Ladies and gentlemen, welcome to the Thule Group Interim Report Q1, January to March 2020 Call. My name is Maxine, and I'll be coordinating the call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Magnus Welander, CEO, to begin. Magnus, please go ahead when you're ready.
Good morning, everybody. First, I have to make a practical announcement since , unfortunately, our service provider managed to put up the link to the quarter one report in 2019. I think it's a little bit like when everybody's 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. Although that might bring us back to a brighter feeling at the end of quarter one 2019 than we currently have, I still need to ask you all to go out of the web conference, and if you see the 2019 presentation , 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.
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 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 and great expectations, and then, as we all know, the world and the Thule Group have faced a very different reality in the last two weeks of the quarter. 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. The first slide in the presentation is, of course, a summary of the quarter.
If you look at the quarter, it's a quarter with two 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 , when we did not perform as strongly as we wanted , was due to the Coronavirus. We have, as you know, been growing very nicely in our luggage area in the Asian Region. As the Asian Region was the first 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. That started impacting relatively early.
As we saw those signals, we, of 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. Sales dropped 5%, 7.5% excluding currency effects. In Region Europe & Rest of World, we reduced by 5.7%, and in Region Americas , by 13%. All of that reduction came in the last two weeks, which made it so that, of course, some of you analysts already have very quickly calculated that that means that we almost saw a 50% drop in sales those two weeks, which is normally actually the peak part of the first quarter as we normally go into a strong spring season towards the end of March.
We have delivered an underlying EBIT of SEK 326 million. We have also generated a positive cash flow of SEK 8 million compared to a negative cash flow of SEK 145 in the first quarter last year. 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 for those plants mid-year, but then, of course, if you have in two 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 the 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 is that we still could deliver an 18.7% EBIT margin.
The whys, of course, quickly then assume that if it had not seen such a significant volume drop at the very end of the quarter, we would have been on track with 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 plants, as we were estimating having made some significant improvements in those plants last year. It was due to a better price versus the incoming cost of goods sold situation. We also saw some mixed changes, slightly negative, and we, of course, saw some underabsorption 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 & Rest of World and look at the performance there, it's very clearly a relation to how hard the measures were implemented by various governments and states that really impacted sales. 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. We see that countries that took the biggest and most decisive and dramatic measures of lockdown and staying at home, like France, where it was even prohibited to go outside for exercise and many other matters and where almost all businesses closed, saw very dramatic declines. While in countries that kept more open, we could even see growth, like, for example, in South Korea.
Also in Europe, in markets like the home market for the company, Sweden, a small market for the Thule Group. 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 second quarter 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 lockdowns.
Which is also why, even if I'm sure I'm going to get a lot of questions from people in the coming Q&A on our speculation going forward, it has relatively little to do with what this company is doing and very much about what the governments do in terms of lockdown measures. There was one category that we managed to grow, despite the fact that that category also did have a decline in growth pace at the end of the quarter, and that was Active with Kids. Very happy with the performance of Active with Kids. It's a combination of a successful launch of our new Thule Spring stroller and actually a good continuous performance of the rest of the product portfolio in Active with Kids as well.
Active with Kids is also the portfolio which we believe, from a category perspective, will have the least impact on Q2 performance in terms of lockdown measures. It is a product category more associated with maybe what people will start to do immediately as they are let 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 go to the Americas region and look at the performance there, the same thing applies, which means that also there, growth until mid-March and then, all of a sudden, a dramatic drop in sales. When you look at Region Americas, you know that we have significant exposure to North America. Within North America, there are certain regions that are very dominant in sales, not purely linked to the number of inhabitants in those U.S. states and Canadian regions but also to what type of activities people pursue in those regions. Very important regions, both in terms of number of people living there and 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.
