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

Welcome to Dometic Q4 Report 2024. 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.

Hello. Good morning, everybody, and welcome to this call for last quarter 2024. Let's proceed immediately with the highlights. In regards to the market, no major changes in comparison to what we saw during the last couple of quarters. We still see tough market conditions. We see as well consumers are still being cautious, even if camping grounds have been filled during the season. Still, the question is very much on the retail inventories and the fact that our customers seemed to be still cautious in building inventories during the season, but also now ahead of the season. We have noted the last, I would say, 2 quarters that we get most that looks to be most positive, and then we see orders coming down again. So the feeling is that dealers do have difficulties to calibrate how much they should have in stock for the time being. Looking at the performance. Organic growth went down 13%. Service & Aftermarket ended up at minus 9%, which is a slight improvement in comparison to Q3. In this case, we have to consider as well that last year, we had a pretty strong quarter in Q4, especially in the Marine area. We would -- we were also happy to see Mobile Cooling coming back after a weaker Q3. They came back with a better Q4, actually an improvement as well in comparison to Q3. On the OEM side, on the contrary, while we see that Americas is improving, we saw -- sorry, deterioration is lower than we have seen during the last quarters, and the same is valid for the Marine OEM. At the same time, as we see how the OEM in both the EMEA region and APAC is accelerating exactly as we were expecting during the last quarters. EBITA ending up at 7.3% versus 8.7% last year. Even here, when excluding the one-off due to the tariff recovery that we had in the U.S., we ended up at 6% in comparison to the 8.7%. And as you all know, we introduced a reduction -- a restructuring program in December 12 that will have an impact during the coming couple of years. Happy to report a very, very strong cash flow as well, ending up at almost SEK 800 million, leading to a leverage of 3.1 in comparison to 3 that we were showing in Q3. Looking a little bit deeper on the numbers. Sales ended up at close to SEK 4.8 billion or 13% negative growth, with EBITA margins ended up at 7.3%, again, excluding the one-off, ending up at 6% and reaching EBITA of SEK 349 million. When you exclude again the one-off, it will be SEK 286 million. Looking at EPS. Negative adjusted EPS of SEK 0.35. As I mentioned, a very strong cash flow almost of SEK 800 million and leverage 3.1 in comparison to 3x last year. Moving to the yearly numbers. SEK 24.6 billion for the entire year with 12% organic drop. EBITA, almost SEK 2.7 billion, and what we consider to be still a very decent EBITA margin of 10.8%, considering obviously the tough margin situation. Adjusted EPS ending up at SEK 3.21. And operating cash flow, over SEK 4.2 billion, which is the second highest cash flow ever seen in the company -- history of the company. Looking at a bit deeper into the sales evolution. Negative growth in all the segments. As we have seen, as I commented before, we see a stabilization of the business in LV Americas. We see also a lower drop in the Marine OEM, while we see the OEM in EMEA and in APAC accelerating. Happy to see MCS, as I mentioned before, and then global. Even here, we have the MPS business, and that's also impacted by deterioration on the RV industry. Looking at the Service & Aftermarket. Slow recovery -- sorry, I missed one, that's by channel. Looking at OEM, as you can see, it has not been percentage-wise in terms of sales, lower than just now 40%. We need to -- we see, obviously, that we are the lowest level on the cycle, and that business should start growing during the second half as per our estimation. And then looking at the RV OEM side, it is down to 20% of the total sales for the company. Looking at Service & Aftermarkets. A very, very slow improvement in Q4. And as I commented at the beginning, we see really a change every second month. We see that they are buying inventory and then they get a little bit slower. In this case, I can mention that we have Marine was very strong in Q4 last year. If we look at both the American business from Service & Aftermarket and the business in Pacific, they were in a pretty good shape in Q4, but the numbers are down by the situation in EMEA and in Asia as well as in Marine. We see, as we commented as well last quarter, that people are not upgrading products. They are not replacing products, but rather repairing the products, waiting for one more to upgrade. Looking at our EBITA evolution over time, 7.3%, but then 6% excluding the one-off. We see gross margins pretty stable, slightly down 20 basis points. We see as well that we continue to invest. And I think that this is also important to mention that we have kept investing all the time, improved development and giving up our sales organizations at the same time as we are reducing capacity all the time in our manufacturing, operations, distribution as well as in administration. Number of FTEs, down 15% in 1 year, about 1/3, 33% during the last 3 years. So we -- in my opinion, we are doing a fantastic job in the organization, reducing capacity at the same time that we are not jeopardizing the future by reducing through development or the sales organization. Looking at the different segments. Americas, organically 6% down. Stable Service & Aftermarkets and less decline in the OEM side that we have seen before. EBITA margin of minus 7.3% versus 6.2% -- minus 6.2% last year. And obviously, it's a consequence of lower sales. We continue to reduce capacity. But of course that we are seeing the infrastructures, and it becomes tougher and tougher. Hopefully, we will see the situation in Americas starting to show a positive evolution in the coming