Ladies and gentlemen, welcome to the Tula Group Interim Report Q1 January to March 2020 Call. My name is Maxine, and I'll be coordinating the call today. I will now hand you over to your host, Magnus Wallander, CEO, to begin. Magnus, please go ahead when you're ready.
Good morning, everybody. And first, I have to make a practical announcement since unfortunately our service provider managed to put up the link to quarter run report in 2019. And I think it's a little bit like when everybody is staying at home in lockdowns. I'm watching old Super Bowl games, the old Champions League final between Liverpool and Milan, and we're watching old reruns. And although that might bring us back to a brighter feeling at the end of quarter 1 'nineteen than we currently have, I still need to ask you all to check out, go out of the web conference and if you see the 2019 presentation and then open up the link again, because then you will see the 2020.
If you already see the 2020, you don't need to go out. But if you see the 2019, you need to go out and click on the link again. So with that, I will give you a few seconds to do that and talk a little bit about the beautiful weather in the southern part of Sweden and the fact that if you then, as I said, go back a year ago and think about all the good things, it's been a very interesting quarter where the first part of the quarter had all those same aspects of a great start to the year, great expectations. And then as we all know, the world and the Thule Group has faced a very different reality in the last 2 weeks of the quarter. So hoping that everybody got the instructions that they needed to go out and go in again.
I will then go on to the first slide in the presentation. And the first slide in the presentation is, of course, a summary of the quarter. So if you look at the quarter, a quarter with 2 very distinct phases, as I said, a very good start to the year where we clearly were hitting those growth ambitions that we saw. The sole exception at the very start of the year for Warne Marine did not perform as strong as we wanted was due to also that due to the coronavirus. We have, as you know, been growing very nicely in our luggage area in the Asian region.
And as the Asian region was the 1st region impacted by various forms of lockdowns and stay at home measures. We did see quite early a very rapid downturn in travel and therefore travel luggage. So that started impacting relatively early. As we saw those signals, we course, started acting and considering our various levels of spend. And that is one of the reasons why you can say also that we managed in the quarter despite a big downturn in revenue at the end of the quarter to deliver an 18.7% EBIT margin in Q1.
So sales dropped 5%, 7.5%, excluding currency effects. And in region Europe and rest of world, we reduced with 5.7% and region Americas with 13%. All of that reduction came in the last 2 weeks, which made, of course, that some of you analysts already have very quickly calculated that. That means that we almost saw a 50% drop in sales those 2 weeks, which is normally actually the peak part of the Q1 as we normally go into a strong spring season at towards the end of March. We have delivered an underlying EBIT of 3 dollars 26,000,000 and we have also generated a positive cash flow of $8,000,000 compared to a negative cash flow of €145,000,000 in the Q1 last year.
Also there, we were on track. As you know, we have communicated that we intended to have an improved inventory level, a reduction versus our levels of last year because last year we were in the ending phase of having done some major layout changes to several of our largest plants. Also on the inventory level, we were tracking very well to those plans to mid year. But then, of course, if you have in 2 weeks a very rapid decline of sales versus not being able to act as quickly on the incoming goods, there was a little bit of buildup at the very end of the quarter, still ending the quarter better than the same period last year. If we go to next slide, we can then look at how our sales and EBIT grew.
And I think the thing we can be most proud of in a quarter where it was very difficult to foresee what would be coming towards the end that we still could deliver an 18.7 percent EBIT margin. Then the Y's, of course, quickly then assume that would it not have seen such a significant volume drop at the very end of quarter, we were on track on our strategic plan to continue to grow our EBIT margin. That growth was then generated until the mid March period by efficiency gains in our plans as we were estimating having done some significant improvements in those plans last year. It was due to a better price versus incoming cost of goods sold situation. But then we also saw some mix changes, slightly negative.
And we of course saw some under absorption coming at the very end of the quarter when you see revenues drop significantly. Overall though, I'm happy with where we came in from a financial perspective considering the circumstances. If we go to region, Europe and rest of world and look at the performance there, it's very clearly relation to how hard the measures were implemented by various governments and states that really impacted sales. So you can clearly track that as various countries took varying levels of lockdowns and stay at home orders in the region. That is the sole impacting factor of our performance.
So we see that countries that took the biggest and most decisive and dramatic measures of lockdown and stay at home, like France, where it was even prohibited to go outside for exercise and many other matters and where almost all is closed, we saw very dramatic declines. While in countries that kept more open, we could even see growth, like for example in South Korea. But also in Europe, we markets like the home market for the company, Sweden, a small market for the Tullig Group. But still, you could see that there where the market was kept more open, our sales did decline a little bit in the last few weeks, but not nearly as much in those places where shops were closed and people were told to stay at home. This also then of course in a logical way will mean that if we look forward towards the Q2 and beyond in Europe, a very much correlation will be on how quickly, in which steps and to which degree the various countries will open up from their lockdown, which is also why even if I'm sure I'm going to get a lot of questions from people in the coming Q and A on our speculation going forward, it has relatively little to what this company is doing and very much about what does the governments do in terms of lockdown measures.