States like California, the states around the New England area, and the Quebec and Ontario regions all implemented very restrictive lockdown measures with shop closures and stay -at-home orders, which clearly then impacted the end of March and have also been impacting here in April. Same thing here. It will be very important now to see what the various let-ups of those exiting lockdown scenarios mean. Similar to Europe, where Germany, Austria, the 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 Region Active with Kids showed very nice growth. Here it was a combination of two factors. Also here, the Thule Spring is doing really well, but it's also a good comeback to growth after a slightly disappointing 2019 for our jogging stroller, the Thule Urban Glide. As we did mention a few times last year, we had some competitors doing , in our opinion, extreme pricing actions.
They have done less of those, and then immediately our sales have picked up in the first quarter. 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. 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, normally here I would throw our CFO as 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, then next quarterly report, you will hear his beautiful voice when we talk about the income statement and the operating working capital. 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, 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. As you also remember, we have a negative tariff impact from the China -to-U.S. tariff. As you all will remember, the second phase of those tariffs was implemented as of July in 2019, which means on a comparable basis now, when we compare quarter one 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've 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 continue to invest in product development. You also remember that in quarter four, 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 million in 2020. That savings first quarter came in on a quarterly basis, so that was part of our reduced spend, those targeted savings.
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, aren't so much to pat yourself on the shoulder about, because if there isn't a fair happening, you will automatically get some savings. If you can't travel, you are saving a lot of money on travel. Those are automatic, I consider them to be. On top of that, we are, of course, taking some other smart measures to ensure that we do the right thing, both short-term and, more importantly, definitely also long-term. Tax rate in the quarter was within the guidance, it was at 23.5%.
If we 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 : we would reduce inventory levels in smart steps during 2020. We will continue to do that. 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 unexpectedly, very dramatically, you struggle in a few weeks to compensate as much. Still, our inventory levels did go down. 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 an FX effect at 23%. We were progressing very well.
Still, despite the drop in sales, we feel good about what we will do with operating working capital. Cash flow from operating activities was 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 Hillerstorp, next to our big plant, where currently our global head office for product development sits and where we're constructing a purpose-built product development plant. At that site, we are investing and continue to plan to open it in quarter one 2021 still. Let's then go to what this meant to our financial targets. Yes, it's obvious we were tracking ahead of our organic growth target until the 13th March, and then things started happening. 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 x, which was 1.9 x at the same time last year. I feel very calm about where we stand in terms of cash position and finance position for the company. As you are aware, the board announced on the 22nd of 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 spring-summer exposure due to the type of products we sell and when people want to pursue the activities that those products are used for. You can really simplistically say, as we have done many times and announced on numerous occasions, that you can simplify it by saying around mid-March until early August, that's where the chunk of the business is done. 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 management and serious management did, focus first 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 distancing at workplaces, et cetera. 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 situation is from a generic perspective, was exceptionally brutally wrong for the Thule Group. We have to say that. Exactly when we normally pick up the most in sales, mid-March, most nations around the world went into aggressive lockdowns, closing stores and closing the opportunity to go outside.
If we look here on the slide, you see our reported sales and reported underlying EBIT by quarter in the three years prior and also, of course, for Q1 2020. It's clear that if you had a third of your sales and close to half of your profits in quarter two, and in quarter two, you started with some nations being completely closed down, like France, and other nations being quite far from closed down, you will have a very tough quarter to be able to deliver a full year at the levels that we would have expected. 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.
It will also impact the opportunity of how bad or not the third quarter will be. As I mentioned before, we believe speculatively from what we work with, so not anymore about when nations open up because anybody else could be as good at speculating as I could. 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.
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. We will have to come back in after the second quarter to also be able to say more about what we can expect for the rest of the year. It's clear that if you take Active with Kids , it's the category we believe will suffer the least. It is also obvious that travel luggage—I think anybody sane 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 have dropped more than 70%, 80%, and up to 90% in March in some countries.
It's clear that a small, very small category for us is still growing and will not see that same path as we had. sport & cargo carriers and RV Products are products we believe have a very good opportunity, but they are not the first thing on day one 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. 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 COVID-19. 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 them in place. We have set up new social distancing and hygiene standards in all our plants.
