Thule : Global Group Meeting with investors and analysts, digital

Thule Group - Global Group

Meeting with Investors and

Analysts

Wednesday, 21st September 2022

Thule Group - Global Group Meeting

Wednesday, 21st September 2022

Global Group Meeting with Investors and Analysts

Magnus Welander

CEO, Thule Group

Introduction

First of all, let us go back to the reason for this call. It is of course that we, about now 1.5 weeks ago or two weeks ago, did a profit warning for the Thule Group on the situation that had clearly amplified in what we were stating at the end of the Q2: that we saw a worrying situation with bike retailers' inventory levels. We grossly underestimated what would happen in the quarter.

Before we go into anything about what that meant and what it will mean, clearly we have to take a step back as management in our company, and myself specifically, to look at how could we, who are very close to so many retailers and so many bike brands in this sector, be so wrong only a few months out.

When we look at it, it is I think a classical situation of being worried but still seeing a lot of good things going on. You sometimes underestimate your worrying feeling. We did have a negative view on a Q3 performance versus the exceptionally strong Q3 in 2021, but we were not even close to estimating how much it would slow down and how rapidly it would slow down in the beginning of the quarter. Since it was so significant, we chose to go out very early. We did not even have the full books for August in, in terms of impact of the business, but we saw the sales numbers for August and therefore we went out and made a clear profit warning to all of you as investors and analysts, because it was such a significant different image than we had seen only a few months before.

In the press release and in the subsequent discussions, we have then walked through some of that combination of two bullwhip effects: a fantastic and extremely successful 2021 as a whole in the bike category, with specifically the third quarter being the exceptionally strongest quarter, versus then an exceptionally weak third quarter now in 2022, but we have relatively seen, from a consumer purchasing behaviour, smaller changes, although changes not nearly as big as the changes are in the ordering that retailers are placing on various brands, including Thule, than in bike-related product categories.

I know that there has been a lot of frustration with me and us, of 'You thought it would go much better. How can you be so wrong?'. I can take that frustration on my shoulders. I am equally frustrated that we were that wrong in our assumptions about the bike market, but we cannot do much about the past of our mistake of not being pessimistic enough on a very rapid retail reaction with a very aggressive handbrake pull on orders. It is a fact. We are now in it, and now it is more about what it means for us as a company and what we do about it.

Questions from analysts and investors

So the questions we have been receiving in front of this call have been about how much more we can detail on what is going on. First of all, when we did the profit warning, it was clearly early days. We are still in the quarter, so we are not seeing a ready picture in any shape or form at the moment, but clearly what we saw was so significant that we needed to communicate it. In the subsequent investor-analyst call we had on the Monday, we outlined some further facts that I want to repeat and clarify, which led to some of you already having done either very analytical macro Excel calculations or back-of-envelope calculations on what the sales drop has been, so I am going to walk through those same statements we did on that investor call and also then refer back to the logic of what that means from a short-term perspective.

Then I am going to be walking through the two other main question areas that you have been posing, which are, 'What do you now believe for the bike sector? When will it recover?', so this is the big €10,000 question. And then the third one, 'What does it mean to the profitability and EBIT margins, short-term and mid-term, for Thule Group, and, more importantly, what are you doing about it, or are you just sitting still in

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Wednesday, 21st September 2022

the boat?'. So, those have been the questions. tough, the questions are posed a little bit tougher.

I have noted, as I said to Fredrik, that when the times are We like that, so we can deal directly with them.

Retailers are overstocked

If we look at the first point, then, the bike retail sector has a very challenged situation in estimating what they are going through, because they had their best year ever in 2021, despite having their worst delivery performance ever from their suppliers in 2021. So in 2021, all bike retailers were extremely frustrated with all bike brands and all bike accessory makers and bike-related product makers for their inability to send them products when they would have liked them. That meant that they had overperforming performance over a period of time, despite not getting good delivery performance.

What is interesting to note is that even today in 2022 Q3, when they have very limited sales out and are pulling the handbrakes on every order from almost every brand, in a recent review done by the German IFO institute only a week ago1, 96% of bike retailers still complained on delivery performance and on-time,in-full delivery from bike brands. That sounds almost like an oxymoron. It sounds impossible. If they are ordering that little and if they have so much inventory stock, how can they be so incredibly frustrated with the inability of the players in the bike brand industry, or bike industry and bike accessory industry, to support them?

