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Edited Transcript of DOM.ST earnings conference call or presentation 24-Oct-19 8:00am GMT

Q3 2019 Dometic Group AB (publ) Earnings Call

SOLNA Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Dometic Group AB (publ) earnings conference call or presentation Thursday, October 24, 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

* 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

* Fredrik Moregard

Pareto Securities, Research Division - Analyst

* Johan Eliason

Kepler Cheuvreux, Research Division - Analyst

* Karri Rinta

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Klara Jonsson

SEB, Research Division - Research Analyst

* Olof Cederholm

ABG Sundal Collier Holding ASA, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Dometic third quarter 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. This is Juan Vargues speaking. I would like to wish you welcome to this presentation for the third quarter. I'm very happy to have with me Stefan Fristedt, new CFO for the Dometic Group.

To you, Stefan, welcome to the first quarterly report.

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

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Thank you very much.

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

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So we'll move on immediately to the Q3 highlights. On the market, we are happy with the evolution in the EMEA region. We see that the market has been growing in most of the areas. APAC, despite the soft market conditions, we've started to see better numbers, obviously, also as a consequence of easier comps in comparison to last year.

We still see a challenging RV market in Americas, despite the fact that Q3 was the first quarter last year where we saw softer numbers and despite expectations [and we see] improvements during the second half of the year. In Q3, we have not seen any major improvements. We see more or less the same trend that we saw during the first half.

The reality though when talking to customers, when listening both to customers and to some of our competitors is that they view an easier way forward is clear, inventories are coming down, but there's nothing that we see in our numbers so far.

In terms of growth, we had a total growth of 2% with a 6% aftermarket growth. We see good numbers in EMEA. We see also improvements in both APAC and Americas. We continue to invest in product developments. And I would say that we are accelerating. We're up 11% versus last year. We were up also close to 5% in the quarter. And we will see this acceleration continue in the quarters to come.

We are also spending a lot of time on our new growth initiatives. And what I'm referring to is one [side] , growth on the Aftermarket side accelerating there, but also starting to have a number of activities on the new growth areas that we described in connection to the Capital Market Day, namely, the patio, the outdoor and the mobile deliveries.

If we move to performance, we continue to deliver a high profit level despite the challenging market conditions and despite the negative effect of the tariffs that were implemented from the 1st of July this year. Having said that, we are working very, very hard, obviously, to mitigate the negative effects. We opened a larger site in Mexico back in August, being 3x the size of the older factory. And we are spending also a lot of time in finding ways to reduce the asset per types. And last but not least, we also launched a global manufacturing footprint program according to the strategy that we have been describing now for a number of quarters.

We'll move on to the financial summary. As I mentioned previously, we were up 2%, totally, of which 6% was organic growth, minus 6%. That was compensated by a positive effect from FX, 6%. And then we have the effect, the positive effect, of the Kampa acquisition in December last year.

EBIT, down 12%, leading to an EBIT margin of 13.5% in comparison to the 15.6% that we had in Q3 last year. What we see here is a lot of improvements, efficiency improvements in large areas of the company. We see -- we have been, obviously, running contingency plans to compensate for the volume drop all over the group. And I have to say that I'm very happy about how the team has been performing. We are -- when comparing the last year September 2019 with 2018, we were down 1,100 people approximately. And as you all know, that's difficult to achieve in such a short period of time. And we have also been working very hard on the pricing side, where we see clear improvements in 2 out of 3 regions.

On the markets, more of the same on the RV. It's clear. We have an outlook from the American Association showing just now that in order to go for last quarter, we should be at minus 10% in comparison to last year [or strictly the same]. Hopefully, we will get the numbers from the association today or tomorrow. And that will be kind of guidance for us, obviously.

And then we have the impact of the new tariffs. In the quarter, we have a negative impact of tariffs of SEK 86 million. That explains, as a matter of fact, the vast majority of the gap in comparison to the performance last year.

EBITDA though is down 1% in comparison to last year. And just as a reminder, we have the amortization for trademarks, which is today, having an impact there and that explains the gap in between EBIT and EBITDA to a major extent.

We're extremely happy to see a very strong cash flow generation. And of course, many of you will think that this is quite logical when the company at this point is shrinking. But I can tell you that when looking at our KPIs behind cash flow, meaning inventories, meaning receivables, meaning payables, all the 3 KPIs are developing in a very positive way. And then -- and we expect, obviously, to have this cash flow generation even more moving forward. We're spending a lot of time to reduce working capital.

