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Edited Transcript of DOM.ST earnings conference call or presentation 17-Jul-19 8:00am GMT

Q2 2019 Dometic Group AB (publ) Earnings Call

SOLNA Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Dometic Group AB (publ) earnings conference call or presentation Wednesday, July 17, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Juan Vargues

Dometic Group AB (publ) - President & CEO

* Per-Arne Blomquist Curt

Dometic Group AB (publ) - Executive Officer

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Conference Call Participants

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* Agnieszka Vilela

Nordea Markets, Research Division - Research Analyst

* Alexander Hogan

PGIM Fixed Income, Research Division - Research Analyst

* Annabel Asquith

Morgan Stanley, Research Division - Research Associate

* Daniel Schmidt

Danske Bank Markets Equity Research - Research Analyst

* Johan Eliason

Kepler Cheuvreux, Research Division - Analyst

* Peter Reilly

Jefferies LLC, Research Division - Head of Capital Goods of Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Dometic Q2 report 2019. Today, I'm pleased to present Juan Vargues, President and CEO; and Per-Arne Blomquist, CFO. (Operator Instructions)

Speakers, please begin.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [2]

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So good morning, everybody. This is Juan Vargues speaking. I'm sitting together with Per-Arne Blomquist, CEO -- CFO for the Dometic Group. And just to start the presentation of this quarter, I would like to say that, while I'm not very happy, obviously, with the market situation in either in Q1 or Q2, I'm pretty pleased with our performance as a company during the second quarter as continuation for a solid performance in the first quarter as well.

Looking at the growth rate. We ended up 1% total growth in a pretty challenging environment. We are coming from a Q1 obviously that was pretty soft, 6% down organically. April started pretty good, May continued pretty good, much better than Q1, but then the last 2 weeks in June became very, very weak with a number of our main customers in the U.S. shutting down their factories, having obviously a very negative effect on our numbers in June.

If we look at the Aftermarket, we showed a 12% total growth with good progress in a number of areas. I already commented the RV OEM market down totally by 13%, organically by 17% in the quarter. We continued to see a stable market in EMEA region, and even Asia did pretty good. And then I'm also very, very pleased with the performance of Kampa since the acquisition took place in December last year, showing a very strong growth improvement in organic terms as well as margin improvements.

Looking at what we are doing on the markets. Already commented obviously the situation on the RV OEM market. We are putting in place a large number of initiatives on one side on today's markets where we see still today a pretty good progress while we are initiating also new activities. As we commented during the Capital Market Day, we're initiating activities to penetrate the patio door, the outdoor business, mobile deliveries and professional Marine. And we continue to see, as I mentioned before, stability in EMEA and in Asia.

If -- I would take 2 areas of the company that I feel especially proud of is really our EBIT performance when considering the circumstances. We see obviously that we have lower volumes. Now we have the tariffs in place since the 1st of January. We have a negative geographical mix, meaning that we are just now shrinking in 2 high-margin areas while EMEA, which is the lowest -- has been until now the lowest EBIT margin area has been growing, and on top of that, we are also increasing our amortization of acquisition in tangible assets. So when you put all that together, we show a pretty strong performance, which is also telling you that underlying we have a lot of improvements in many different areas across the company.

And having said that, I'm also very, very confident that, once we move from the tough markets we are seeing just now on the RV side, we will also see a good marginal effect on our growth. We continued to run our structuring program. We see good effects of -- given the first quarter and the second quarter. We are just now year-to-date at SEK 35 million in savings coming from the restructuring program. We're expecting SEK 60 million at the end on the year.

And then the other area where I feel very, very proud of is our cash flow. I still remember some apocalyptic comments some months ago when the market started to shrink about what was going to happen with our EBIT number, our cash flow and even the risk we would have for raising capital. And I do believe that now, after 4 pretty strong -- pretty weak quarters from a market perspective, we have been showing solid EBIT numbers, and we have been showing as well a pretty strong cash flow generation.

And then last but not least, as a consequence obviously of the tariffs implemented in the U.S., we already started to manufacture in Mexico. We built up a factory that was up and running in February last year, and we are building up a second site which is 3x the size of the first site, but we will be taking over during Q3 or beginning of Q4 this year. That will help us mitigate the negative effects of the tariffs.

If we move over to the financial summary. As mentioned previously, 1% total growth with 7% organic. Our estimation is that if we take away the effects of the shutdowns in the last 2 weeks of June on the U.S. market, plus the fact that we had 1 working day less in the quarter, the minus 7% should have been minus 5%. Then on top of that, we have positive FX of 5% and 3% on M&A coming from the Kampa acquisition.

On the EBIT number, 2% down in absolute terms or an EBIT margin of 16.9% versus 17.5%. If you take like-for-like, if you add the additional amortization that we are doing due to the acquisitions and trademarks plus the tariff situation, we would have beaten quite a bit the EBIT margin that we had 1 year ago despite a 7% organic growth -- negative organic growth.

We are obviously working very hard to keep our cost in balance with our volumes, and that's also what you are seeing in the numbers. And we will continue to do so, obviously, as far as the market is now returning to a positive. And then obviously, moving forward, we have the -- started to kick in, in June is the 25% tariffs moving from the 10% that was applied from the end of last year into 25% again during the recent weeks.