Simply, it is because they have the wrong products in stock and premium bikes and premium bike-related products, mostly the premium bikes, are still a struggle to get with decent lead times, because despite many bike brands ramping up their capabilities, the premium e-bikes and the premium downhill mountain bikes and the premium road bikes are not delivered in the best type of delivery performance still. What was able to be ramped up was very significant volumes of more ordinary bikes: children's bikes and basic bikes.

A strong 2021 for Thule

What was happening then, to go back to it? In 2021 we got the question from some relatively newer investors: 'Did you really say that bike was your biggest growth factor in 2021?'. I can then calmly say, since I am now seeing a lot of my quotes being snippetted out - that 'You said exactly this', and then there is a part of my quotes to make it sound certain ways - I want to be clear, we did repeat many times throughout 2021, in every quarterly report, that we were generally performing well but that all the bike- related products were performing exceptionally well.

So yes, we were sure and confident that we had an exceptionally strong 2021. We then stepped into the first quarter of 2022 and had an exceptionally strong bike-related category in the first quarter of 2022. That quarter was well above any other quarter in bike-related products. We did not expect that we would have an exceptional 2022 in bike, but yet quarter 1 was exceptional. The reason was this fear that many retailers had that, since they could have sold even more in 2021, they felt, with many visitors coming back and forth to the shop asking for specific products, any retailer wanted to avoid that issue in 2022 by ordering earlier. All retailers did that almost across the board, not only with one brand but with all brands, and at that time most brands were catching up better, except Shimano, which still struggled for the premium bike accessories, gears, etc. Therefore, the premium downhill mountain bike or gravel bike makers, but most retailers, most brands were catching up in bike gear and in bikes in starting to deliver good quantities.

So, in 2022 Q1, we pointed out that we had an exceptional start of a very strong bike season. It actually continued with strong performance in April and May, which means that we were seeing a strong, knowing we would be facing very difficult comps with early sales. We therefore had communicated to the market also clearly that our ambition was to lower our inventory levels that we had been building up to be able to better supply in a complex and longer-lead-time reality, and our ambition was already before this happened,

1https://www.ifo.de/en/press-release/2022-09-20/german-retailers-concerned-about-getting-hold-supplies

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therefore, to reduce our temporary workforce that we take in normally during a period of peak performance or peak sales. That was more luck than skill, because it means then that we had already sent messages to our factories and started to reduce our workforce long before we saw this dramatic decline coming in Q3. Our reason for doing that was to reduce inventory levels. It was not because we were expecting the drop to be as significant as it became. So that has then two consequences. One, we will not be reducing our inventory levels in the way we were estimating. We expect to end the quarter at similar levels as we were before in the previous quarter, rather than reducing it. Secondly, those impacts were good in a certain sense because we of course did not have the temporary workforce in direct wages, but we still have a bigger organisation that does not see the top-line volume coming through.

Impact on margins

To the follow-up question that a lot of people have asked, of course that will have an impact on our margins.

To give you an idea then of what has happened in bike, we also in the subsequent call on the Monday after the profit warning informed you that in 2021, which we had already presented, approximately 50% of our sales were bike-related products, while in the years before the pandemic it was very close to 40%. So, clearly, the share of business going to bike-related has been amplified, where we were growing in other categories but we were growing faster in the bike category during the pandemic. Specifically, it was the third quarter and the fourth quarter which had an absurdly much bigger share of bike during the pandemic than it did before, because normally, historically bike was very dominant in the spring and then became much smaller in the autumn, when people did not buy as much bike products. However, due to inability to fully meet demand and a very strong market, we sold more products in the second half of the year to retailers, and there were more consumers that were patient to wait and buy the products in the autumn when they got their bikes throughout the pandemic. So, we in fact in Q3 2021, 50% of our sales were bike- related products.

I then presented on the Monday that that was now going to be only 25% of our share indicatively. So, smart analysts did a quick back-of-envelope calculation and yes, their estimations were right. That must mean that you are dropping 60% of sales on bike-related product, because we had communicated that we were still growing in other categories. So that is a pretty good guess. I mean, there are still 10 days left, but we are going to be approximately 60% down. If you do that logic of the share sales, as we have communicated, you are correct in that assumption in bike.

