Good morning, everybody, and happy to talk about our Q3 of 2019. And as the first slide headline says, it was a very good quarter in all markets except our biggest market, the U. S. So of course, the coal will both deal with what's going on in all the other countries outside the U. S, but of course also why we didn't perform as we would have liked in the U.
S. So if you look at net sales, we had a net sales of 1,682,000,000,000 dollars which meant a 7.7 percent growth and excluding the currency effects at 3.9% currency growth. And there the region, Europe and Rest of World grew with 6 point 7%, excluding currency, while we saw a decline of 2% in region Americas. Fully contributing the negative effect was the U. S.
Margins. If we look at EUR 1000000 and an underlying EBIT margin of 16.3%. For you who also read the report, we have also announced the fact that we have initiated a product recall of 2 types of motorized awnings in our RV product category. So EBIT effect as we have made a SEK 25,000,000 provision for that product recall is then that we are EBIT is SEK 249,000,000 in the quarter. And from a net income perspective, we are at €181,000,000 Good solid cash flow in the quarter and the cash flow from the operating activities was €571,000,000 as compared to the €499,000,000 for the same period last year.
If we turn to the next page and look a little bit what this quarter versus the year to date performance has been, You can see that on a year to date performance, we are growing in our sales of 9.4% but 4.6% excluding the currency effects. So we are still doing a solid growth. Our growth of EBIT year to date is 6.8%. And year to date, we are then at a 20.2% underlying EBIT margin versus the 20.6% the same time last year. If we then jump to into the regions and we start with region Americas.
We can clearly say that it was a tough quarter in the U. S. Market, which is our biggest market. So net sales was €494,000,000 but it was a 2% decline excluding the currency effects. And year to date, we have a 0.1% growth, excluding currency effect.
If we look at it, there are some good things in the region and then there are some tougher things in the region. So if we to highlight in regards to the acquisition we did in December last year of the Tepui branded rooftop tents where the focus of that market is in the U. S, it is very nice to say that that is tracking according to our plan. Sales from Tepui was in this quarter SEK 14,000,000. And year to date, we have sold for SEK 61,000,000, which means if you would compare to what TEPUVI as a standalone was doing in that same time period, a 24% growth versus previous year.
We have already announced that as of 1st January 2020, we are rebranding these products to Thule. So they will be Thule rooftop tents with Thule as the brand. And we are also bringing them into a global scenario. So it's very nice to see the strong performance of that acquisition continue. We've also mentioned for a 18 month period the choice we made to phase ourselves out some low margin OEE programs in the U.
S. Market specifically. The impact negatively in this quarter was up €10,000,000 Year to date, we've had a decline of €39,000,000 We are finally coming to an end of this phase out. So if we look at it in the 4th quarter, we are expecting a decline of a slightly bigger decline than we had in Q3, which then of course will impact that quarter more proportionately as that is a smaller sales out quarter. But it also means that we are finally coming to an end of something that over a long period of time had been a drag on the U.
S. Sales defaults. If we look at then that U. S. Market taking in these things into consideration, the U.
S. Market specifically declined 6% in the quarter. I think all of you that are following consumer goods companies and especially seldom purchased consumer goods companies in the U. S. Market know that the communication in regards to tariffs has been erratic over the year and unclear at times.
But to remind everybody a little bit on what has happened, we had a tariff communicated September last year, late September last year. And that tariff was then announced to be a 2 step fair with first tariffs implemented at the very end of September 2018 of 10%. The additional 15% were initially planned to be implemented in January. That did not materialize, and it was then later on postponed and announced in late May for a true introduction in July. So in the Q3, the additional 15% tariff.
And then after that, in fact, there is additional tariffs on some of the products that initially were not included in tariffs on these Chinese produced goods. On a total scale, we have more local U. S. Production than our competitors have in these niches where we do. So it's not that we have a competitive disadvantage.
If anything, the opposite is true. But what absolutely has happened clearly in the period is with the confusion and the concerns in the marketplace, it's clear that several retailers have both worked on their inventory levels further. There has been clearly some impact also on consumer confidence, especially related to the bike category where sales numbers as officially reported in the U. S. Market are very disappointing on sales of bikes.
And the reality is this bikes are to a great majority in the U. S. Made in China. And if you look at a tariff impact then in the Q3 as of July of 25% on a relatively expensive bike, that has meant that a lot of U. S.
Consumers, I think, partly tactically, and this is my hypothesis, together with our U. S. Sales team, are maybe hoping and holding on and waiting for some end of season discounts or some changes potentially to tariffs before they commit to buy new bikes. So there is a tough bike market definitely in the U. S.
There is a general retail concern. What is also the case is that every time when you have a outside performance that is not promising to quickly change into the better, you as an organization have to challenge if you have done everything in your power and with the right ways in this organizational setup that you have. What we have decided to do is that we, together with the U. S. Management, are going through a detailed review on our commercial organizational setup for the U.
