Welcome to the Thule Group interim report quarter one 2018. My name is Sasha and I will be coordinating your call today. If you would like to ask a question during the presentation, you can do so by pressing star followed by the number one on your telephone keypad. I will now hand you over to your host, Magnus Welander, CEO, and Lennart Mauritzson, CFO to begin. Please go ahead.
Thank you very much, Sasha. Good morning, everybody, and welcome to our Q1 2018 conference call. As always, it is good to get off to a good start to the year. We have had a solid start of 2018. We have grown our sales in line with our expectations with 5.6%, 5.5% if you exclude the currency effects. If you look at what we have delivered in terms of EBIT. We have grown our EBIT to SEK 309 million, which is then delivering an EBIT margin of 19.2% for the quarter versus the 17.8% we had first quarter last year. A strong start and the main reason for that pickup on margin is a combination of currency and the fact that we are selling higher margin products, which I will come back to a bit when I talk about Region Americas.
Then, as we all know, you've seen our patterns for many years. We are a company that in this quarter will spend a lot of cash because we're building up ahead of the peak season. That is also true and valid for this year. We had a negative cash flow of SEK 214 million. We're ending the quarter with higher inventory than last year, and Lennart will come back to that. In short, you can say that the main reason is we are confident that we will have a good season, and we've decided to make sure that on the high volume products, we had enough product in stock to handle a smooth peak season. If you go to the next slide, you can then see the numbers in more detail.
As we can see on the EBIT effect, we do see a currency impact there where our reported growth was 14%, while the constant currency growth on EBIT was 8.4%. A strong EUR is, of course, always very good for the Thule Group as we have a lot of our costs in the European and Rest of World category in Swedish krona and zloty, while we sell a lot in EUR. That is the main contributor to why there is that currency boost. Overall, solid start for the year. If we look at the two regions, starting with Region Americas on the next slide. We knew that we would decline in some contracts that we have with OE.
We have communicated that during last year and the second half of the year that we decided in 2017 to not actively pursue growth and in fact, rather pursue a steady phasing out of low margin OE contracts in the U.S. They are not huge, but they are big enough that the entire decline in the quarter for the Region Americas was due to these contracts being phased out. They are associated partly within the business associated with pickup trucks that was not sold off when we sold our pickup truck toolbox business, but it's also within the bags and case business. These two types of product categories had by far our lowest gross margin, that of course, means that we have had a mathematical margin enhancing effect of having growth in higher margin products and decline in lower margin products.
What is worth to note also in Region Americas, as the rest of the region was flat, is that clearly in the biggest market for the region, which is the U.S., there is still a very cautious retail sector. I'm sure you've heard and listened into, I am sure there will be a theme in many consumer goods companies speaking about the late spring. I know that, for example, Husqvarna noted and commented on that recently. It is true that a late spring has meant that a lot of retailers were cautious with their purchases at the end of quarter one. We're generally not worried about things like this because over a total season, those one or two or three weeks moving back and forth normally doesn't have a major impact on the business.
It is clearly the case that retail sector is cautious in the U.S., not only due to a late spring, but generally, we all know that there has been a lot of turmoil in especially the brick and mortar retail in the U.S. Overall for the season, we are positive and confident that we will pick that up during Q2 and Q3. If we look at the category that we were most satisfied with in Region Americas in the first quarter, it was the Active with Kids category.
If you look at it, a key launch was our upgraded stroller, the Thule Urban Glide 2, which has been very successful in both regions and also in Region Americas we continue to have a very strong development of our child bike seats business. We then turn to the next slide and look at the biggest region, Region Europe and Rest of World, we continued the very strong momentum we've had now for a long time in Region Europe and Rest of World with a 9% growth in constant currency. A very strong start to the year. The biggest category, Sport&Cargo Carriers, was a key driver in this, where we have had both very successful sales growth in our roof rack category and in our roof box category. Some regions that stand out are the Nordics region, France, and Australia.
As always, this is also partly due to how well they did in 2017 versus 2018. Generally, these are the regions that showed the biggest pickups with both key new listings and very strong sell-through in the quarter one. Within Packs, Bags & Luggage, we had an okay start to the year. We do know that we have some legacy products here, but they have been offset by growth in our growth categories, luggage and smaller everyday bags and technical packs. Now we enter the much bigger season for those type of products, so the year is still exciting ahead. As I mentioned, Active with Kids did very well in the U.S. and in Region Americas overall. It was the same case also in Region Europe & ROW.