On the EPS, we ended up at SEK 1.26, which is about [14%] below last year's numbers, very much driven by EBITDA.

We will move over to the 9 months' numbers. More or less, the same trends, 6% organic down, 6% compensated by FX, and then 3% coming from the Kampa acquisition.

EBIT, minus 5%, leading to an EBIT margin of 14.7% in comparison to 15.9%. And in reality, the difference between Q3 and the first half is the additional tariffs of 25% from the 1st of July in comparison to the 10% that we had on the vast majority of the product groups prior to the 1st of July. Same story, lots of efficiency improvements, underlying efficiency improvements. A good job on reducing capacity and then pricing in all over the world.

And then just to comment on the tariffs, had an impact of SEK 86 million in Q3 [wide] for the year-to-date number, we ended up at SEK 176 million. EBITDA, being positive 4%, leading to the same EBITDA margin as we had 1 year ago. And even there, just to confirm, a very strong cash flow generation, and we see that this will continue in the quarters to come. And then EPS, ending up at SEK 4.32 or 11% down.

If we look a little bit on the trends in the marketplace, we see, obviously, that the vertical industry segment that has been coming down is RV, still showing flattish on the graph, but obviously, that's a total [months] only numbers, so we will see this begin [south] in the quarters to come. While CPV, especially Marine, but even Retail and Lodging, have been developing positively until now.

If we move over to our application areas, and as you all know, this is the new way that we are going to report moving forward from the first quarter next year. Food and beverage is obviously impacted very much by the RV situation, especially in Americas. Climate has been doing very well for us. Power and control, where we had our investments, is developing very nicely. And other applications, which is a small part of the business, is no more than 8%, 9%, is also developing in a very positive way.

If we look at the medium-time term, we see that this is the fourth quarter where we are showing negative organic growth numbers, while we see also a positive effect of acquisitions. And yes, I think that even Q4, we will see some improvement, but we will see also a negative growth in Q4, as we can see just now.

If we move over to innovation, obviously, one of the areas where we are working very hard on is on diversifying Dometic and investing even more in areas outside the RV OEM. What we are showing today is 2 new product launches. One, for our parking cooler for trucks and specialty vehicles industry, which is very innovative. It's the slimmest product in the marketplace. And then on the right side, you have a new minibar, which has been awarded several times due to both efficiency, high efficiency, better design, very low noise level. And we will continue to see, obviously, that -- and many of the investments that we have been doing during the last quarters, will start showing in our numbers.

If we look at the different regions, Americas, 12% down organically, with food and beverage being impacted, clearly, and even climate by the RV OEM being negative. Power and control is flattish, and then other applications is reported with a strong growth even in this case is -- stands for still a minor part of the business.

EBIT, heavily impacted by the tariffs, 31% in the quarter, ending up 12% in comparison to 16.7% that we were showing 1 year ago. We continue to work to reduce our cost base. We see, on the negative side, how the numbers on the OEM -- RV OEM market is impacted, and I already mentioned the tariffs having a major impact for us.

If we move over to EMEA, we are extremely happy to see the performance, 3% organic growth, with most of the segments showing very nice numbers. And I'm especially happy to see a strong Aftermarket business where we see all the bits and pieces showing positive numbers. On the profitability, a very, very solid and continuous improvement in comparison to last year, and we have seen this now for 7, 8 quarters in a row, as a consequence of pricing, as a consequence as well of efficiency improvements, clear efficiency improvements. And nonetheless also, we see additional growth by the effect to having dedicated the [finance ratios] that we are starting to implement about 1 year ago.

And then ending up with APAC, 7% organic to be compared with the minus 12% that we were after 6 months, with food and beverage being negative, even there as a consequence of the RV OEM. We see climates reporting pretty good growth as well as power and control. And then other applications, which is also [small] for the Pacific, showing a slightly negative growth.

I'm very pleased even in APAC to see that our margins are holding up very, very well despite the fact that we saw a volume decline, we have a negative geographical mix with Pacific coming down, while Asia is positive and then we have also a negative influence so a total mix with cooling boxes being negative in the quarter.

