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

Welcome to the Thule Pre-Q3 Update [Operator Instructions] Now I will hand the conference over to the CEO and President, Mattias Ankarberg; and CFO, Toby Lawton. Please go ahead.

Thank you very much, and welcome, everybody, to this call. As usual, we will have a short presentation and then followed by Q&A. I will start with a bit of a business update and then talk with add some financial perspectives before we then turn into Q&A. So yes, if we start with the -- start where we left off at the Q2 call. As you are aware, we have set a clear direction going forward. And at the end of last year, we both put new financial targets in place, but also a plan to reach them. The whole plan builds on us using our product helping capabilities and other efforts still what we call champion product categories, where we can be market leaders and innovate more than competition and also to drive efficiency gains. And it is positive for us that when we look back to the second quarter, but also the first half year that we see that our efforts are given results. We have seen organic growth and profitability improvements for both the first 2 quarters of the year. Organic growth is up 3% for the first half and EBIT margin almost 1.5 percentage points. And in times of a still tough market, it's good to see that we are making progress in the right direction, even, of course, we want -- there's more work to be done before we reach our targets. I think beyond the overall numbers, we were particularly pleased to see where the growth was coming from. In Q2, we did see growth in all the four product areas we report, but particularly the highest growth in the product area Active with Kids and Dogs where we also have the highest growth ambition, which has delivered 9% organic growth so far for the first half year. And this is a product area where we have three product categories, which we believe will be future champions, so we call champion candidates. They are all growing really fast, car seats, all terrain running strollers and dog transportation products. So in all, we are focused on our priorities, and they gave effect in the first half of the year. If we look at the long-term development on the next page, that means that the direction towards the Northeast, so to speak, continues for the last 12 months. We are now at a last 12-month basis and net sales of just over SEK 10 billion, SEK 10.4 billion, and an EBIT margin of 16.8%. Moving over to the market situation and our own priorities. As we updated you at the Q2 call, we, at the time, had started to see the impact of the conflict in the Middle East, both on consumer demand and also for sure on raw material prices. And Toby will get back a little bit later with some quantified impacts of these items. But also, we, of course, saw the impact on our business the exposure that we have to the sort of biggest ticket items is within the RV business, the motor home and caravan business where we sell some product. And that business started to that RV business started to decline in terms of registrations during spring, following a period of improved conditions. We also saw that more consumers plan to spend vacations closer to the home. And we saw that North America was still the toughest space. If we move forward to present day and look at the market dynamics as we speak, we basically see a continuation of the same market trend. So very little drama to say it like that. We continue to see that the RV market has seen a couple of more months of declining registrations. We have, however, seen quite high interest in the RV space over summer. But for example, RV rental business is doing really well with good interest at camp sites and fares. And this also rings with the trend that we have seen that more consumers are spending vacation closer to homes, providing for us some counter and support to the more negative consumer sentiment that has been in place in Europe over the summer also. In North America, we did see consumer sentiment improving a bit towards the end of Q2 in June and July, then falling back again in August and September. So overall, a pretty unchanged situation versus Q2. For those who follow us closely, you may remember that we did say in Q2 that we saw some improvement in terms of sellout of Thule products to consumers, but U.S. retailers were cautious and on stock levels and also actively reducing inventory, which, of course, then held our sales back to retailers. Our B2C channel continued to do very well. And this has been a bit more normalized during summer, which has been positive for us, of course. Now we just have a very big promotional period behind us, Labor Day, and we will in the coming couple of weeks, see how retailers are thinking about restocking and what that means for the quarter in North America. So that was some details and nuances regarding the market situation. But as mentioned, overall, very similar situation to where we ended Q2. Then moving more importantly, we think on to the priorities that we drive. We have been over the last couple of months, continuing to full force, deliver on the priorities that we have set for ourselves that is building bigger and more champion product categories and driving efficiency gains. And just to mention a couple of things. We have been busy, of course, catching the tail end of the bike season as this is an important category for us, an important part of the year. And we have seen quite a few new products this year, which have been well received. And if we move to the next couple of pages, you can see the product launches is quite heavy on the champion categories. And if we keep moving forward, you can see some of the bike products that we have launched this year, specifically bike carriers. So [indiscernible], as a reminder, it was long during spring, which is a North American product for heavy bikes, which we have seen good effects from I think particularly maybe interesting example of how we can develop a category is the Thule Epos Park Secure on the next page, where we have really sort of move the goal post out. We have taken the markets and our most premium by care there is and added parking sensors, with the product even better, of course, charging a premium price, and that's been really well received in the market. And we also, on the note of how we can expand product categories have delivered to live light this summer, which is a new entry level bike carrier or entry level by our price range at least, in the first ever platform bike carrier from Thule coming into one bike version. So all attempts to address niches or pockets in the market and continue to take -- to build the category and take in sales, of course. So -- and bike has been a big focus. And the other really big focus we've had for the summer has been continuing to build out the Active with Kids and Dogs product area, where we have both launched more products and also driven a lot of product activation and sales and marketing efforts. So on the connected car seats rollout. We are now live in several markets starting to distribute this product to -- across Europe. We really have really proud of the team to deliver a product that can take sort of safety to the next level in terms of being focused on making sure the product is correctly installed and avoiding misuse and this is something we have been really busy with over summertime when will continue throughout the autumn. We've also launched more products in the dog space, excuse me, [ Thule Dart ] is premium harness for larger dogs, and I think it also illustrates quite well how we work to build up new product categories. Two years ago, we launched the first ever dog product, which was a dog crate for the car called Thule Allax, very much focused on Thule territory, car safety first premium product from that followed by Thule [indiscernible], which is a crash-tested harness that goes also for dogs in the car, touching that to the seatbelt, provides great protection for the dog. And building on that, we can now both develop more everyday harnesses as accessories like [ Thule Dart ] and complement that with a small acquisition of [ Purley ], which we have closed, which also is a complementary product to this. All in all, continuing with high effort and activity to build out the dog transportation category. And then also give a lot of credit to our teams who have been really busy showing products for consumers over the summer. This is, of course, a period where a lot of people engage with Thule products, and we've had good reception and following of everything from running stroller events at the Adidas 10-K in Paris, great camping and bike events across Europe, maybe Lake District in the U.K. and [ Insbrok ] stands out and a lot of activation around our Thule stores and partner stores and more -- much more coming up here for the autumn. So really busy with, particularly bike and Active with Kids and Dogs. And yes, that was a bit of an update with how the market situation and the things we are driving actively during the summer. And with that, I will hand over to Toby to comment a bit more on some of the financial facts.