Also here it was the successful launch of the new upgraded stroller Thule Urban Glide 2 that was the biggest driver. Also the launch we did last year of the Thule Chariot bike trailers was continuing to deliver a good growth. Even here, the very broad portfolio of child bike seats continues to develop well. Especially, we saw, which is something we always like when media does, there was a very big test done in the biggest market in Germany on child bike seats, on how safe they were, and our child bike seats were the clear winners, and some of the large players in the market actually came out as not recommended to be used due to unsafe conditions. Those type of things, especially in a market like Germany, helps your sales.
Finally on RV Products, I think it's worth mentioning and clarifying something, because at the Capital Markets Day last autumn, we commented to the fact that in general, this is one of the few categories where you can track the development of the overall market by looking at the registration statistics of motor homes and caravans. That's normally the case, but actually in quarter one in 2018, if you would have tracked those numbers, you would have been amazed how fantastic the motor home vehicle market was because there was a registration growth in the high 20s. In reality, though, what has taken place during the first quarter this year was that the extensions that had been given for registering and selling vehicles of an older emission class, an emission class actually called 5B+, where light commercial vehicles had already had to move to emission class 6.
This sector of RV was given an extension period as they are rebuilt vehicles, that extension ended at the end of February this year. That meant that a lot of dealerships that had purchased vehicles in the past needed to either sell them or they would not be allowed to sell them at all. They needed to register them before this date. What a lot of dealerships did around Europe was that they registered these vehicles in their own name rather than selling them to a consumer, thereby they can now sell them as a secondhand vehicle, although not driven to a consumer during the year, or they can, as in some cases are done, start renting them out for a rental vehicle. That artificially, in a more administrative way than inflated the registration numbers significantly for motor homes.
Our estimations is that it is around a 10% true consumer sell-through growth, which is still a very good number, and we continue to outpace the market. If we move over to the income statement, I'll let you talk about that, Lennart.
Thank you very much. Looking at slide six, I will comment on some of the items in the income statement. Gross margins were at 41.6% versus prior year 40.9%, helped by favorable currency development, which was 0.4 percentage points, and the remaining improvements in gross margins of 0.3% were driven by positive product and customer mix, as Magnus mentioned. Combined with normal price increases we are doing mainly within Sport&Cargo Carriers, somewhat muted by continued negative raw material prices in Q1, primarily plastic for us. Financial net was -16 million SEK in the quarter versus prior year, -11 million SEK. Negative FX effect or revaluation on FX accounts for loans and cash in local entities is the reason for the higher financial expenses this year. If we look at our pure external cost of debt, the expenses were actually slightly lower than prior year.
We had 10 versus 11 million SEK. If we look at the SG&A, we are slightly higher than prior year, but it's driven by higher product development spend as planned and as we have communicated, that we will have increased efforts on product development during this year. The effective tax rate in the quarter was 25.1% versus prior year, 24.2%. If we look at this next slide, seven, on operating working capital and operational cash flow. This quarter, we ended with approximately 1.3 billion SEK in operating working capital, which is 21.4% of last 12 months of sales versus 22.7% last year. A decrease in percentage. However, as Magnus mentioned, we have an increase in inventory as we follow the plan to smooth out our seasonal ramp-up and enter Q2 with more finished products in order to meet expected sales growth.
If you look at our operational cash flow, we do have the same pattern as prior years, for many years, with the buildup of working capital preparing for the high seasons in Q2 and Q3. We had a negative cash flow in the quarter of 90 million SEK versus prior year, minus 69 million SEK. As I said, we will see an improvement during Q2 and onwards for the year. Thank you.
Thank you, Lennart. If we go to the next slide and look at then the financial targets and our performance, again. Those, as I've already mentioned, a solid start to the year with an organic constant currency sales growth of 5.5%, which is higher than our 5% target. We had a strong improvement of our EBIT margin, where we moved from 17.8% to 19.2%, and more importantly maybe is to look at then the rolling 12 months, which means that we are now at 18.6% rolling 12 months EBIT margin. Our net debt to EBITDA is 1.6 times, which is well in line in our span that we have set as the target.