There was one category that we managed to grow despite that, that category also did have a decline in growth pace at the end of the quarter, and that was Actaway Kids. Very happy with the performance of Actaway Kids. It's a combination of a successful launch of our new Tula Spring stroller and actually a good continuous performance of the rest of the product portfolio in Activewear Kids as well. Active with Kids is also the portfolio, which we believe that from a category perspective that will have the least impact on Q2 performance in terms of lockdown measures. It is a product category more associated to maybe what people will start to do immediately as they are left out of their apartments, while some of our other product categories, we believe, will take some weeks before people start thinking about those things after they've been sitting inside and locked in an apartment.
In terms of our sites in the region and our assembly plants, they are all up and operational. But in all of them, we have, due to the reduced demand, already implemented various levels of short term furloughs at all the sites. If we then go to region Americas and look at the performance there, same thing applies, which is meaning that also there growth until mid March and then all of a sudden a dramatic drop in sales. When you look at regions that are very dominant in sales, not purely linked to the number of inhabitants in those US states and Canadian regions, but also to what type of activities people pursue in those regions. So very important regions, both in terms of number of people living there, but also activities and athletic outdoor oriented audiences.
We can see that our core markets, unfortunately, in North America were those states and regions that implemented the most aggressive lockdown measures and the most restrictive measures. So states like California, the states around the New England area, Quebec and Ontario region all implemented very restrictive lockdown measures and with shop closures and stay at home orders, which clearly then impacted in the end of March and also has been impacting here in April. Same thing here, it will be very important now to see what the various let ups of those exit from lockdown scenarios means. So similar to Europe, where Germany, Austria, Czech Republic and others have already been starting to open up, we start to see Colorado and Connecticut as of this week. But there are other states like California and Quebec, which are still presenting very severe lockdowns for quite some extensive time to come.
The best performing market in the region was very clearly linked to the country taking the least aggressive measures in terms of lockdowns and stay at home Brazil. And there, our performance was solid. Also here in the Americas region, Active With Kids showed very nice growth. Here, it was a combination of 2 factors. Also here, the Tula Spring launch doing really well, but also a good comeback to growth after a slightly disappointing 2019 for our jogging stroller to Larrub and Glide.
And as we did mention a few times last year, we had some competitors doing in what was, in our opinion, extreme pricing actions. They have done less of those and then immediately our sales have picked up in the Q1. Also in the very small niche segment of RV products in this region, which we remind you is less than 1% or a little bit more than 1% of sales in the region. But in that niche, we continue to do some wins in what is otherwise a quite challenged RV reality in the North American market. Also here, our sites are operational and short term furloughs have been implemented also in the Americas region.
If we go on to the income statement, and normally here I would throw our CFO at presenting it. But since Jonas, who is with me today, is so fresh in the company, I thought I would help him out this time. And then next quarterly report you will hear his beautiful voice when we talk about the income statement and the operating working capital. So if you look at the income statement in a little bit more detail, you can see that we did see a positive FX effect on our gross margin, which was the driving factor for why that margin was slightly up. As I already mentioned, we were tracking very nicely on our efficiency improvements in the plant as long as volumes were there.
And then with some very dramatic volume drops, of course, that could not be maintained at the very end of the quarter. We also continue to see a positive effect of our price increases versus the cost of material coming in. But as you also remember, we have a negative tariff impact in the China to U. S. Tariffs.
As you all will remember, the second phase of those tariffs were implemented as of July in 2019, which means on a comparable basis now when we compare quarter 1 against the same period last year, this is having a negative impact as we're only passing on the tariff itself, not with an additional margin on top of it. If you look at delivering an EBIT margin of 18.7%, which was the same as last year. As I said, I'm very happy with that, and it means that we have a rolling 12 month level of 17.7%. We continue to push product development and we will continue to push that. It is obvious with expectations going forward of a tough second quarter, which is our biggest quarter, that we will do that in a planned and smart way, but we will not hold back.
We will quarter 4, you may remember that we announced the restructuring of our North American organization a bit, where we announced a one off cost and then an annualized saving of approximately SEK 25,000,000 in 2020. That savings Q1 came in on a quarterly basis. So that was part of our reduced spend was those targeted savings. And then we did, as I mentioned in the initial part of the call, start acting on some of the measures of how we tactically could make sure we did the right things, considering some concerns of what was going on in Asia with the COVID pandemic. Some of those savings, to be honest, isn't so much to clap yourself on the shoulder about because if there isn't a fare happening, you will automatically get some savings.
And if you can travel, you are saving a lot of money on travel. So those are automatic. I consider them. On top of that, we are of course taking some other smart measures to ensure that we do the right thing, both short term, but more importantly, definitely also long term. Tax rate in the quarter was within the guidance and it was at 23.5%.