EBITDA was positive 5% ending up at SEK 1.1 billion. Cash flow, I already mentioned, very, very strong, above SEK 1.4 billion or 50% up. And then EPS, 11% down, diluted by the lower EBIT performance and financial items that Per-Arne will go through in detail.

When looking at the first half, it's very, very similar to the second quarter, so totally speaking, 3% growth with 6% organic down, 6% FX and 3% M&A. And the same is valid for the EBIT. If like-for-like, you just take away the additional amortization we have this year, we will be almost at the same level as 1 year ago. And then if you add also the negative tariff impact, it will be beaten last year despite a negative growth or 6% in total.

EBITDA, strong 6%. And I have to say I'm very happy to see working capital coming down, inventories -- days of inventory reduced by 8 days after 2 quarters despite the fact that we're building up a factory and that we are building up inventories to bridge over the period of time where we are running the factory. Strong cash flow. And the same level on the EPS, down 10% due to the EBIT and the financial items.

If we move over to the sales growth. As I mentioned previously, this is the fourth quarter with negative growth on the RV side -- on the RV OEM side. Started already in Q3 last year with minus 6% organic; Q4, minus 10% organic; Q1, minus 14%; and now, minus 17%.

And then moving over to the next slide. This new slide shows really the importance of the non-RV OEM, how important it is obviously for us to diversify even more and to reduce the -- our dependence on one segment that we have today. Having said that, we have to remember that RV OEM stands today for 1/3, 33% of the total revenue of the company in comparison to 39% 1 year ago. On one side, the RV OEM is shrinking, at the same time as the non-RV OEM is growing faster and then we're adding acquisitions.

So if we move over, I already commented this one. So you can see how the RV OEM is coming down from 39% to 33% or how the non-RV OEM stands today for 67% and growing 5% while the RV OEM is coming down organically by 17% in the quarter.

If we move over to EBIT. As I said, I feel very proud of what the team has achieved despite the headwinds that we had in a number of areas with the tariffs, with the volumes. And as I was telling you that, underlying, we have a lot of efficiency improvements all over. And of course, not to forget that we are also working on the pricing, trying to mitigate as much as we can the negative effects of the tariffs. And on top of that, as already mentioned as well, we are building up a new site in Mexico to move even more products from China into Mexico.

So on the product side, on the next slide, this is -- we would like to mention the new generation of equipment for mobile deliveries. We launched the first generation a few years ago. And considering our strategic path moving forward of getting into new businesses and reducing even more dependence on RV OEM, this is one of the areas where we're investing the most, making mobile deliveries. Starting with the vehicles as this product has been launched -- was launched about 2 months ago with so far very, very good entry to the market. We have live patents pending that have been filed that we expect to get approved in a few months from now. And again, the market has reacted very positively so far. This is really the first step. On the second step, we will move also not just for being part of the vehicle but also into the boxes. That's something that we are building up organizations just now and hiring people.

If we move over to the regions, starting with Americas. [Up top], minus 12%, as I mentioned previously. June was really bad in the last 2 weeks even if we saw improvements in April and May. We see while looking at the new application areas that both food and beverage and climate have been negative. They were impacted by the RV OEM, while power and control, which is primarily going to the Marine industry, has been developing positively during the quarter.

If we look at EBIT, it's 22% down, totally speaking. And then we have to consider, again, that the tariffs have a pretty negative effect on those numbers. So we would not be far away from last year's EBIT number in percentage if we don't have the tariffs. We obviously continue to adjust our cost base. We have been working very hard in pricing, and we will continue to do so moving forward. At the same time, it's obviously, when the market is down at the level that we are, it's very difficult to compensate totally for those negative effects.

Just one comment about the market, the expectation from the American Association for the year 2019 was about 453,000 units for 2019. That has been revised into 460,000 units. And then we need to remember that we are coming from almost 484,000 units during the year 2018. And that affects -- that means as well that the inventory correction that started in Q3 last year expects to be prolonged for a little more -- a little while.

If we move over to the EMEA region, we are very happy with the performance. We see organic growth. We see that Kampa is developing in a very positive way for us. It's more than 2-digit organic growth after 6 months. We see power and control growing due to new product launches. Last quarter, we commented a new battery charger, the PLB40, that has had a great success around the world but even more in the EMEA region. And then we see also food and beverage growing, especially on the Mobile Cooling side but also in some other segments.

We have also a positive impact of the Aftermarket in EMEA. And at the same time, in the same way, we are also -- we have been adopting our cost base even if we are still positive organic growth. But we are down in a number of these by 6%. As a consequence, we see also how our EBIT improvements are kicking in. We are 19% up versus last year. And we expect even the second half to show very positive development in that area.

If we move over to Asia Pacific, negative growth, 12%, a little bit of a similar situation as we see in Americas with inventories, especially in the Pacific. While Asia continues to grow organically in a good manner, Pacific is negative. And there exactly the same, we see food and beverage and climate impacted by the negative effect of the RV OEM while we see at the same time the Marine Power & Control are growing. We established a new company in Korea a few months ago, and we see that the market is kicking off, and there is a good acceptance for our approach in the area.

I'm also very happy to see the EBIT evolution in APAC while looking at the organic growth developments. We are delivering an EBIT performance of 22% versus 23.6% last year. And even here, we have exactly the same situation, so we have a negative geographical mix kicking in while efficiency is increasing quarter by quarter.