Later today, we'll have our annual general meeting where the board has proposed for approval at AGM, a SEK 6 per share ordinary dividend to be split out in two payments, which then equals 87% of our net income. Overall, moving very well with our long-term financial targets as presented. If we then look forward to what's a very few exciting months coming ahead. As we understand from our business, and looking at next slide, you can see that we are now in the peak of what this company is at most busy. We're starting to have peak output from our plants. Sales are really starting to kick in as the spring season comes, and we are in the last few months ahead of showing new products to all the trade fairs for 2019 launches.
I can promise you, there is a lot of busy people in Thule Group at the moment. We also on top of that, of course, have launched a number of new products that are really starting now to be hitting consumers, being shown in stores and being purchased online in online stores. Now we will really see the key telling points of how well those new launches truly sell through. We have good feedback, initial early days, but very positive feedback on the 2018 launches. Especially we have, of course, a very exciting launch coming up later on where the first Thule Sleek strollers will be hitting the shops in Q3 in this year. That will be a key addition, of course, in our product portfolio going forward. We are working, as I said, hard in all the factories in ramping up production.
We have a continued focus on a high on-time in full delivery performance. We know that with a cautious retail sector not wanting to have things too much on stock, one of the ways we can secure that we do pick up all the opportunities that are there is our capability of serving them well with next day deliveries. We are working hard in our newly opened plant in Piła in Poland, where we will do the Thule Sleek assembly. We have started our building works on a CapEx investment of expanding our Eastern European distribution center in line with the plans that we communicated in the past. Of course, also, I think all of you will have noticed some very volatile raw material developments in, for example, the aluminum, considering some of the things that have happened in that market.
Of course, key for us is to keep on top of that and track what's going on. We are hedged in aluminum, we're not too worried, but it's, of course, something we need to be looking and tracking. Generally it is a high raw material cost structure we still see. We're therefore confident and happy that we did the necessary price increases and also that we have a good product mix as we grow with high margin categories and reduce and decline in low margin categories. Not to underestimate, we are now at those levels as communicated in the Capital Markets Day of around 6% of our spend on product development, and we are hiring more new engineers than ever. We're tooling up to more new products than ever.
It is a buzzing, exciting feeling in the company, working on products in all the new product categories. Therefore, some very exciting months ahead, and look forward to have some new cool stuff to show you at the next quarterly call. With that, we leave the floor for questions.
Ladies and gentlemen, if you'd like to ask a question, please press star 1. If you change your mind and wish to cancel that question, please press star 2. When preparing to ask the question, please ensure that your phone is unmuted locally. The first question we have comes from Daniel Schmidt of Danske Bank. Daniel, your line is open. You can go ahead.
Yes, hello. Good morning. Do you hear me?
We do.
Good. All right, a few questions. I think, Magnus, you mentioned that when it comes to the decline in the Americas, it was entirely self-inflicted on the back of the phasing out of these contracts. So first of all, basically saying then, excluding those phase outs, you were trading sideways in Americas. Secondly, should we expect the same impact in terms of phase out for the coming quarters as we saw in Q1? I think we start there.
Yes, you're right. We were flat if you excluded those conscious decisions of phasing ourselves out of low-margin products. The main reason was, as I mentioned, there has been a very cautious retail sector in the U.S. with the late spring. If you look at the effect of what you should be expecting, as communicated, we will be phasing these out until the beginning of next year. The monetary amount of that decline, similar to what was the decline it is relatively similar, not exactly, but relatively similar by quarter until, we can say quarter two 2019, when they will be fully phased out.
All right. Good. You do sound, even though you had, of course, a poor quarter in the Americas, even excluding this phase out, you sound a bit optimistic. Of course, you had the late spring issues and cold and so on. Does that mean that you've seen any sort of change to the retail environment for your sake, entering so far into Q2?
We never comment going looking forward, but generally, you're listening to my voice and saying that I feel relatively confident. I do feel relatively confident. We have to say, we have an extremely short order book, and we always comment on that. We sell things for the next day, which is a lot of benefits. There is also that we don't have a brilliant track record of what we will be able to say we can sell. We have good confidence that our new products have hit off well. We don't believe the cautious U.S. retail is really matching what the consumer in the U.S. is looking at. We are hoping and expecting that that should materialize in growth also in Region Americas.