If we then go on and look at the operating working capital and our cash flow, As I mentioned on inventory, we had a plan and we have communicated that plan clearly that we would reduce inventory levels in smart steps during 2020. We will continue to do that. So we hold true to that overall statement. The challenge we had at the end of the quarter was, of course, obvious, as I said, if sales drop very unexpected, very dramatic, you struggle in a few weeks to compensate as much. But still, our inventory levels did go down.
And if you look at our performance in also excluding the currency effect, our operating working capital would be at 22% versus the 24% we had last year. Now it ended with FX effect at 23. So we were progressing very well. Still, despite the drop in sales, we feel good about what we will do on operational operating working capital. Cash flow from operating activities were positive in the quarter, and we kept on investing for the future and the majority of the CapEx in the quarter is associated with the construction of our large new facility in Sweden in Hillostorpe next to our big plant where currently our global head office for product development sits, where we're constructing a purpose built product development plant.
And in that site, we are investing and continue and plan to open it in quarter 1, 2021 still. If we then go to what this meant to our financial targets, yes, it's obvious we were tracking ahead of our organic growth target until 13th March, and then things started happening. So we were on an organic decline totally in the quarter of 7.5%. Our underlying EBIT margin is on a rolling 12 month basis 17.7% with 18.7% in the quarter. We have a net debt to EBITDA leverage of 1.7 times, which was 1.9 times at the same time last year.
And I feel very calm about where we stand in terms of cash position and finance position for the company. And as you are aware, the board announced on the 22nd March that they withdrew the previous proposal to today's AGM of a dividend due to the uncertainties in the short term caused by the corona pandemic. If we go to the 2020 focus of the company and we look at what all of you who are analytical already have concluded and which has already been reported in media. This company has never hidden the fact that we have a very clear springsummer exposure due to the type of products we sell and when people want to pursue the activities that those products are used for. So you can really simplistically say, as we have done many times and announced numerous occasions, that you can simplify by saying around mid March until early August, that's where the chunk of the business is done.
So everybody is impacted very clearly from a situation around the world with the pandemic. When you're sitting in that, it's obvious that our company, as all senior and serious management did, focused 1st and foremost on the health and safety of your employees, making sure we did all those right steps, organizing work from home travel bans, social visiting at workplaces, etcetera. But when you have done that first step, the second step is, of course, to look at what is potentially impacting the short term for your business. From a business perspective, I have to say the timing, as terrible as the whole COVID is from a generic perspective, the timing was exceptionally brutally wrong for the Thillig Group. We have to say that because exactly when we normally pick up the most in sales mid March, most nations around the world went into aggressive lockdowns, closing stores, closing the opportunity to go outside.
So if we look here on the slide, you see our reported sales and reported underlying EBIT by quarter in the 3 years and prior and also of course for Q1 2020. And it's clear that if you have a third of your sales and close to half of your profits in the quarter 2, and in the quarter 2, you started with some nations being completely closed down, like France, and other nations being quite far closed down, we will have a very tough quarter to be able to deliver a full year at the levels that we would have expected. So the key question, which I wouldn't be able to speculate even on is depending on when nations open up and to what degree they open up, it will, of course, still be a very tough Q2 with significant reductions in both sales and EBIT. But it will also impact about opportunity of how bad or not the Q3 will be. As I mentioned before, we believe speculatively from what we work with, so not anymore about when nations open up because that anybody else could be as good at speculating as I could, but more in terms of our product categories and what we believe consumers from our vast knowledge of how we have been interacting with them in the past, there are certain product categories where you earlier will start to see sales picking up as soon as the lockdowns and stay at home orders are eased, while others will take some more time.
And that means that depending on when the whole thing opens up more during Q2, it might also impact more or less significantly in the beginning of Q3, which is the lion's share of our sales in Q3. So we will have to come back in after the Q2 to also be able to say more of what we can expect for the rest of the year. But it's clear that if you take active with kids is the category we believe will suffer the least. It is also obvious that travel luggage, I think anybody staying will say that's the category that will suffer by far the most. We've seen numbers already from some other players in the industry and from industry statistics that sales of luggage has dropped more than 70%, 80% and to 90% in March in some countries.
So it's clear that, that small, very small category for us but still growing, will not see that same path as we had hoped. And our sporting cargo carriers and RV product categories, our products, we believe, have a very good opportunity, but that are not the first thing day 1 when you're finally left out of your apartment quarantine that you might go and buy. Unless you're a very avid biker and you've been just yearning for the opportunity to go out. If we go down to the last slide, the headline says managing short term reality while maintaining a long term strategy, which is exactly what this company has been doing for 78 years and luckily I've been doing for the last 10 years as the CEO. We've always worked on those two aspects in parallel, never forgetting about the long term just because you have to deal with the short term.
So short term reality has demanded an incredible focus from this management as from any management in any company in the world. We have definitely had a huge focus on the health and safety of our employees. And I'm happy to say that we have had no very serious cases of employees having had the COVID-nineteen. There might have been, as we all know in the community, somebody having it, but not with those serious consequences. We opened up work from home positions wherever that was possible and put in place.