Next part, we'll move over more to one of the major activities that we are launching as a part of our strategy review during 2018. We identified a number of areas, and we decided that one of those areas to reduce complexity in everything that we are doing. I have been communicating what we are doing on SKUs, what we are doing on the suppliers, what we are doing in a number of [occasions] , what we are doing in a number of legal entities, in a number of EFPs, you name it. We have worked for quarters to prepare ourselves, and we feel that it is time to start the execution of those plans. Of course, the situation we see on the market with lower demand, and in combination with additional tariffs that were implemented in July, makes it even more important for us to accelerate the implementation of the program.

If we look at the details of the program, we are expecting to get savings of approximately SEK 400 million per year. We will start seeing effects during 2021. And we will see full effects from middle of 2022. We will have a cost for this program, around SEK 750 million. We booked SEK 37 million in connection through the quarter. And we will see the vast majority of the cost happening during the coming 18 months.

Focus areas is really all our locations. So we have been mapping factories. We have been mapping warehouses. And we have been mapping offices. And in all those locations, the 20 locations that will be affected today we will have 1,500 employees working. As we move to the execution of the program, we will inform you on the progress on a quarterly basis.

We'll move over to more of the strategy execution. On the expansion side, we have seen a very positive evolution for both SeaStar acquisition and Kampa. We have completed a number of very important positions to drive the new growth areas. Two of them have already -- 2 of the top managers have already joined the company. The third to join in the coming month. We see also how having these dedicated team specialization is starting to have an effect. We have seen the numbers in EMEA. We see also the numbers in Americas how we are growing rapidly on mobile cooling, how we are growing rapidly on CPV. We have the awards. Even the invoicing is taking a while to realize, since we are talking about long-term projects. And we see as well that the changes that we have done on the Aftermarket organization are starting also to kick in.

From a product perspective, group leadership, even there, we have now 3 new global product managers, in charge of the global products, as I have commented before, namely, refrigeration, air conditioning and mobile cooling. We are increasing our investments in product developments, starting today, 11% higher than 1 year ago. We see also how our innovation index, namely products that we launched into the last 36 months, is starting to grow [stable-wise] , but steadily. So from last year, we have improved from 12% 1 year ago, into 16% this year. We will see further improvements.

And then on the complexity side, I'm extremely happy as well with the job that we are doing. Just now, we are down 40% on the number of SKUs that we sold during 2018. If you compare the number of SKUs that we have been selling in the last 4, 5 years, we are down 37%, which is obviously massive, and this is also one of the reasons for seeing improvements in our inventories, and we will see more effects moving forward, both in terms of inventories, but also in terms of cost.

On the cost reduction side, manufacturing footprint has been launched, extremely important, but we also have a number of other activities to reduce the negative impact of the tariffs. Our large factory in Mexico will have a major impact moving forward. We have also upgraded our sourcing organization. We have new sourcing managers in the 3 regions, and we have a new head of sourcing for Dometic Group that are going to play a very important role moving forward. And I already commented the inventory reduction, which again -- I move simply from [kronas] into number of days, we are down 15 days in inventories, which is, in my opinion, a very, very strong improvement.

And with that, I would like to hand over to Stefan. Stefan, please.

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

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Thank you, Juan. And yes, Juan has already elaborated extensively on the trend growth, and I will touch upon some of them in the coming slides here. So we're moving to the next page.

This is the bridge on the net sales, the different components impacting it, translation FX effect 6%, organic growth minus 6% and M&A plus 2% in the quarter. And for the ones of you who are following us since a while, you are not surprised to see our exposure to which type of currencies. The majority is, of course, towards U.S. dollars, and then it is euro, not surprising.

If we just move on to the next page, we will see the same for year-to-date, 6%, related to translation FX minus 6%; organic growth, a 3% contribution related to the Kampa acquisition.

Moving on to the next one. CapEx, we have been spending SEK 71 million in the quarter, 1.5% in relation to net sales, which is somewhat down to last year. The focus of the investments is in Americas and also within the IT area. And in Americas, it's related to building up the structure as Juan already mentioned, around our new factory in Mexico.

We're looking on, product development. We are continuing to invest in product development as was mentioned before. SEK 95 million were spent in the quarter, 2% of net sales, and it's the new level that we see. And as Juan also mentioned, we will continue to even increase from that level going forward.

Moving on to the working capital development, which has been continuing to be very positive, continuing the trend since the second quarter. So we had a contribution of SEK 587 million related to working capital in the month. And you can see working capital in percent of net sales on its way down, currently on 23%.

Moving over to the next slide. You see how it is distributed among the different components in working capital. Improvements in all areas, but the most significant contribution is coming from a reduction in inventory since the beginning of the year, but also a reduction in accounts receivables, as you can see.