quarters. Looking at Land Vehicles in EMEA. This is really what we saw together with the situation in APAC, the deterioration on the OEM side. So totally speaking, organic growth down 90%, very much driven by the OEM side. EBITA, positive 0.3% versus 2.4% positive last year, and a little bit of the situation in Americas is very much now about keeping, reducing capacity at the same time as we keep investing in product developments. Looking at Land Vehicles. APAC, down 23%. Same story, very much driven by OEM. We still feel very proud, obviously, on the EBITA margins that we are delivering, 26.6% versus 29.1% 1 year. And the same, I believe that this is important to consider, obviously, that in this case, when you have the high profitability that we are showing in a couple of segments, whenever they are dropping on the magnitude that they are dropping, it's very difficult to compensate on the bottom line. So again, I feel very, very proud of what we are doing there. The same is valid in Marine, down 12%. We see OEM showing a lower deterioration that we saw in previous quarters, while the aftermarket was weak in the quarter. Still, margins are very resilient, up 19% for the quarter. And in this case, we keep in mind -- we have to keep in mind that we are investing heavily in new product generation, in a new product area that we are launching as we speak in February. Looking at Mobile Cooling. Organic growth, down 5%, a clear improvement versus the previous period, Q3. EBITA margin, 7.4%, of course positively impacted by the one-off. But even when excluding that, we are positive in comparison to last year, even if we are showing negative organic growth, and even in this case, with lots of investments, both in the product development and building up our global resources. Moving over to Global Ventures. Organic growth, down 11%. We see growth in hospitality. This is also positive. While residential is down sales-wise, we see order intake is starting to show positive numbers now for a few months. So somewhere, we start to see some green shoots, especially in the distribution area. We did do -- did better with hospitality. Still driving very nicely. And residential, starting to see -- to show positive order intake. While on the contrary, Mobile Power Solutions, which is very much driven by the RV industry, is still down. EBITA margin is 5.1%. And even in this case, we have investments both in product development area as well as in building up our global sales organization. Moving forward to sustainability. Very happy to see as well the results. So injuries, doing well and at targets. Female managers, the same levels as last year, well above the targets that we decided a couple of years ago. CO2, important improvements, and we have seen very clear improvements year-on-year since we started really to pay more attention to the side of the company. All of it is the same, well in parity. And also happy to report, what I already have said, that we continue to invest in product development, and innovation index ended up at 21% versus 17%. In terms of product development, we just launched a new series of air conditioners, showing a fantastic performance, including also the new refrigerants that is going to be regulatory from next year. And with a fantastic achievement, we are reducing global warming potential by 78%, which is pretty amazing. The same, we have been investing quite a lot in Mobile Cooling, and we saw the first results last year in terms of seeing the Igloo branded products on active cooling started to kick in America market. We also extended the portfolio models to attract more consumers on -- at different levels -- price levels. And we are also investing, obviously, on the outdoor standalone areas and how to you get NPS to be really having an impact on all different product areas of Dometic, something which is starting to take place. We also introduced a cost reduction program on December 12. The expectation is to have annual savings of SEK 750 million once we are totally done at the end of 2026. We will see the first effects from -- starting in Q1 2025. We have no impact in Q4. And as you may remember, we had restructuring charges of SEK 1.2 billion, of which SEK 400 million impact in cash flow. The whole amount is booked in Q4, and the cash will be having an impact from 2025. When looking at the businesses that we also communicated will be discontinued, we are talking about SEK 800 million altogether. We had no impact in Q4. We will see a gradual impact in the quarters to come. And as we also commented, we are looking for a number of investments that will be generate -- or that will lead to a total annual sales of SEK 1.5 billion to SEK 3 billion. And as we commented, we are not going to disclose any details. It's a work in progress. We feel good about the progress, and we will comment more, obviously, when we have the final completions. And with that, Stefan? Yes, before the last one, sorry. The new organization. So obviously, this is also a consequence of the restructuring program that we presented. This is a little bit what we have been doing during the last years, really getting more focused into different verticals. We have the 3 regional areas for Land Vehicles that are going to be converted into 1 single segment called Land Vehicles. Since we have the restructuring program, we are going to take it step wise, meaning that we are going to consolidate into Land Vehicles, but we will still be disclosing the evolution for the 3 regions until the restructuring program is totally completed. We are just now in the process of recruiting a new lead for Land Vehicles -- Global Land Vehicles. And until that person, that individual is in place, I will be heading the segments. And we are planning to start reporting from Q1 this year. Again, it's going to be an aggregated number, and we will have the disclosure of the 3 different regions as part of the LV. And now, Stefan, please, could you please take us through the rest, please?