We have set up new social distancing and hygiene standards in all our plans. We have really had a very structured approach in our total health and safety approach of how to do this. And I'm very proud of how our site management in the assembly plants and HR teams and experts have worked on that. We have, of course, when we now look at the short term focus for a second quarter, we are not sitting idly by looking at sales dropping very significantly in end of March April and slowly but surely picking up in our expectations as we go on. We, of course, have needed to put short term furlough programs in place, which we've done in all our plants globally.
We have, of course, worked very closely with our suppliers to look at various order status, planning, etcetera. And one of the huge advantages we have as a company here is that we do not order enormous quantities at once because we are a next day delivery focused company with a high on time and full focus, which allows us to both work with our suppliers to help them, but also to help ourselves in managing the right level of inventory on the right products while handling them at the drop. Another factor that helps why in terms of staffing levels is that normally at this period of the year, especially now at the end of April, we would have the most significant amount of short term employees employed. So that's seasonal staff employed by the Thistle Group, and it is short term seasonal staff where we use various work agency companies. That normally adds roughly 600 people more into our production now.
So that has enabled us. Our flexible way of setting up that seasonal handling has enabled us to very quickly act on staffing levels aside from the short term furlough opportunity provided by most governments where we operate. So that level of initiatives have to be right because, as I said, we will balance it towards the long term structure. We have a very strong cash position and we have a very solid financing in place, which means we have all the calm working room and do not need to focus on those aspects hindering in our decision making. If you look at the long term strategy, I can say it's virtually unchanged.
And the virtual part is 2 minor adjustments that I should mention first before I remind you what our strategy is for the long term. The minor adjustments is we had a very successful growth plan and growth phase in 2019 for luggage. And we were launching at the very beginning of this year 2 more collections and had a number of initiatives planned further collections and further things. It is obvious that we will not be spending the same type of money and having the same type of ambitions in a scenario where people are not traveling. So there are some adjustments to our plans in luggage already having happened.
And then it is we already have been, as we've mentioned many times as a company, focusing to support all our customers, both online and brick and mortar. We spend significant initiatives on our online support to retailers. And we have, in the past 2 years, opened up online sales in the U. S, Sweden and Denmark ourselves directly to consumer. It's obvious that those are measures in a reality where brick and mortar is more challenged than ever.
That is a good timing to further speed up those initiatives that were already underway, opening up B2C in more countries in the coming future. If you look at the strategy that does remain exactly as what we have communicated in the last few years, it is a growth focused strategy long term with a key focus on product is king. We will drive our profitable organic sales via great products. That's what we've been doing for as long as this company has been around and as long as we've been on the stock market. And we will continue to spend significant funds on product development.
In fact, due to the drop in revenue, I believe, in the end, rather than going down slightly in product development spend as share of sales, which was the plans for 'twenty, we will probably go up a bit because we have so many good initiatives that we still want to be putting out in the market for 2021 and beyond. We continue to strengthen the Tula brand and the MOSSA Bring Your Life. And it is, of course, something where we believe that what if you look at what that brand connects to, it is a with friends and family in your close vicinity, close to your homes, going on short trips, going on small locations. And the classical concept of staycation is where we are doing best already. So I feel we are correctly exposed there.
And then of course, utilizing our strong back end organization and flexibility and efficiency in our structures in doing that. So what we will do is really to a great extent the same things that we were planning to do. We're just needing to do it with some balancing and a lot of focus on 1, the health and well-being of our staff 2, in adhering to all the guidelines terms of lockdowns, etcetera and 3, being very nimble and quick on our feet in supporting retail customers as they come out of those exit scenarios to best be able to serve the consumers. With that, I open the floor for questions.
We have a question from Karri Winter from SHB. Your line is now open.
Yes. Thank you. Karri Rinta, Anders Banken. Maybe firstly about the comments regarding the expected recovery after things normalized. Maybe if you look back at what happened 10 years ago after the financial crisis, so how quickly what can you say about your sort of growth rate earnings growth rate in 2010?
And maybe more specifically, what happened then? And what do you expect to happen now within sport and cargo carriers? So if you can discuss the different product categories within sport and cargo carriers in a bit more detail. So what's your experience of recovery rates within that sector?
If we take good morning, Carey. If we take I think if you talk about financial crisis, you actually have to go back to 2,007 to 2,009 or N7 until 10 to look at it. But if you look at the growth we had in sport and cargo carriers in those years, we had a cargo growth of around the 5% that we have as a target now as well, immediately following also the crisis. So what happened here, I think you need to be very careful on comparing a financial crisis with a lockdown where people are not allowed to go out and do things. Then you might be speculating, Curry, that there is a similar financial crisis and that in its turn might be the similarities later on.
