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Edited Transcript of DOM.ST earnings conference call or presentation 31-Jan-20 9:00am GMT

Q4 2019 Dometic Group AB (publ) Earnings Call

SOLNA Feb 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Dometic Group AB (publ) earnings conference call or presentation Friday, January 31, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Juan Vargues

Dometic Group AB (publ) - President & CEO

* Stefan Fristedt

Dometic Group AB (publ) - CFO & Executive VP

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Conference Call Participants

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* Agnieszka Vilela

Nordea Markets, Research Division - Research Analyst

* Daniel Schmidt

Danske Bank Markets Equity Research - Research Analyst

* Fredrik Moregard

Pareto Securities, Research Division - Analyst

* Johan Eliason

Kepler Cheuvreux, Research Division - Analyst

* Klara Jonsson

SEB, Research Division - Research Analyst

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Dometic Q4 Report 2019. Today, I am pleased to present Juan Vargues, President and CEO; and Stefan Fristedt, CFO. (Operator Instructions) Speakers, please begin.

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

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Good morning, everybody, and welcome to this fourth quarter report presentation. I'm sitting together with Stefan Fristedt in Stockholm, and we will be very happy to walk you through the presentation of this quarter as well as for the full year results. And as usual, we will have a Q&A session to be able to answer all your questions.

If we move over to the Q4 results, we see still a weak market evolution, especially in the -- on the OEM side. Americas and APAC continue to be challenging. EMEA turned to negative organic growth, very much driven by the RV OEM. When looking at -- on the growth side, we ended up a minus 4% in the quarter with a growth of 5% on the aftermarket. We continue to have a strong focus on our new growth initiatives. We have been investing during the last months in building up our patio residential business, our outdoor and mobile deliveries. And we continue to be working very hard on our product developments, where we see a lot of progress and where we feel that we have a strong product pipeline into 2020.

In terms of performance, we have been spending a lot of time on the sourcing and strengthening the sourcing organization. We have new management in place at group level as well as in the regions. We communicated somehow a year ago that we have started product manufacturing in Mexico, where we moved one of our lines. During Q4, we moved another 2 lines, which means that, basically, we are up and running with the entire air conditioning program now in Mexico. And on top of that, we initiated the implementation of the global restructuring program during the quarter.

Looking at the markets. As I said, OEM started, obviously, already during the second half 2018, is showing weakness on the RV side. What we have seen during the last couple of months is really Marine also becoming softer as well as the CPV market. So basically, the entire OEM has been facing challenges during the last quarter. On the contrary, we're looking at the entire year, EMEA is still showing positive results despite a weaker Q4, driven by the RV side. We have seen challenges during the entire year in Americas and APAC, even if APAC has been improving during the last second half.

On the growth side, we ended up about 1% total growth, and it represent Aftermarkets, very much driven by the Kampa acquisition that we ended up at the end of last year. In the same way, we have -- we took the decision to invest in new growth areas at the beginning of the year, and this has taken quite a substantial part of our investments during the year. And as I said, product development continues to be driven at a very high pace. We have increased our investments during the year, and we will continue to do so in order to strengthen our position moving forward even more.

In terms of performance, we are very happy to see that our product development investments are starting to kick in. We lifted our innovation index. And just as a reminder, our innovation index represents the share of sales coming from products that we launched in the last 3 years, where we went up from 12% at the end of 2018 to 16% at the end of the last year. We also believe that we have done a very, very strong job in adapting capacity to the market demand during the last 18 months. We put together pretty ambitious targets in terms of complexity reduction already 2 years ago. We mentioned that we were going to reduce our SKUs by 30%. We ended up at 32% of sold SKUs in 2018. If you add on top of that all the other SKUs that we had in our inventories, we ended up at minus 44%. So I'm extremely happy to see the evolution during the last 18 months. That also helped us to reduce the space quite heavily. The number of square meters or square feet that we have in the company is 10% lower today than we had 1 year ago.

And I'm also pleased with the way that we have initiated our global manufacturing footprint program, where you know, even if we announced during last quarter, we have been working very hard during the last 18 months.

If we move over to the financial summary, net sales, as you are aware of, ended up at minus 4% totally, with 9% organic down, 4% benefit on the FX and then 1% M&A. If we look at EBIT, ended up at SEK 288 million or minus 29%, very much driven by efficiency improvements. We see also a heavy capacity reduction. Just to give some perspective, when comparing the last of December 2019 with the last of December 2017, we have a reduction in FTEs of 22%. And of course, that helped us big time to mitigate the effects of the lower volumes but even also, partially, the tariffs. And we continue to work on our pricing side.

Lower volumes are having a major impact. I do believe that everybody expected the second half 2019 to look better. Unfortunately, that didn't show up. So we have the impact. And then on top of that, we have also the full impact of 25% tariffs that have been in place since the first of July.