Moving on to the next page, summarized in our operating cash flow. You see that we did generate SEK 1.3 billion of operating cash flow in the third quarter. That is equating to a cash conversion rate of 157%, which is a very, very good number.

Moving on to the next. Our leverage ended at 2.68 at the end of Q3. It's impacted by currency with approximately 0.1, which means that in constant currencies, the leverage would be 0.1 [turns] lower, so around 2.58.

Yes. We are coming back to the outlook here. So let's continue to the next one. We have a pretty significant amount cash on hand, SEK 3.6 billion as of the end of Q3. And that is, of course, then creating some flexibility for M&A activities going forward. On top of that, we also have an unutilized revolving credit facility of EUR 200 million.

Moving over to our debt maturity profile, which is a very strong maturity profile with maturities pretty far out on the time axis. So it's a pleasure to take over such a maturity profile as a new CFO of the company. The debt portfolio, on an average, is carrying a financing cost of around 3.5%.

Moving over to the final slide here, looking on our financial targets communicated on the Capital Market Day and then comparing it to the last 12 months number as it stands after September. So we see net sales growth of 7%. Of course, on its way down compared to 10%. And EBIT margin of 13.7% compared to targets 16% to 17%. And a net debt-to-EBITDA leverage of 2.7x where the long-term target is 2x.

So with that, Juan, I'm handing over to you to make the summary.

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Juan Vargues, Dometic Group AB (publ) - President & CEO [6]

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Thank you, Stefan. And first of all, I do understand that we had some technical problem during the first part of the presentation. I'm really sorry for that. And of course, that we will answer any kind of questions that you may have later on.

If we try to summarize Q3, sales, we are very, very happy with the 4 months in EMEA. Obviously, we still see the challenges on the RV markets, especially in Americas. And we keep on working on building up our acquisitive pipeline.

Profitability-wise, we are holding a high profitability level despite the current conditions. We see improved, strongly improved profitability in EMEA, we see a strong profit level in APAC. And of course, we are impacted in Americas, and we're going to keep accelerating our efforts to reduce the negative impacts. And underlying, obviously, we have a lot of very good activities that are not shown in the numbers, but we see on the KPIs when we are following this on daily basis.

And we are clearly adapting our capacity. I mentioned previously, we are 1,100 people down versus the situation last year. And if you compare that, we are 6% organic growth down and almost 40% the number of employees when excluding Mexico and excluding the additional Kampa employees. I feel we've done a terrific job in mitigating the negative effects of the volume [growth] .

Our factory in Mexico will obviously be key to mitigating the tariffs. We have already moved one product. We are just now moving additional products from China into Mexico, and we will continue to do so.

Last but not least, important to us, to start execution on the restructuring program that will also, on one side, mitigate the negative effects of the market situation and the tariffs, but also help us to take the company to a totally different profitability level in comparison to where we are coming from.

And then, last but not least, I'm very proud about the cash flow generation. Again, behind that cash flow generation, we have all the KPIs pointing in the right direction.

And then we'll move over to the outlook. We saw the RV industry in Americas, the association, coming down again with a new outlook for 2019. At the end of August, they reduced the numbers again. If we combine the impact, the negative impact of the volumes, according to a new outlook and on top of that, the tariff situation, we expect to see negative growth this year. We expect to see an EBIT margin around 13.5% at the end of this year and leverage around 2.4x, influenced, obviously, by the EBITDA developments during the quarter.

And with that, I would like to open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from Fredrik Moregard from Pareto Securities.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [2]

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Just a couple of questions from me on the restructuring program to start with. Could you tell us something more about how you see the restructuring program playing out across the regions? Where should we expect most of the savings of this -- of the SEK 400 million annualized to come through? And where should we expect the cost of the SEK 750 million to be taken?

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

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You will see -- in reality, I mean, this will affect the 3 regions, but the vast majority of the savings are coming from the 2 regions in west, meaning Americas and EMEA. And we are looking at the costs. It will be more or less the same answer. It's going to be very much about Americas and it's going to be very much about EMEA.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [4]

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Okay. And do you see any difference with regards to timing between those 2 markets? Is EMEA so to speak, a few months or a few quarters ahead of the Americas? Or how do you see that playing out?