S. Market specifically. And we'll be announcing some changes to that setup during the 4th quarter. To give you an indicative thing because that easily sounds like we're doing major restructurings, that is not what we're doing because we have a lean and well working overall organization. But at the same time, as some flows of who we sell to and where we sell and to whom we sell, we work with, as often is the case in the U.
S, a combination of owned salespeople to major national accounts combined with independent sales rep groups for specific smaller shops around the U. S. Market. And as flows and growth rates change between these type of accounts, there is opportunities to reorganize and reshape the organization. At the same time, we also are in the final phases of an implementation of 1 global ERP system, where we, by Q1 next year, will be ready with that implementation.
And that, of course, also enables some synergistic efficiency gains in how we operate as a company globally. That will impact the U. S. Setup. So what we're talking about to give you a sense of scale, this is a rough number, but it's a sense of scale of a one off cost hitting in the Q4 of around SEK 15,000,000.
And we then assumed annualized savings when fully implemented of around SEK 20,000,000. So it's not the focus is not, as you can hear on those numbers, the financial as much as the operational efficiencies of a slimmer, better operating setup in the commercial structure that we are asking. So that's for the U. S. If you look for the rest of the markets in the region Americas, Canada kept on performing really well.
Brazil, which is the 3rd market where we are integrated forward to sell direct to retail, continues to perform well, which is very nice. And as many of you will have remembered, in the rest of the Latin American markets and Central American markets where we operate and we distribute your setups, has been quite erratic performance during the 1st 2 quarters of this year. It was therefore very nice to note that we had a growth in the rest of Latin American markets also in Q3. I personally still believe that the Latin American markets will continue to be volatile, but it's nice still to see that we had a strong Q3. So overall, outside of the U.
S, a strong performance. If we then go to region, Europe and Rest of World, there we can clearly say that our performance was very solid in the ending part of the season in Q3 as well. So we had sales of EUR 1,188,000,000, dollars which was a 6.7 percent excluding currency effect growth. Year to date, we therefore had a 6.4% growth excluding currency effects. And what is nice to note here clearly was that this really applies to all major markets and in general to all markets actually.
And especially here, once again, noting to previous quarterly calls where we have communicated a weak start in the Nordics region and in the Russia region in the 1st part of the year. It was nice to note, as we had expected, that Nordics returned to a positive performance. And it was also good that Russia did the same. So we saw a good development in both positive regions as well. We have also commented previously in the roof racks where we I remind everybody that we are doing a very big generational shift that we have partially decided to make life easier for all our retail customers around the world being the undisputed market leader globally on roof racks, which is a very complex category to serve all the different car types and car roof types and car models.
We did that launch or decided to do that launch in 3 phases. We're just about to go into Phase 2 in this region, and the region Americas will follow soon. And as the keen observer of the Sili Group will remember, we have announced that the phase out of the old systems for Phase 1 was slower and with bigger inventory take holdings in some of those distributor markets than we had expected, which therefore dented our sales in the first half of the year. That's why it is nice to see the confirmation that, that hypothesis that we said that, that would be mostly a slower and slightly larger pipeline depletion of O. It was nice to know that we started growth again in the Q3 of rufrex.
Then finally, the category that we also have discussed a lot in the past calls where we will probably be accused of Cry Wolf Syndrome is that we have been quite cautious for a number of quarters in a row on the RV market. And then as you may remember that we commented that the second quarter started well for RV Products after a strong Q1, but then ended abruptly at the very end of the second quarter with clearly a lot less production from the RV manufacturers. We were a little bit positively surprised how strong the RV market continued in Q3 after the rapid decline in Q2. So it is not nearly as bad as we had expected. In fact, it was pretty good.
So that means that some of the manufacturers started in Q3 to get some of the capacity limitations they have had on the new Euro 6d chassis and engines, the new eco confirmed engines to that setup, they must have been getting slightly more than we were expecting. However, if you look at reports from the various companies in the sector and commentary, there is probably still some concern definitely in Q4 on that all of them will not be getting all of the quantities that they may have even consumer orders for those vehicles. I don't think it will be a very strong Q4, but still surprisingly holding on well in Q3. If you then look at the remaining two categories, the newer categories that we are having a long term ambition to win. It's nice to know that Active with Kids continues to perform well and that we now saw a very good growth in packs, packs and luggage.
We are a very small player in a huge market in luggage. And when you're a very small player, you have to realize that it takes time to do things, but you have to have wins all the time. So it's very good to note that in the key Asian markets, which is today, of course, a very small region for sales of the film group, but where in the global sense for luggage, it is a very key region. It is nice to know that we're getting a lot of good listings both at airport stores, department stores and luggage specialists. It is from a very low base, so we shouldn't bear ourselves dwelling on percent of growth.
But it is good to see that we have a good traction with those bags. And we are, of course, continually broadening our assortment. So in the Q3, we launched our 3rd collection, which is called Thule Krasor 2. It's a soft luggage collection with various types of both rolling bags as well as smaller bags. What it also meant was our first soft bag luggage collection with what is called spinner wheels, so 4 wheels, which is a key category.