If we move over to our strategy, a lot of things are going on. So we keep working with our expansion even if just now obviously we have the organic growth influenced by the RV market. We are working on the 4 initiatives that we initiated in connection to the Capital Market Day. We see Kampa kicking in. We see still today a good Aftermarket growth. And we are moving more investments into the Aftermarket side. And we are also adding resources into the M&A teams to accelerate that part of the business.

On the product leadership, I'm happy to see as well how the new strategy is kicking in. We are hiring key persons both in operations and product development. We see our innovation index starting to improve from 12.3% 1 year ago to 15.5%, and we will see an acceleration in the quarters to come. We are also pretty pleased with evolution on complexity reduction. We see SKU coming down now 7%. And when we are talking about 7% here, it's SKUs that are totally out from our systems, from our inventories. And we are working with taking away the 23% remaining that we have for the rest of the year.

On the cost reductions, a lot of initiatives in place, both in terms of direct labor, indirect labor. We are also, as you all know, executing our restructuring program, which is also giving us good results. We will mitigate the effects of negative -- the negative effects of the tariffs by having a bigger site in Mexico. I'm also happy to see, as I mentioned previously, the inventory reduction, 8 days during the last 6 months and more to do moving forward. So that will also help, again, to generate positive cash flow moving forward. And then last but not least, we are strengthening our management, especially on the sourcing side, where we see good potential moving forward.

And with that said, I will like to leave over to Per-Arne, please, on the financials.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [3]

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Thank you, Juan. Starting with the long-term trends, you can see that Dometic right now is pacing at SEK 18.5 billion in sales, which has been more than 100% up since 2014. We are now also hovering around SEK 2.6 billion in EBIT, which is something that's a higher increase than the (inaudible).

Transport has been more important is that if you look at EBITDA, there we have had an increase of 171% in the last year and are now pacing at SEK 3.3 billion. Operating cash flow, a real uptick here, 241%, and pacing at SEK 3.2 billion, which means that if you take LTM for '19, we have a cash conversion of roughly 97%. I think that's really, really good.

And also in these times when the markets are a bit tougher, it's good to see that we continue to have a very high cash generation. And this is a focus for us within Dometic to continue to make sure that we can generate cash for future investments.

If we look at then the trends. Overall we have talked about ad sales, part of that being out right now, we can see that the EBIT and EBIT margin is slightly under pressure, meanwhile operating cash flow, as I said, is moving upwards.

Looking at the different business areas. RV, as I said -- been said here, is under pressure and especially the American market and Australian market. Meanwhile, we could see a sort of a long-term growth in the CPV business and also in Marine and Retail & Lodging. And RV today stands for 52% of the business and Marine has now surpassed 25%. So I think the balance is close to be pretty good and also that you know that the Marine business having a good margin and a good overall margin helps us also to protect the margin even when we see the downturns as we're seeing right now with the Norway business.

Then we have the new application areas that we introduced in -- during the Capital Markets Day: food and beverage, climate, power and control, and other applications. What is under pressure right now is food and beverage, of course, due to the fact that we have pressure on the RV market. Still see a pretty positive development on the climate side, and of course, power and control with the acquisition of SeaStar continued to be a much more important area for us. And there's also -- we're also happy to see that, even though it's a small area, that other applications continues to grow. So we are putting efforts into different areas to make sure that we are growing at the same time that we see sort of declines in other areas.

If we then look at the key ratios, I think it's worthwhile to stay here a second or 2. I think this is the fourth consecutive quarter where we show resistance to a downturn in the market. And this has been -- during the last 5 years a lot of discussion what happens with Dometic when you see a real downturn in the American RV market. And here you could see that, if we take the quarter, which was a tough quarter with close to 7% on an organic growth, we're actually up on the gross profit. We're defending our gross profit. We are down 60 basis points on EBIT, but we are actually up on EBITDA even though EBITDA is inflated by the new IFRS 16 rules. Even if we should take that away, we should be up 19.8%. So we're actually protecting the margins in a very good way.

You could also see that operating cash flow is up with 50% in the quarter. And if we do the same -- take the same view on the first half year, improving gross profit, we are improving EBITDA margins. We are down of course on the EBIT side, but I will come back to that later on. And we are improving the cash flow of roughly 64% during the first half year. I think that's a strength. And this is the fourth consecutive quarter that we show this resistance to a very, very tough market.

If we then look at the sales side, you can see that the weak Swedish krona is, of course, affecting us. We have translation effects of 5%, and it's very much the U.S. dollar hasn't been moving. We have more than 50% of the business now in the U.S., and of course, we are sensitive to that.

If we then look at the earnings per share, it's down, and it's partly we have a higher financial net. I will come back to that later. But we actually renegotiated our loans -- bank loans, and we have some redemption fees or prepayment fees that we needed to pay. But overall, the situation for the financial net will be very good going forward, and I come back to details later on.

Tax side is a bit of a concern right now given the new rules in the U.S. We had the lower tax rate, but at the same time, when they implemented that, they also implemented new rules for what we call build and BEAT, and that's affecting the taxes for the time being to make it a bit on the higher side than we have expected.

If we then look at also the double taxation agreement with Canada, we are right now paying taxes both in Canada and in the U.S. for the same result, and that makes the tax rate be a bit higher than the 25% that we have anticipated before. Some of these rules and new laws will then be eliminated during the end of this year, so expect the tax rate to be better in the coming year and come back to close to the 25%, perhaps 26% that we have stated before.