EBITDA, SEK 505 million or 10% down. We feel very proud of the cash flow generation that we have seen during the year and continue to be so. Stefan will come back to working capital, but we see major improvements, and we'll keep working hard to reduce working capital even more. And then EPS, down by 0.65 -- 65%, sorry, to SEK 0.16, very much affected by a lower profitability but also the restructuring programs that we put in place.

Looking at the annual numbers, we ended up at 1% up in total growth with an organic negative growth of 7%. 5% up, helped by FX movements and then 3% totally in M&A. EBIT ended up minus 9%, lower than last year, benefiting by a growing aftermarket. We saw efficiency improvements across the year. We adapted our capacity as well and continue to work on the pricing. And even here, we had negative effect by lower volumes and the tariff impact during the entire year. EBITDA, up 2% for a complete year. And as I mentioned previously, a very strong cash flow during the entire year, with EPS ending up at minus 16% or NOK 4.48.

If we look at the different business areas, the business area has been affected the most has been RV. During the entire year, we have seen EMEA quite stable for the first 9 months, while we saw a contraction during Q4. We see also Marine, a very, very strong first half, slower Q3 and weaker Q4. And then we see Retail and Lodging, pretty stable as CPV coming down during the last quarter, very much affected, as a matter of fact, by the situation on refrigerants that we had in Q4 last year. Just as a reminder, our Aftermarket business in CPV showed that growth -- organic growth 1 year ago of 22% in Q4. So we have very, very tough comparables in terms of CPV.

Looking at our application areas, food and beverage is the one which is most affected by the RV markets. On climate, we are still positive, 2 components. One is the Kampa acquisition. The other one is the fact that we have been introducing new products in a number of geographical markets, and that's helping us up. On power and control, it's very much driven by the SeaStar acquisition, steering systems. And while we saw a very, very strong first half, as I mentioned previously, Q4 has been weaker. And then on the other applications, we also have a number of new products that we have been introducing during the year.

If we summarize the year, looking at the next slide, as you can see, we started the year at minus 6% on organic growth, moved to minus 7%, minus 7%, and then the last quarter has been a minus 9%. So obviously, the predictions for the second half was going to look better than the first half didn't take place. On the contrary, we saw a deterioration on the marine market and on CPV during the last quarter.

As a consequence, looking at EBIT, 2 major effects in reality. One is the volume and the second is the tariffs. Underlying, we feel very proud about what we have been achieving, especially considering that we are investing in a number of areas. We are investing in building up our new market organizations. We are investing on our operations, so we can run our manufacturing footprint program in a good way and timely. We have been investing on IT infrastructures, and we have been investing as well on product development. So considering all those factors, we feel that the underlying margins are pretty good.

Moving into innovation, we'll start to see the results of the efforts that we have done during the last 2 years. We launched a totally new generation of compressor coolers, cooling boxes, where we have big expectations, big expectations for the coming couple of years. We also launched a new device, very much designed for the Pacific area, where caravans, motor homes get problems due to the dust on the waste but also introduced in South -- in -- sorry, in Southern U.S. And we have seen volumes coming through. And we will see more improvements across 2020, where we have a very strong pipeline, as I mentioned previously.

Looking at different regions, Americas is obviously the region that has been suffering the most, 12% down organically, affected by the RV market. And then again, in the last quarter, by the Marine market. We see on the new areas that we have started to invest 2 years ago that mobile cooling is growing 2 digits. We also see improvements on the CPV OEM, where we built up a new organization, where we expect to see sales starting to come through in Q4 this year.

Looking at EBIT, ended up 39% down. I feel the same, proud of the job that we have done adjusting capacity. Then, of course, the reality is that we have infrastructures with a number of factories in North America. And that's also one of the explanations for the global restructuring program that we are running. We need to become much more agile as a company. And the level of outsourcing is going to grow, so we can mitigate the effects of this cyclicality we are seeing just now. And then on top of that, obviously, we had 25% tariffs having full effect.

Looking at EMEA, which I assume is perhaps the major surprise that we have on this report, we have seen a very, very stable situation during 3 quarters. We moved into negative territory in the fourth quarter, driven by the RV markets. We see -- we have seen, as a matter of fact, also an inventory correction in EMEA. And then, as I mentioned previously as well, we had a very, very strong Q4 last year, and that explains why Aftermarket is a little bit weaker than we have been seeing until now.

Looking at EBIT, 31% down, very much the consequence of the lower volumes in EMEA but also the fact that we had a pretty substantial positive FX effect in Q4 last year, while we have a negative FX effect this year. And then the other factor, obviously, is the volume decline that we saw in Q4. Having said that, we are very pleased with what we have seen in terms of efficiency improvements and on the pricing that we have been running during the entire year and continue to drive.