In quarter 4, we will be broadening that solution with spinner wheels 4 wheels also to our best performing luggage collection Thula Sotaro. So later on in Q4 now, there is coming also spinner solutions into the successful Thula ZAPERA collection. And that means that we're starting to really truly be able to offer 2 full soft goods collections with spinners 2 wheels smaller bags and larger checking bags as well as the Tuller Evolv hard case collection. And finally, by that we're starting to be a real player, not an army of 1 or 1.5, but really starts to have a promoter assortment in luggage. If we then move on to some of the financials, I leave the words to Lennart, who will walk you through that.
Thank you very much, Magnus. So on Slide 6, where we have the full income statement, you can see that gross margins declined in the 3rd quarter CapEx adjusted versus prior year with 1.2 percentage points. Decrease in the margins driven by the negative effect we talked about in the Chinese tariffs with U. S. Processes equivalent to approximately 0.2 percentage points.
Primarily driver was the handover portion hit in our spending units due to lower production volumes. We did see and it's good to note that we did have small favorable purchase price variances on commodities as we have estimated should come beginning in the second half of the year. Looking at our SG and A expenses, they are higher than prior year in absolute numbers. But if we exclude negative currency effect and the fact that we acquired the employees last year. The organic increase in the quarter was SEK 11,000,000 and that is due to the product development push and commercial initiatives.
As you can see, we are still very lean on the administrative expense line. Also, the line item selling expenses worth mentioning is that in here, you see the hit of the SEK 20 5,000,000 of product recall provision that we have mentioned. Financial net, minus SEK 12,000,000, that's flat versus prior year. However, this year, we have the IFRS 16 accounting rule change, which broaden this financial math of SEK3 1,000,000 plus in the expenses. So we were actually like for like, we would have been SEK 3,000,000 less.
And mentioning then the IFRS 16 impact, as we have also had several times mentioned, there is almost no effect on our income statement. As a matter of fact, in this quarter, it's 0 because the EBIT held with SEK 3,000,000,000. We then have the financial expenses on SEK 3,000,000. Effective tax rate quarter, 23 point 7%. So year to date, we are at 23.3%.
If you look at the next slide, which is the operating working capital and operational cash flow, we see that operating working capital, we ended the quarter with TRY 1,446,000,000, which is 20.7 percent of sales. As we said, in the Q2 report, we expected inventory, because that's the main driver for this, to be reduced in Q3, and we did decrease it between Q2 and Q3 with SEK 144,000,000. If you then look at the currently adjusted increase of inventory of SEK 70,000,000 which remains, half of that is SEK 35,000,000 is because of the acquisition of the Boeing, which we didn't have last year and the tariff impact on Chinese purchases. That means that we had a very good operational cash flow in the quarter. So we reached SEK 600,000,000 versus SEK 515,000,000 prior year.
And year to date, we are at close to SEK 1,000,000,000 accumulated versus SEK 800,000,000 last year. So improvement due to increased earnings, improved working capital and less cap refill expenditure spend this year. Thank you.
Thank you, Lena. If we then look at our performance versus the financial targets, we are constant currency net sales excluding the Taguya acquisition at 3.5% versus our target of about 5%. And considering that the 4th quarter is by far the smallest sales quarter, it is clearly the case that we will not be able to reach the 5%. We believe that quarter 4 will be in line with roughly what we did in quarter 3 in terms of sales growth. If you look at underlying EBIT margin, we are at a rolling 12 month basis at 17.7% and year to date 20.2%.
So therefore, it's worth noting and reminding that the Q4 is not only our lowest sales quarter, it is also clearly the one with by far lowest EBIT margin. So if you look at that, that's also where we believe from an EBIT margin point of view will be in line with what we did EBIT margin wise in 2018 in the Q4. If you look at the leverage, we are at a net debt to EBITDA at 1.4 times. And we've of course done the dividend of the SEK 7 per share this year, which was 86% of net income. So if we look forward to the coming months, the commercial focus for the coming months, it is as always for ourselves to make sure that we support our retailers to get the true sellout traction of those new products.
And I mentioned already the broadened luggage portfolio with the total cost of reduced soft sided luggage collection that started coming into stores already in Q3 in some markets and it continued to roll in and hopefully then roll out of the stores as well in Q4. We have now in Q4 the launch of our new premium rooftop box that's a Levexter. So that is a positive to bring into the 4th quarter. And we are in the European region doing the Phase 2 of our new roof rack generation. If you look at it from a point of view more of midterm on what we have shown because quarter 3 is still the biggest quarter for us, showing to retailers what will come in the 2020 season.
We have a number of both fares and OMMs as well as customer meetings showing a lot of new products. And the image on the slide shows the new Kule Spring Compact 3 Wheeled City Stroller, which becomes then our 3rd stroller in the stroller category, which we showed at the world leading Kinzun Jugan fair and is currently showing in the U. S. At the U. S.