If we then go to the regional results. You can see what we have summarized, what Juan has said, that it's the same tendency in the quarters in the first half year. Americas, of course, under pressure given sort of the decline we see especially on the volume side on the RV side. At the same time, EMEA is improving, and I think that the effects of the long-term work that we have been working with since, I would say, the end of 2017 that's now started really to yield effect, and we expect that to continue to yield good effects. And Asia Pacific, despite a tough top line decline, they are protecting the margins on a pretty high level. So I think 21.6% when you have a -- net sales going down with 11% is very, very good protection that they have showed in a very tough market.

If we then go into the key ratio -- and I think it's also worthwhile looking at this. We have a stable -- very, very stable underlying profit. If we take -- we know EBIT is -- yes, it's down, but if we then take EBIT up, you could see that we are down from 18.5% to 18.3% on the quarterly side. And we are down from 17.1% to 16.7%. And this is despite the fact that we're actually taking now investments for IT. We're taking investments for product development. We're taking investment for product management. We have the impact from the tariffs. We also have cost for building up new facilities in Mexico.

And I think this is a strength to show that we are protecting the margins in such an environment where we also see a real downturn on the top line. So underlying profit is looking I think good, given also the different efforts that we're doing right now, and all these efforts will pay off later on. This is long-term investments that we are doing that will be a gain for the company in the coming quarters and the coming years.

You can see on the next slide that we are continuing to invest, as I said, in CapEx and also in product development. And we are at close to 2% in both areas, and thus far, I think you should expect from us 2% to 3% over time also when we invest more heavily in the new sites like in Mexico.

Working capital. This was mentioned by Juan that we have been able to take down the working capital. And when you look at this slide, you can see that the SEK 355 million is the cash flow effect of what we have done with the working capital, i.e., taking down especially inventory but also improving the accounts receivable side.

The target is still to be at 20% and that's, for sure, achievable. More difficult to do it very quickly right now. We also see a downturn of the top line, but over time, you should expect us to operate on a 20% level.

Working capital. Now down to SEK 4.4 billion. And we have also in that number a Kampa effect of more than SEK 280 million and inventory that are affected by tariffs. So there is an underlying good progress on the working capital side.

Cash flow, I mentioned before, SEK 1.4 billion in the quarter, up with 50%. And the target is for us to continue to have a high cash conversion, and we said at the Capital Markets there that we should be roughly at 85% over time.

Net debt down to 2.8. We have taken it down from 3.3 last year at the same period down to 2.8. And we are still very firm on the target that should be around 2 at the end of this year. And I think with the cash generation we have right now and also the debt structure that we have put in place, we feel very strong that we will be able to deliver upon that target.

If then look at the debt side. We have been very active when it comes to the capital structures. We have, during the first half year, issued a bond in Swedish krona. It was a 2-year bond, SEK 1 billion, 2%. We have started to issue commercial papers, which we did in March. SEK 500 million on 0.5 percentage, 3 months. We also issued a Eurobond, 7 years, after the Q1 where we paid 3% for EUR 300 million. We have amortized bank loans. We have renegotiated bank loans, which means that we have only bullet loans left. We have also prolonged the maturities of these loans. And we have also extended the revolving credit facility. Average interest right now will be -- expected to be roughly 3.5% to 3.6% going forward.

And if we then look at the cash and the cash on hand, we have today SEK 2.6 billion in cash on hand, and we have unutilized RCF of roughly EUR 200 million, which means that we have available cash close to SEK 4.7 billion.

If we then also look at the debt maturity profile. Given the change we have done, we have, yes, one-off amortization in 2021, which is then SEK 1 billion. That's the Swedish bond that we made, otherwise we will have no amortizations until maturity out in 2023, which gives us a good ability to generate cash for further investments in both M&A activities and also in CapEx in the company. If you remember, there are SEK 3.2 billion in cash that we talked about at the beginning. And we take away roughly SEK 400 million in interest cost. And we have tax around SEK 600 million. We have roughly SEK 2 billion in cash generation that we could use for -- on an annual basis that we could use for different investments.

Financial targets. The new one. We have 10% in the mid-/long-term net sales growth. We are pacing at 7% right now when it comes to the last 12 months. EBIT margin at 14.2%. Target is 16%, 17%, and the investment that we are doing right now will yield result in the coming, I will say, year and years, and that will help us to reach that. And I think we have a good pace when it comes to deleveraging the company, also given the new debt structure that we have in the company.

So Juan. Please, sum it up.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [4]

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So summarizing the second quarter. Total sale growth of 1%. Obviously, negative impact by the RV markets but also with obviously being aware that the non-RV is holding pretty well. We continue to work on the long-term activities. We are strengthening the Aftermarket organization. We're increasing our pace of innovation, and we see that already in the numbers. We are actively building up our acquisitive pipeline. We are -- have been working very, very hard on the cash flow and our financing so we can afford -- starting to look more -- even more actively on those acquisitions.

I feel very, very proud about what the team had achieved in terms of underlying EBIT performance and the top market conditions. And I'm fully convinced that we will see the marginal positive effects when the market turns to positive, that we will see that the EBIT numbers coming up quite a bit.