Looking at APAC, very weak first half of the year, slightly better second half with also a slight improvement in Q4 versus Q3 this year. Despite the fact that the RV market has -- continues to drop in the Pacific area where obviously we have our base, we see improvements in the rest of Asia, and thus, kind of helping us up. I'm happy to see the EBIT evolution despite the fact that we have a pretty negative geographic mix and we have a pretty negative product mix, which is telling us that our organization over there is doing a great job in mitigating the negative effects. We continue to work on pricing but especially on efficiency improvements, and we have seen effects during the entire year.

Looking at the restructuring program that we launched in connection to the last quarterly report, we have sped it up. We initiated the program in 10 locations. So far, we have 200 employees that have been affected. The cost that we took in the quarter amounted to SEK 80 million. And totally, we are SEK 116 million. On top of what we did during the quarter, during January, after the end of the quarter, we also announced the shutdown of our plant in LaGrange, U.S. that will be affecting another 200 employees approximately.

Looking at strategy execution, as you remember we have the 3 pillars, starting with profitable expansion. We have completed the hiring process of business developers for different -- 3 businesses that we are building up, meaning residential patio, outdoor and mobile deliveries. We keep working on having more dedicated resources to the different segments that we are working on. We are also increasing focus on Aftermarket even more, putting behind the sales organizations, more product development and product management. And last but not least, we have a very active and growing acquisitive pipeline, where we have also added a number of resources, both in Americas and EMEA, to speed up the processes.

In the product area, I have been informing in a continuous basis what we have been doing on the global products and global technologies. We have new product management in place. We have new product development managers in place. And we start to see, as I mentioned previously, the results of those investments. Our innovation index improved to 16% from 12%, so it's a substantial improvement. And we feel pretty confident that we will continue to see improvements across 2020. And then on complexity reduction, SKUs were reduced by 32%, which is -- even that having a very positive effect in our inventories and on our working capital.

On cost reductions, a lot of hard work done during the entire year. I already mentioned our restructuring program. The fact that we're up and running in Mexico with 3 lines on aircondition, efficiency improving every day on the first line, we have exactly the same efficiency levels today that we have in China after many years, and now we're starting to see efficiency improvements in -- with the recent move of the new 2 lines. Sourcing is an area where we will put much more attention moving forward and where we have now the organization in place, and we believe that we still have quite a bit to go in terms of inventories and feel very pleased with the results this year.

If I hand over -- having said that, I hand it over to Stefan, please?

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [3]

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Thank you. Starting with our net sales bridge for the fourth quarter, we see a total reduction of net sales of 4%. We see somewhat less positive impact from the currencies in the fourth quarter due to the strengthening Swedish kroner amounting to 4%. We have a 9% negative organic sales development. And that 1% is related to acquired units.

Moving on to CapEx and product development, Q4 is -- it's not uncommon that it is a bigger CapEx quarter due to the seasonality in our business. And looking on CapEx in relation to net sales, we are ending up on the same level as in 2018. And as Juan mentioned before, we see continuous investments in IT. We also have capitalized product development cost there -- in here of SEK 6.5 million. So the composition of the 2.9% is slightly changing.

If we look in on our product development, ending up at 2.5% is a slightly increase compared to the same number for 2018. And Juan has already touched upon this that it's important to keep in mind that the spend on product development is changing. It's more focused to prioritized areas. And to a higher degree, we are investing in global platforms.

Moving to the next, working capital development. We are very pleased with the development of working capital. That has been the case during the year, and it has continued in the fourth quarter. So we are down 1.5% units in relation to net sales compared to the -- how we ended 2018. And the main contribution in this is on the inventory side where we have focused activities to drive down our inventory levels.

The next is just showing the composition of the different components in working capital, so I think I leave that for individual studies. Moving on to cash flow and here, of course, due to the strong development of working capital, we're seeing a cash conversion of 182%. It is usually a strong cash conversion quarter, but this year, it's standing out even more due to the working capital development. The cash flow development is impacting our net debt as well. So it has been coming down 12% in the quarter. So we are ending our leverage on 2.4, which is in line with what we communicated in connection with the Q3 report.

Take a look on our debt portfolio, which is showing a very good maturity profile. You have seen it before, and we are happy with the structure of our debt portfolio as it looks like now. And there is no need for any immediate action. But the market, the debt market has started strong this year, so the positive situation there remains also now when we're coming into 2020.

We're moving on to the financial targets. We see that on net sales growth, we are ending up totaling 1%. If we see the average of the 3 years, we -- or the 4 years we are showing here, it's 12%. So in that perspective, it is in line with our long-term targets. EBIT margin of 13.2%, it's important to keep in mind that in that number, as Juan already has mentioned, we have SEK 258 million related to tariffs. So in the light of that and the volume development, a very strong statement on being able to keep up the EBIT margin.