Leading ABC Kids Show. That stroller has garnered a lot of positive attention, so it will be a key addition to our stroller portfolio. We also are launching some new, as always, Vicarious, etcetera, and here, I think more of the other thing is that U. S. Targeted to the helium hitch mounted bikeracor, I think, will be a key addition in a challenged and tough bike carrier market.
We are also launching a number of updated and refreshed backpacks and luggage in the next year. So if you look at it, continuing a very long term focus of bringing great product to market also now as we speak looking for the coming months. From a more purely operational focus, we have already mentioned that U. S. Restructuring program.
So I remind that it is not a huge endeavor. It is more of a targeted for the flexibility and the new step that we have from a customer point of view. And combining that with the go live of 1 common global ERP system, enabling some synergistic savings with one off cost estimated around EUR 50,000,000 and then annualized savings around EUR 20,000,000 after that. If you look at it, it is clear also that we have a continued push for big product development efforts, both for those products that are hitting in 2020, but also for those that will come in the years after 2020. And we continue to do lots of effort there.
We can therefore be happy to say that we are doing a big effort and a big growth effort in our Hillostorpe product development facility, where we are we'll be expanding over 2020 2021 as well to handle all of those growth initiatives and projects. In our factories and our 9 assembly plants around the world, we have communicated over the last 2 years a number of major initiatives where we have focused on more efficient assembly setups. And of course, we are aiming to start really capturing some of those efficiency savings that those type of investments should be giving as long as we see that volume growth that we are targeting. So with that, I leave it to the operator to open the floor for questions.
Thank you very much. Our first question comes from Daniel Smith of Danske Bank. Daniel, please go ahead.
Yes, good morning Magnus and Leannotte. A couple of questions from me, starting with the cost side. And selling expenses in the quarter were up by 19%, and I assume that that's been pushed by product development spending kept elevated. Given what you said on the last final slide in terms of product launches in the coming quarters years. Should we expect selling expenses to stay elevated also for the coming quarters, I.
E, product development spending? Is that going to be above 6%? Or where should we how should we pencil in that in the coming quarters into 2020? Start with that one.
Yes. So if we started with I think the most important thing, as Lennart did mention and I once pointed out, selling expenses in the quarter specifically, that is where we have the provision of SEK 25,000,000 for the product recall. So of course, if you then take away the SEK 25,000,000, you do an FX adjustment, which is the key because that happens. In addition, we have now the SG and A or selling expenses of the acquired TEPHUVI organization, which is roughly CHF 5 ish million. Actually, the true organic, so to speak, FX adjusted SG and A increase in the quarter was only CHF 11,000,000.
So that is just to clarify a little bit of what the reality was for Q3. If you look on your more long term, midterm question in terms of are we starting to spend more than 6% on product development? No is the answer. We feel very good that we are going to make sure, as we've seen already, with growth in the newer categories, we will continue to do big product development efforts over luggage and strollers. But like what happens always, when that proportionally starts growing, your percentage proportion becomes more normalized.
At the moment, we have clearly a overspend proportionally by running several parallel stroller projects and luggage projects versus relatively small revenue. Luckily, those revenues are constantly growing. On top of that, we have, of course, a continuous spend in the other categories, but also increase.
And sort of this has, of course, changed over time and a lot of things have maybe sort of been altered since you had the CMD a couple of years ago. And you've been very clear that it's going to stay elevated for this year. But when you say decrease, is that sort of looking a couple of quarters ahead? Are we basically in the second half of twenty twenty then? Or how do you sort of how do you look at it?
Yes. Since we don't run the company, which we've repeated a few times on a quarterly basis, basis, it means, of course, there is no rapid change to this, because it is phasing in on various projects. But if you're right, slowly but surely, you will see it. It won't happen in Q4 because by default, Q4 also being such a small revenue quarter. So it's more when you come into the bigger revenue quarters in Q2 and Q3 next year at the same time as we will continue to in a like for like sense in pure money, spend more money, I am sure, but with growth, therefore, you will start to see the percentage slowly declining, as you say, versus the second half of the year.
Okay, good. Second question on Active with Kids. You mentioned it on the call and you said that you did well. You stated in Q2 and Q1 that there was sort of you were lagging slightly behind schedule or plan when it came to Europe in Q2 and the U. S.
In Q1. Are you feeling that you're catching up on your sort of budget when it comes to active kids and strollers and the Thule's leak?
Yes. If you look at
it, I think very simplistically, we had a clear mention of something, which was the child bite seats in one specific market, which has density a little bit our performance there. If you look at it in the region Americas, we did have a very weak quarter 1 in with kids where we didn't see with some of the existing stronger models with Zalurb and Live 2 etcetera with some of our competitors being extremely aggressive price pitches, we didn't see the performance we would like. That has already turned. So in Europe, the performance is slightly better, but it was actually quite good already, while in the U. S, it was a bad start of the year and it has been better since.