Thank you, Juan. Starting with the income statement for Q4. The gross profit margin is holding up well, as we have seen also in the past, and that's the result of that we are continuously working on adjusting capacity, as was mentioned here before. We also have a sales mix effect, less OEM part of the total sales. And then we are also starting to see the logistics cost coming down. On an operating expense point of view, we have a positive impact. However, it's still higher in percentage of net sales. We are obviously continuing to invest in strategic growth areas, while we are controlling the spend in other areas. Then we have the onetime positive gain of SEK 63 million related to tariff refund within Mobile Cooling, the SEK 63 million, and it's booked on the line other operating income and expenses, in line with previous handling of these type of items. Then on net financial expenses, they are slightly up versus the same quarter last year. And the net interest of bank loans and financial income is SEK 136 million. And then we have FX revaluation and other items of SEK 38 million. And fortunately, the improvements on this line is a bit masked due to the currency effect. On the tax side, we actually have a positive effect of SEK 40 million in the quarter, and that has been impacted by the items affecting comparability in the quarter. Moving over to operating cash flow. SEK 784 million is a good Q4 number, a little bit better than what we did expect, driven by underlying earnings, but also on the development of working capital. So with that, we move on to the underlying parts of core working capital. As we see, accounts payable is stable, around 55 days. The same thing on accounts receivables, 45 days on an average here. And then inventories, which we have been working very dedicated with SEK 138 million and over 138 days. And the trend is continuing down. The working capital in relation to net sales is 29%. And working capital as such is coming down. But obviously, net sales is also coming down. So that's a little bit why we are a bit stuck on that KPI. And as I said, the number of days of inventory, 138 days. And in constant currency, that's a reduction of around SEK 1 billion in the full year. So -- but we continue to be committed to our target that, over time, we should take the working capital down, towards 20% of net sales. Moving over to CapEx and R&D spend. So CapEx in the quarter was slightly higher than the previous quarters, 2.1% of net sales, but 1.3% of net sales for the full year. And we will keep controlling this, even though we feel that it's a bit on the low level, but that will then start to change when the overall business climate is changing. Looking on R&D spend, 3.3% of net sales compared to 2.8% last year. And it includes capitalized development cost of SEK 13 million, and we continue to invest in structural growth areas. Marine and Mobile Cooling is the most obvious examples here. And for the full year, it is 2.6% in relation to net sales. Taking a look on our free cash flow here in Q4 and in the full year. And as we mentioned before, there is a robust operating cash flow in the quarter, and it is the second best year ever, supported by reduced working capital, obviously. The global restructuring program of approximately SEK 1.2 billion is included in adjustment for noncash items. So for example, when you're looking at the change in inventory, that is not impacted by the part of the restructuring program, which is related to the inventory write-offs. So that is a clean number. Obviously, we have a high focus on working capital optimization, and that will remain in 2025. And we will continue to carefully prioritize investment in fixed asset, as I mentioned before here. Free cash flow before M&A, the income tax paid declined in 2024, which is, of course, natural because the earnings are lower. And then the paid and received has been trading down in 2024 as expected. So we are prioritizing to take down leverage. Of course, we have said that all along, and the global restructuring program includes also divestment opportunities going forward, which we have mentioned. And they will then be communicated at the point when they are realized. Moving over to net debt to EBITDA leverage ratio. We ended at 3.1 in the -- after Q4 compared to 3.0 in Q3. The EBITDA obviously is contributing slightly negative, compensated by positive cash flow effect. And then we have this -- yes, the strengthening dollar versus the Swedish krona that is then impacting on the FX side with approximately 0.2. And as I said before, we are continuing to be very commitment on -- committed to achieve our leverage target of around 2.5. That's what we are expecting, to take a significant step towards in 2025. Taking a look on the debt maturity. We have an average maturity on 2.1 years. If we include the extension options, it's 2.5 years. The average interest rate on the debt portfolio, 4.8%. We have the undrawn revolving credit facility of EUR 280 million maturing in 2027. And we are, as always, continuously working with our debt portfolio. Moving over to the dividend proposal by the Board, proposed this to pay SEK 1.30 per share compared to SEK 1.90 per share last year. And the motivation is that it reflects a balanced view of the financial position, business outlook and the current market conditions, and that would be 40% of 2024 adjusted EPS. And as you know, our dividend target is at least 40% of net profit over a buy -- over a busy cycle. So with that, Juan, I hand back to you to summarize Q4.

