember, we communicated throughout 2021 that we saw a very positive boosted effect of the pandemic on our sales. With biking being a key part of what the Thule Group does, the bike sector's fast growth and the bike demand was a key contributor to our fantastic record year in 2021. In fact, in 2021, we ended the year with half of our sales being bike-related products. We sell bike-related products in all our 4 product categories that we present. So in reality, it of course, helped all 4. But if you look at the share of sales, it is clearly the case that the 2 big categories of Sport&Cargo Carriers and Juvenile & Pet, we previously called Juvenile & Pet, Active with Kids, both those 2 categories, which are our by far best high gross margin categories, have the highest share of bike-related products. In fact, in Juvenile & Pet, roughly a bit more than 2/3 of our sales is bike related as we are the global market leader in bike trailers and one of the biggest players in child bike seats. And in Sport&Cargo Carriers bike-related products, the bike carriers for your cars stand for more than half of our sales in 2021. So as an undisputed market leader in these categories and with a very high share and with a very extreme growth in 2021, we noted already in our quarterly report in 2021 that the second half of 2021 was helped significantly by the fact that retail were restocking after long lead times had caused a lack of availability and the huge demand driving retailers to bring in more products. We then also communicated throughout the second half of 2021 that we, having our plans close to the market and a strong financial situation, were more capable than our competition in capturing that market demand upside by quicker ramping up, a show of strength in our flexibility, in our operational model, and our capability of ramping up fast and ramping down fast. Therefore, we had an extremely positive second half of the year. We also started, as we announced after the first quarter report, on a very strong note in the bike retail sector sales in 2022 first quarter. So overall, we had 3 extreme quarters. If you looked at quarter 3, historically, bike-related products, which normally then are coming to their low season, because bike-related products are mostly a spring and early summer sales product, but bike-related product for us was, in pre-pandemic times, roughly 1/3 of our sales. In 2021, it rose to half of our sales. So a huge growth with finally catching up with some of the pent-up demand and with retailers being very optimistic of future consumer demand. What was clear was that consumers were buying more product, but not as much more as what was happening for our sales, partly because we were winning market share and partly because retailers were stocking it back up again. What we now expect in 2022 quarter 3 is that bike-related products will only make up 1/4 of our sales. So we are seeing a significant market drop in purchases of our bike-related products. The reason is now the bullwhip is hitting the other way. If you look at Google Search trends or consumer visits to stores, there is a lower level than in the peak Q3 2021, but not that markedly as the purchases from the bike retail sector is going down. And the reason is clearly the fact that after having them not being able to fully meet the demand during 2021, bike retailers were very optimistic about the 2022 season. With the bike retail sector as a whole having also seen extensive prolongation of lead times of their core product, the bikes themselves, they were now needing to speculate. Historically, bikes had lead times of anything up to 6 to 9 months, but if you looked at it for a period, many bikes had all of a sudden lead times of more than a year out, with the pure shipment time extending to more than 3, 4 months and then with demand issues in the supply chain from the manufacturers of the bikes leading to extremely long lead times. That means that what the bike retail sector has been receiving over the last 4 to 5 months have been products that they bought or ordered in the peak of the pandemic boosted biking category. So that means, over a few months, when consumer demand has returned to a more normal level than in the extreme record year 2021, they have been receiving very significant amount of stock. One of the problem with that inventory they have been receiving is a little bit during the pandemic they could sell any bike they had in store, because retailers were telling the consumer that came into store, "I only can offer you these bikes, but nobody else can offer any other bike either. So if you want a bike, grab this one." And consumers were okay with doing that in '21, desiring to come out and do the biking and feeling that if they didn't