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 at the end of March and 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 statuses, planning, et cetera.
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 and also to help ourselves in managing the right level of inventory on the right products while handling the drop. Another factor that helped us 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. That's seasonal staff employed by the Thule 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 at this period of year for the peak season.
As you can all understand, those 600 are not there now. That has enabled our flexible way of setting up that seasonal handling and has enabled us to very quickly act on staffing levels aside from the short-term furlough opportunity provided by most governments where we operate. That level of initiative has 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 very solid financing in place, which means we have all the calm working room and do not need to focus on those aspects hindering our decision-making. If you look at the long-term strategy, I can say it's virtually unchanged, and the virtual part is two 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 two more collections and had a number of initiatives planned for 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. There are some adjustments to our plants for luggage already having happened. It is what we already have been, as we've mentioned many times, as a company, focusing on supporting all our customers, both online and brick-and-mortar. We have spent significant effort on our online support to retailers, and we have, in the past two years, opened up online sales in the U.S., Sweden, and Denmark ourselves directly to consumers.
It's obvious that those are measures in a reality where brick and mortar is more challenged than ever, so it is a good time 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 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's been around and as long as we've been on the stock market. 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 a share of sales, which was the plan for 2020, 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 Thule brand and the motto, Bring your life. It is, of course, something where we believe that if you look at what that brand connects to, it is friends and family in your close vicinity, close to your homes, going on short trips, going on small vacations, and the classical concept of staycation is where we are doing best already. I feel we are correctly exposed there.
Of course, utilizing our strong backend organization and flexibility and efficiency in our structures in doing that. 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, one, the health and well-being of our staff, two, adhering to all the guidelines and rules in terms of lockdowns, et cetera, and three, 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.
If you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted. We have a question from Karri Rinta from SHB. Your line is now open.
Yes. Thank you, [inaudible] . Firstly, about the comments regarding the expected recovery after things normalize. If you look back at what happened 10 years ago after the financial crisis. What can you say about your sort of growth rate, earnings growth rate, in 2010? Maybe more specifically, what happened then, and what do you expect to happen now within Sport & Cargo Carriers? if you can, discuss the different product Sport & Cargo Carriers, in a bit more detail. What's your experience of recovery rates within that category?
If we take Morning, Karri. I think if you talk about the financial crisis, you actually have to go back to 2007 to 2009 or late 2007 until 2010 to look at it. If you look at the growth we had in Sport & 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 the crisis. What happened here? I think you need to be very careful when comparing a financial crisis with a lockdown where people are not allowed to go out and do things. You might be speculating, Karri, that there is a similar financial crisis, and that, in turn, might be the similarity later on. We will see about the financial crisis.
If it is more about will people, when they potentially have less to spend, still continue to buy Thule products? If that is the scenario you're asking about and comparing them with the financial crisis, it must make sense, yes, they did. In fact, we saw growth rates in countries like Italy, Greece, and Spain also in those years, 2007, 2008, 2009, and 2010. The logic for that was that maybe they skipped some trips to Bali, Thailand, and other places, but since we do not sell products at the low price points, there are always private label products that are much cheaper than the high-quality products from Thule. 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.
If you looked at it from that perspective, we saw that the staycation maybe offset some of the general spending. Our belief is if it's a pure financial situation, we will see a similar growth pattern. Now with a pandemic and global lockdowns and quarantines, it changes the game completely. It's not about me not having the money to do it. I'm not allowed to have the shop open. I'm not allowed to go on doing it. 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, such as Sport & Cargo Carriers, there are some categories that are more exposed to seasonality. The most exposed is the biggest one, bike carriers, which are clearly the most spring/summer products. There is a good logic for that.
