Thule : Mid-Quarter Group Meeting with Investors and Analysts

Thule Group Mid-Quarter meeting

with Investors and Analysts

Wednesday, 23rd November 2022

Thule Group Meeting with Investors and Analysts

Wednesday, 23rd November 2022

Introduction

Tommy Ilmoni

Financial Analyst, Carnegie Investment Bank

Welcome

Welcome to the [inaudible] call with Thule's top management, CEO Magnus Welander and CFO Jonas Lindqvist. I suggest that we proceed so that you Magnus give us a short overview of what is going on at the moment. What is the management agenda? Then we can continue with the Q&A session after that. You can raise your hand and I then give you the floor for discussion afterwards. Magnus, please go ahead.

Thule Group Management Focus

Magnus Welander

CEO, Thule Group

Flexibility

Thank you Tommy. Management's attention at this point in time I think in most consumer goods companies is about flexibility. If you look at it you know that throughout the pandemic we had a fantastic growth and we are struggling to meet up with the boosted demand of our product. However we did much better than our peers and therefore captured a nice share and a strong growth.

We started the year very strongly in quarter one 2022 with a 20% growth versus an already strong 2021 and a 64% growth versus the pre-pandemic 2019. In quarter two we were only 43% up versus the pre- pandemic 2019 quarter two. Then we came in with a disappointing quarter three where we were only 23% up versus the pre-pandemic 2019. The disappointment came in Q3 from us having underestimated despite giving some warnings already in Q1 report and more so in Q2 report, we underestimated clearly how much bike retailers had built up inventory of everything bike related. First and foremost of course of bikes, but also of all other bike related accessories, which meant that now when they were seeing in the end of the season that they had been far too optimistic they more or less stopped ordering anything that had to do with bikes. Then impacting our sales significantly in the period as bike related products represented in 2021 almost 50% of our sales.

We therefore did a profit warning for the first time since we got stock listed. That profit warning was not so much about the Q3 but the fact that we realised that with a very strong comp period of Q4 2021 and Q1 2022 when we sold a lot of bike products, we would not see that coming in those quarters and therefore we would be financially impacted both on top line and on profitability versus the very strong comp periods. That was the reason for that profit warning.

Inventory levels

What we have been doing even long before our Q3 report was that clearly we were planning to reduce inventory levels in 2022. Our inventory levels had grown, as for most consumer goods companies, due to the fact that with the erratic supply chain and a much longer supply chain from sub-components supply and parts supply, we were needing(OTIF) next day delivery service to retail.

Since we during 2021 ramped up our capacity and found a more balanced situation in our supply chain we were planning throughout 2022 to reduce our inventory. However in actual terms we could not, due to the rapid downturn in sales in Q3. We were ending up with the same inventory levels in September as we had in June, which is an inventory level that is higher than we think we should have going forward.

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Thule Group Meeting with Investors and Analysts

Wednesday, 23rd November 2022

Workforce levels

That has meant that we have been reducing the workforce in our plants aggressively. We could do that without any big announcement of future staff reductions. We are today in November about 1,200 people fewer in our plants than we were mid-March when we peaked in 2022. We could do that because we have a three-tier approach, fixed employees from Thule that we have year around, seasonal employees from anything from 2-6 months that we take into our employ during the season and then a vast number of temps that we take in on anything from daily to weekly basis from external companies. Therefore when we saw that we were planning to reduce inventories we were already starting to send those people home throughout the year.

At the moment we have only the fixed employees from Thule in our plants and considering that we have high inventory levels of our high-volume bike carriers and other products that we will be selling throughout next season, we will not need to ramp up nearly as early as we would normally do. We will have much fewer staff going into the season than we have had historically. We will then in the season still ramp up with seasonal workforce and temporary workforce but much later and to a lesser degree. We will instead use the inventory we have to meet that high service level that we want to do.

A big focus for senior management in this company and operational site management is now balancing what is clearly an under-absorbed production need because we do not need to produce nearly as much as we would normally do in these periods. Balancing that with having a capability as the season comes to still offer a great service level. That I would say is the big focus.