Net debt to EBITDA, as I mentioned, 2.4x, where our long-term target is to be around 2x. And dividend, as it is proposed to the Annual Shareholders Meeting, would end up on 49%. And that should be compared to our target to be at least at 40%.

So with that, I hand over to you, Juan, to make the final summary.

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

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Thank you. So summarizing the entire year, it is clear that we have been facing very challenging market situation in Americas and Pacific. We have seen very good performance in EMEA during the entire year even if we saw some softness in Q4. Obviously, as well, the tariffs did have a major impact on our numbers this year. We are working on that, and we will see improvements during the rest of the year even if the first half is going to be tough. We have been doing a very good job in adapting our capacity to the new levels, and we'll continue to do so. And I also believe that we have achieved a very good cash flow generation, and we are putting in place all the measurements to keep that on improving moving forward as well.

If we look at the strategy, a lot of progress. Keep in mind that we launched our new strategy internally in October 2018, communicated to the market in May 2019. And when you see the number of activities that we have in place and the progress that we have on the KPIs, I think that we are moving pretty fast. We have big organizations in the new growth areas. We need to be less dependent on the RV markets. Clearly, we need to build up the aftermarkets. We are building up a strong acquisitive pipeline. We are increasing substantially our investments in both R&D, which will generate growth, but also on IT that will help us to reduce the cost moving forward. We have reduced complexity big time during the year. We are not done yet, but we have taken a giant step towards a more agile and fast-moving organization. And last but not least, we have initiated the global restructuring program. And so far, we are pretty pleased with the results.

And with all that said, I would like to open for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from the line of Daniel Schmidt from Danske Bank.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [2]

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A couple of questions from me then. Starting with the cash flow and you saw quite substantial inventory reduction. Year-on-year, it's down 22% while at the same time, if you look at the quarter, sales is down only 4%. So it looks like a fairly substantial underproduction in the quarter. Is that correct? Then in that case, how much has that impacted absorption of fixed costs during the latter half of 2019?

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

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So I mean, it is quite clear that we have been adapting our capacity big time. It is also clear that we see it in a number of factories. And of course, when you have such a volume drop, as we are seeing now, it becomes pretty tough. And that also explains why we are running a global restructuring program.

So just now, what we can do is to reduce direct labor. We can reduce indirect labor. We can reduce SG&A, but we cannot get rid of machines overnight, and we cannot get rid of buildings overnight. So that's why to become much more agile as a company is so important. What I think is important to see is, again, that the inventory reduction, you have not seen at the end of the year, and you have seen that across the entire year. We have measurements in place to continue to do so. From that perspective, I hope that you understand today why the SKU reduction was important because that's one of the bases to be able to reduce space and inventories.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [4]

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Yes. So I was just wondering what sort of P&L impact has that underproduction led to. Do you have any estimates on that?

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [5]

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There is an impact where we are, of course, seeing an underabsorption. Then on the other hand, we also have some positive impact on raw materials. So if you combine these 2 effects, I would say it's slightly negative.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [6]

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Okay. And then the second question is sort of just looking at the top line performance in each category that you provide. It does look like you sort of continued to lose market share, to speak, versus market data, at least in U.S. and maybe also in Europe in some areas. When you look at the U.S., is that partly driven by the need for compensation when it comes to tariffs, then that you are in a higher need for that versus competition? Is that an explanation? Or how would you view it?

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

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I don't know, Daniel, how you get to the conclusion that we are losing market share. That's not what we see when looking at different product groups. Of course, that is very, very difficult -- it's very, very difficult to keep exactly the same number with 2 decimals product-by-product during the entire year. But if you look at what is going on, of course, that we are losing 1 percentage point in 1 product group, and we are gaining 1 percentage point in another group. So I think we are very, very stable in our market share evolution. And this is also the reason, Daniel, for not passing even more tariffs to the market on the second half because we are starting to see the risk, obviously, when we are competing primarily with American competitors that had been tougher on the pricing, at the same time as we had a tariff impact, could jeopardize our market position.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [8]

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I'm only referring to the public data, of course, what you can see from marine registrations and what you can see for an RV shipments and...

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

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But -- just a second. Just a second, Daniel. Registrations has nothing to do with production.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [10]

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Sure. Sure. But shipments...