Any keen biker on the call will know when it is that you're the most keen: it is when early spring sets in, you see the light, there is no ice on the roads, and you're ready to go. You start going out and you have those long pants on and your gloves, et cetera. Then as the spring comes, you start loving it. When it then comes to the big market, now again reminding you that the big markets for bike carriers are in Central and Southern Europe and the U.S., not the Nordics. 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 by biking.
There is the category in the short -term reality that we're most exposed to: how early people are let out or not out of their lockdowns. While there is a slightly more late reality, if you look at roof racks and roof boxes, they are 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, hits us now ahead of Easter skiing, which is obvious on roof racks and roof boxes. The majority of our roof racks and roof boxes are sold in connection with summer vacation, where you need to pack your stuff to drive to the summer house or drive to the beach or drive somewhere and you don't have enough space. That then comes later on.
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. 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 survive in this? Maybe independent bike retailers in the U.S. or some bigger sports chains that were sort of challenged already before. What kind of risk concentrations do you see among your customers?
Yeah. If you first take the reality that you have 35,000 doors and a lot of different customers and no customer represents more than 3% of your sales, we are constantly seeing by default, as I tell my two daughters that study at university when they ask me, Dad, do you see any of your customers going bankrupt? Constantly. Because the 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, Karri, 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 is being hit and hurt much more than others.
For example, one of the things that happened in both the U.K. and California was that bike shops were considered essential shops to be open to service bikes all of a sudden. 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. 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. That is because we are a next -day delivery company, which means we generally, even to rather big retailers, sell 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 a season's worth of winter sports 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 Stjernholm from Nordea. Your line is now open.
Hi, Stefan Stjernholm here. Can you hear me?
Yes.
Yeah. 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 are currently closed.
Yeah. You know me well, Stefan. I talk very little about the future, but April is almost starting to be the past, and I knew you would be asking. April is as bad as the end of March was. That's the quick, simple, and then everybody has to do their estimation of how bad the end of March was. If you look around the world, it is so dramatically different. France is, for us, almost no sales at all. It is the most extreme of the European countries in terms of measures of lockdown. France is our third biggest market, so that is a challenge. In other markets, they are almost fully open, and in some markets they are being opened now as we speak at the end of April.
If you look at it, we have anything from countries with almost 100% of our shops, retailers, and customers not being allowed to do business to some markets where they're almost fully open. I would say that it's shifted already during the month. It's opening up, and the key market, Germany, which is our second -biggest market, is the one that is opening up now as of the last few days. That will add a lot of store openings in total because the German market is such a big market. 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.
If you look at Sweden, for example, whereby stores have been open throughout this period, can you see a recovery in April versus the last two weeks of March?
Yes. 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 made , it isn't day one. 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 six weeks. Once you've been out there breathing, doing, and going to work a little bit, you see some of those products being picked up very quickly, like a jogging stroller for your kid or a multi-bike trailer. Those quickly have picked up sales, I can say, very quickly. While some of the other products are coming one or two weeks later on, you start to see the bike carriers picking up, et cetera. It takes a longer time for our sport and cargo carrier product than it does, for example, for our Active with Kids product.
If you look at our RV Products, there we are much more associated. Roughly 40% is sold to manufacturers building motor homes. There we're associated with those motor home manufacturers going back to operations, which they are at the moment in Germany, opening up this week to partial productivity. It will be very difficult to judge, but the next six weeks will be very telling.
Yeah. The last question from me, regarding underabsorption in production, can you give a figure for what that impact is on gross margin in Q1 to get a sense for what we can expect going forward?
No, I couldn't. 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 now, which we, of course, despite being very proactive, due to both following professionalism towards your employees and following how those various legislations needed to land in countries were not impacting or helping us in any form in the first quarter. They will, of course, be offsetting some of that under absorption in the second quarter. It is far too early to speculate on what that would be.
Okay, thanks.
We have a question from Fredrik Ivarsson from ABG Sundal Collier . Your line is now open.