So yes, slowly but surely, we're getting towards where we want to be.
Okay, good. And then finally on the recall, could you say anything more? You're stating that there has been no accidents. Has there been any backlashes in terms of the brand and the consumer perception of the brand in any way on the back of this recall?
I think, first of all, product recall is never good for anybody. So that we need to state. The decision that we have taken to do a product recall is because of our very high focus on safety. There has been very, very few incidents. But due to the fact of how those incidents in an absolute worst case scenario could mean something, hasn't meant any accidents, we have decided to take the most stringent thing you could decide to do, and that is to product recall together with then our RV manufacturer and RV dealership customers and offering the consumers an upgrade to make sure that that risk doesn't continue.
I think if you do that well as a brand and you have a fantastic historical track record, it will not dent you. If you wouldn't do it well and didn't manage it and work all about for having snuck away from it, I think that would have potentially definitely damaged it. So it's never good. Product recall is always bad. It takes time.
It takes focus. It costs money. But from a brand perspective, I am not worried because we have done the exact thing that anybody would expect from a super professional high quality company.
Thank you, Magnus.
Thank you.
Our next question comes from Gustave Sandstroms of SEB. Gustaf, please go ahead.
Thank you. Good morning, guys. If I may start with a quite simple question. Did you have volume growth in Q3 excluding Capoe?
Yes, we did.
Perfect. And then did you engage in any price initiatives in Q3 in Europe related to roof racks and roof boxes? And then if so, does it refer only to your old models or also new the new launches?
The answer is no, we did not.
Perfect. And also could you remind us now for in Americas what your how big of a share case logic in camera bags makeup of your U. S. Sales and what the year on year decline is in Q3?
Yes. So I wouldn't call it Case Logic because to simplify what we call legacy NOE bags because we do sell also Chase Logic newer backpacks and other things, which we do not consider declining categories. So if you look at it, what we call them the legacy NOE bags are those categories, which simply are shrinking away. And you are right, Gustaf. They are by us today sold under the Case Logic brands in that sense, but we do also sell the Case Logic branded products in some of the growth categories.
But if you look at legacy and OE, we had as a total last year, we said it was roughly about 40% of the U. S. Business and much, much, much smaller in the rest of the world where we haven't historically had the historical success with those catches. That has now declined clearly. And I think by the end of the year, it will be more around 30% of the business.
So that means for the total packs, packs and luggage, we're now down clearly to a lot less than we're probably around, yes, less than 20% of the clearly of that business, 15% ish.
Perfect. That's helpful. And referring to Daniel's question on the stroller side. With Tula Sleek, are you now on par with the Glide series in terms of units sold, would you say? Or are you still catching up to that number?
Yes. We don't disclose numbers or units of anything. So I can say that that's not the case that we disclosed. But no, we're not at the same level as the turnover in Y2.
Okay. Perfect. Lastly, on capital allocation, as you mentioned in the report, you're trending below your target range for indebtedness. How do you think about capital allocation? You mentioned some initiatives internally, which I guess also would imply some CapEx going forward, but
in particular versus equity, etcetera? Yes. I understand your question as with the low leverage rate of 1.4 we have, which is below the range we communicated, will we see some differences in our approach. We have communicated that our first and foremost focus is to clearly work with making sure we drive organic growth. There is no need to do anything dramatic there because we continue to do that.
We have then said we have some opportunities with M and A. We constantly looked at that. And then, of course, we have the 3rd, which is how much do we dividend out. That is going to be communicated in conjunction with the Q4 report. But it is, of course, clearly the case if you see our strong cash generation, leverage ratio, unless we have some bigger news on some acquisitions, it looks promising for what will be proposed by the Board in terms of dividend.
Excellent. Those were all my questions. Thank you, guys.
Thank
you. Our next question comes from Stellan Hellstrom of Nordea. Stellan, please go ahead.
Thank you. Yes, just a question on the Magnus, you mentioned that you see the sort of same development in sales in the Q4 as in the 3rd. And just looking at the comparables here, you had quite a little bit weaker sales growth in the Q3 last year and strongly in the 4th quite strong actually in the Q4 last year. So that seems to indicate a sequential improvement quarter by quarter. And I was wondering what do you see there?
What areas do you think will do better?
You're absolutely right. And to clarify, Stan, and that is on top of them having actually a bigger proportional impact of all those OE contracts that are hurting us more proportionally with in quarter 4 than they did with the €10,000,000 decline in quarter 3. So you're actually right. And the reason is that we do have some launches specifically in quarter 4 this year, which are products that we didn't have at the same time last year and that of course helps us. If you take for example the Tula Vector Premium Roof Box line is a real strong addition that we're expecting to have and boost our performance in that category.
We have then, as I mentioned, just launched our 3rd luggage collection line, the TILMMA Crossover 2 into stores. And we are doing some extensions to our best selling luggage collection line that's in Zevtera with some spinner wheels. So the reason for that is mostly associated with some of those new products that we did not have at the same time last year helping.