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Juan Vargues, Dometic Group AB (publ) - President & CEO [11]

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So -- I mean, if you look -- I don't know to which numbers, but look, please, at the Brunswick results. Look at BFP's results. The guys that are manufacturing boats, I think that Brunswick communicated yesterday that they were down 15% on the boat side.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [12]

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All right. Sure. Sure. Marine registrations, I totally agree. But if you look at RV shipments, they have been sort of less negative now for a couple of quarters compared to where you have been in terms of RV sales, at least.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [13]

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Yes. And again, sales and the number of units are not always related. That depends also on the mix, whether you have bigger ones, where you have more number of our products, where you have the smaller ones.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [14]

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Sure. Sure. All right. So when you look at your data, at least, do you feel that you're sort of in line with the market?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [15]

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Yes. Yes. So far so good.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [16]

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All right. And then maybe a final question on the tariffs. Because you also write -- you write gross impact from tariffs. And could you give us the net impact?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [17]

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I mean, if I look at the second half, I would say that the gross and the net are very similar. During the first half, we did a pretty good job in compensating. The 25 -- the 15 percentage points in difference between the 10 and the 25 is really grossly the same as net.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [18]

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All right. And then maybe a last one on the inventory reduction. And I think you said that SKUs are down 32%, then you were down -- you've come a long way. I think the target was 30%. And then if I remember, May was [40%] in total. So -- and you're also saying that you will continue this journey. But 3 quarters are done. Is that what you're saying on SKUs?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [19]

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I think that we are very much there. The difference is, obviously, that when we are launching our new products, we are also building in modularity and platform thinking. So that's why I believe that we will -- as a first target, 40% is our target. I believe that we will see even more complexity reduction in the long term as we are launching new products.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [20]

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All right.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [21]

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40% is the first target, and then we'll take it from there.

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Operator [22]

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Next question is from Fredrik Moregard from Pareto Securities.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [23]

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A couple of questions from my part. First of all, on the APAC region, in Australia, specifically, we've all seen in the news the bush fires and what it has -- how it has impacted the country. But I was wondering, have you seen any impact from the bush fires in Australia impacting your business in terms of tourism or consumers' willingness to purchase mobile cooling equipment and so on?

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

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Not really. Not -- I mean, of course, we have been talking about that, but we don't see a major effect. I mean, the major effect we have seen on the RV evolution in the last, I would say, 18 months the market in Australia has been involved in a very similar pattern as the market in the U.S. So the answer is no. We are talking still. We are in January, so it's still high season in Australia. We didn't have any major effect during December. January, we -- no. I will not say that the drop is due to the bush fires.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [25]

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Okay. That's very good. And on expenses, on selling expenses, particularly, we saw them increase quite a lot here in Q4. I think they were up 28% year-on-year. And I hear you talking about increased marketing expenses and product development and so on. But could you give us a bit more detail on what this money has been used for, which regions, businesses, areas you're investing in?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [26]

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Yes. So we are building a business development organization to develop a number of new segments. I have been describing residential or patio. I have been talking about outdoor, and I have also been talking about mobile deliveries. So that's very much of that. On top of that, we are becoming more segmented in our market organizations all over the world. We had an organization in EMEA in the old days where all the salespeople were selling all the products. And I -- we don't believe that that's the right recipe for success. We believe that you need to have world champions on every single segment. And therefore, we are investing in building on the top. It's not massive. But of course, on a temporary basis, when you have additional hiring expenses, things like that, you will see that the cost is coming up. But we are -- this will come down over time. So that's very much an exceptional cost in this moment.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [27]

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Okay. So more of a year-end effect with the very high increasing cost rather than the run rate going forward? All right. That's it for me.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [28]

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Yes. We don't have an underlying SG&A increase of the magnitude that you are talking about.

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Operator [29]

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Next question is from Klara Jonsson from SEB.

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Klara Jonsson, SEB, Research Division - Research Analyst [30]

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So first, I want to talk a bit about EMEA. So this was the first quarter since 2014, I think, that EMEA saw organic contraction. And it was a tough RV OEM environment that drove the decline, if I got it right. So what do you see going into 2020 here for this market?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [31]

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If you go back 1 year in time, already after the [shale industrial law] of 2019, people were talking about inventory corrections even in Europe. We never saw the numbers kicking in during the first 3 quarters of last year. We saw that in Q4. It is clear, the registrations -- if you look at registrations from the major market in Germany, they have been very, very high. Production has been low. So an inventory reduction is taking place without any kind of doubts. The question is when do you think? I don't know, Klara. I mean, I would be -- I mean, I'm hearing exactly the same people talking in terms of optimism for 2020. But at this time, we are coming from a negative quarter. I cannot tell you that we are going to see it during the first half. I believe that in EMEA, like in the rest of the world, we have a tougher or a continuously tough environment during the first half and we have an easier comparable in the second half. That's everything I can tell you.