Thanks, Stefan. So let us start first with more of the facts. Clearly, the market was another challenging one with organic growth down 12%. EBITA, now we consider to be robust considering the situation, ending up at 10.8%, and a strong -- very strong cash flow of SEK 4.2 billion. If we look at the outlook for 2025, it's clear that we are entering the year with lower inventory levels, practically everywhere. So even in the areas where we see no matter we are talking about EMEA or we are talking about APAC or Marine, inventories are coming down quite dramatically now when production is coming down at the same time as registrations are up or much less down than production. So we feel confident that we are moving in the right direction. The market is moving in the right direction. We are also expecting Service & Aftermarkets to recover stepwise. We have said that a couple of times. It is clear that we have seen a couple of times back and forth movements. We see that our customers in the distribution channels have difficulties to calibrate. The good news, still, consumers keep camping. As far as they are camping, they are using our products. So it's going to come back. It's a question of when. And then we see OEM. And even here, I have to beat myself. We see inventories coming down. We see that inventories in the RV side in North America have not been lower for the last 20 years. It is massive. We see also that if you look at Marine, while retail is down 7%, manufacturing is down 29%, so it should be relatively fast now before -- until we get into some stabilization of the market. So from that perspective, I feel -- we feel that we are a little bit closer to the trough and that we should be passing somewhere during the first half. Then strategically, I feel that we are doing a very, very good job. We keep simplifying our business. We are taking a lot of the complexity that we used to have. We have decided to run our restructuring program that will reduce complexity additionally. We are working with our divestments. We feel that we will get some of these done in the coming quarters. We are, as you know, simplifying as well our structures with LV now becoming 1 single vertical instead of 3. We believe that, that will also lead us to a faster restructuring program and additional simplification of the business. And we keep investing. So even if we are reducing costs in all the areas of the company, we are accepting really product development, where we keep investing all the time. And we see more and more products coming to the market. And the other area where we are investing is in building up some of the new business areas, both in terms of salespeople are also building up the organization. So we can say -- I can say that we are happy. We -- you can never be happy with your performance when you are delivering less money than we did last year. But I'm really proud of what we are doing as an organization. And I'm fully convinced that with all the efforts that we are taking, once the market comes back, we will have a fantastic upside. And with that said, I would like to open for the Q&A session.

[Operator Instructions] The next question comes from Fredrik Ivarsson from ABG Sundal Collier.

I've got 3 questions, the first one on EMEA. Obviously, soft in the quarter due to the, I guess, land production holds among the customers, et cetera, et cetera. But what do you see and hear from your customers in terms of production volumes when you look into Q1, please?