Okay, good.
Then I was also just wondering on the gradual launches here of the new generation of roof boxes. I take it that you think that the biggest impact of those inventory reductions happen in the first phase and won't really recur in this Phase 2 and Phase 3. Is that correct?
Yes. Refracts, not refracts, but you're right. So the logic is yes, but those three launch phases were built on the logic that launch Phase 1 roughly represented roughly half of our revenue was those models we replaced of the traditional historical revenue in total in RufeRx was that first launch. Those were also the most complex roof racks. So these are the roof racks with a lot of special adaptions for very specific car models, where you need a lot of SKUs to cover those type of cars with all those different connections you need to.
Launch Phase 2 and 3 jointly then represent the rest of the half. So 1 quarter each, roughly, of our historical sales. But they're also representing that with many fewer SKUs. So significant reduction in number of SKUs needed to serve those models there. If you then have fewer SKUs at our distributor, there is a less risk there.
You're sitting on a lot of old ones for some specific car models. Secondly, of course, with some looking, we do learn as we go. We have been communicating very, very extensively now with all those distributors in regards to making sure that they have continuously made sure that they are not sitting on too many of these racks that we are now replacing in CNM3. So that's why you're right. Our assumption is that the most significant of these negative pipeline effects was associated with the first phase that we now, when we look at a growth in Q3, seem to be out of.
There will still be pipeline depletions of the old generation also for Phase 2 and 3 up to a smaller effect. And that's why we believe we are, so to speak, through that part of the change.
Good.
Then also a question on the margin decline in the Q3 here. If you can maybe elaborate a little bit on the various items here, the mix shift, the under absorption and the what was it now?
Yes. The third one is there is a negative impact due to simply only tapping on the tariff in itself without a margin on top of the tariff. So as Leila mentioned, that was 0.2 of the minus 1 point 2. That means there is minus 1 point left. And that majority of that is under absorption in our 9 assembly plants.
And the logic for that then, any analytical mind like yours, Dalan, will quickly jump to the conclusion that probably that means that you saw a later than you could act on in getting rid of people in your factories or a combination of that and the fact of saying, if we don't believe it's a long term decline, but rather a dip, are you going to fire people to hire them a few months later on? And it's a combination of those. If we are convinced that these volumes will be coming, so we're not going to take stupid short term measures with fast structures, etcetera. And secondly, the performance was weaker in some of those volumes than we quickly could have reacted on anyway. So it is very much dominated by that under absorption.
And then there is a little bit of product mix effect as well, but the majority is clearly under absorption.
And this under absorption, that's related to that. It's nothing to do with the new facilities and the efficiency gains that you expected there not coming through as expected?
Well, actually, you are, of course, right that if you've done new facilities, that costs you money because that's the fact. Then if those new facilities are very efficient, which they happen to be, so that's good, but still costs you money. And if the top line doesn't happen as much as it's expected, then that is part of that. So it is an under absorption, partly driven by a few years of expanding, putting robots in place, etcetera, that didn't materialize. But still the majority and the big chunk of our cost is associated with things we've had for years and staff levels that we've had for years.
So that's where the biggest money comes from. In terms of how efficient the plants are performing, I feel very good about that. I see the new roof rack assembly. I see the new lines that we have done in Norimar. We feel very good.
But at the same time, if our total volumes do not come in, there will be some under absorption. And as we believe the volumes will come, we haven't taken rash quick to make a specific quarter look better and then throw cost on taking in the same people some months later on. That's not how we act as a company.
Good. Then just finally on the product launches. You have been announcing this awesome here. Are there any of those that you expect to be volume products going into next year?
Yes. If you look at some
of those GE by carriers, etcetera, like this is the Eli Lilly mentioned, by default, since so big in these categories and these are coming in, we clearly will see some big volume drivers in those. But also, we clearly believe that adding a third stroller in with the Silas Spring, it is versus the other 2 categories the 2 strollers we have in the categories, it adds another step in something where we now already have distribution. So we expect that we will gain some good volumes with that Strole model. The same applies to some of the new luggage collections. Once we now have opened a lot of doors with luggage, it is easier to quicker get up some volume growth with additional collections that move into maybe not all of these stores, but to many of those stores where we sell other collections.
So I think across several of these categories, it is clearly products that we expect will have some significant input. But we are not a company in general, I can say, where it's one product that makes a huge difference for our total revenue. We have a lots of different products that have to deliver to make up those numbers.
All right. Good. Thank you.
Thank you.
Our next question comes from Karri Rinta of Handelsbanken. Kari, please go ahead.
Yes. Thank you very much. I wanted to start with the U. S. And you made a reference to the bicycle sales.
So do you have a sort of a fresh number that would capture what has happened since the tariffs were raised? And then a follow-up on the sort of the changing channel landscape in the U. S. Am I correct in assuming that you would be sort of retargeting your efforts more towards the smaller independent retailers and away from large sort of centralized chains? I would like to start with that.