Thank you, Mattias, and good afternoon, everybody. Firstly, on this Page 12 with the two graphs, which show the quarterly development in recent history. And you can see here that quarter 3 is an important quarter for us, not quite as big as quarter 2, but it's still an important quarter for us. And actually, if you look at the graph on the right-hand side, the EBIT graph, you can see that quarter 3 last year actually had a good improvement versus the year before, and it was actually the strongest margin we've had in the quarter 3, excluding the pandemic year. So it's a good benchmark with a good margin we had last year in quarter 3. So moving on and just a few words on the gross margin, and we mentioned this a bit also at the end of Q2 when we announced the Q2 results, that we expect three effects to impact the gross margin here in the third quarter. The first effect is that we have higher freight and material costs coming through, which are the result of the Middle East conflict. And previously, these costs have been largely hedged, but they're no longer hedged to quarter 3, so therefore, we will see the negative impact from the higher cost coming through, which is really driven by the energy costs impact of the Middle East conflict. So that will have a negative impact. On the other hand, we have increased prices in most markets by approximately 2.5% from the first of August. And this will offset the impact from these higher freight and material costs going forward. But it's important to remember that this price increase will not have a full effect in quarter 3. So in the quarter, it will not fully offset the higher freight to material costs. So those -- we have those two effects. And then on top of that, we will have a tariff refund in the quarter, which is a one-off tariff refund, which will be approximately USD 5 million or SEK 50 million. And if you include the tariff refund on top of the first two, then overall, it will be a positive impact. But of course, remember that the tariff refund is a one-off item, and we only expect the tariff refund in this quarter. Then -- so that's gross margin, which I think is important to understand there. And then I would also like to comment on the RV product area, and this is a product area that over a full year represents about 17% of group sales, but it is a bigger share in the third quarter. And Mattias mentioned this, but we had good growth in RV for the first half of the year, but you can read and see that registrations for motor homes have been down for a few months now, and that is expected to have an impact on the second half of the year for RV and RV sales. And it's important to still keep that in context. Interest in RV is still at a good level. The rental business has been strong this year. And also, there was a big trade fair a couple of weeks ago, caravans on in Dusseldorf, and we still had good visitor numbers this year. But it's clear -- yes, both consumers and therefore, dealers are cautious and dealers are not bringing in as much stock or more stock than necessary now in the second half and not reordering as much from the original equipment manufacturers as they previously expected in the second half. And just remember, also pleased that our RV business is only almost entirely European. So we don't have any kind of exposure to the U.S. RV market or any significant exposure. And then one final comment for me just on cash flow. Q3 is seasonally a strong quarter for us in terms of cash flow, and we do expect a good cash flow this quarter, which should have a good effect to bring the leverage ratio down in quarter 3 at the end of September. Okay. With that, yes, I think we can run of a move to Q&A.

