Dometic Group AB (publ) (DOM) Earnings Call Transcript & Summary

Welcome to the Dometic Analyst Call. Today, I am pleased to present CEO, Juan Vargues; CFO, Stefan Fristedt; and Head of Investor Relations, Rikard Tunedal. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead.

Good morning, everybody. It's Juan Vargues speaking, and welcome to this special call after the announcement of our restructuring program. I would suggest that we start immediately with the presentation, and moving to the next page. So I would like to start really with the journey. We introduced a new strategy in May 2019. We have been working hard to implement our strategy. And again, this is a journey with a number of different steps. We obviously got the pandemic situation and the post-pandemic situation that still is affecting our business like many other businesses. We communicated in connection with the Q3 report that we were going to announce a restructuring program, and that's exactly what we communicated at 7:30 this morning. Next page. So let's [ go over what ] we've achieved during the last few years, the last 5 years. Well, first of all, our exposure to the OEM markets has changed quite a bit. We started over 62% of our sales coming from the OEM channel. Today, we are down to around 40%. We increased our innovation index from 14% to 20%, where we ended up at the end of Q3, and that will keep creeping up upwards. We have implemented 2 restructuring programs during the course of those years. We have reduced the number of factories by 28%. We started with 28 factories. We added 4 factories, 3 acquisitions, and we have reduced 9 factories. We have significant efficiency in gains. We have increased our sales per employee by 64%. We have reduced our number of employees from the pandemic by 3,200, which is about 20% at the same time as our sales has also dropped 20%. So a lot of changes, in other words. So why are we taking this step today? Well, basically, 2 main reasons. Next page, sorry. So basically, 2 main reasons. One of the reasons is to put even more emphasis in our portfolio. We have been driving very, very hard during the last couple of years, our portfolio management. We want to reduce the complexity. We want to focus more in future growth areas. We want obviously to focus even more on the higher-margin businesses and on the trends that are going to influence our growth moving forward. So that's one part. From that perspective, we are looking at, on one side, divestments, and this is nothing new. We have been talking about investments now for a while. What we have done now is that we have gotten even deeper after our portfolio management exercise and looked for some additional businesses that we believe are not strategic anymore. And we are very much aware, obviously, of all the questions that we got about the lower margins OEM business that we have in the company. And of course, part of the job that we have done is looking at those businesses, but also businesses that might have higher margins but still don't fit strategically to today's Dometic. So that's one part of the discussion today. The other part is obviously that it's clear that our volumes have been coming down recently. We expect 2024 to become a better year. We expected the interest rates to move faster on the way down. It has happened. Having said that, we need to adapt our capacity to the needs that we see just now on the market. Next page. So on one side, getting more focused on the future growth areas at the same time as we want to divest a number of nonstrategic product areas means that we will have more resources to find our growth in what we call growth areas, such as Mobile Power Solutions, Mobile Cooling, Marine and so forth. The steps that we are taking today will continue to serve the 3 sales channels that we have currently, meaning the OEM, meaning Service & Aftermarket, I mean Distribution. And at this point, we are not changing either the segment structure that we implemented during the last years. Next page. So as I commented, it is, on one side, lower businesses, but also businesses that strategically are not part of our future. We are talking about businesses, a number of businesses having a revenue today that will sort of give us a total net sales of SEK 1.5 billion to SEK 3 billion today. We are looking at 2024, the margins are different across different businesses. Discussions were initiated already a couple of years ago, and they have been accelerated during the last months. And hopefully, we will be able to close some of these deals in the coming months. And of course, we will communicate more details as transactions are completed. Next page. Then the second part is also businesses that we are discontinuing. And this is something that we have been working for now for a number of months. And we are talking about the large compressor refrigerators for the RV industry, we are talking as well on the window businesses that we have in the U.S., and we are talking about the hot and cooking product categories as well. The 3 different product areas very much related to Land Vehicles Americas. So this is not impacting the other regions. We're also looking at the generator business that we had in Global Ventures. And we are also looking at a number of different product categories, low-margin product categories in the segment, Land Vehicles in EMEA. We are going to be exiting those businesses in the coming 24 months, and we will see this will also lead to a positive impact on our margins. And we are talking altogether on a revenue 2024 of about SEK 800 million. Then the third part is the structural cost reductions -- next page, yes, correct, where we are clearly rightsizing the business just now to the capacity and the volumes that we see on the market. This will impact 2 manufacturing sites and 5 distribution centers. We are also talking about 500 employees that will be affected by these changes. It will affect all the segments, but primarily Land Vehicles Americas, Land Vehicles EMEA and even Marine. And then with that said, Stefan, could you please tell us about the financial impact of those changes?