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

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I think, obviously, I would say that you have 2 partial answers to that. Obviously, we were working very hard in EMEA since we know that we have a lot to do there, but the situation with the tariffs also kind of makes us accelerate our plans in Americas. So I would say that both are equally important. And if you look at the profitability level we have today, both are very important to us. You have to take away Marine. Marine is doing great. So as you look at the RV Americas and the EMEA, site-wise, they are pretty similar, and profitability-wise, they are not far away. So it's important to improve profitability in both of them.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [6]

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Yes. Sure. And the you -- well, these SEK 37 million, I think, it was in this quarter that was related to the restructuring program. Should we expect those expenses going forward to reported as -- to be reported as nonrecurring items as well? Or will they be included in the adjusted EBIT figure?

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

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No, the cost related to this program will occur in items affecting comparability.

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Operator [8]

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We have a next question from Klara Jonsson from SRLL (sic) [SEB].

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Klara Jonsson, SEB, Research Division - Research Analyst [9]

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Yes. This is Klara Jonsson from SEB. So I have a few questions from tariffs and then on the restructuring program. And I'll start with the tariff questions.

So you saw a step-up in tariffs in Q3, and I guess, they will be quite tough in Q4 as well. But your full year guidance of 13.5% EBIT margin impact, you will go from, basically, 200 basis points year-on-year EBIT margin contraction this quarter to, basically, almost flat development here in Q4. So something positive will offset the additional tariffs. What is that?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [10]

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Well, you have a number of things. I mean, obviously, you have higher tariff percentage, but at the same time, you also have a less reduction on the volumes. Keep in mind that Q4 is a weaker quarter for us. At the same time, we also see that other segments, we foresee improvements in comparison to Q3. You see also that APAC, which is also an important part of our business, having high profitability, is not dropping as much as we have seen during the year, and then we see the [specs] with our situation in EMEA.

So all together -- and then keep in mind also that on the Q3, we had an extra impact as well on the tariffs because we were not moving fast enough. Keep in mind that the tariffs were meant to stay at 10% up to pretty late in the second quarter. So as you know, we started to work on our restructuring programs many quarters ago, and we have a different order.

So when we were building our factory in Mexico, we were taking some products from China into the Mexican factory, but we were also starting to work on some other products coming from the U.S. to Mexico. And as we were planning, all of a sudden, yes, the new tax situation appeared with 25%. So we needed to replan again. And that cost us a number of months.

So we have a number of things going on that we believe are going to support our fourth quarter. But nonetheless, Klara, I have to say, I mean, it is tough. And you cannot take 25% tariffs on a lot of products that we are bringing from China overnight. So that's why we're accelerating -- yes?

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Klara Jonsson, SEB, Research Division - Research Analyst [11]

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Sorry, that's why I said that you're moving your production to Mexico. That's my next question. So -- and then what does this mean from a tariff perspective? Will you move everything that you produced in China to Mexico now? And if everything will be moved, when will we start to see the impact from that?

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

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You will see a stabilized approach. So we have started with one product. So one of the products we have is fully manufactured in Mexico today. Now we are moving another 2 products, so that will take place in Q4. And I'm not talking about planning. I'm talking about moving. So really up and running during Q4 and beginning of Q1 next year. At the same time as we are planning with the next moves. So this -- you will see changes over time.

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Klara Jonsson, SEB, Research Division - Research Analyst [13]

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All right. So -- and then, could you say anything about tariff impact next year? And then just -- I know you had 10% all of 2019, but then you will have 25% going into next year...

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

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Correct.

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Klara Jonsson, SEB, Research Division - Research Analyst [15]

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So this is the SEK 700 million or so? Is that correct?

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

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The first half is going to be tough. As we are working, we expect to see improvements, clear improvement in the second half.

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Klara Jonsson, SEB, Research Division - Research Analyst [17]

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All right. And also, I have another question, if I may, on the restructuring program. It's quite large, turning over (inaudible) [is costing a lot of] money. Are you still comfortable with doing acquisitions next year?

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

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Yes. I am.

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Klara Jonsson, SEB, Research Division - Research Analyst [19]

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Okay. How far could you stretch the balance sheet? I mean, you will be less 2.4x less debt-to-EBITDA by the end of this year. Could you go up to 3x and still be comfortable?

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

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I don't think -- I think the preconditions to get into 3x is you have a major acquisition. As you know, the market doesn't open for many companies turning 200 million or 300 million dollars or euros. Most of the companies in our industry are 40 million, 50 million, 60 million euros or dollars. And we'll consider acquisitions of that size. It will cost us 0.1 to 0.15.