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Klara Jonsson, SEB, Research Division - Research Analyst [32]

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All right. Still, I mean, you've had a nice year so far. So I guess, it's sort of a step change in Q4 in EMEA.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [33]

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I think that what I could say is that you know that you have this technology shift as well with some of the chassis manufacturers, and they were suffering from delays so that it was supposed to be at the beginning of the year. I am -- I have the feeling that they came later, that it came in Q3 and Q4. Obviously, I think as you saw as well Trigano's comments. So as I said, I feel the inventory correction is taking place all over the world. That's crystal clear. Then the question is if retail numbers continue to be strong in Germany and across Europe at the same time as this inventory correction is kicking in, of course, sooner or later we will see positive numbers. But I cannot tell you that's going to happen in Q1 or Q2. That's why we are cautious with our outlook.

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Klara Jonsson, SEB, Research Division - Research Analyst [34]

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Yes. I understand. So -- and then just -- you haven't seen the same sort of correction in EMEA as we have -- for RVs as we have in the U.S. and in Australia?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [35]

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No. But the inventory is -- no but inventories -- the inventories in EMEA have never been on the same levels as the inventories in Americas. In EMEA, you have had an inventory which is about 20% of the annual consumption or annual retail sales, while in the U.S., you have been almost on 45%, 50%.

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Klara Jonsson, SEB, Research Division - Research Analyst [36]

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All right. Okay. So -- but let's says that the EMEA RV market would be down some 10% in 2020, what measures could you take to defend your profitability? I mean, I guess, it's a bit harder than in the U.S. because it's easier to scale down on FTEs there. Is that correct?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [37]

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Yes. It is. But at the same time, we also have -- as we also have in the U.S., a number of temporary staff that we can release. We have been working in EMEA. So I mean, it is not that we haven't done anything in EMEA. If you look at our numbers, our FTE numbers in EMEA, even if we ended up plus 1% for the entire year, we were down 5% in number of FTEs. So we have been working continuously on efficiency measurements. And we intend to do so even moving forward. So the answer, Klara, is we are aware that it's a little bit tougher in EMEA than it is in the U.S. But you also have different countries in EMEA. In some countries, a little bit easier. In some countries, it's a little bit more difficult. And we are -- we have been doing this in EMEA as well during the last 24 months.

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Klara Jonsson, SEB, Research Division - Research Analyst [38]

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Yes. Okay. So my next question is about -- that you mentioned that you closed the factory in Indiana last week or it was this week? You let some 200 FTEs go. So maybe you already mentioned it, but was this a part of the cost savings program that you initiated in Q3? And if it is, will we have to wait until 2021 to see the positive effects on your total (inaudible)

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Juan Vargues, Dometic Group AB (publ) - President & CEO [39]

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Yes. So 2 things. We didn't close the factory. We announced that we will close the factory. And also, of course, it takes a number of months. So that's one of the reasons. One thing is to take the decision. The second is to announce to our people. The third is to really shut down the factory. It takes a while. So it has been announced. We have been preparing ourselves. Keep in mind that what we announced at the end of Q3 is not what we initiated in Q3. It is what we initiated already 18 months ago. That's why we are moving now pretty steady. Then, of course, when you are moving factories, Klara, you have efficiency losses. So that's why, even if people are leaving today, you will not see that you have the same efficiency there was. So that's why you have an overlap. So we would need to wait some months before we see the effects.

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Klara Jonsson, SEB, Research Division - Research Analyst [40]

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All right. Okay. And then just last quick one. On your production in China, you moved another 2 lines to Mexico in Q4 from China. How much production do you have left in China now that you shipped into the U.S.?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [41]

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Of in terms of millions. What do we have? We have...

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Klara Jonsson, SEB, Research Division - Research Analyst [42]

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Yes. I mean -- or you can just compare it to what you had last year.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [43]

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Yes. I will say -- yes. Percentage-wise, I would say that we have about 50% left where we have plants. So it is not that we'll be there forever. By the same, I mean, we are working on a number of initiatives. It takes a while before you see the effects.

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Operator [44]

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Next question is from Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [45]

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I have a couple, and I will go one at a time, please. The first one I wanted to ask was, actually, if you could help us a little bit on your FX guidance for 2020 because it seems the FX impact on the margin, specifically in EMEA, was quite pronounced in the fourth quarter. And so I was hoping that at current rates, you could give us what you expect in terms of top line impact or benefits and also EBIT benefit or impact at current rate, please?

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [46]

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Yes. Totally for the group, I mean, this comment was specifically for EMEA. But if we look on the FX impact for the total group in the fourth quarter, it is, you could say, pretty neutral. And moving into 2020, of course, it's very difficult to say what the currency impact is going to be because that will, of course, be dependent on how the currency or important currency pairs are developing. But so Q4 was a change in the sense that we have been seeing positive effects up to the third quarter and then neutral in Q4.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [47]

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But I guess -- and the FX could vary during 2020, but if we take the rates basically as of today or as we have seen in January 2020 and extrapolate them for the rest of the year, which type of impact should we be expecting?