Yes. Summarizing the financial impact of the program. So savings related to structural cost reduction and the business exits, it's planned to be SEK 750 million on an annual basis when it is fully implemented. We expect the implementation time to be within 24 months, where -- and we will start to see a gradual effect from the first quarter of 2025. And as you can see on the pie chart to the right, approximately 1/4 of the savings relates to SG&A and the other 3/4 of the savings is related to cost of goods sold. The cost to execute this program will be reported as items affecting comparability. And the total restructuring charges, as we have mentioned, is SEK 1.2 billion, whereof SEK 0.4 billion is estimated to have a cash flow impact. And the charges is going to be booked in Q4 2024, and the cash impact is going to be within 2025. The impact on net sales, the total current annual net sales of the businesses that we are discontinuing, as mentioned before, is SEK 0.8 billion. And the total current sales of the businesses that we are looking into divesting is in the range of SEK 1.5 billion up to SEK 3.0 billion. And we will communicate more about these divestments transaction per transaction when they are occurring. You can also see that the run rate of the savings as we -- that approximately SEK 300 million is expected to come in 2025 and then up to the full amount in 2026. Next page. So just to reiterate, these measures we are taking here is falling within the communicated strategy. So the strategy remains. And you have all of the components here. It's profitable expansion. It is product leadership through innovation and, obviously, continuous cost reduction. So there is no change to the underlying strategy. Next page. So in relation to our targets, we stay committed. It will now be taken in some steps here, obviously. And the first part here is obviously to take actions to turn around Land Vehicles Americas as we have had the toughest development in that segment. So in 2024, we have strengthened the organization and the capabilities. As you know, we have a new leader for that segment, but not only the leader, where there has also been carried out changes in his direct report organization. Then with the global restructuring program, we are accelerating the actions to turn around the business. And we are targeting improvements, notable improvements in 2025, and that we are returning to profit in 2026. And then the long-term potential in that segment, we see still double-digit margins, probably not to the total average of the group, but still double-digit margins. And as a consequence of this program, we are expecting an EBITDA margin for the group of 14% in 2027. And it is obviously driven by this global cost reduction program. It's the turnaround in the LV Americas. And it is also building on current market conditions. So obviously, if the market conditions are getting better, there is more potential. And if the market conditions are getting worse, then it could affect the total saving potential. So current market conditions is what we are assuming here. We remain committed to our long-term financial targets, and it is supported by continued operational excellence and the sales growth in strategic growth areas. And then it will -- this program will also support that -- obviously, that we are getting more focused in the group. And then concerning our net debt leverage target, we are staying committed to that target. And it's not to be expected that we will be fully there at the end of 2025, but we will take notable steps in the right direction. So with that, we would like to open up for Q&A.

[Operator Instructions] The next question comes from Agnieszka Vilela from Nordea.

I have a few questions. Maybe starting on the potential divestments of between SEK 1.5 billion to SEK 3 billion sales. Can you put any more color on that? And maybe also tell us why you put the low end to the range, does it mean that you are quite certain to close these deals?

We have started -- discussions are not new. We have started discussions with some other targets already 2 years ago. Of course, it has been discussions about pricing. As we know, the market is tough just now. And in the same way, as I said earlier, you want to pay the same multiples that we could see in 2021. As a buyer, it is the other way around. So again, it's nothing that we are starting now. It has been ongoing. And we are hopeful that we are going to see some of these divestments done soon. I cannot be more specific than that.

So you should probably say that SEK 1.5 billion is the minimum and SEK 3 billion is the max, yes.

Yes. And if you remember well, Agnieszka, we have been commenting earlier SEK 1 billion to SEK 2 billion. So that means that we have added some additional business to what we have from the beginning.

Understood. And maybe a follow-up on that. You also mentioned that you consider selling some businesses with higher margin, but the businesses that don't fit strategically in Dometic. Can you provide us with any detail what kind of product can it be?

Not really. We -- as you know, with acquisitions, you get -- it's very, very seldom that you get 100% everything that you like. Sometimes you have 20% and it doesn't fit, you get 10% and it doesn't fit. And I do believe that, for Dometic, it's time now to clean up to be even more focused on the businesses that we see as part of the future, and simply to find better owners for the businesses that don't fit strategically.

Yes. Understood. And then maybe on the exits especially in the U.S., after these exits, will you still have some operations that will be loss-bringing in Americas?

Not over time. But of course, it takes a while to get it right.

Understood. And then the last question really on your margin guidance for both Americas for 2025, '26, and then on a group level for 2027, you don't assume any kind of normalization of the markets. And then in case the markets normalize, what would be the upside, if you could quantify it?