We will see about the financial crisis. But if it is more about will people, when they potentially have less to spend, still continue to buy total products, if that is the scenario you're Spain, also in those years, 7, 8, 9, Spain also in those years, 7, 8, 9, 10. So their logic for that was that maybe they skipped some trips to Bali, Thailand and other places. But since we do not sell products to the low price points, there are always private label products that are much cheaper than the high quality products in Tesla. We tended already normally to sell products to a middle income earning community and or a very enthusiastic low income earner who loved their biking and therefore preferred a quality product, for example.
So if you looked at it from that perspective, we saw that the staycation maybe offset some of the general spend. So our belief is if it's a pure financial situation, we will see a similar growth pattern. Now with a pandemic and the global lock downs and quarantines, it changes the game completely. It's not about I don't have the money to do it. I'm not allowed to have the shop open.
I'm not allowed to go on doing it. So therefore, that's why I'm saying it's very difficult to speculate because I don't think any company has lived through this reality. If you look at the various subcategories, as you asked about, sporting cargo carriers, there are some categories that are more exposed to the seasonality. So the most exposed is the biggest one, bike carriers, is clearly the most springsummer product. And there's a good logic for that.
Any keen biker on the call will know when is it you're the most keen. It is when early spring sets in, you see the light, there is not ice on the roads, you're ready to go, you start going out and you have those long pants on and your gloves, etcetera. And then as the spring comes, you start loving it. And when it then comes to the big market, now again reminding you that the big market for bike carriers are in Central and Southern Europe and the U. S, Nordics.
Then when it starts to get up to the high 30s or low 40s and you're in peak August season, you might instead be down by the beach on a beach holiday with your family and might not be so triggered on biking. So there is the category in the short term reality that we're most exposed to how early people are let out or not in out of their lockdown. While there is a slightly more later reality, if you look at roof racks and roof boxes, very logical as we presented in the past, it's a product that people buy when they go on vacation. Once again, many Nordics believe that's on your skiing vacation, which, of course, hit us now ahead of Easter skiing, which is obvious on roof racks and roof boxes. But the majority of our roof racks and roof boxes are sold in connection with the summer vacation, where you need to pack your stuff to drive to the summerhouse or drive to the beach or drive somewhere and you don't have enough space.
That then comes later on. So depending on once again, a little bit later on in the season, that then will depend on the seasonality and the opening of lockdowns.
Okay. That's very helpful. Then a question on your channel partners, I. E, your customers. Do you see any risk of any types of customers having financial difficulties that they can't divide in this?
I mean, maybe independent type retailers in the U. S. Or some bigger sports chains that were sort of challenged already before? So what kind of risk concentrations do you see among your customers?
Yes. If you
first take the reality that if you have 35,000 doors and a lot of customers and no customer represents more than 3% of your sales, we are constantly seeing by default, As I tell my 2 daughters that study at university, when they ask me, Dad, do you see any of your customers going bankrupt? Constantly. Because reality is if you have a lot of small customers, there is always challenges as the world is changing. That, of course, you're right, Tari, will be more exposed now. Will some of those that maybe were struggling?
I'm not so convinced that it necessarily is any type of significant shift. I don't think you should oversimplify the expectation level that is one industry being hit and hurt much more than others. For example, one of the things that happened in both U. K. And California was that bike shops were considered essential shops to be open to service bikes all of a sudden.
So all of a sudden, the small independent was in a slightly better situation than some of the bigger players. In France, they even closed Amazon now for almost 10 days, right? So you never know really. It is clear that there is a lot of players that we are in very close consideration and discussions with. We have historically a very, very low level of credit risk and bad debt.
And that is because we are a next day delivery company, which means we generally, even to rather big retailers, sell in very little at any given time. Of course, the bigger the retailer, the more shops they have. That still means quite a lot of money outstanding. But versus many companies, we don't dump in a season worth of winter sport clothing and hope to get paid at the end. We sell continuously, which is therefore reducing our risk.
Perfect. That's very helpful. Thank you.
Thank you.
We have a question from Stefan Kjartnerholm from Nordea. Your line is now open.
Hi, Stefan Karlie here. Can you hear me? Yes. Yes. I guess you don't want to give a figure for the current trading in April, but it would be very helpful if you could say how many of your resellers that are currently closed?
Yes. I can actually you know me well, Stefan. I have very little talk about the future, but April is almost starting to be the past, and I knew you would be asking. So April is as bad as end of March was. That's the quick, simple, and then everybody has to do their estimation of how bad end of March was.
If you look around the world, it is so dramatically different. So France is, for us, almost no sales at all. It is the most extreme of the European countries in terms of measures of lockdown. And France is our 3rd biggest market, so that is a challenge. In other markets, they are almost fully open.
And in some markets, they are being open now, as we speak, at the end of April. So if you look at it, we have anything from countries with almost 100% of our shops, retailers, customers not being allowed to do business to some markets where they're almost fully open. So I would say that it's shifted already during the month, and it's opening up. And the key market, Germany, which is our 2nd biggest market, is the one which is opening up now as of the last few days. And that will then add a lot of store openings in the totality because the German market is such a big market.