New Product Categories and Products

There is a second very big focus which is we will enter into some new product categories in 2023. Car seats and also dog related products. We are ramping up our production and doing all our final stages in those big development projects.

On top of that we are having the heaviest launch year ever in terms of new products for all the existing categories as well. There are many new products starting to be manufactured, to be available for retail in the spring of 2023. A big focus on all those development projects is also key at the moment.

With that I leave it back to you Tommy.

Q&A

Tommy Ilmoni: Thank you Magnus. Now anyone who wants to ask a question please raise your hand. While waiting, if we start with looking at the demand situation. Obviously the demand for bike related products has been, as we all know, challenging at the moment. What about the other categories, in particular for RV Products? I would assume that is a fairly cyclical category as well.

Magnus Welander: You are absolutely right Tommy. Historically we have always presented RV category for us as being by far the most cyclical because differently from the Sport & Cargo Carriers category when you buy an RV product from us, an awning or a bike carrier, etc you will not want to attach it yourself. You do not want to drill into that flimsy wall and maybe drill into a fridge from Dometic or something like that. You are going to ask the dealership or you are going to ask the manufacturer to do it which means that it is much more associated with a much bigger financial commitment. You are buying a vehicle, a used one or a new one, so it is associated with a bigger purchase. What we can say is that due to the RV manufacturers' inability in 2020 and 2021 to meet the demand from all those consumers that wanted to travel with a small motorhome or a van, they have had a good year in 2022 in spite of maybe what you would think with a big

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Thule Group Meeting with Investors and Analysts

Wednesday, 23rd November 2022

financial outlay. However, they had built up a huge order backlog. If you look at the three stock listed companies that you have in Europe, because 96% of our RV sales is in Europe, you can see that those three represent almost two-thirds of the European motorhome and caravan market. You have Trigano, the French one, you have Knaus-Tabbert, the German one and you have the Hymer Group nowadays owned by the stock listed Thor Industries. They all report still big backlogs. They are still meeting up with people that already stood in queue throughout the year.

What we have said, and now I have cried wolf four times in the RV industry without being right so I should be careful of crying wolf a fifth time. If you look at that you could say that I believe that when you look at the whole situation there it is calming down. You are starting to see the first people maybe stepping out of the queue so if you listen to the manufacturers they have been very optimistic until the third quarter report because they had such strong order books. Now they are starting to say maybe some people will step off those order books and so it is calming down. It is slowing down but it is still okay and the year as a whole will have been very strong for us and for everybody in RV.

If you take the rest of the categories you can say there you see clearly, as you would expect, Packs, Bags & Luggage people did not travel. People did not go back and forth to work in the previous comparative period as much - so nice growth there and nice momentum. But actually honestly partly only due to the fact that we are having easy comps, if we are brutally honest. Packs, Bags & Luggage continues to perform very strongly.

Then if you look within the Juvenile we have strollers that are not associated with bike and there we are growing, but that is because we are new in strollers as a market player and still continue to take market share. Then you have the rest of Sport & Cargo Carriers where you can say that the roof box part has had a very strong year because there was no inventory so it was sell out naturally. Now we will have the questionable time around winter periods and winter vacationing. It was actually quite good in many markets last year so a more challenged period. In roof racks generally we do two types. As you look more than 90% of Thule's sales is our own brand but in roof racks specifically we also supply to some of the leading car manufacturing brands in the world. If you buy a BMW there is a roof rack with the BMW brand on it that we have developed and manufacture for them. Same thing for Volvo, same thing for some other brands. As you all know, you can see car sales are not great at the moment so for us that business is weak. While it is better and okay in the normal Thule world where it is more, I am going on a vacation, I go to a shop to buy my rack so I can put my box and go on my vacation. That is a little bit of an update on how things are trending.

Tommy Ilmoni: Thank you. Now let us take the first question from Georgi. Georgi please go ahead.

Giorgi Tevzadze (GLG Partners): Thanks for taking my question. Can you give us an update maybe on the situation of the channel inventories? Has your visibility improved since you reported? When you are having discussions with retailers and distributors what is their tone generally? Do you expect them to be more cautious on taking on inventory for the peak season?