Yes. So if we take the first question, no, there is no official data yet for details fully for the Q3. That tends to come a 2, 3 months delay. So if you look at how bike sales are captured in the U. S.
Market in official data, there are 2 different ways of looking at that market. One is what is captured by the bike association in the U. S, which honestly only captures a part of the market because it focuses on the independents and on more expensive bikes, it doesn't fully cover the typical family bike for kids and others. That one for the first two parts of the year was already down 15% on sales. So that has been a very tough start.
We, of course, talk to all the big bike brands in the U. S, and you will see differences between them, etcetera. But indicatively, I don't think you've seen any type of more positive view that it has been a very tough year. My expectation more or less in line with a weak overall performance in bike also in the Q3 with those type of numbers. It's I think it will be double digit decline, exactly how much more than that difficult to say, we'll see.
If you look at then how we are retargeting our efforts, I would actually say that if you look at the independent retail structure in the U. S, that's not where we're going to focus a lot more attention. We already have a very good attention. And as I mentioned briefly, as most major brands operate in the U. S, you focus on independence in that very large U.
S. Market, where California alone is bigger than any European market. You look at that by serving it with very professional independent sales rep structures, which you of course need to manage. So we do have people that manage that. But that is where you work with those independent retail structures.
It is more between and within the major national accounts. And it's, of course, also in the U. S, specifically, our continued fast growth on our own B2C online channel that is partly shifting what's going on there. So it is more about which one of those major national accounts, the combination of omni channel players, pure online players, our own B2C, those realities are making us make some moves and allows us to make some changes to how many people we have operating with those partners. So it is a classical tricky game to try to be the winners for the future, not the winners of the past.
And in that, we see some changes that are good to do now.
All right. Good. That was a lot to digest. Shifting gears to the RV market in Europe. There seems to be that there are some OEMs that are more optimistic than others and then some of your peers are somewhere in between.
But what are your thoughts beyond Q4? And assuming that the sort of the short term capacity bottlenecks is, how should we think about 2020 in Europe?
This is the probably the only time in my entire life that I have been accused of being the most pessimistic and that I've been about the European Army Industry. And I've been wrong all the time so far, so you probably shouldn't trust me too much. But I have been more pessimistic than many others. I have to admit that I've been wrong constantly that it hasn't been as bad as I thought. What has been the main reason for why I have been wrong is actually the consumer purchasing has been more positive in some of the very big markets.
Because you have to remember that it's easy to talk about a pan European thing and you add all the numbers together. But if you then look at the biggest market by far being Germany and Germany doing much better than the average, you might be slightly fooled. So the question is more about what will go on in Germany. If you break down the European market, you see some very bad performance in Sweden and some weak performances in the U. K.
Due to tax in Sweden, due to Brexit in the U. K. Then you see a lot of other countries where it's quite good. And then you see in Germany, where it feels very good. My mistake has clearly been about the German market.
So I think if you look at the manufacturers, the reason why you will see differences is you probably have read the Triggano report is my guess and some others. And they will be tainted by which country they mostly service. And it's clear that it doesn't service as much in the German market as they do in other markets. So they will have a softer view than somebody who serves the German market above like the Thorheimer Group does. So if you put all of that together and knowing and admitting that I've been clearly wrong so far, I am not super positive.
I haven't dramatically changed my view, but I think Q4 will be relatively shaky, but not as bad as I thought only a quarter ago. And if I look at 2020, I will probably join the people that believe it will be a low single digit year.
Great. That was very helpful. Then finally on the Revolt luggage collection and the so what have you learned because it's a bit of an outlier with being hard case and so forth. So what have you learned so far from entering into this category? Any sort of adjustments that you have needed to make?
How successful you have been compared to your sort of soft shell collections? So I guess the question is, are you happy with Hillel so far?
Yes, we're happy with Hillel and Hillel's performance so far. And yes, we're constantly learning on all the collections and doing changes and adding things and taking away things and adding more collections. But yes, happy with Tullarivol so far. There is a constant learning, which we knew when we stepped into a completely new category, both in terms of sales channels, consumer perceptions, focus areas, supplier challenges, etcetera. So there's consistently some bigger learnings in the new category than anything else.
But what we are clearly saying is that we are on a good path. It is happening a little bit as we've been saying. It's going much faster than in some countries than we thought and much slower in some countries than we would like. That reality is still valid. And that also applies to Tiller Evolv as it has done on other collections.
But overall, yes, we're happy with the start of the Tiller Evolve. We're happy with the feedback on the newer collections that we're now launching. And it will be a long haul bumpy ride, but the direction is good in
lunch. Good. Thank you very much. Thank you.
Our next question comes from Mats Liz of Kepler Cheuvreux. Mats, please go ahead.
Yes. Hi. Thank you. Can you hear me?
Yes.