[Operator Instructions] The next question comes from Daniel Schmidt from Danske Bank.

Yes. Mattias and Toby. Just wanted to ask you about Mattias -- since that there's been a bit more normalized restocking at in the U.S. from retailers compared to what you saw in H1 and maybe especially in Q2. And you also mentioned that your direct-to-consumer channel continues to do well. How does that sort of trend stack up against the weakness or beginning of weakness that you see in the European RV business?

Daniel, yes, I can start. As you are aware. And I guess, just for the audience, those are, of course, to very different effects. And I think we are Importantly, seeing some market setbacks in the RV business. Having said -- which will impact us, as Toby said. Having said that, I think we have been also driving new products and the RV business may be a bit better than the market so far. So we continue to believe that we can outpace the market, although it's clearly turning a bit negative. On the U.S. piece, you are very right. We had a good run with D2C. It's been delivering very nice growth for us in the U.S. this first half year in North America, also more broadly. But we have suffered a bit from retail-facing inventory down being really cautious. And that's been more normal now. I think the U.S. -- when you're going down to individual quarters, it also comes down to very specific things like promotional periods. And we just had Labor Day and a really big promotional period, and that seems to have gone okay. But now it's sort of the time really pretty much end of last week and this coming 7, 8 days until the September is over a retailer decided to replenish or not. To be really honest, Daniel, that could swing a single quarter sales number in a single market up or down a few percentage points. But we are sort of encouraged by the fact that we do well on D2C and that the POS is doing better and better. And then we hope that, of course, that will normalize fully, and we will see all that effect in our sales numbers as well.

Okay. But if you sort of look at what you've seen so far and you single out a couple of areas where you see a weakening or maybe a stronger trend in the U.S. than weaker in RV in Europe. And it's still a couple of these that say to go and they could swing, but it feels like you're saying that you are in a similar trajectory so far into H2 as you were in Q2 or H1?

Yes. Around there. I think the U.S., I wouldn't be overly optimistic. We'll say that not to get carried away, but I would call out rather than maybe we have seen really good momentum in the Active with Kids and Dogs product area for the first half of the year, as you know, and that's something that will continue also in the second half. So all in all, I mean, we expect to deliver growth, organic growth and then the exact number, we will see when we close the books at the end of September.

Yes. And anything you want to sort of within drill on SG&A that much, anything that you want to comment there?

Yes. I think -- I mean, there's no kind of big things to point out. No, I would say we are -- as we've said before, we're on a journey this year where we are reducing cost levels versus last year. Most of that effect, as we've also said previously, you would see in the first half. So it's not a big effect in the second half. But otherwise, no, no big changes.

When you look at '26, it's entirely tilted to H1 or you've done some actions also during the summer. Is that helping you, I guess...

Maybe -- so what we said is we expect -- I mean, the cost reduction in the first half is where most of the cost reduction is not all, but most of the cost reduction.

[Operator Instructions] The next question comes from Mats Liss from Kepler Cheuvreux.

Yes. Thank you. Sort of a question here regarding, I mean, the bank-related chances to be positive in Europe in some markets anyway. And I mean, normally, that's pretty good for your margin development. Should we expect that to be sort of the case now also. Or are there other reasons in tinea you mentioned the cost trend and maybe also see some discounts among retailers that sort of balance the volume growth there. Could you share some comments regarding this?

Yes. No, happy to, Mats. I can start here. I think our view is that the bike market in Europe is positive. And so for us, which is good. I mean it's back to the conversation we just had. But I would also maybe as you asked about it nuance a little bit some of the headlines that you see in the press around companies. I mean some seem to do well, some, obviously, due to the expense of margins, where we have seen some players out there raising guidance for sales, but lowering for profit. And others are, of course, struggling still, and we saw [ XL ] going into restructuring or potentially even bankruptcy. So it's a little bit of a mixed bag, but our view is that in Europe, bike market is in positive territory, and we are growing on the back of that.

And well, maybe about this champion development, and you mentioned the core there, and you mentioned to transport products when should we expect them to be more in the champion area if the current trend continues.