At the same time, as we are working on one of the main activities of continuous cost reductions, obviously, we have done a pretty good job in adopting capacity until now, and we will continue to do so. We are executing the restructuring program that we communicated at the beginning of the year. We're working on the Mexico side. We are making progress on our digital agenda that will also generate further savings down the road. Last but not least, we're also looking for additional initiatives to reduce the cost even more now when we see that the volumes are low. And then of course, as I said, we have still today a very strong cash-generation capability that we will utilize to generate acquisitive growth moving forward.

And with that, I would like to move over to the last slide. As you all know, we held our Capital Market Day in Stockholm May 28. At that time, we communicated our long-term financial targets. We believe the new targets are ambitious and will require investments in new business segments, innovation, acquisitions and continuous cost reductions. When looking at that and considering the long-term targets and the detailed activity plans that we have communicated, we will put all our emphasis going forward in delivering the expected results.

In other words, this also means that this new revised outlook for 2019 that we are communicating today will be the last short-term outlook that we will release going forward. In the future, our intention is to keep working on the long-term strategic plans and to give -- to share with the market obviously what we see on the market trends on demands, up or down, moving forward.

And now moving now in practice to the outlook, we expect for the year a negative organic growth, very much influenced obviously by what we saw in June but also the revised forecast from the American Association.

We expect EBIT margin to be above 14% and lower than the close to 15% that we announced before, and there's really 2 different factors. One is again the lower volumes that we are expecting for the rest of the year. At the same time, the 25% tariffs are new to us. It's pretty difficult to compensate totally for such an impact.

That means also in practice that we are still expecting to have slightly positive growth in the second half. July has started better, considerably better than June ended up in the last 2 weeks. But we see clear that the inventory correction is being prolonged in accordance to the communication that we have with our customers. And that's why we obviously need to be more cautious in the second half. Leverage, we continue to expect to be around 2, obviously excluding acquisitions.

And with all that said, I would like to open for the M&A -- sorry, the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Johan Eliason from Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [2]

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I hope you can hear me. I was just wondering about this closure you talked about the end of June. You said if you adjusted for that, organic growth would be better. But why would you adjust for that? Was there any specific reason for this closure? Isn't it just to adapt to a lower end demand?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [3]

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Yes. Yes, but let me explain it to you. So we knew from the beginning obviously the second quarter was going to be tough. We have been talking about that the Q1 and Q2 in comparison to 2018 were going to be very, very tough while we will see improvements in Q3. What happened, and then especially after seeing June as -- April and June come in, in the way they were coming, we never expected what was going to happen during the second half of June. So what I'm just saying is that, that had a major effect on our second quarter. That is, is a reality obviously that, when they are shutting down the factories, it's obviously because they are also adapting to the new sentiments on the RV market, which is talking about minus 14% in comparison to the minus 5% that was communicated before. So numbers are numbers, so they are real. So minus 7% is real. I'm just trying to explain what -- why we are adapting also our view moving forward.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [4]

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And talking about this guidance in RV over the full year. You have the first half already done. I guess you should have a fairly good visibility into July in your order backlogs as well, and Q4 is typically a very small quarter. Are you really confident that you can beat the 14% margin?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [5]

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Not the 15%. The 15% is gone. But the 14%, we believe absolutely. I mean of course that we could never forecast what's happening in the last week or the 2 last weeks in June. So we have uncertainties on the marketplace. But considering what we know today, we feel pretty confident that we are going to deliver going to these items. We still believe that the second half, organic growth-wise, will be positive. We will not fly, but it will be positive. And with all the activities we have in place, we will be able to, to a very fine extent, mitigate the effects -- the negative effects of additional tariffs. My crystal ball is a little bit better than yours. I'm not -- there's not so much more.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [6]

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No. And then just on this new product you mentioned here, the Dometic Frigo. It looks good, clearly compelling. How -- what sales channel -- is the CPV channel something to you sort of you need to develop a new sales channel for this product?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [7]

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Yes. For this specific, which is very much on the sitting on the vehicles, we have a channel, so the CPV channel. Having said that, historically, we have been very strong in CPV in a number of European markets. We are launching the product all over Europe. So we are doing it, and we are building up the organization to be even more present on the CPV channel, starting with Europe. And then we will look especially in Pacific and the U.S. But the pilot is really Europe, where we always had a strong CPV organization.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [8]

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And then does this also imply that you already have this model in some -- or this product into some new models already with the OEMs? Or how does it work?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [9]

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We have -- we are already selling. It's up and running. So we see obviously from a low base, but they're selling very, very well. So the market acceptance has been very positive.

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Operator [10]

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Our next question comes from Annabel Asquith from Morgan Stanley.

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Annabel Asquith, Morgan Stanley, Research Division - Research Associate [11]

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I will have a few, please. Perhaps if I go one at a time. So the first one, how much visibility do you have on your inventory levels at your customers and your dealers? And how would you assess your overall inventory level for yourself?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [12]

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Yes. So we take on the customer side. We are tracking this on a monthly basis. When looking at the inventories on the American market, we -- it's our opinion that the inventories have dropped 20%. We believe the manufacturers just now are not sitting inventories. It's the retailers who are sitting with inventories. There we see that the recent numbers have been down somewhere between 5% to 10% in the first 5 months, while as you can see, we are down after 5 months. The industry is publishing the numbers, and we are down close to 20%. So the inventory had been reduced. Our calculation just now is talking about a little bit over 200,000 units on the entire marketplace. The magic number, according to the experts on -- historic experts on this market, there's a magic number, which is 2 turns. And we are very much there at this point. So that's also the reason why we believe that we are reaching kind of the magic number and that we should be seeing turn into positive in the second half. And keep in mind obviously that everything started in August last year. So it was the first number -- sorry.