buy the bikes that were in the shops, they wouldn't get the bike. Now that feeling from consumers is different. As you're all aware, consumers are more cautious with their spending and now a consumer entering into bike shop wants the right product, the one they really want, the right setup, the right gears, the right look, the right whole package. They will, therefore, say no if somebody offers a mediocre B or C product. What happened was that when then the bike brands and the bike gear brands started to catch up with capacity, the retailers who were quite gone home, ordered many brands of products. And so we found ourselves during the '22 part or the first half of the year seeing a significant increase in what we would consider B and C brand level of competitive products in store. The problem that we now face is that with retailers having far too much of B and C level things in store and being challenged with a cash flow situation having received those products and with a more selective consumer entering the stores and more cautious consumer, the bike retailers are now trying to focus on selling out the B and C products rather than trying to serve at times consumers with the best product. Therefore, we have an issue where we see, as I said, market reductions in orders of our products. We believe that this will continue to impact throughout the rest of the year and into the first quarter and in 2023, and only really be possible to get a better inventory level out in the bike retail sector when the season of 2023 starts in the spring of 2023. And therefore, it will impact our sales. I know I will be getting a lot of follow-up question on exactly how much. This is too early to tell. But as I said, in 2021, 50% of our sales in quarter 3 were bike-related. We believe it will be only a 1/4 in 2022 quarter 3. If you look at quarter 4, in historical terms, which is the lowest season for bike product, normally 1/5 of our total sales is bike-related. But in 2021, it was 1/3. So you realize that we're facing some extreme comps. And those comps we will not be able to measure up to. The impact means that we will see both a drop in sales and also a drop in profitability levels. Because as we have previously communicated, the 2 categories of Sport&Cargo Carriers and Juvenile & Pet are our highest average gross margin categories. And within those categories, the bike-related products are the highest margin performers. So we will see an impact in 2 ways. What we have decided to do, and I think this is the most important message to you as analysts and investors, is we are not changing our long-term plans. As you are aware, after our Capital Markets Day earlier this year in May, we have very ambitious plans to enter into new product categories and to drive growth as we've done with great new product innovation. We will not hold back on those. That also means we have the highest spend we've ever had on product development here in 2022 Q3, and we'll continue to have that in '24 and beyond. It also means that we have hired and we will continue to step up in our sales channel and in our marketing channel for those new categories that we are about to enter, because we are convinced that the bike sector will regain its momentum with strong underlying long-term trends, and we are convinced that the growth that we will be able to achieve in these new categories are key for meeting the long-term financial targets. We are, therefore, very calm in our long-term financial goals, and we are not changing our long-term strategy in any way. I'm also happy to announce that we were participating at the world's biggest children's fair or children's product fair, Kind and Jugend in Cologne in Germany this week and weekend, where we introduced retail for real our new entry into car seats with very positive reception from the market. That means we are continuing to build out our plans to handle these new products, we are investing in our sales and marketing efforts, and we will continue to be pushing on our products. As always, the Thule Group has proven to be very flexible, which means that we will, of course, not do things from a capacity need if we don't need to. We have utilized the flexibility we have in our supply chain model with a partial fixed workforce for Thule, a temporary workforce of Thule Fab and a temporary workforce of outside agency by reducing the outside agency to 0, actually at the moment, to handle what is less demand at the short term. So overall, there will be impact on our finances. It's too early to tell exactly how much. Our long-term strategy sits firm because we are convinced that what we are seeing now is a combination of 2 bullwhip effects in big bike retail. And with that, I open up the floor for questions.