It's still soft. So all customers are communicating more on the second half than they communicated in the first half. So I don't think that we will see any fantastic numbers coming in, in Q1. I think it's going to take the first half. In registration, with the exception of December, December was slightly negative. With the exception of December, we have 15 months -- 16 months during the last period that there have been positive registrations. So that's pretty positive. But then we have massive, as you know, shutdowns by KNAUS, HYMER, all the major players. So of course, that has an effect. At the same time, all of them seemed to be very positive about the second half.

Okay. That's clear. Second one on the distribution business. You mentioned that the ramp-up of new products sort of supported growth in the -- in this business. Can you give an indication of this impact? And maybe also if you could talk a little bit about the pipeline for the coming quarters.

Yes. So I cannot give you exact percentage, but it's clear that we launched a total new series called CFX 5 on the Dometic brand. We launched a new series called CFX 2, which is a more affordable product. We launched the new active coolers under the Igloo brand. We are launching the Igloo range both in APAC and EMEA. So without any kind of doubt that, that had a couple of percentage points of growth for the year 2024. Then moving into 2025, we have a full new range that we will be launching in Q1 and Q2 as well, both on the hard coolers and on the soft coolers as well as sling wear. So those investments will continue, and you will see wave after wave of new products. That's one of the areas where we are betting.

That's very clear also. And last question on the net working capital and, I guess, inventory in particular. You've been reducing the position quite significantly during the last few years, you talked about, Stefan. But what do you plan for 2025? I guess, you might not reach the 20% target already this year.

Yes. But as I said before, the net working capital is clearly coming down. You can see that in absolute terms. Then obviously, in the KPI in relation to net sales is a bit challenging for when we have the organic development as we have. But with that said, for 2025, I still see that we have further possibilities and potential to continue to reduce working capital, and we are working with it. We have plans for it. And it's -- so will it build -- as Juan mentioned, we had the second strongest year ever on operating cash flow. Will we be able to repeat that in 2025? It's probably going to be a little bit lower than that. And -- but still, there is continuous potential to reduce working capital.

The next question comes from Daniel Schmidt from Danske.

Just a couple of questions from me then. Coming back to RV, but maybe more on the U.S. side, if you look -- if we look at your numbers for Q4 and try to sort of dissect, what is OE and what is aftermarket, given what you write? It looks like the underperformance that you've had for a couple of quarters versus the RV shipment data is looking a little bit less bad. Is that just base effects? Or is it you sort of regaining some momentum with the customer base in the U.S.?

I think it's still early to say, but we -- it looks better on the RV side, but it looks also better on the CPV side. So it's a combination of both. And then we have -- on top of that, we have Service & Aftermarket doing reasonably well. Service & Aftermarket, when I commented this a little bit every second month, that's also valid for North America. You get the feeling that dealers do have difficulties to calibrate. So thereby-- I'm sorry, we had a weaker Q3. And now we had a pretty good Q4.

Okay. Good. I heard your comment on EMEA, of course. But I -- it's hard to refrain from the fact that if you read Trigano's late trading update, which was very poor on top line, there was a positive signal when it came to underproduction, where they basically said that they would stop to underproduce during the start of 2025. Is that old news? Have you heard anything else regarding that? Or how do you view...

No, not really. But I guess that we are back to the never-ending discussion. You have your own customers, and that's one of the parameters that we are following. At the same time, we also have a track record, obviously, of our customers being a little bit too optimistic in comparison to what we'll for real later on. So we are simply trying to follow as close as we can, and I cannot be sitting here today and saying that I'm expecting a fantastic growth next year. I don't see that. I do believe that now we will see some improvements. I think Q4 was tough. And of course that all factories are shutting down in December. But this year, as you are aware of, some factories shut down already in November. And so factories are planning to start producing again in February. There has been a very, very long prolongation. So in Q1, I believe that January will be tough for many since the factories have been closed down. So I believe that we see some improvement in Q2 and then gradual improvement for the rest of the year.

And the production stock is related to that. The inventory levels by the dealers have been elevated. And when you try to estimate how that looks like between the different manufacturers, it's -- it looks different, if I say. Some are better off and some are a bit worse off. So it's also surprising that you maybe get a little bit different signals from different manufacturers, depending on how their inventory situation looks like.