When we presented that 60% down, therefore, we also clearly communicated, which we have done before but we repeated it again, that these are high-margin categories for the Thule Group, as we have communicated before.

Within the Thule Group, out of the four product categories, it is Sport & Cargo Carriers and Active with Kids, as it used to be called - it will be called Juvenile & Pet going forward - that are the two highest-margin categories, which has been communicated on repeated occasions. Within those categories, these bike- related products are more significant. It is more than two-thirds in Active with Kids and it is more than half in Sport & Cargo Carriers. So clearly you understand that it is high-gross-margin products that we are also seeing the significant volume drop in. By default, it will therefore have an impact on our average gross margin, even without taking in account any economies of scale on product overhead.

More competition

Then the other thing that was noted specifically, which I have received a lot of follow-up questions on, is that we made clear in the call on the Monday that we are seeing clear trends that it is at some of the mid-to- lower price points for Thule, which means for many other brands relatively higher price points, but in the market our lesser expensive products, that are seeing the most significant negative impact in sales, while more expensive products are actually performing significantly better comparably. To give you an idea and

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as an example, we can look at our bike trailer segment, as we are the number one in the world in bike trailers and very, very strong in the more extreme premium bike trailer segment, with our Thule Chariot product. We also sell some much more basic, lower-priced bike trailer products, where there is a significantly more competitive environment. In the premium bike trailer segment, there is only one strong competitor, which is a German brand called Croozer, that also sells volumes of a premium bike trailer, while if you go down to a more basic, entry-level type of bike trailer, you will find seven or eight different brands doing quite okay products.

What then has happened during the pandemic - you are all aware that material costs and prices and freight have gone up. As Thule should do, we have ensured that we put the right price in the market to continue to be price-effective and to be profitable. So clearly we had raised prices more than the competition, because they had been less focused on that or less aware or less capable of doing that. When we then entered 2022 and all the retailers were worried that they had not been getting enough products, they bought a lot of products from everybody - from us and from other brands. If you have one main competitor, it meant that they bought too many in the beginning, in the pre-season, of two brands, so too many of ours in the premium and of our competitor, Croozer. If it was a product level where there were seven competitors, you might find it weird, but actually the right retailers bought too many of all seven. If you amplify that and put them on top of each other, that means by default there were significantly much more overstock levels at those types of price points, because there were simply more average Joe brands also playing in there. You can see that on our bike trailer segment, where if we look at our performance in the quarter so far, we are then on our most premium bike trailer growing significantly versus 2019 but declining somewhat against 2021.

So we are in decline even in the most premium versus the exceptional, extraordinary 2021, but there is a significant growth of more than 30% versus what the number of units - we are not talking value, because the price has also gone up - of our most premium bike trailers before the pandemic. However, on our least premium bike trailer, we are declining, with 70% versus 2019. Why is that? Because every retailer is sitting with a lot of Thule, but unfortunately with also seven other brands that they had a lot of. When that happens, it takes a much longer time for the cleansing of that to be balanced out.

That whole logic is also why - which is applicable on bike carriers and many other products, but in our case on bike carriers and on bike trailers, which are our two biggest categories by far in the bike-related category

• we estimate that what we will be seeing is not just a negative effect of retailers adjusting their inventory levels, because it is not just Thule inventory levels, it is definitely inventory levels of a lot of other products from other brands, but they will be doing that for the coming three quarters, so quarter 3 this year, quarter 4 this year and also versus an exceptionally strong first quarter 2022, they will be a lot less aggressive in pre- season buying. They have not told us that, but I can guarantee that that will be happening, because they are obviously very gun shy now, sitting with far too much stock in many things.

Retail market unlikely to rebalance before spring 2023

That will mean the earliest we will see from a retail perspective a more balanced situation is when the normal season starts in the second quarter spring 2023. That means we need to be realistic, considering that we had exceptionally strong bike-related sales in the third and fourth quarter of 2021 and the first quarter of 2022, that we will see a significant drop in sales in those bike-related categories for all three quarters. That then means clearly, as we said, that there is a negative impact on average gross margin, even before taking into account the economies of scale effect or production overhead coverage and SG&A coverage.

Supporting launches with higher spend

This then leads to the second biggest question, which we have got from a few: why did we not announce a number of saving initiatives when we announced the significant sales drop? Other companies that have

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