[Operator Instructions] Our first question today comes from the line of Mats Liss from Kepler Cheuvreux.

Just a couple of them. And I mean the inventory level said during the third quarter seems to have continued up. And then again, you mentioned you have a flexible production. And then again, you mentioned that last year you added 50% bike-related products, this year it's 25%. Should we expect a substantial increase in inventories, I guess, for this type of gear? And how will it sort of -- will it have any impact on your cash flow and maybe gearing going forward and potential to continue to distribute dividends as previously?

So first question, inventory buildup. As you will remember, Mats, we said during late last year and the beginning of this year that we had a plan to reduce our inventories during the summer. So we will not see it increase, but the reduction that we had planned isn't taking place, so you will not see an increase of inventory, because we have already acted and we were planning, as we had communicated, to actually reduce it quite significantly, but the reduction won't be taking place.

Great. So don't have to worry about that. And the flexibility now and -- well, you mentioned that sales of bike-related products is about 1/4 this year, that's substantial sales decline, I guess, and could you say something about the fixed cost absorption in this quarter compared to last year? And maybe the average then in margins. Should we be very concerned about this. I mean last year, you had a 24% margin. I guess you have the 20% target. Should we expect you to sort of end up below 20%? And again, I mean, it seems to be a reasonable guess.

That is definitely a reasonable guess. You're absolutely right, Mats. As we have communicated throughout the last few years that one of the key drivers for our successful margin improvement has been an economies of scale -- both in economies of scale on our production overhead, of course, but also in economies of scale of a very scalable back end of the business. If we then see significant revenue drops of our highest margin product, you will clearly see an impact both on our production overhead coverage and our SG&A coverage. Especially, as I said, our belief is, as a long-term company, being around for more than 80 years, I've been in the company for more than 17, we don't run this company on a quarterly basis. We are convinced that the bike sector will regain momentum. We won't be making stupid reductions or incorrect things that would hurt us in the long run. We are diligent, of course, with spend, so we're not going to do things that we don't need to. But generally, we are not pulling back on all those efforts that we're doing to be a successful company for the future. That means that the top line drop of the highest-margin product will have a clear effect, and we will go clearly below what we were in the past quarters in the comp period.

Okay. Great. And just finally, about competition. Do you see -- well, do you experience or do you expect them to have a similar situation as you? I mean, having too high inventory levels and that you could see a...

I think they have the worst situation. To be honest, we have seen the first bankruptcies came just some weeks ago in one U.S. competitor, where clearly, they have less of flexibility and clearly lower margins normally, and they are now facing this situation with very long lead times to their suppliers that are making finished products in China that they are still seeing it arriving on their doorsteps while retailers are pulling the hand break completely. So if anything, our competition is more exposed to these very rapid bullwhip effects. And so it's never fun, but at least we're doing less badly than others are affected by that.

And just finally, I guess your financial position is strong going into this and you see opportunities to go through, well, acquisition now when competitors maybe are in a worse shape and you see opportunities there?

I would be honest to say, within those categories where we are the undisputed global market leader, bike carriers and bike trailers, we have so much better product and so strong position that it doesn't make sense to actually acquire anybody. So no, it won't open up in those sectors any specific acquisition.

The next question today comes from the line of Karri Rinta from SHB.

I missed the first part of the question. So apologies if I ask something that you already have commented. But these references to bike retailers and their high inventories of low- to mid-priced product. But what's your sense of their inventory of your products? What's the level compared to normal levels?

So if you look at it, we have all the premium product in the Thule range. So you talk about the more expensive Thule Chariot bike trailers, the more expensive Thule EasyFold bike carriers, et cetera, they have normal levels. But also of our product at the lower price points, they have, which is the mid-price point market-wise, but our lowest ones, they have more of those than we would like and they would like.

Okay. Good. That's helpful. Then the comments that you made about bike related and how much of your sales that was in Q3 compared to last year, that suggests that your sales in that category were down more than 50% year-on-year and probably more so in volume. What's your sense of their sell out? And what kind of sort of run rate are you seeing in your own direct-to-consumer channel sort of trying to get a sense of what the consumer purchasing levels are?

Yes. If you take our direct-to-consumer, we, of course, need to compare with only the markets where we have been doing it for a few years because easy to forget that '21 was exceptional in many ways with a lack of demand and therefore, selling more in Q3 catching up, because we have to -- as we always admit that you do not go to a bike retailer or you do not commit to a bike trail because you love bike trail, that you committed because you're biking and you bought a bike or you bought bikes for the family and you intend to do something. When those bikes became available later in the year in Q3 that helped ourselves also in a direct to consumer. So it's a little bit -- the best comparison is there for the market where we were doing direct-to-consumer already before the pandemic in the U.S. And if you look at that, we're actually performing at a strong level. I think that partly is though due to the fact that we mostly sell premium products. So a little comment, we don't sell the lower end so much, because you can find that in other more basic stores. So I would say, if you look at bikes, it's better in sell-out than in 2019, it is not as good as in '21.