Yes. Well, first, I mean, the organic growth target of 5 percent. I guess, just to get the feel of the view you have of that going into next year, I guess, you have the product launches, which will be quite supportive. Then again, I mean, market conditions might be somewhat softer next year, who knows. But what could you give me a feel about that?
Could you reach the target in spite of a softer economic growth next year?
Yes. I think we would not have put in a 5% growth target if we didn't truly believe we should be delivering it every year. So clearly, we are not happy with not delivering it this year. There are some very key drags that we will not have entering into 2020. We have to remind ourselves that we have SEK 50,000,000 drag that we will have had by the end of the year in those phase of OE businesses in U.
S. That drag, we will not have in 2020. On top of that, we will not have the drag that we saw with the pipeline depletion of the first phase of the roof racks. And on top of that, we have entered successfully and as we've mentioned what is not calculated in our organic growth rate because we just acquired the company in December. But if you look at the acquired rooftop tenant business in a true life for life, that has been a 24% growth, small little piece of business, but still 24% growth year to date.
So with those things combined, we still believe the 5% target is definitely achievable in 2020.
Okay, great. And secondly, I mean, the changes you make in the U. S. Sales organization, is that something that you could sort of, if successful, I guess, apply in the European market as well? Or is this a totally different story?
Yes. If you look at it, every organization I mean, we constantly do SaaS changes, organizational set of changes as realities change in every market. The reason why the U. S. Organizational change will be happening now is that there has been bigger shift and higher uncertainties on the players in that market plus the combination with a finalized ERP system implementation with a lot of advantages in data sharing and other things, there is a much more obvious to do it at one go, which is why we're announcing it.
In Europe, that has been a more continuous journey along constantly doing. So now you will not see a similar program being launched anywhere else. This is very small and specific associated with the U. S. And the whole reason why we're mentioning it is more about professional versus those people involved that this is one of those things happening.
Great. Thank you. And then coming back to the recall then, could it be so that these those problems are traced back to the supplier and maybe you can pass them on? Or is it, well, your own costs?
I think, as always, when you look at a product recall, that will be a long story of who's to blame for what and how is the cost. We would not have put in a provision of SEK 25,000,000 if we didn't think that provision was roughly right. Will we know exactly how right it is and what it will be? That we will know when the product recall is closed. It's just been initiated.
And it's your cost. I mean, it's not the supplier there, I don't know. It's some
Considering that we have put an accrual provision in, that's the provision we think the cost potentially could pay for us.
Okay. And finally, about I mean, raw materials seems to be somewhat giving you some tailwind going forward. I guess, is that right? Or
Yes. As Lennart mentioned, we believe and with current trends on what's going on in the marketplace that we should be seeing some help from our cost setup versus what we have had. And that is, of course, what we are seeing as one way of hopefully performing stronger as we move into 2020 on our margins. Okay,
great. Thanks a lot.
Thank you.
Our next question comes from Frederic Morgard of Pareto Securities. Frederic, please go ahead.
Thank you. Hello, everybody. Just a couple of questions on the luggage business mainly. I mean, obviously, you're having success with the luggage in Asia. But I was also wondering how is it progressing in the U.
S? And how should we think about the growth profile of packs back to luggage meaning or assuming at least that luggage would be the fastest grower across those regions?
Yes. If you look at it, it's clearly the case that luggage will be the key driver for the growth across all parts of the world, including the U. S, where we are getting good listings and are selling luggage. So that is not only in Asia. The reason why we highlight Asia more is that Asia is so tiny in the traditional categories, if you look at our regional splits and as we present them.
And it cannot be that in luggage, we truly want to be successful because the world market is roughly onethree of luggage sold in Asia, onethree in Europe and onethree in the region Americas. And should we then want to become over long term a player, we need to be more successful in Asia. And that's why I'm mentioning it that, that is nice to see. We are having traction in Europe and we are having traction in the U. S.
As well. And luggage will be a key driver for the entire packs of luggage across all those three regions. The difference is, as was asked by before by Gustafsson and some others, is clearly the case that we have and will continue to be legacy businesses that decline in the U. S. So there is a more of a drag there than there is in Asia where we didn't sell any of those.
So that might dent the total percentage number for packs bags and luggage in the U. S. But there is no doubt that the luggage percentage is strong also in the U. S.
Okay. That's very helpful. And also did you manage to grow that or the packs, bags and luggage business in the U. S. This quarter?
Yes.
Okay. Perfect. Sorry, just a final one on the under absorption. You say also that in the report that you were or that under absorption was higher than you had expected heading into the quarter. What took you by surprise on that?
What took us by surprise was the weak performance in the U. S. Market. No doubt, we did not expect the U. S.
To be a minus 6% in this
quarter. Okay. Thank you.
We have no further questions, so I'll hand back.
Thank you very much, Ben. Thank you for all the interesting questions. I wish you all an exciting autumn period with lots of traveling, having a lot of use of Thill the luggage in airport stores and around the world. And I look forward to talking to you again when we do our full year