So difficult to say. I think in the end, we can say that probably 10% of shops are normally operating, another 40%, 50% of shops are operating in some form of fashion and around 40% of the shops are almost closed or closed fully.
And if you look at Sweden, for example, whereby stores have been open throughout the period, can you see a recovery in April versus the last 2 months weeks over March?
Yes. I mean, what you can say is that you can see that in all the countries where there is any type of store opening that has been is that it isn't day 1. We willingly admit that our product isn't the first thing you're thinking about when you're being allowed out from your apartment after 6 weeks. But once you've been out there breathing, doing, going to work a little bit, you see some of those products being picked up very quickly, a jogging stroller for your kid, a multi bike trailer, those quickly have picked up sales, I can say, very quickly. While some of the other products are coming 1 or 2 weeks later on, you start to see the bike carriers picking up, etcetera.
So it takes a longer time for our sport and cargo carrier products than it does, for example, for our active with kids product. And if you look at our RV products, there we are much more associated, roughly 40% is sold to manufacturers building motorhomes. So there were associated with those motorhome manufacturers going back to operations, which they are the moment in Germany, opening up this week to partial productivity. So it will be a very difficult to judge, but a very interesting next 6 weeks that will be very telling.
Yes. And the last question for me. Regarding under absorption in production, can you give a figure for what that impacted gross margin in Q1 to get a sense for what we can expect going forward?
No, I couldn't. And I wouldn't speculate on the gross margin impact. What I can tell you is that short term furloughs will, of course, be one part in playing in this as we have implemented those with now, which we, of course, despite being very proactive due to both following professionalism towards your employees, but also following how those various legislations needed to land in countries were not impacting or helping us in any form in the Q1, they will, of course, be offsetting some of that under absorption in the second quarter. But it is far too early to speculate on what that would be.
Okay. Thanks.
We have a question from Frederic Moraigard from Pareto Securities. Your line is now open.
Good morning, everybody. First of all, a question on active with kids, basically the only category that is signed for the U. S, which grew in Q1. Can you tell us something or give us some sort of comment on whether or not this is actually step 2 coming through? Or if it is mainly retail selling of the new telescreen and also refilling of other products?
I'm very convinced it's an actual sell through as well. We get very good feedback. We see also the orders in April. So I'm convinced that, that was a sell through. And also Activewear Kids actually had a stronger performance until the corona impact started reducing with lots of juvenile stores also being closed around the world.
But no, I'm convinced that, that will sell through.
Okay, okay. Very helpful. And then secondly, could you give us some sort of ballpark figure of what share your white collar employees are on furlough?
Yes. I mean, indicatively, of course, there are big differences, as you can understand. There are some staff that are very much to the extremes up to what you can do in different legislations in countries, and there is very different laws and very different restrictions. But indicatively around somewhere around 30%.
Okay. I guess product development would be less impacted, as you indicated, with
the R and D spending, probably being up
as a percentage of sales. But is there a risk of delays with regards to your product roadmap going forward?
Yes. As we said earlier on, we are doing some choices on some projects that we will be launching later. Since you don't know what that road map is and since we will have so many exciting new products, I don't think anybody external will notice. And this is also part of one of the things you do. It's been interesting.
If you follow the outdoor industry, there has been 5 of the most important players in the outdoor industry in the last 2 weeks that have gone out and communicated that they will not launch new products at all in 2021 almost to support retail due to that if you had a fashionable summer or winter jacket and nobody sold it due to COVID and nobody could have the stores open. To support those retailers and their own cost structures, they're not going to launch a new jacket model for 2021. They're going to go with the same one. That is, of course, very different totally because we're not fashion and we don't need to dump in and out. You can use our bike carrier for many years.
So sometimes when we launch products, it's really a more tactical, it's time to refresh. You will see a lot of new products in all our categories in '21 as well. Some products that maybe were targeted for early 'twenty two might be mid 'twenty two or if everything turns around again and the world opens up again, we might speed it up again. So that's more how you should look at.
Okay. Looking forward to those launches then. Thanks a lot.
Yes. Thank you.
We have a question from Daniel Schmidt from Danske Bank. Your line is now open.
Yes, good morning Magnus.
Good morning, Daniel.
We've sort of touched on the subject a couple of different questions. But put it this way, if you look at the operating leverage that you did have in Q1, is there sort of anything in there that you think is not relevant when looking at Q2 and our assumptions when it comes to operating leverage?
I think if you look at it, operating leverage is a can be covering a lot of things. So if you look at our gross margin performance and efficiency in plans, it is, of course, clear for most people when they looked at our books over the years and looked at annual reports, etcetera, that simplistically said, 3 quarters of our cost of the goods sold is material and 1 quarter is the rest. That means, of course, that if we believe we've done the right things as we've communicated on pricing versus costs of materials and if you speculate that it's unlikely that material costs in the reality we're facing will dramatically shift to the worst, that should mean that a significant chunk of what helps our gross margin will be continuing to do well. Then if you look at the other parts of the transformation cost component in the cost of goods sold, you of course have a balancing of a direct wage component and a production overhead component. Some parts of production overhead is fixed because you simply have the equipment in place.