Good. Just finally on RV, where it sounds like you were maybe up 14%, 15% or something like that in the first quarter. As you know, there's been a lot of concerns when it comes to RV demand, especially in the U.S., and you have almost entirely your operation in Europe. Given the visibility that you have, and what you hear in the market, is there any sort of feeling out there that that would be something similar happening in Europe, that we have in terms of fears when it comes to the U.S. market? Sort of any general reflections on RV in Europe?
I think the general reflection on RV Europe is that it's a very healthy market, which we say if it's 10 or 11 or something like that, it's that type of range in our estimate if you take away this artificial effect.
There is still good confidence. If you look, the large RV manufacturers have very nice order books. They are optimistic. My view is that, talking to my experts in our team that work with these big manufacturers all the time, it's clearly the case that I think everybody in the industry is expecting a very good market, at least until after this summer season. That's the time when I think a lot of people in the market will step back and look at, did that nice, very strong growth pattern continue throughout the season, or did there start to be some people starting to canceling orders? There is no signals of that yet, but I think everybody is cautious of seeing that, will it continue into the later half of the year?
All right. Okay. Good. Thank you.
The second question we have comes from Gustav Hagéus of SEB. Your line is now open. Please go ahead.
Thank you, operator. Good morning. Congrats, a solid report again. My first question regarding the Thule Urban Glide 2 launch, which apparently was a major success driving that category.
Can you draw any conclusions from this when looking into your next big launch being the Thule Sleek? Do you have discussions with retailers already regarding volumes for Thule Sleek so that you know any type of volume impact we should expect from stocking up Thule Sleek in this year? Thanks.
Thanks, Gustav. Generally, you can say what was key for us is due to the positioning of the Thule Urban Glide 2 as a much more urban position, both in styling but also in some of the feature sets. It was, of course, a good indicator of getting into the right juvenile channels and a door opener, a precursor to what is definitely a stroller that really only fits in the juvenile channel with the Thule Sleek. What it has done for us, it's shown that the brand carries in a more urban stroller. It has enabled us to get some very strong listings with some of the key retailers around the world. Actually, all the key retailers we targeted in the major markets. That, once again, doesn't mean that we get huge orders.
As I said, one of our key things is what we do know is we're going to get listed and we're going to be shown in a lot of cool stores all over the world. That's a great start, consumers need to buy it to create any significant volumes that have any impact on our numbers. What the good thing is, a very good listing reality has been a little bit the consequence of the success of Thule Urban Glide 2, and of course, that the Thule Sleek stroller is a fantastic looking stroller. That combination makes us more confident now when we look at which type of listings we will start with in Q3.
No material impact from stocking that you know of today that we should look forward to in Q2, Q3 from Thule Sleek?
No.
Okay, great.
You should look at what will have any material effect is actually the sell-through that we of course, hope to generate already some the starting points of that in Q3, but which really starts happening as you come a few months into the whole. It's the sell-through that will generate significant numbers.
Right. A similar question regarding the Thule Revolve luggage that you're about to launch, too. Is it the same story there that we shouldn't expect any store stocking and do you have any discussions on that end with retailers that you can share?
Same thing there. The success, which we definitely have had with Thule Subterra, which continues to do really well, is of course a key then to open the door to say, "Here we have another collection." We feel better than when we entered with just Thule Subterra, because then there were completely new doors to open. Many of those are already open to us, and they will list a second collection. That means, easier is maybe the wrong word, but it definitely makes it for a higher likelihood of rollout effect. It's the same thing actually also there, that it's really the sell-through that drives significant numbers for us. It's not pipeline filling thousands and thousands of shops. It doesn't come with one go. It spread out over time.
It will be also there in six to nine months into it, you can start to see significant volumes from those new collections.
Regarding the Piła factory in Poland ramping up, could you share how big of a fixed cost base you have there? And if utilization rate was a factor in this quarter or will be going forward with regards to under or over absorption?
We normally don't comment on a specific fixed cost by a plant, you're very astute in guessing, Gustav, that we have been very inefficient from a costing structure in that factory because we have, of course, had all the senior management in place for some time. We have purposely brought in all the shift leaders and trained people, and we are plus, generally not nearly up to the volume utilization of that capacity of that plant yet. We're on top of that doing two brand-new assembly lines for two completely different products from the past, which we, of course, want to ensure we get off the ground really well. We have started very early to spend a lot of time and money on that.