Yes. But I mean, basically, I mean, we are obviously staying optimistic about this space. But I mean 2025 is most likely still going to be a challenging year and it's more about the delay in time of that recovery. But we -- it doesn't -- that we say that we are using the assumption of current market situation doesn't take away that we are, of course, optimistic about the potential in this space over time, but it's more about timing that -- and of course, if the market conditions are getting better, then there is more potential. If the market conditions are getting worse, then maybe a little bit less. So it's just an assumption to be able to express the potential with this program.

The next question comes from Daniel Schmidt from Danske Bank.

Just a follow-up then maybe on the divestments that you hope to do in '25, it sounds like. If you assume the midpoint of what you're suggesting, between SEK 1.5 billion and SEK 3 billion in sales that will be divested, and when you look at that sort of potential business that you could divest in that space, what will that do, hopefully, you think to margins, first of all, for the group? And then secondly, net debt to EBITDA for the group?

I mean the margins in this portfolio of companies that we have on this list, on an average, you can probably assume that it is on par with the average of the group. So then it will have a positive effect on net debt to EBITDA. So...

Yes. And...

Everything is in timing. Everything is on timing, Daniel. So the effect on the short term or long term will depend very much on when we can close those deals.

Yes, and at what price, of course, as well. But...

I think that's an important one. We want to divest, we don't want to give away.

No, absolutely. And when you, Stefan, mentioned that you should make strides towards 2.5x net debt to EBITDA during '25, but you might not get fully there, but it sounds like you think you should get close to 2.5. Does that include these divestments that we talk about? Or is that more sort of organic progress?

It does not include the effect of the divestments.

Okay. Good. And you don't want to give any indications what it might do to net debt to EBITDA in terms of quantity in terms of change of the ratio?

No, not at this point in time.

Okay. And then just secondly, on the same topic that was up just recently. When you look at the savings that you hope to generate through the restructuring, and a lot of it is related to RV Americas, not all of it. But you aim to have a run rate of savings of SEK 300 million by the end of '25, how would you divide that saving between the divisions? Is half of that coming into RV Americas?

I would say that we have decided not to exactly quantify that. But it is, of course, Land Vehicles Americas, Land Vehicles EMEA and Marine, who are the 3 largest areas.

And maybe also Global Ventures? Or given that you said that you will terminate the generator business there?

In relation to their size of business, yes. But I was more referring to the total of the SEK 750 million.

The next question comes from Johan Eliason from Kepler Cheuvreux.

Johan Eliason from Kepler Cheuvreux here. Just on the net debt as discussed previously, I mean, you have a bit of a headwind from a seasonal perspective in terms of cash flow ahead of you. And then now you have these additional sort of charges, potentially SEK 400 million in the full year, whenever those sort of come through. Have you been in contact with your banks, so to say, about your covenants, et cetera, so you have enough room to maneuver right now?

The headroom in the covenants is sufficient.

Good. And I think you mentioned that the big refrigerators in the U.S. will be closed down. Is that what is impacting the Marine business? Or why are you mentioning the Marine here as well in the cost-cutting program but not identifying the products, if I have read it correctly?

It was -- you have one part, which is portfolio management. The other one is adapting capacity to any situation. It is clear that the Marine business has also been coming down. Even if the Marine business is highly profitable, we don't see anything wrong in keeping our margins and even improving our margins as the capacity is coming down. So it has nothing to do with portfolio management.

The next question comes from Daniel Johansson from Pantechnicon Advisors LLP.

Can you hear me?

You're up.

I was wondering, obviously, there is the new president coming in, in the U.S. and he has talked about tariffs basically all over the place, and this was a little bit of a headwind for you last time around and you did a lot of changes. But it seems like the biggest currency pair for you remains the dollar versus the renminbi. So is this program partly addressing such imbalances also? Or is it completely separate?

I'm not sure. Was the question around tariffs or about currency?

Well, the question, I guess, basically is that the currency sensitivities indicate that you do export a lot from China to the U.S., and is this program addressing that manufacturing setup? Or is it completely a separate restructuring program?

Yes. But I think that in terms of -- I mean, it is like you said, we have been doing a lot of things last time there was tariffs introduced, right? And our decision was then, like many others, to move manufacturing from China to Mexico. Now we have to see what -- how this is going to end because now there has been discussion about also implementing tariffs towards Mexico and Canada as well as increasing the tariffs versus China. So I mean, we obviously have different scenarios, but I think we need to understand better what is actually going to happen. And so it might lead to actions. And I will not say that this program per se is addressing the tariff situation, so -- but we need to get more clarity first.

I mean I can just comment, obviously, that the direction since 2018 when the first tariffs were announced has been to reduce our exposure to China. Then, of course, it's very, very difficult to totally eliminate the exposure to China, and we will continue to reduce our exposure to China.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Well, thank you very much, all of you for your attention. We are totally committed to execute properly this program, and we are totally committed to reach our financial targets. So thank you very much, and have, all, a very good day. Thanks.

Bye.