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Annabel Asquith, Morgan Stanley, Research Division - Research Associate [13]

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Sorry. And then...

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Juan Vargues, Dometic Group AB (publ) - President & CEO [14]

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Yes. In terms of…

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Annabel Asquith, Morgan Stanley, Research Division - Research Associate [15]

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And specifically what we've seen industry level, what are you seeing there?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [16]

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A little bit of the same. I think we believe that what we see in Marine just now is really all the information I'm getting, is that the issue during the last, I would say, 7, 8 weeks, when looking into the numbers published by the Association is really that the old war is still negotiated, which is what we have present. And then one of the issues has been really the weather, the flooding that we have seen in the Midwest in the U.S. that has had an impact on negative numbers on the Retail side.

And then looking at our own inventories, our own inventories, we are working on continuous basis. So I mean coming back to the question on visibility, we have, I would say, a few weeks on the RV side, a couple of months on the Marine side. That's on that level.

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Annabel Asquith, Morgan Stanley, Research Division - Research Associate [17]

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Okay. And then can you please provide some color on your end market trends in the EMEA business between RV, Marine, commercial vehicles and the other segments? Since there is the 1% organic growth this quarter, and that's signaling a fair amount of deceleration. And just some color on what you're seeing there, please.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [18]

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The RV OEM has been negative. Marine has been pretty good. So I would say that this is very much written by RV Marine -- sorry, RV OEM in the second quarter. Other than that, all the segments are positive. We are flattish on CPV OEM, but we are strong on Marine OEM. And again, Aftermarket is solid.

On the RV, perhaps I should take the opportunity to comment. As you know, we have the new regulations beginning in Europe for vehicles for RVs. And we know that the number of chassis manufacturers, these have issues to deliver to the OEMs. The expectation for the year is that the market is going to be down about 6%. We were positive in Q1. We were slightly negative in Q2. The expectation is that we are going to be, on the RV OEM side, negative in Q3 due to the delays with the new regulations, and we will be positive in Q4.

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Annabel Asquith, Morgan Stanley, Research Division - Research Associate [19]

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Okay. And then would you please just explain the organic decline in your non-OE sales in America and APAC? And then how should we think about this going forward, especially since the OE outlook remains uncertain? What do you think we should be thinking about here?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [20]

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I think basically one segment is really written in Pacific, where we see that a number of our customers did carry quite a bit of inventories during -- especially in Q4 but also in the beginning of Q1. And the market has been softer. So we see we should have -- our forecast and our outlook is that we will have a better second half than we have seen in the first half.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [21]

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Also important to remember that some of these retailers in Australia, they have a year-end result in end of June. So also, they are trying to destock as much as they can for year-end numbers.

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Operator [22]

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Our next question comes from Daniel Schmidt from Danske Bank.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [23]

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Just a question on the short-term again. Sorry for that. You write in the report that you're looking at additional initiatives in all 3 regions to protect profitability in the short term. Is that something that you feel that you need to be addressing more aggressively in order to stay above the 14% guidance that you gave this morning for the full year?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [24]

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I think Daniel, that as you know, we have been working now for 15 months on a lot of activities, both basically long term. But at the same time, when you see obviously the volumes, then we have been, as you know, adapting our cost level to the new volumes on the marketplace. What we see just now is that some of the plans that we had a little bit further on could be accelerated, and we have all the intentions in the world of accelerating those plans. So we can still keep our EBIT margins at the levels that we are performing today.

So I think our priority number one, number two, number three for us just now is to protect profitability while building up a more diversified company moving forward. The market volumes on the RV we cannot do anything about, but we can protect our company. We can gain efficiency. And we can accelerate some of these plans that we have down the road.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [25]

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I also feel confident that we can do that because if we look at the build-up of this margin that we have, it has also been doing very well. So we feel confident that we can do these things, take the investments and some positives, both to protect the long and the short term of that, especially for the long term. So that's what we're looking at right now. We don't need -- so we are without some of that until this time. We feel pretty confident that we can reach the 14% anyway, but this suggests to have a perhaps a more mid- and long-term perspective.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [26]

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All right. Okay. And are you then between the lines saying that we should expect maybe in Q3 or in Q4 some additional one-offs that we saw by the end of last year?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [27]

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Daniel, we never write between the lines.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [28]

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All right. Okay. Good. And just a clarification then again on the short term when it comes to the top line. Are you implicitly saying -- even though you're saying that July is looking a bit better than June, which was dreadful, are you implicitly saying that you will be below the 0, in negative territory in Q3? And then you should be performing in positive territory in organic growth in Q4? Is that how you should model it?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [29]

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Yes. I mean it's always -- Daniel, it's going to be in September or in October. But in those terms, yes, we believe that Q3 will show a good improvement versus Q1 and Q2. Q4 should be positive.