Magnus Welander: If you look at it even before we had a relatively good visibility in terms of we know what they are selling out and what they sit on stock of. However, you are right Georgi, in the logic of saying no retailer is feeling confident on anything at the moment. Now the lack of confidence is different by retailer without necessarily having any different data. We had a discussion with two different relatively big German bike related retailers. They had exactly the same factual numbers, exactly the same logic and they had hugely differing views on how optimistic they were about next season despite having the same facts. Psychology, and you guys in the investment community know a lot about what happens with psychology when people start thinking about things, is at the big question point at the moment.

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Thule Group Meeting with Investors and Analysts

Wednesday, 23rd November 2022

Generally I think retailers have to be, due to their cash situation, etc, cautious of sitting with too much. That means I believe generally all brands, and definitely us, will see a much later start of season sales and more in the season. We were seeing the absolute opposite in 2022 when everybody was too gung-ho ahead of the season. We will clearly be most penalised in Q1 comparisons and hopefully considering a very weak comp then so to speak in Q3 and being in season, our yearly performance by quarters will be shifting due to retailers' uncertainty.

Then you can see that in some countries you see a much more cautious retail. You are not surprised, reading everything about the UK and Brexit, anxiety and why did we do it, that UK retail is at the moment the most pessimistic of all, I would argue. Otherwise it is very much up to each individual retailer's psychology.

Giorgi Tevzadze: Understood. Maybe once the inventories normalise over time and you will enter your peak season, can you help us understand what sort of base you think you will grow from? Is it like 2021? Is it 2020, pre-pandemic? Here in the UK, for example, Halfords reported this morning and cycling volumes actually are down versus pre-pandemic. Can you help us understand how we should think about the underlying demand once inventories normalise or what you are thinking about that?

Magnus Welander: Our thinking is that you have a combination of a number of factors. Of course consumer interest is one thing and then the question is when are things normalised in truth? You can say the weakest market from all data we are getting in any shape or form is the UK at the moment. Generally UK is the most underperforming market in all signals we are getting also from true consumer purchases through consumer behaviour. If you look at other markets around Europe and also look at North America there you can actually see that if you look at bike sales and bike trends and how many people that are putting up to go out to bike competitions, how many bookings there are at mountain bike resorts, etc. There the trends are positive versus pre-pandemic. Some of them are not as strong as during the pandemic where some people felt a little bit forced to go on their local vacation and now they can go to Ibiza or do their other trip and go to Thailand, etc. You can see that if you look at it the base number of unit sales is going to be a base where it is likely that you compare smarter with 2019. I think it will go, as I said, from some markets similar or slightly below to some markets clearly above.

What has happened in the meantime is that there has been both a trend upwards in terms of product mix. People are buying more expensive products due to the fact that much more expensive bikes, etc. Also generally all price points have moved up so even if you sell similar number of units, or a lower number of units, there is a factor of a price component helping the revenue for most brands, including us.

Giorgi Tevzadze: Understood. Maybe a final one from me. I guess in your presentation Q3 had this nice chart showing the share of bike related products in recent quarters [inaudible] from Q1 2021. What was the situation in 2020 and 2019 or pre-pandemic? What was your share of bike related products?

Magnus Welander: If you look at it we were at total at 40% in those years. You can say the biggest difference, if you look and compare in the quarters on share of sales, is versus 2021 it was much lower in Q1, Q3 and Q4 but relatively similar actually in Q2. Q2 is the strong bike quarter. If you take 2022 it is absurdly high in Q1 and it is too low in Q3 versus historical. It was slightly too good to be true in quarter one or a lot too good to be true. Relatively logical percentage in 2022 Q2 and too low in Q3 also versus pre-pandemic average years 2017-2019.

Giorgi Tevzadze: Understood. Thank you very much. I will jump back in the queue.

Tommy Ilmoni: Thank you. Next question from Thomas Brown. Thomas please go ahead.

Thomas Brown (Premier Miton Investors): Hi, thank you very much. Hi Magnus.

Magnus Welander: Hi.

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