And the good news -- I have to come back there, Danny. The good news is that if you compare the European market with American market, the positive is that we have registrations now for 16 months. And of course, if manufacturing is down 20%, 25%, it doesn't take that long before you are in balance again. So there is a balance in the U.S. We should get balance during this year in Europe as well. And the same -- you see exactly the same in APAC, right? We see heavy, heavy drops at the same time as retail is not falling by any means at the same pace.

Okay. Good. And just maybe 2 shorter ones. When we talk about discontinuing certain product categories, which of course announced before Christmas, SEK 800 million in total, do you have a good view on sort of the sequencing of that discontinuation? Is that going to be H1 heavy? Or is it going to be gradual throughout the year? Or sort of some help with modeling there.

It's going to be stepwise. This is -- yes, I cannot tell you so much more. It's going to be a stepwise, and it's going to be a little bit different depending on geography as well since the plans are not exactly the same everywhere. This is really what we are trying to simplify, Daniel, as well by creating an organization. Since we had 3 organizations, they had different focus on different product areas in different regions. Of course, what we are trying to do is to build up something which is when we are developing products that we have a similar approach. When we are betting on product range, we have a similar approach. So the intention, obviously, is to take 1 more step into simplification in the same way as we did with Marine or the others. And this has an impact on the discontinuation of the products as well.

Okay, okay. Maybe just the last one, and it's been very erratic, of course, when it comes to different statements regarding Mexico and Canada, and tariffs are quite aggressive as of late. Have you taken any actions in the past couple of weeks to mitigate any sort of very negative surprises on tariffs?

No. We are obviously working very, very close. We have our people on attention. We have all tables, some impact here and there. But so far, just now, it's impossible to take any decisions. It's always the same. No matter what you do, you don't know if you are going to be right or not. We know the impacts. We know that we have capacity in the U.S. if we needed to move some capacity back to the U.S. We have Canada. So it's going to be depending obviously on where and which country is going to be impacted the most, and then we will take actions. And then I think it's important to remember. Keep in mind that in terms of the U.S. market, specifically, we have been competing Chinese companies during the last 3 years. So if it becomes heavy duties on China, I don't necessarily believe that it's going to have a negative impact on us. It might be the other way around.

Yes. Sure, sure. I'm just thinking more about Mexico, maybe into some degree Canada. But maybe on Canada, you feel that you have fairly good pricing power and you can pass on any tariffs. I guess, it's a bit more difficult than Mexico maybe given what you're sourcing from there.

Yes. But at the same time, we also have our competitors are sourcing from China. Our main competitors are sourcing from China, both components and finished products. We are not. So I tell you that we need to wait. I will also tell you, this is what we do now because we know. Just now is simply guessing. Keep in mind that we were coming from 6 months of discussions on 60% tariffs in China. That would be 35% export tariffs on existing products. And that would kill, obviously, Chinese imports. And now, all of a sudden, we have tariffs on Canada. So I think simply that we need to be patient, work. It's clear that we are working internally. But the question is, are you building capacity in the U.S. here and now? The answer is no. We have the capacity.

The next question comes from Gustav Hagéus from SEB.

Let me ask my questions. If I can follow up on Daniel's question on the trade tariffs and all that. It's -- how big of a process would it potentially be for you to reverse the decision to unwind the refrigerator business in U.S. in a scenario where that market would dramatically improve on the back of new tariffs? I believe it was 25% of your business in Americas for RV at some point. Could you expand on that?

I would. From my point of view, I would say that the resources that we have internally in terms of assembly operations and so on, we obviously have them still. But then in the step that we took that we were partially outsourcing a part of it, I think it's more on the supplier base then. And a little bit, our assessment on how long term is this, is it going to be a change that is going to be for a longer period of time? Or is it a short-term reaction and so on? So it will have to be an assessment of the longevity of such an opportunity, I would say, as well.

And it's going to be just followed by products country by country at the same time.

Okay. And on another note -- sorry, go ahead.

No. That as I commented before, we have -- all the segments have plants, but it's difficult to just push buttons without having certainty.

Yes. That's understandable. And then on another note. Once you've consolidated all your RV into this global new segment, could you expand a bit on what will be the interdependencies between that RV segment and the other segments and the businesses?

Very little, very little.

Very little?

Yes.