It's an inefficient plan from that perspective at the moment, and will really be so for quite a long time, which is included in our estimates of going forward because it needs to get up to those bigger sell-through numbers of both the new stroller and the new luggage to start compensating for the fixed structures we took on already as of Q4 last year.
Great. Finally for me, are you confident now that the U.S. retailers are low or perhaps too low on inventory in which there is a less likelihood of them de-stocking also for the remainder of this year?
I'm very confident that they are too low at the moment. Our sales team in the U.S. had a lot of discussions with some of the retailers, this is something we have to say that we are always worried when they get a little bit too low, because although we have a fantastic track record of high on time and full, if they're very low, that still might mean that they leave money on the table at times when the customer came in. I wished I could love it to say that everybody plans their purchases of their next Thule bike rack months ahead. Generally, it isn't like that. They come in and they realize they want it on the Saturday.
If, in that case, that retailer had sold the few they had in the store and haven't ordered a new one, we potentially left money on the table. We are not 100% happy with that, I have to say. I cannot see them destocking more from that perspective, because then really they are jeopardizing, which I think they realize, to leave too much money on the table. I don't foresee any logical reason why there should be a destocking in the U.S. retail.
Great. Thank you for taking all my questions. Again, congrats to a solid report.
Thank you. On marketing.
Okay. Just also your favorable effect here of currencies. I would think that given the weakness of the Swedish krona, you are in a favorable position also when we look at coming quarters, given that you produce a lot in Sweden, have a lot of cost base in Sweden.
You are absolutely right. If currencies stay as they are at the moment, we will definitely be seeing a positive FX effect for us.
All right. Okay. That was all my questions. Thanks.
The next question we have comes from Daniel Schmidt of Danske Bank. Daniel, your line is now open. Please go ahead.
Yes. Daniel Schmidt from Danske here. Again, Magnus and Lennart. Given that you alluded to sort of the RV growth in your statement, could you give us some sort of ballpark figure when it comes to the development of the other three segments in Q1? It sounds like Packs, Bags & Luggage were down in the quarter.
Yeah. You astutely have mathematically tried to create a model while we're discussing. Yes, I think if you look at and listen to our comments, you will understand that due to the OE projects and contracts that we are phasing out in the U.S., that is pulling us down in Packs, Bags & Luggage, because there are some cases and bags we do there. On top of that, we do have still the decline we had to admit in CD wallets and other things, that continues. As we didn't have the same type of growth in luggage like we had, because we really did the big launch last year, we do continue to do well. That was a small decline in Packs, Bags & Luggage.
We have the highest growth rate in Active with Kids, and we have a solid growth in Europe and rest of world in Sport&Cargo Carriers, while relatively flat if you exclude the OE contracts in the Region Americas.
All right. Given that mix then and what we've talked about in terms of FX and your sort of manufacturing base in Sweden and also in Poland and sort of the currency has continued to weaken, of course, and the mix between these segments. Is it sort of ruled out in any way that you would be approaching your 20% EBIT margin sort of maybe a bit quicker than what you alluded to in connection with the CMD in September?
I think the key thing is we don't do the currency aspect when we talked about our 20% margin, because that would be highly and difficult speculation work. When we presented a 20% margin, and when we presented the fact that 2018 would not be the year that you should estimate that we should do the biggest pickups to reach the 20, we didn't speculate on currency. If currency comes in and helps us, that will of course move us closer. Potentially currency could come in and be detrimental. That statement in the Capital Markets Day was associated with assuming that the currency didn't help us. If you take that might be what makes the difference this year. If the currency continues to help us, yes, we would by mathematical points, so to speak, move forward to it.
Adding to that, has anything sort of changed in your view in terms of product development spending? Have you changed your plan in any way? If you look ahead in the coming couple of quarters in 2018, will you go above the 6% for some reason in some quarters? Is there any reason to change the modeling around that?
No. It's not an exact 6% that we have defined. It's around 6%. We feel very confident with that plan that if you look on a rolling 12 months, we're around 6%. It can be slightly above and marginally below, or it's going to be around 6% now for a few quarters to come, as we said, during 2018. I think in a modeling, 6% is a correct number to use.
Thank you. That's all for me. Thank you.
Thank you.
We currently have no further questions. I'll hand back over to you.
I thank you all for listening in, wish you all some fantastic spring weather, which has come to Europe at least, some super active vacations with lots of Thule products. We will talk again in July. Thank you very much.