Good morning, everybody. First of all, a question on Active with Kids. Basically, the only category besides RV U.S., which grew in Q1. Can you tell us something or give us some sort of comment on whether or not this is actual sell-through coming through, or if it is mainly retail selling of the new Thule Spring 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. I'm convinced that that was a sell-through. Also, Active with Kids actually had a stronger performance until the corona impact started reducing with lots of juvenile stores also being closed around the world. No, I'm convinced that that was sell-through.
Okay. Very helpful. Then secondly, can you give us some sort of ballpark figure of what share your white-collar employees are on furlough?
Yeah, indicatively, of course, there are big differences, as you can understand. There are some staff that are very much up to the extremes, up to what you can do in different legislations and countries. There is very different laws and very different restrictions, but indicatively somewhere around 30%.
Okay. I guess product development would be less impacted, as you indicated, with the R&D spending probably being up by a percentage of sales. Is there a risk of delays with regards to your product roadmap going forward?
As we said earlier on, we are making some choices on some projects that we will be launching later. Since you don't know what that roadmap is, and since we will have so many exciting new products, I don't think anybody externally will notice. This is also part of one of the things you do. It's been interesting. If you follow the outdoor industry, there have been five of the most important players in the outdoor industry in the last two 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 from Thule because we're not fashion, and we don't need to dump in and out. You can use our bike carrier for many years. Sometimes when we launch products, it's really more tactical, it's time to refresh. You will see a lot of new products in all our categories in 2021 as well. Some products that maybe were targeted for early 2022 might be for mid -2022, or if everything turns around again and the world opens up again, we might speed it up again. That's more how you should look at it.
Okay. Looking forward to those launches then. Thanks a lot.
Yeah. Thank you.
We have a question from Daniel Schmidt from Danske Bank. Your line is now open.
Yes. Good morning, Magnus.
Good morning.
We 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 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 can be covering a lot of things. If you look at our gross margin performance and efficiency in plants, it is of course clear for most people when they looked at our books over the years and looked at annual reports, et cetera, that, simplistically said, three quarters of our cost of goods sold is material and one 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 worse, that should mean that a significant chunk of what helps our gross margin will be continuing to do well.
If you look at the other parts of the transformation cost component in 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 forklift drivers that serve a lot of different production lines, et cetera. In a reality where your demand is lower, you're going to have some of those staff also on short-term furlough. 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 with operating leverage is more that, if you drop a lot of sales in your biggest quarter, it is a balancing act of how many other costs you're taking out of your SG&A cost structure. Also, there are, of course, some short-term furlough offset things, 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. That is, of course, the most delicate and intellectually demanding situation we have at the moment, and constantly discussing it with our board as well is to do that balancing, driving for long-term success while being smart about short-term challenges.
Good. I think I can read you between the lines. 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. 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 development 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. Put it this way: you said that you will keep product development spending elevated in 2020, and you had this guidance that it will go down a percentage, but of course, COVID-19 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, not in percentage terms.
Thank you. That's all for me.
Thank you.
We have a question from Gustav Hagéus from SEB. Your line is now open.
Thank you. Good morning, guys.
Good morning.
Could you just reiterate, Magnus, about the 50%? Did you say 50% of sales dropped in the last two weeks in March, or was that just a general discussion of the mechanical impact of reaching that 5% organic growth or drop in Q1?
What I stated was that if you look at the factor that we've communicated, that we had very good growth until mid-March, then it's not exactly, to be honest, two weeks is always a discussion when we started. We can say we started actually seeing the drop on the 13th March if you exactly want to know when we stopped growing and started to see negative numbers versus the same period last year. It's slightly more than two 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 therefore what I'm saying, what that April is around.
Yes, okay. Was this solely a function of volume, or did you also see an element of price mix 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 has been positive. 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 it stays at these spot levels.
Yeah, 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, etc. 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 do from a purchasing approach as well. No, I'm not going to give you exact numbers, but it's clearly a success; 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. Would you confirm whether or not both the parameters of raw material and price helped, or was it solely raw material that helped that spread?