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Operator [30]

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Our next question comes from Peter Reilly from Jefferies.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [31]

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Firstly, if I can start with a technical question. The PPA amortization you're pushing through, which obviously is depressing your reported EBIT, is that all in the Americas? And the reason I'm asking is I'm just trying to get a better understanding of the operating leverage. Is that the real underlying margin performance versus the organic growth decline in the second quarter? So maybe you can help us with that.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [32]

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No, it's not. I mean that is, I will say, Europe and also in Americas. That's where we have most of it. And then I mean the PPA that we are pushing through is also based on the sort of write-offs of the brands that perhaps I think is proper sort of balance sheet management right now. But it is basically, I will say, EMEA and Americas.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [33]

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Can you give us the number for the Americas, please?

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [34]

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No, when we'll find that. But let's see whether we can help you out later on. We are not specific on this.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [35]

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Okay. And then in terms of the SKU reduction, you've done 7% year-to-date. You're targeting 30% by the end of the year. That's a lot to put through in the second half of the year. Mainly if you can give us some more color on how you can do that level of reduction at a relatively short space of time and whether you get any cost reduction benefits in the second half or whether it's more longer-term story because you can rationalize the manufacturing footprint.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [36]

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It's both. So obviously the 7%, we have a very, very, very detailed process with a number of toll gates. The 7% is when the SKUs in all our inventories are gone, totally gone. So all of that is us. Then we are working -- and this is nothing new. It's not that we have something to work now. We have been working now during the last 15 months in passing the toll gates for the remaining 23% up to 30%. We feel confident that, that will be done. And obviously, one of the differences that we have in the last 6 months is that, just now, we have 3, 4, 5 people fully dedicated to get this down, working in the different regions. So it took a while last year before we got the resources in place. The resources have been in place now for a while. So we're initially -- it's something that -- we are tracking this every single month. We have the numbers.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [37]

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I'm sure you are. I was just surprised by the scale of reduction you're planning in the second half of the year, which is a very big reduction in a 6-month period.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [38]

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We have started -- again, it's nothing that we are starting now. We started already 15 months ago. So when we say the 7%, it's obviously the easiest one. And we still have...

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [39]

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And can you talk a bit more about what you did in the last 2 weeks in June? Because I'm slightly surprised that you talked about the last 2 weeks being very difficult with all of your U.S. customers essentially closing the factories. And yet there's very little margin damage in the second quarter. I assume you had very little advance warning of this factory shutdown. And normally, when you have a sharp slowdown in the last weeks of the quarter, you can't avoid having a fairly major margin impact because there's no time to react. So what essentially happened?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [40]

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Yes, but that's the reality. I mean we cannot release people for 1 week. We are not -- we don't know in advance. So if we had been given notice, it will work as before, we could have acted in a different way. But when you have these kind of situations, there is no chance that it can be sent home overnight. So that's the reality. But that's why, Peter, I'm saying that I'm very, very grateful for the team because the underlying margins, when you take away the external amortization that we have in our numbers and the negative impact of the tariffs that have started to kick in, 1st of June is pretty solid. I mean again underlying we have the margin that we had in Q2 last year or year-to-date last year despite 6% organic growth.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [41]

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And if you take into account on all the investment done in IT, product development, I think that, that is probably, all in all, perhaps SEK 50 million for the first half year. And so that shows that the underlying work with efficiency is actually easy.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [42]

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That's why I asked the boring question about the PPA amortization because I'm just a bit surprised by -- that the U.S. margin or Americas margin wasn't worse in the second quarter.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [43]

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But let's come back another time. We have to check if we have revealed -- I don't know what this is. But that's why also we start to look more on [EBIT DA] and also the EBITDA. But that shows sort of what's happening in the business.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [44]

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Just for your understanding, Peter. I mean if you look at our money just now in the U.S. -- sorry, in Americas, we are down 16%, the number of [TEs] in comparison to a situation which we had 1 year ago. So I mean we have been pretty good or pretty tough in reducing costs and that in our capacity. And our plan is to continue to do the same. So as I said, we -- I believe that the underlying efficiency that we have in the company today is quite a bit higher than what we had 1 year ago.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [45]

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And then if I could just have one final one. Any comment you can make on some of your growth initiatives, particularly mobile coolers and SUV armrest coolers? You've given us another photograph of the armrest cooler without yet telling us...

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Juan Vargues, Dometic Group AB (publ) - President & CEO [46]

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So it's growing -- yes, it's growing very nicely in EMEA. So one of the parts on the Aftermarket side that is growing the nicest in EMEA is really more in cooling. We have 21%, 22% organic growth in Americas. While as I mentioned previously, on the Pacific, where we have been suffering in the first 2 quarters, we expect to see improvements in the second half.

So altogether, we are positive in Q2. We are positive year-to-date in our cooling, but Pacific has been -- has had I mean a negative impact. And then we are launching a totally new generation of coolers in Q1 next year.

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Operator [47]

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Our next question comes from Alex Hogan from PGIM.

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Alexander Hogan, PGIM Fixed Income, Research Division - Research Analyst [48]

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Just 2 questions. I'm trying to get a better understanding of the like-for-like development in EBITDA. And I'm just wondering, do you just strip out the impact of IFRS 16 in your 2019 numbers? And then also the impact of M&A. I'm just trying to understand like on an organic ...

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [49]

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But EBITDA -- if you take the EBITDA, he'll take middle if we take out the IFRS, it would be more 19.8% compared to 19.9%.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [50]

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Yes. Correct.