So I think it's very difficult to me to say what is going to happen because, of course, that we will do 2 or 3 of those, then we will need to start considering, okay, should we take the next one or not?

If something big came in our way, then we need to think a different way. And then we will need to take a position. So what is clear, Klara, is that we are working on our pipelines. We are adding resources to our M&A team. So we are hiring people in Americas. We are hiring people in EMEA. And we are strengthening the organization as well in Stockholm. So we see...

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [21]

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But also keep in mind, Klara, if we take Kampa as an example, as you, of course, have the ability to add the EBITDA coming in with the target, Kampa was adding 0.1 turns on our leverage when we did that acquisition. So that's maybe something to keep in mind.

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Operator [22]

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We have a following question from Agnieszka Vilela from Nordea.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [23]

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I have a couple of questions. Maybe starting with the follow-up on tariffs. Can you just remind us what's the total exports today from China to the U.S.? I think that you said before that it is about SEK 1.5 billion on an annual basis. Is that correct? And also, how much of that exports could you allocate in the end to Mexico?

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

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So we'll go back to 2018, we were talking about $250 million of export from China to Mexico. We are just now, in comparison to the same period last year, 44% down, which is then obviously that we have done a number of things to reduce the impact. So you have, obviously, the volume drop, but you also have the activities that we have [not] been able to realize until now. And that's my point. Then, of course, you have 2 things moving at the same time. Just now, we are moving 10% to 25%, while at the same time, we are also accelerating some of these movements.

Then when is it going to be 0? Well, I think that will be very much depending on whether there is an agreement later on or not. With some of the products, one of the questions that you need to think about this, okay, if the tariffs should stay at 10%, are you better off by moving more from China to Mexico? Or are you better off by starting to move more from a high cost country to a low cost country? Now 25% is clear that I need to prioritize China. At 10%, it is not.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [25]

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Okay. Perfect. And then just a follow-up also on the restructuring program. Of the SEK 400 million that you expect in savings, how much is related to the kind of pure layoffs of personnel? And how much is related further to consolidation of the factories and taking down the fixed cost base?

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

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It's very difficult to say in one go, but you have a number of things even there. I mean, one of the things, the most important areas that we will do is that we are not just consolidating sites, we intend to outsource noncore activities. So that's a very, very important parameter. Today, we're extremely vertically integrated. When you consider that we see cyclicality in the business, but especially the real seasonality in the business. That caused a major impact. So I wouldn't dare to tell you one number here and now. Let me -- let us look at that and come back to you. So this has been a part of the plan.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [27]

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Yes. But I can imagine that -- I mean, the kind of personnel reduction savings that you can probably calculate in a way by just taking away...

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

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Absolutely, we have it. We have it as part of the program.

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [29]

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But just keep in mind, the number that we are mentioning the number of [employees] , that's basically the gross number of the people that affected.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [30]

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Okay. So the next number would be lower?

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

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Yes. Yes. Yes. Absolutely. Absolutely.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [32]

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Yes. All right. All right. And then I know that you tend to talk more about the kind of product categories or technology categories that you have. But we would appreciate still probably some comments about the end markets. So if you could give us some color on the RV market in the U.S., but then also in Europe, how do you think the new CO2 emission rules will affect the demand? And then also, what you see in the Marine business and commercial and passenger vehicle business given that outlooks there are worsening somewhat?

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

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So we look at the RV industry, I'm sure that you have the numbers from American Association, talking about 3.5% down next year. Europe is also flattish. We have seen Europe so far performing better than I expected 1 year ago, I have to say. But of course, when you read papers every single day, you have to think what happens. If we look -- so RV, I don't think it's going to fly next year. I think that if anything, it's going to be negative. Again, just looking at the numbers from American Association, keep in mind that this year, the initial outlook was about 470; then in February, went down to 460; in May from 416; and in August to 401. [So they cannot have been very good at forecasting.] Let's put it that way.

If we look -- and now they are talking about 3.5. So it's clear that when talking to customers, when I'm talking to customers and some of them are public and you get exactly the same access to information as I have, they are pretty bullish about the situation of inventories, and now, we should be starting to see growth.

If we look at European business, and it's not many weeks ago that we have one of the main customers across Europe, I'm sure that you know who I'm talking about, also been pretty positive about the quarters to come. So what I can do, obviously, is listening to the market, listening to my customers and staying very, very, very close. But I am a little bit more cautious than they are, simply because I have seen how the numbers have been coming down so far.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [34]

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And the customers are probably notoriously optimistic about the industry?