Yes, that's a good question. And we are fighting hard to make it very quick. But the one that we have been clear is the furthest along is the one we call all terrain running strollers. Which we did say at the CMD, if I can remember correctly, somewhere north of SEK 250 million in size, which we introduced about 10 years ago, and we have continued to see really nice momentum also this year. So expect that number to be clearly higher by the end of the year, but still with a few years before we sort of cost the SEK 500 million mark, which is the one -- which is the level we have set sort of just to put the number out there for when we consider a category to be a champion. So all terrain running strollers are further along. And yes, a few years away.

And finally, just about -- you mentioned the if sales went well. But what about color? I mean, you usually give some comment there about the year-over-year improvement has continue about 10% or stopped commenting on that.

No, that's not intentional. I think maybe we've now on quarter 4, almost 2 years. So it probably gets mixed into things. But it's a great business and continues to do well. I think in terms of exactly for the quarter, the thing that we are observing now is that Apple, which is, of course, the biggest -- or iPhone, which is the biggest mobile market has changed their launch patterns a bit. I'm sure if you have noticed, but they decided to launch some models, the Pro and the Pro Max models now in September and whereas other models later, whereas last year, there was a much bigger launch event. So that was just the other day. And typically, that's a good source of people upgrading phones. So that will probably have an impact in the quarter. But besides that kind of that's a fine thing between months in that case. But -- but besides that, it's still happy about the business, great team, good new products delivered with a great pipeline going forward. And could also note that the collaboration with Thule team is continuing, and we are now seeing a lot of products in Halfords in the U.K. as of this spring, which is, of course, a door that we were able to open. And as of next spring, you will see a couple of more major global outdoor retailers taking do product deals. So we're on a positive trend still.

Yes. Yes. And just about the acquisitions talking about color. I mean it seems to do quite well. And given current market conditions, do you see that opportunities are opening up for more? Or is it -- I mean the good companies are still, well, tough to get to acquire.

There's a lot of companies -- there's a lot of potential dialogues. There's a lot of companies that we, from our view, observed seems to be up for sale to put it only. I think we a bigger challenge for us or the bigger work for us rather is to find companies that really fit the strategy in terms of potentially being a stand-alone champion or adding to one. We were quite pleased -- it's small, but we were quite pleased to acquire currently in the dog space here earlier this year. That transaction closed just before end of June and very high speed with integration, and we will looks like we will get the tuna branded product out by Q1 '27, which I think is very fast. So I think there's a lot out there, but we try to be really strict around the criteria for what to act on. And then, of course, on top of that, there is also a discussion always about valuation and cultural fit and shared ambition and all those things. So no -- many opportunities, Mats, but I think our focus is on organic growth and selectively take these opportunities that we really see as a strong fit.

The next question comes from Agnieszka Vilela from Nordea.

Maybe starting with the price increases that you implemented. Can you update us on how they have been replied the customers and also if you see competitors doing similar actions? .

Toby here. Yes, I mean I think price increases are never received positively by customers, but I think we're not concerned. I mean, I think there are price increases out there for competitors as well and everyone is experiencing the same pressure on freight costs and material costs, which are up pretty much across the board across a range of materials as well. So it's I don't think we stick out on the high side, if I put it like that.

Okay. Good to know. And then maybe just looking also on the otherwise material cost and freight cost. I mean it is volatile. But if you look at the contracts that you have and also the current rates, do you believe that the level of price increases that you implemented is enough to offset any negative cost inflation and impact on margins going into Q4 as well and into 2027.

Yes. That's a good point, is that we see the price increase that we've implemented it's enough to offset the negative impact from the higher material costs and freight costs going forward. So it's only -- we see in the third quarter because of the timing of the price increase that we don't have offset. But going forward, if the material cost and freight costs are at the level they are today, then we offset that. And then I would just add, I mean, it's -- they went up basically at the end of Q1, pretty much when the -- obviously, the Middle East crisis started and they hit a higher level. They varied a little bit, but they're basically still at the same level now as when we increase the price increase as well. So it's -- yes, it's there's not been a big change in the last month or 2 in the level.

And the last one for me, probably to Mattias. I mean, you do sound quite optimistic Active with Kids & dogs category and the reception of the products. Do you expect the growth momentum from H1 about, say, 9% organic to continue now into H2? That's one part of the question. Also, long term, you have the ambition to have a 15% annual growth there. When do you think this kind of growth will happen and what's needed for that to be materialized?