Some parts of what is in production are also indirect workforces in terms of the truck forklift drivers that serve a lot of different production lines, etcetera. In reality where demand is lower, you're going to have some of those stuff also in short term furlough. So I think there is a reality where we will be able to compensate a lot, also utilizing some of those state furlough programs. The challenge on operating leverage is more that if you drop a lot of sales in your biggest quarter, it is a balancing act of how much other costs you're taking out on your SG and A cost structure. Also there, there is, of course, some short term furlough offsetting, but we are a long term company.
We don't run this company for showing something fantastic on operating leverage in Q2 and damaging the business for the next 18 months. So that is, of course, the most delicate and intellectually demanding situation we have at the moment and constantly discussing with our Board as well is to do that balancing, driving for long term success while being smart about short term challenge.
Good. I think
I can redo between the lines. And then just could you, by any chance, give us the percentage number when it comes to travel luggage as a percentage of sales?
I saw your early send out this morning, you guessed 3. That's not such a bad guess. Okay.
And when you say that you will cut back on product development spending on travel luggage, which makes sense, of course, If it's around 3% of sales, how much of product front end spending, how much of that budget has gone into travel luggage, would you say?
You would never be able to trick me to answer that one, Dan.
Okay. But put it this way, you said that you will keep product development spending elevated in 2020, and you have this guidance that it will go down in percentage, but of course, COVID-nineteen has changed the top line trajectory quite a lot since then and now will go up. Do you think the product development spending in absolute terms will be down versus 2019?
In absolute terms, yes, but not in percentage terms.
Thank you. That's all for me.
Thank you.
We have a question from Gustaf Sandstrom from SEB. Your line is now open.
Thank you. Good morning, guys. Good morning. Could you just reiterate minus about the 50% did you say 50% sales dropped in the last 2 weeks in March? Or was that just a general discussion of the mechanical impact to reaching that 5% organic growth for or drop in Q1?
What I stated was that if you look at the factor that we communicated that we had very good growth until mid March, and then it's not exactly, to be honest, 2 weeks is always a discussion when we started. We can say we started actually seeing the drop. The 13th March, if you know when exactly want to know when we stopped growing and started to see negative numbers versus same period last year. So it's slightly more than 2 weeks. But if you look at it, that means mathematically quite quickly that you're landing around that number that those weeks were at roughly half of sales versus the same period last year, which is also indicatively there for what I'm saying that April is around.
Yes. Okay.
And was this solely a function of volume? Or did you also see any elements of pricemix into this decline?
This is 100% volume related due to lockdowns and people not allowed to do business.
Okay. On raw material, you state, as I find it, that the spread between your price and raw mats have been positive. But could you also give us an indicative figure on how much the actual raw material impact is helping your margins in Q1? It looks like it should be quite a meaningful contributor both in Q1 and throughout the rest of 2020 if staying at the spot levels.
Yes. I think as always, we've mentioned it before, when it's bad. So we didn't want to blame the spot levels when it was bad. We're not going to thank the spot levels when it's good because we, of course, buy things at different periods of the year, and we have hedging for aluminum, etcetera. So in practice, you're right.
It is expected to help us with the current levels over time. Yes, it did help us. And it's, of course, a combination of what we did with a what we do from a purchasing approach as well. So no, I'm not going to give you exact numbers, but it's clearly a as we were already presenting that we expected it to help us in 2020, that is happening. And therefore, that should continue to help us in the rest of the year as well.
Great. But would you confirm whether or not both the parameters being raw mat and price helped? Or was it solely raw mat that helped us? Both helped.
So our pricing helped and the raw material is helping.
Okay,
great. And lastly, how do you feel about pricing in a scenario where we have a little bit of long lasting effects on consumer confidence, do you have a plan to be more aggressive to get market shares? Or are you willing to sacrifice market shares in a scenario where people start to trade down a little bit more?
I think the reality is that as we look at every single product category and subcategory, we do a market based pricing. We do not do cost plus. We do market based pricing. And we would be stupid if we didn't continue to challenge market based pricing, which will therefore mean that in some categories where we feel that we're so much better than everybody else, why should we then tactically not make sure that we make the right amount of money? And in some categories where we are challenging others, we just need to be smart about what our pricing levels are, and we need to be very savvy on what we do.
So it's a little bit too simple to make one answer on it. But I think generally, we always look on a market based pricing. And I think realistically, it's not going to be about this company all of a sudden becoming a discounter selling product at Rustoma no matter how good Rustoma will go year because that's not what we do. We sell high quality products at a premium price point.
That's very clear.
All
right. Thank you, guys. Keep it up. Thank you.