Both helped. Our pricing helped, and the raw material is helping.
Okay, great. 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. 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? 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.
It's a little bit too simple to make one answer on it, but I think generally we always look on market-based pricing, and I think realistically, it's not going to be about this company all of a sudden becoming a discounter selling products at Rusta or Jula, no matter how good Rusta or Jula will be next year. 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 Mats Liss from Kepler. Your line is now open.
Yeah, hi. Thank you for taking my question. A couple of easy ones, I guess. First, coming back to the slowdown of sales in mid-March, I just had a question there regarding how you see it. Is this [sales dial] sufficient to sort of avoid having an excess supply and excess inventory in the supply chain that could affect your opportunity to sell going forward?
Yeah, I think the key point to make here, aside from RV Products, where we do sell +40% to the manufacturers, where they assemble our awnings and bike carriers on the vehicle, which is fully ready-made in a purpose-built way for a specific consumer. Where there is, of course, a more classical old style, we deliver in big containers and a lot of awnings to a manufacturing plant, and they , therefore, will have some stock. Even there, one of the things we prided ourselves on over the last 10 years is that we became super efficient in making sure they didn't need to sit on too much inventory. Also there, we don't have a huge order stock and huge inventory holdings 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. The majority of our products is therefore something the retailers are striving not to have too many of generally because they occupy space in the store and because we have a fantastic ability to deliver on time in full the next day. 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 two strollers they had, and they need to order the next day. 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 various states will go through their exit from lockdown. What will that mean in measures and steps? How quick will it be? After people have been allowed out of apartments, will they on day one say, Let's go biking on a bike trip, mate? Let's go? Maybe not. Some will, because they've been longing for it for six weeks. Some might not. They say, Oh, I'm just happy to be able to walk out in the park and breathe again. We'll have to see.
That's going to be the issue, not that the retailers are sitting on inventory.
Okay. It's no use waiting for a good deal on my next bike carrier then. It sounds like that, anyway.
Yeah. I think there's always a very good deal. Anytime you buy a Thule product, it's a good deal in that sense. No, I doubt that there will be anybody trying to dump things out there. I doubt that very much.
Yeah. Coming back to the Packs, Bags & Luggage there, I guess it's a tough market out there. Do you expect to, well, implement some restructuring in that area? Is it more like wait and see?
We have had to be in a lot of restructuring in that business for a lot of years. We are running it extremely slim with third-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 central warehouses, et cetera. I don't have either the need or the opportunity to do any significant reduction in terms of taking out a lot of cost because we run it very lean. What we're doing there is a little bit less aggressive on intending to grow, so there are 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. Thank you. Finally, you have probably touched upon it , but the M&A opportunities are going forward. You're in pretty good shape, and there are competitors out there that maybe have not made some bolt-on acquisitions historically. Are those the kinds of bolt-on acquisitions we could expect going forward? Do you see any sort of bigger ones coming up now? I think it's the same. Is it more like handling your own structure that's the main point? We shouldn't expect anything?
I think in terms of M&A, you need to be careful not to change your mind just because the world is in turmoil. We have said that organic growth comes first, Mats. We will definitely keep on doing bolt-on acquisitions, no doubt. We've said it 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 into an 18% or 20% EBIT company. Those are relatively few and far between. You're right in that sense, Mats, that it might be that a crisis makes 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 as interesting, we would definitely be one of the players in such a process.
Okay, great. Thanks, Magnus.
Thank you.
As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now. It seems we currently have no further questions. If you'd like to continue.
Thank you. 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 and the beginning of the call, we apologize for that. I still want to remind you that I think we delivered a fantastic EBIT margin in quarter one, 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 strong position we have there, our ability to very flexibly meet demand, our great product, and our continuously growing brand presence. We are maintaining that focus on the long term while, of course, being smart about the short-term focus.
With that, I thank you for your attention and look forward to talking to you again after the second quarter. Thank you very much.