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

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Yes. So that's definitely my point. But I do believe that what Dometic has done in a very good way, in my opinion, is that we have acted extremely fast. And we have protected our margins extremely fast in a totally decent manner than the rest of the industry and simply because I cannot just count on forecast when I see that the track record is not great. So we have been fast cutting in advance. And we will keep doing so as soon as we see some signals.

If we look at Marine, Marine has been showing a fantastic development for us for quarters. And I'm not talking just about the SeaStar acquisition, but I also think about the underlying Dometic Marine business. We have seen Q3 being weaker on the OEM side, much stronger on the AM side. When talking to our own guys, they are still very optimistic about 2020. They don't see any kind of numbers as we were discussing on the RV side, but I believe as well that it is clear that when you are reading the media, when you are seeing what's going on around the world, obviously, if you are going to make a major investment, you will think twice before pushing the button.

On the CPV, I think it's a different story. I understand that the truck market is coming down, but keep in mind that our products is a pretty new product. What we see in our numbers so far is the other way around. So we see that the job that we have done in Americas in the last 2 years is starting to bring a lot of awards, as we communicated during the Capital Market Day. And we have seen also some nice awards in Q3. We see that EMEA has been developing so far very nicely. So we don't see [signals moderation.] But again, keep in mind that, for us, we are selling a pretty new product to the market. The penetration rate is very, very low. So even if the market went down 30%, I don't believe that we are going to be heavily affected. Again, these are the 3 main markets.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [36]

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And last question from me, if I may. The 6% Aftermarket growth in the quarter, it is the reported growth, yes? And what would be the growth if you adjust for the Kampa acquisition in the currencies?

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

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Yes. Flattish for totally with negative growth in Americas, with very positive growth in EMEA. And even excluding mobile cooling in APAC, very positive growth. So we are seeing very good growth in many areas. Unfortunately, for Americas, RV Aftermarket is huge and that has been negative in the quarter, but much better than we saw in Q1 and Q2. So we are getting close now.

And we have -- I forgot to mention, that we have a new organization in place, in Americas.

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Operator [38]

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Our next question is from Olof Cederholm from ABG Sundal Collier.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Analyst [39]

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It's Olof Cederholm with ABG. Just a follow-up on Agnieszka's question on the Marine side. If we're not talking about the market, we're talking about you and your Marine business, how resilient should we think this business is if the market is weakening? Let's say, the market is down 5%, how would your business develop in that kind of environment?

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

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What we have seen in the last years is that, you look at Marine, Leisure Marine. Leisure Marine has been growing at a 2% to 3% pace in the last 4, 5 years. And we are talking about engine, the engine business. We are talking about Leisure Marine as I mentioned previously.

We have been growing something between 8% [to] 12%. So we have been growing 2.5x to 3.5x faster than market. If the market goes down 5%, I should expect that it would be flattish, slightly positive or slightly negative, but that's kind of a frame that I expect. And we see as well in comparison to the other side that Marine Aftermarket stands for a bigger portion than RV Aftermarket. So that also supports obviously, both on the top line side, but also on the margin side at this figure.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Analyst [41]

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Okay. That's great. The -- if we're talking about raw material cost, et cetera, the steel prices coming down, plastics should come down, could you give us an early look of what we can expect for 2020 over 2019?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [42]

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We'll see, obviously, what we have, always have this year, right? And we have seen -- do you want -- Stefan...

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [43]

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No. No. But we, of course, seeing positive effects of the raw material. So no doubt about it. So yes.

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

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So we have to think moving on there as well. So we have, on one side, positive effects of raw material. At the same time, something we are not talking about is, obviously, we are buying -- when we are buying components [through] our American factories, as part of those components, they have Chinese imports as well. And of course, we have what we call [for in depth] tariffs kicking in as well.

So they are not fully offsetting the savings that we have on material, but they are also costing us a bit of money. Raw materials has been coming down, and we see still all the KPIs for material being [coming down]. So we should see additional savings.