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [48]

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We would estimate them to be fairly neutral.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [49]

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So you would expect no FX impact in 2020? Based on -.

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [50]

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If we are doing the assumptions that you are just doing.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [51]

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Okay. Understood. The second question I had was around the aftermarket. I remember at the Capital Markets Day, you were talking about Dometic not being so much of a cyclical company, the resilience provided by the Aftermarket. But we've seen a significant drop on the overall organic growth of the company. And the Aftermarket has been, on an organic basis, hovering around flat since the beginning of the year. It's now roughly minus 3 organically in the fourth quarter. Can you explain maybe what is happening here? Because a lot of other aftermarket, we look in the industrial sector, tend to be fairly resilient even if the OE is not that resilient.

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

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Well, I think that we had a report in the week from the last [corp.] call where they were stating that they were flattish as well. So I don't think that you can just take and say this is the way -- that depends on what the aftermarket is coming from. If we are talking about the service business, it's clear that we don't have a maintenance-driven service business. We have a spare part business. We have an agri business. We have an organization business, and it is clear that we are flattish. If -- the problem we have just now is obviously that the OEM business has been dropping big time. And it's very difficult to compensate when you have an aftermarket in a tough -- and the tough market concessions, which is growing 0, 1% or 2%. That's why we are investing more in developing the aftermarket because I do believe that we can do much more than we are doing today. But again, this is not a business I have in my former job when I have 2 million products under service contract.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [53]

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Understood. So is it fair to say that maybe the aftermarket resilience is maybe not as prominent as initially [expected]? And well, I guess the -- so yes. I just mean the cyclicality, of course, sir, of the business. I mean, the drop in organic growth throughout the year, I think, is quite clear. So it's difficult to assume that the business is not cyclical.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [54]

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Well, I think the OEM business is clearly cyclical. That's -- I mean, we have the facts on the table, while the Aftermarket is very stable. But that was [really] my point.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [55]

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But it's gone negative in the fourth quarter. It's gone negative in the fourth quarter.

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

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Yes. But we are coming from a plus 8 in the last quarter -- or last year. And we have plus 22 on 25% on the quarter last year.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [57]

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Yes. That was not to M&A contribution on an organic basis. The full year is around 0.

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [58]

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Yes.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [59]

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Yes.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [60]

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And just my last question around the dynamic you are seeing in the U.S. I appreciate the tariff headwind, but the tariff situation hasn't really been changing since July in terms of the new announcements. And I think you were quite clear earlier in the year that you were going to be quite disciplined on the price to increase prices to offset the tariffs. We've seen some of your competitor actually expanding gross margin in U.S. on the equipment despite the tariffs. So can we -- maybe can you explain maybe the change of stance maybe around the pricing here?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [61]

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I think I've explained that before. I do believe that we did a pretty good job in the first half as we had 10% tariff from the 1st of January. But looking at the situation after the first half when the 25% has started to kick in, of course, that we tried, and we realized that the risk was pretty big that we were going to lose our market position. And referring back to Aftermarket, I could increase prices but then I would not grow my installed base. And if I don't grow my installed base, down the road, in 18 months, 24 months from now, I would see a shrink in Aftermarket. So I took the decision of not passing prices to the market.

On the contrary, we are accelerating our activities to reduce our costs on the tariffs. Are we going to implement prices moving forward? We will do our best. But obviously, on a market which is in contraction at the same time as you have tariffs, is pretty tough. I cannot judge my competitors or my customers. I can just do what I can with my company.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [62]

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Is it fair to say, if I may ask, that -- because, I mean, the headwind were already quite clear at the beginning of the year on the U.S. RV side. We are seeing now other end markets like marine, for example, or EMEA RV decelerating. And I think the trend was also clear if we look quarter-after-quarter, tariffs have been an ongoing situation. Is it fair to say maybe that -- and despite a lot of initiatives that has been taken for the past 2 years since you've been in the job, that the room of maneuver maybe in the current end market you are in, are maybe not as high than what you had expected? Because we've seen several guidance miss or revision now.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [63]

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No, but I mean, I think that I cannot judge much better than the rest of the world. I do believe that entire markets, starting with my customers, were expecting a second half much better than the first half. The associations, the former associations, both Marine and RV, were expecting a much better outcome than it became in reality. So I mean, I cannot pretend to be so much better in qualified estimations than they are. They are professionals. And I am, of course, doing our best to adapt to the current situation. What we can do is, of course, improving internally our efficiencies in trying to create a less cyclical business. But I cannot influence the market when the drop -- when the American RV market is dropping 16% or the marine market is dropping 6%. We aren't alone on these markets. Again, that's why we need to invest in other areas, so next time we are facing such a situation, we don't have the same effects that we have seen this time.