Okay. And then the -- I mean there's 2 parts to the story. One is this high inventories, but then there's, of course, this other part that you also referred to the weak consumer confidence and the upcoming recession. So first, can you remind us how your different categories performed in 2008 and '09? And of course, it's never exactly the same as it was in previous cycles. So what -- besides the inventories and besides the tender mix. So how should we think about the pure impact from weaker economy this time around?

Absolutely. So we didn't do anything in Active with Kids, so that I cannot compare for you, because we didn't do any product back then. But if you take Sport&Cargo carriers, which is still 2/3 of our business today, and it was a business I was running already back then, we grew those years. So we had growth in Sport&Cargo Carriers, we had growth in bike carriers, we had growth in roof racks throughout that period. And if we look at the only product category that we didn't grow in that period that we still have as part of our portfolio, it was the RV-related product. At the moment, we're still growing very nicely in RV-related products. And here it is because the bullwhip didn't happen, as you are keenly aware, Karri. I know you look at also the RV manufacturers that are stock listed, they have struggled to ramp up and meet demand, and they are still struggling. So there's still this pent-up demand for motor homes, which has meant that we can see that it's been more comparable, even if there was a huge demand in '21, they couldn't get the vehicles out. So you didn't see these extremes in comp periods. It's more flattened out. But the only category that did see, due to the financial situation of consumers, a decline and a downturn in '08 and '09 was RV products. And we always say that's because it's related to a very large purchase of vehicles since the consumer won't be installing the product themselves. It gets more associated with the acquisition of a large vehicle. So here, if we look at a tougher economy, and you took the word, Karri, recession, I didn't, but if we would speculate in your word, Karri, that there is going to be financially a tougher time, it is clear that the category that we would be more concerned about in a situation like that is the RV product due to the connection, the large financial commitment. At the moment, if you look at forecast from the industry, they're still quite bullish. I was crying wolf long before the pandemic and was wrong all the time that I felt that there might be a slowdown. We will have to see. We believe that there is some challenges, because if you don't get the vehicle now when you ordered it, and in the meantime your total financial situation changes, you might be considering, should I still be in this queue for getting a vehicle. That's the big question, I think, for us as well.

[Operator Instructions] Our next question today comes from the line of Andreas Lundberg from SEB.

Andreas Lundberg with SEB. You touched on RV-related products, but what about the other products you have in your portfolio? Can you give any comments on those ones?

Yes. So if we take Sport&Cargo Carriers first, which is our biggest category and a non-bike-related, we're seeing growth in the quarter. So we're performing well here. The big difference here why that is still happening is, of course, we didn't see the same pandemic boosted growth in 2021. It was growing nicely, but not nearly to the level of bikes. So we have a more, let's say, fair comp, and it's a continuous strong performance we've had for a number of years, and the rest of those Sport&Cargo Carriers had a normal growth rate. We then have our best performing category at the moment. As you would assume, it's Packs, Bags & Luggage because here it's the opposite effect. In '21, people were still not going back to universities, traveling and doing as much as they're doing at the moment. So that's the category where we have a very strong growth rate versus what then was a relatively weak comp in '21. And within Strollers, we are growing because we're slowly but surely becoming a bigger player. So there is not so much about comps or trends because, honestly, people were buying strollers at the same pace throughout the pandemic as they were before. So there our growth is related to the fact that we're just simply becoming a broader and better known player. And then in RV products, as I mentioned, we do have bike-related products in RV, and we can see that even there, there is a slow down for the bike related, because they're sitting on too many, being a little bit too optimistic on that as well. But the rest of our RV business continues to do well in the quarter.

And then lastly, on bike-related products. Are you concerned that there had been too much prebuying when you entered spring of '23, or are you comfortable that you can continue to grow from that time? Or how do you view that?