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Operator [45]

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Our next question is from Johan Eliason from Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [46]

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This is Johan. Just a question on this Mexican plant that you mentioned. So you move manufacturing from China to Mexico. But I would assume you would still import the components from China and just do the assembly part in Mexico. Is that really such a big positive driver for getting around the tariffs? Or am I missing something here?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [47]

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Yes. You are missing -- you are missing something there because, obviously, we are not just moving labor, we are also looking at component suppliers in Mexico. We are looking at component suppliers south of Mexico. So you have obviously moves that you have to do step-wise. The first one is to reduce the tariffs. The second one is also to get low-cost country. So we avoid the freight cost and the lead times.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [48]

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Okay. Good. And the reason why tariffs hurt now was, obviously, that as you mentioned, they move pretty swiftly...

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Juan Vargues, Dometic Group AB (publ) - President & CEO [49]

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25.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [50]

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Yes. Exactly. But pricing then can also move, but you prefer to be more cautious on pricing and then weigh the benefits from the manufacturing move rather, is that...

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Juan Vargues, Dometic Group AB (publ) - President & CEO [51]

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Well, no. No. No. I have to say, I mean, we had a good effect on pricing during the first half that compensated partially for the tariffs. What we have seen in Q3, that obviously a market, which is still down, even if we see easier comps. At the same time as high tariffs are kicking in. There are limits also for how much, how aggressive can you be in such a market condition. We will do anything we can to move prices out. And that's what we did. But we also have a competitive environment. And we don't see a lot of competitors moving prices.

So just now, since -- sorry, because that's an important one. Aftermarket is also important. So it's always a balancing act. So we were aggressive and we calibrate. And we will become aggressive again, and we will calibrate again. That's not my point. I mean, again, there's always a balancing act because we have an Aftermarket. It will have one transaction. That would have been a different story. But for the Aftermarket, it's important to have installed base that you need to put some limits for how much you can lose on share.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [52]

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And coming to the share, how has that developed then in the U.S. or in Europe, Asia Pacific?

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Juan Vargues, Dometic Group AB (publ) - President & CEO [53]

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We are -- I have to say that I'm happy that we are holding our share. Obviously, we have many different products. In some products, you might be losing 0.5, 1 percentage point of share. On next product, we are gaining 1% of share. So we see, on our numbers, when we're talking to customers and looking at the volumes that we are very much in parity with markets.

Again, it doesn't mean that it's 1:1 for every single SKU. But if you look at the total product portfolio, it's very, very similar.

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Operator [54]

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We will be taking our last question with Harry Winter (sic) [Karri Rinta] from Handelsbanken.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [55]

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Karri Rinta, Handelsbanken. A quick follow-up on the restructuring program or just a clarification first. Did you say that your headcount in September was down 1,100 compared to last year? Or the time...

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

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Yes. Yes.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [57]

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Okay. All right. So can you then, maybe, to some extent, quantify the impact on costs from this? And then maybe compare that to the restructuring program that you announced today because frankly a SEK 400 million savings from a sizable program like this sounds rather low. So what is the impact -- what is the cost impact of actions that you already have taken in relation to this that you are now sort of embarking upon?

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

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As you look at the savings that we have on the capacity reduction that we saw in the last 12 months, I would say, is close to some SEK 200 million all together. But again, now we are talking about something different. We are talking about people, but you will not see 1,500 people in the company. It's far from that. What we are saying -- what we are stating in our communication is that we will assess 1,500 employees working in 20 locations. That's not going to be a net number.

One of the reasons for that is at the same time, we also want to invest. We want to be more innovative. We are investing in IT. We are investing to development and that will be a part of that. So it is important that we do those other things.

We have investments that we are going to pay depreciation for. So of course, that a bulk of those monies, the SEK 400 million is people. But it's not just people, we have a lot of [complexity] with all those factories that are working 2 quarters per year, where we have a lot of inefficiencies, 2 quarters every single year. So you cannot just take the number of people, put a number of krona per month, and then getting to the SEK 400 million. That will not work out. It is a little bit more complicated than that.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [59]

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All right. And then just a quick clarification on that and the SEK 750 million number is probably not all cash. There will likely to be some impairments and write-downs there as well, right?

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [60]

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Yes. You can assume that approximately 20% of that number is noncash.

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

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Anything else? Should we close? So then I would like to thank you all for your participation. And yes, now we'll start working on the next quarter. Thank you.

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Stefan Fristedt, Dometic Group AB (publ) - CFO & Executive VP [62]

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Thank you.

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Operator [63]

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Thank you. Ladies and gentlemen, I would like to apologize for the technical issues encountered during this call. This call is now over. Thank you all for your participation. You may now disconnect.