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Alexander Hogan, PGIM Fixed Income, Research Division - Research Analyst [51]

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Sorry. 19.8%?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [52]

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In comparison to 19.9%.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [53]

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So last year.

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Alexander Hogan, PGIM Fixed Income, Research Division - Research Analyst [54]

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Okay. And on M&A, the impact year-on-year versus what -- I mean your EBITDA numbers you've got for Q2 right there, 1,100? How much of that is from the M&A?

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [55]

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With EBITDA, you don't have any M&A. This is sort of the impact from...

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Juan Vargues, Dometic Group AB (publ) - President & CEO [56]

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From the EBIT.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [57]

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The same as EBIT. We don't put that number on the EBITDA level.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [58]

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But you have -- on EBIT, you have SEK 20 million in difference versus last year in the quarter, and you have SEK 45 million year-to-date.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [59]

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Yes. But you mean the underlying profitability required under this on the EBITDA level? You ask for that. But they are not -- but if you take the depreciation for IFRS 16, it's SEK 44 million in the quarter and SEK 86 million in -- for the first half year.

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Alexander Hogan, PGIM Fixed Income, Research Division - Research Analyst [60]

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Okay. And the interest element as well? Is there an interest element?

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [61]

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I think that's a little bit small. I don't have that. We can -- let's come back on that. I think it's SEK 3 million to SEK 4 million or something. It's very small, SEK 3 million to SEK 4 million.

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Operator [62]

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We have a question from the line of Agnieszka Vilela from Nordea.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [63]

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I have 2 questions. Starting again with the kind of June/July dynamics, I was a bit surprised when you said that this shutdowns in production by your customers came quite unexpected. We had Thor announcing production shutdowns the 10th of June already. And I can imagine that probably you have some kind of dialogue with your customers. So if you could explain that.

And then another part of that question, if you can tell us about your own production adjustment. Have you been a bit behind the curve and were producing still into Q2 until the end of June and maybe now you take the opportunity to limit the production? How should we see that?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [64]

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Let me take the first one. It is clear that we are talking to our customers every single day. If you look at the RV OEM market, it is known that we have thousands of customers. On the Aftermarket, it's a little bit more difficult on the OEM. We have daily contacts with these customers. So obviously that they were announcing, they never told us exactly which factories and when. So it came. It came as a cold shower in the last 10 days, unfortunately.

On our own production, we have lead times. For the RV OEM, we have lead times of about 2 to 3 weeks. So obviously, we were a little bit late on adopting that. Having said that, we know as well that we are ahead of the market in adopting capacity to the levels that we see on the marketplace. So I don't see -- obviously we have been allotting capacity every single week in -- this project started 4 quarters ago. So I don't see that, tough to say.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [65]

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No. But it still took you by surprise. And I think like I appreciate the comment about you having many customers. But when it comes to Thor, isn't that customer standing for like half of the volumes in the U.S?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [66]

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Not for us.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [67]

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And they explicitly say -- no, maybe not for you but for the market then. Maybe you can kind of assume what's happening in the market.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [68]

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But Agnieszka, it's also very difficult when they announced. It's very difficult to understand what is the magnitude. And they have a lot of different sites, and they have more than one customer. It's...

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Juan Vargues, Dometic Group AB (publ) - President & CEO [69]

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And you look at Thor. Thor is one corporate office, an umbrella, obviously. But you have -- you need to then to look at Jayco set. You need to look at the Dutchmen set. You have all these factories that are run -- imagine it. So it's impossible to know. And then you have the broader mix. And Thor, in comparison to Winnebago or in comparison to Forest River, they are much more into A class model homes. And we don't have a lot of equipment there in comparison to the rest. So that's why adopting capacity for Thor doesn't mean how much they are going to -- or when it's going -- they are going to shut down one specific factory, unfortunately. I wish that we could have information.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [70]

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Yes. Fair point. But then overall, how would you kind of assess your visibility if these things can happen that quickly?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [71]

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3 weeks -- 2 to 3 weeks. 2 to 3 weeks. The lead times on the RV OEM market are 2 to 3 weeks. So that's why you need to have daily contacts.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [72]

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Okay. Yes. And on your comment about July being a bit better then you also refer to what the customers are doing. Are they now opening factories? Or how should we see that?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [73]

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We see our order intake at the beginning of July being much better than it was at the end of June, much better. But again, of course, we don't know what's going to happen the last week of July.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [74]

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But I mean the first and the second week, the first week was when we had 4th of July. And then it was all closed anyway, but then the second week started to take off.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [75]

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Right. Perfect. And then my last question when it comes to tariffs, if you can help us to understand how much of your top line is exposed to these tariffs and quantify that.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [76]

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We can comment how much we know is coming through our bills. The negative effect of the tariffs so far this year has been SEK 86 million.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [77]

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SEK 96 million?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [78]

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SEK 86 million.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [79]

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SEK 86 million.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [80]

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SEK 86 million. Okay. SEK 86 million. Okay. Perfect.

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Per-Arne Blomquist Curt, Dometic Group AB (publ) - Executive Officer [81]

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And on the quarter, it has been SEK 52 million.

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Operator [82]

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Okay. So I hand it back to the speakers for any further comments.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [83]

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So I would like to end up by thanking you very much for your attention, thanking obviously my team as well for a solid performance in a tough second quarter. So thank you very much. By the way, have a nice vacation, all of you.