I think it's always the definition what prebuying is. We had this discussion also with the Board. If a retailer says, I want this product now. If you don't supply it, I will buy it from a B brand or a C brand, if that's you're competing with. We will always prefer to sell it rather than -- we said when we did the 2022 Q1 that we felt that bike retail -- we communicated that in conjunction with our quarter 1 report that bike retailers, unnecessarily so, with our very good availability of next-day deliveries and having ramped up our capabilities, were ordering more than they need to. So that was a communication combined with a very strong Q1 result, which was significantly above what we've ever had before. So '21 was, from that perspective, a pre-buy, not something that we needed actually, but it's better they buy from us than from somebody else. We were, therefore, as we communicated at that time, expecting to see a slower Q2 and especially a slower Q3 as the season normally is mostly Q2. So that was not a surprise. What is more amplified is how hard they're pulling on the handbrake now. That is clearly above and beyond what we expected.

Next up, we have a follow-up question from Mats Liss of Kepler Cheuvreux.

Yes. I will follow up there on -- I mean a lot of the raw material or the cost you use when you produce your products have come down quite a bit like aluminum. And so do you expect to see some impact of that in the second half or maybe next year?

Yes. Considering if you sell too little, which we honestly have to say we do within the bike retail, you're not going to see those positive effects, right, because it means that we are sitting, as you realize, when we talked about how much staff less we are and the fact that we are not growing our inventory levels, that it means that in practice, we're not going to see that positive effect. What it means, however, is that we will not need to increase prices in 2022 in the way -- in '23 for January in the ways we've had to do to compensate. And our market-based pricing approach will allow us to be smart about what the price situation will be with a lower material cost. But it will only, so to speak, start to pan out and roll out in '23, and then you need to be careful about -- I didn't expect there to be a Russian invasion of Ukraine this year, so I have to say, I couldn't promise that material prices will continue to be good in '23 and beyond. All indications at the moment, as you correctly point out, Mats, is that it will enable us not to need to raise prices in '23.

Great. And just about pricing. I mean, you have announced quite substantial price increases this year. I thought it was some 7%, 8% this year when the year started. And you also indicated that there would be price increases at the mid-year. Have you sort of experienced prebuying impact also that retailers try to stock up before the price increase, that's affecting your situation as well?

No, I would say that it's actually not due to our price increases, because they have been rather market-based and not surprised anybody, they have been very logical. And so what you can say is more that the reason that bike retailers now are seeing this extreme bullwhip effect is that they had these very much extended lead times. All those other lead times were twice as long as before. It was very difficult to forecast. I've never been so much wrong as I've been in the last 2.5, 3 years in forecasting. I think bike retailers have been even more wrong and have overreacted maybe a bit more. They're also buying from many brands and in some categories where they, therefore, were optimistic, they were needing to speculate maybe 1 year, 1.5 years out on some products. They were doing that speculation when it was the hottest adverse situation and they, therefore, went a bit too aggressive. What then tends to happen with a bullwhip effect is you get an opposite effect. Now they are far too pessimistic. That's life when you supply to retail. They tend to do that, I have to say, retailers. So the reality wasn't that it was triggered by ours or anybody else's price increases, it was triggered by their belief in the market.

[Operator Instructions]

As there doesn't seem to be any further questions, I would, therefore, propose that we conclude. And I want to remind you that we will have our normal quarterly report coming out, and that will be coming out on October 26. We are available, of course, for any follow-up questions, et cetera. And I also want to reiterate that our long-term belief on our strategy and our long-term financials holds very true. We have not changed our mind versus what we stated on reaching SEK 20 billion by 2030. And our long-term ambition of a 20% EBIT margin has not changed. We will see significant impact for the next 3 quarters to both sales and profitability. We are a very strong and flexible company that will manage that well and we'll continue to invest heavily to the entry into new product categories and launches of new products in the existing product categories. So with that, I thank you and wish you a great Monday.