We have a question from Matt Bliss from Kepler
Chauffeur. A couple of easy ones, I guess. First, coming back to the slowdown of safety in mid March. And I just had a question there regarding the how you see the well, is there is this sales signal sufficient to sort of avoid having an excess inventory in the supply chain that could affect your opportunity to sell EMEA going forward?
Yes. I think the key point to make here, aside from RV products, where we do sell to 40% plus to the manufacturers where they assemble our awnings and bike carriers on the vehicle, which is fully ready made on a purpose built way for a specific consumer. Where there is, of course, a more classical old style, we deliver in big containers a lot of awnings to a manufacturing plant, and they therefore have will have some stock. Even there, one of the things we've prided ourselves over the last 10 years is we become super efficient in making sure they didn't need to sit on too much inventory. So also there, we don't have a huge order stock and huge inventory holding at our retailers.
If you look at them or sorry, at the manufacturers. If you take the rest of the business, which is then by far the majority of our business, 90% of that business goes via retail. We have relatively physically large products, and they are seldom purchased consumer goods. So they're not sold 15 a day, even if we would love if they were. So the majority of our products is therefore something the retailers are striving not to have too many home generally because they occupy space in the store and because we have a fantastic ability to deliver on time in full next day.
So that means that what you see is when people stop ordering, they stop ordering because they don't need it that day because their store is closed. When they open the store, they sell the bike carrier they had or the 2 strollers they had and they need to order the next day. So generally, I don't have any fear from there is an overstocking in the market at retail at all. My whole worry about what will happen in Q2 is more about how will various states go through their exit from low down? What will that mean in measures and steps?
How quick will it be? And after people have been allowed out of apartments, will they day 1 say, let's go biking on a bike trip, mate, let's go? Maybe not. And that's going to be some will because they've been longing for it for 6 weeks. Some might not.
They say, oh, I'm just happy to be able to walk out in the park and breathe again. So we'll have to see if that's going to be the issue, not that the retailers are sitting on inventory.
Okay. So it's no use waiting for a good deal minus next 5th period then. It sounds like that anyway.
Yes. I think there's always a very good deal. Anytime you buy a sort of product is a good deal in that sense. But no, I doubt that there will be anybody trying to dump things out there. I doubt that very much.
Yes. And then coming back to the packs and bags there, and I guess it's a tough market out there. Do you expect to implement some restructuring in that area? Or is it more like wait and see and could keep your
Yes. We have had to be in a lot of restructuring in that business for a lot of years, and we are running it extremely slim with 3rd party suppliers assembling the bags for us having product design, product development and product management sales of it with a very efficient use of general center warehouses, etcetera. So I don't have neither the need nor the opportunity to do any significant reduction in terms of taking out a lot of costs because we run it very lean. So what we're doing there is a little bit less aggressive on intending to grow, so some less product development measures. Otherwise, it's going to be about maintaining that slim structure and capturing as much as we can of the market.
Okay. And finally, Jatin, you have touched upon it probably, but the M and A opportunities going forward, I mean, you're in pretty good shape and there are competitors out there that may be not that made some bolt on acquisitions historically. Is it those kind of bolt on acquisitions we could expect going forward? Or do you see any sort of bigger ones coming up now and I think the same sort? Is it more like handling your own structure?
That's the main point. So we shouldn't expect anything.
Yes. I think in terms of M and A, you need to be careful to change your mind just because the world is in a turmoil. We have said that organic growth 1st month, we will definitely keep on doing bolt on acquisitions, no doubt. And we've said already before, there are only a relatively small set of larger companies that we would really be interested in because we need a quality company if we're going to take in a bigger chunk. Because then you take on so much responsibility, you don't want to have a 5% EBIT company and think it's going to be easy to turn that to an 18%, 20% EBIT company.
So those are relatively few and far between. You're right in that sense, Musk, that it might be that a crisis makes that some of those come to market or something like that. I wouldn't speculate too much on that. I still believe that it's going to be the organic growth and bolt on acquisitions that's going to be the key. We will, of course, look at if it's one of those right ones that we've been considering it's interesting, we would definitely be one of the players in such a process.
Okay, great. Thanks, Bill.
Thank you.
It seems we currently have no further questions. So if you'd like to continue.
Thank you. Then I want to conclude by saying I hope you enjoyed our trip down memory lane, the old Champions League final, remembering how swell we all felt at the end of Q1 last year in the beginning of the call. We apologize for that. But I still want to remind you that I think we delivered a fantastic EBIT margin in Q1 despite some challenging end of quarter situations. We will be running this company on a long term agenda and a long term focus.
I feel very good about the long term in terms of what we do as a company, our financial strength, a strength position we have there, our ability to very flexibly meet demand, our great product and our continuously growing brand presence. And we are maintaining that focus on the long term while, of course, being smart about the short term focus. So with that, I thank you for your attention and look forward to talking to you again after the Q2. Thank you very much.