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Operator [64]

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Next question is from Johan Eliason from Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [65]

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Just shortly on this currency impact in Europe, how much was transactional on the EBIT?

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [66]

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Transactional-wise, we -- that is basically where the effect has been coming in, and the translation effect is still positive as that is, of course, coming in on a different average rate than on the transaction side.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [67]

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And then how big was it in million terms?

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [68]

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In terms of -- in EMEA, it was in between SEK 15 million and SEK 20 million.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [69]

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Okay. Excellent. Then another question. You mentioned that you have an active M&A pipeline. So we have seen one of your competitors listed buying a company in Europe every quarter. Does it worry you? Are those targets that you would be looking at, at all? Or I mean, you want really to grow in some other areas outside the RV market, obviously. So what's your view on the impact for you from these activities?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [70]

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That's the case. So Eureka, what (inaudible) is doing, obviously, we are meeting on the markets, but the only product where we are competing today is really awnings, which is a smaller product group for us as it is a smaller product group for them. So we see, again -- obviously, we meet when meeting customers on the caravans and motor homes, but we are coming to the market with different product ranges. So they are much more into mechanical products. We are much more into appliances. As I said, the only product that we have in common is awnings today.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [71]

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And those were not targeted, you were considering anyhow then, I suppose?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [72]

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No. No. I feel we have been very, very clear on that. Of course, we might acquire something on the RV industry if we are talking about complementary products where we see that there is some kind of technology fitting our targets. But on mechanical tools, we are not into chassis. We are not into braking devices. That's not our business.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [73]

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Okay. And then another point on the M&A front, Trigano mentioned that they want to do some more vertical integration. I'm not seeing exactly about how they were thinking. I suppose that's also more mechanical products than potentially taking away opportunities for most of your products? Or how do you view that comment?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [74]

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That's what I assume. I mean, obviously, we have installed base since many, many years. It takes critical mass to get the kind of efficiency levels that we have today. But I have no idea of how they are thinking. I think that this is not about Trigano. I do believe that everybody is trying to define whether to become more of a product supplier or becoming more of a system supplier. And of course, that means integration at different levels in the value chain.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [75]

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Yes. But it's also strange from a point of view when you are in a cyclical industry and Trigano, obviously, being extremely cyclical that you would consider vertical integration.

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

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As you know, we are going the other -- exactly. As you know, we are going the other way around.

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Operator [77]

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And next question is from Agnieszka Vilela from Nordea.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [78]

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I have a question on your outlook. In Q4, we've seen accelerating organic decline in Americas and also talk about the Marine vertical deteriorating. In EMEA, we have some inventory charges. So my question really is when you talk about the challenging outlook, is EMEA or Americas a larger concern?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [79]

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I think -- I mean, I have seen RV in Americas slightly better in Q4 than we had year-to-date. That's clear. We have seen Marine coming down quite a bit in Q4. At the same time, looking at all the outlooks from competitors, from associations, they are still positive for 2020. And some of them, they are very positive about 2020. So I think, personally, again, that the inventory correction is very, very close to be over in Americas as we can perceive just now. We don't have any other macroeconomic factors kicking in, and that would help us during the second half. I believe as well that Marine has moved quite a bit in one quarter. We have seen also, looking at customers, that they have been losing volumes big time the entire year where we only saw one quarter in reality. So that's why, Agnieszka, my assumption is that the second half, we are going to have much easy comparables, provided again the macroeconomic environment doesn't change.

EMEA is a different story. I don't see such a drop in EMEA today as we saw in the U.S., on the simple reason that the inventory levels are a totally different scale in Europe than they are in the U.S.

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

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All right. Perfect. And then just if you could still help us with different factors that can affect EBIT in the coming year. You touched upon the FX. Can you tell us if you expect any savings contribution in 2020 already?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [81]

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I think that what we are doing is, obviously, the tariffs have been in place. As I mentioned, we moved 2 lines for 2 major products in Q4. So we will see efficiency improvements coming in during the year. We are working on more tariff improvements. So it's a little bit the same. It takes a while, but we see that we are making progress in many different areas. And I'm fully convinced that we will see some improvements across the year.

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [82]

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But I think it's important there to state that the tariff improvement is more going to be towards the second half of 2020.

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

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Absolutely.

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Operator [84]

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And that was our final question for today, so I'll hand the call over to the speakers for any closing comments. Please go ahead.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [85]

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Well, thank you very much for your attention, and we will keep working hard to get back to growth. Other than that, I would like to thank you again for your attention. Goodbye.

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Operator [86]

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And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.