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

Welcome to Dometic Q2 Report 2025. Today, I am pleased to present the CEO, Juan Vargues; and the CFO, Stefan Fristedt [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead.

Good morning, everybody, and welcome to the quarterly report for second quarter 2025. If we start immediately with the presentation, the turbulent market conditions and tariff uncertainties continue to have a negative impact on our numbers. We see that there is still today a low consumer confidence, leading also to a negative sentiment among dealers, especially in the OEM channel. And that leads also to a situation where retailers still are very, very careful in building up inventories. When looking at performance -- our performance, we ended up the quarter showing a negative organic growth of 11%, with Service & Aftermarket down 12%. Here, we need to keep in mind that we have a relatively good Q2 2024. Distribution ended up at minus 7% organically, affected both by production stock -- primarily, I would say, production stock in our facility in Katy, Texas, and we will come back with some more detail later, and then also affected by poor weather in the American market. And then OEM ended up at minus 14%, with growth in Land Vehicle Americas, while both APAC and EMEA are down. We are happy to comment that we see a stabilization of the order intake in Q2 in comparison to Q1 given also a better backlog situation at the end of the quarter than what we had at the end of Q1. Looking at our profitability, we ended up at 14%, which is in par with the profitability we showed in Q2 last year. We introduced, as you all know, a restructuring program in December last year. The program is running according to plan. And then on top of the restructuring program, we also have a number of efficiency initiatives that are kicking in and obviously having impact in the first 2 quarters of this year. We see Land Vehicles and Mobile Cooling showing margin increases, while Marine and Global Ventures are down in comparison to last year. And free cash flow ended up at SEK 1.3 billion, leading to a leverage of 3.3, which is also in par with the leverage that we showed in Q1 this year. Moving over to the financials. The quarter ended up at SEK 6.3 billion, with 11% negative organic growth, 7% negatively affected by FX and 1% affected by the portfolio changes that we also announced in connection to the December communication. EBITA ended up at SEK 877 million, which is an EBITA margin of 14%, exactly at the same level as 1 year ago. Looking at adjusted EPS, ended up at SEK 1.38, which is lower compared to the SEK 1.76 that we communicated 1 year ago. And free cash flow ended up to SEK 1.3 billion in comparison to almost SEK 1.4 billion 1 year ago, ending up again at a leverage of 3.3. Looking at the year-to-date numbers, we reached a revenue of SEK 12.1 billion, showing 10% negative organic growth, 4% negative effect of FX and, in the same manner as for the quarter, 1% in negative effects of the portfolio changes. EBITA margin ended up at 12.3% versus 13%. So again, Q2 had a positive impact. We are getting closer to last year's numbers year-to-date. Adjusted EPS at SEK 2.26 and free cash flow of almost SEK 900 million, leading to leverage of 3.3. Looking at sales, again, 1 more negative quarter in terms of organic growth, where Land Vehicles ended up at 11% negative organic growth, with Americas, minus 14%. And as I commented before, so looking at the OEM was positive for second quarter in a row, while the negative effect came in through the Service & Aftermarket in Americas that did show a pretty good growth -- pretty strong growth in Q2 last year. Land Vehicles EMEA ending up at 8% negative growth and APAC, 17%. Marine at 11%; Mobile Cooling Solutions, 10% negative growth; and Global Ventures ending up at 11%. Even if we see negative numbers in all the segments, we see also some green shoots. We see part of the Land Vehicles, especially the commercial part of the Land Vehicles starting to show positive numbers both in the quarter and year-to-date. We see also Residential showing pretty good numbers. The Outdoor business that we have in Europe also showing pretty positive numbers in the quarter. Looking at the sale channels, no major changes. In reality, we are down, on OEM, 1 percentage point, while Distribution is up 1 percentage point in comparison to last year. Perhaps worth to comment that RV OEM stands today for 19% of the business in comparison to 49% of the business 2017, which is a major transformation of the company that has been taking place in recent years. Looking more in detail to the different sales channels. Starting with Service & Aftermarket, weakening growth in this quarter in comparison to last quarter but happy to see that the order intake was -- looked better during the quarter. So we had a relatively clear improvement in Q2 versus Q1. We see a decline is primarily driven by LV. Even Marine was weak. But again, on the RV side, we had a pretty strong quarter in Q2 last year. And we see also differences. So the European situation is improving much faster than the American situation. And we are obviously totally convinced that the American situation is impacted by all discussions about the tariffs. Looking at Distribution. Even there, we saw a weakening growth. Two major parts, one was really the production stop. What's happened is that we got -- stopped for several days due to pollution in one of our foaming tanks in Katy, Texas. But then we also need to comment that we have also pretty bad weather in North America and even Europe, but of course, our Igloo sales is very much exposed to the North America market. And I already commented that we saw good growth in both Residential and stand-alone products in Europe. On the OEM channel, we continue to see a sequential improvement, with improvement led by the situation in Americas, again, the second [indiscernible] growth in Americas. We also see registrations in Europe being negative, minus 1%, starting negative in Q1. Q2 looks a little bit more positive. And then, of course, when considering that production is down much more, that's also leading us to the conclusion that we should see improvements at the end of the year or perhaps beginning of next year. And Marine still continues to be slow. Looking at profitability, we ended up at 14%, in par with last year, with a good improvement in gross margins, led on one side by sales mix, but also the fact that the restructuring program that we launched is kicking in clearly. And then we also have a number of other efficiency measures that are improving our margins. On operating expenses, we are also down. We have been working very, very hard also to contain our expenses even if we continue to invest in strategic important areas for our future. A lot of discussions on tariffs and the potential impact on the tariffs. Just as a reminder, we have a little bit more than 50% of our revenues in the U.S. 85% of everything that we are selling in the U.S. is produced in North America: U.S., Mexico or Canada. And the production that we have in Mexico, in Canada -- and Canada is very much included in the USMCA exemption list. So, so far, we are protected. And on top of that, we also have a good spread of our factories, with 9 factories in the U.S., 2 factories in Mexico and 1 factory in Canada. We don't know how the tariff discussions are going to end up. But obviously, in the short term, it's very much about adjusting prices or surcharges we can have a little bit, and we have been applying changes during the quarter, both ups and downs depending on the communication delivered by the U.S. administration. And then on the long term, of course, that we are working on several different scenarios in order to change both logistic flows and also add more value in our U.S. factories. Looking a little bit more in detail into the different segments. Land vehicles ending up at 11%, with a double-digit decline in Service & Aftermarket, especially in Americas. But again, we had a relatively good Q2 last year, and then we saw a deterioration in Q3 and Q4. On the OEM, I already commented that we see EMEA and APAC still coming down at the same time as LVA is showing positive numbers for the second quarter in a row. And we are also happy to see that registration numbers in Europe are not more down than 1% in comparison to the hefty drop that we see in production across the OEM manufacturers. Good improvement in EBITA, ending up at 12% versus 10.5% last year, with improvements in Americas and EMEA and a deterioration at APAC, but then we need to remember as well that APAC is still showing almost 25% in EBITA margin despite the drop on the top line. Marine, down organically 11%, with Service & Aftermarket still challenging, but we see some improvements towards the end of the quarter, while we still see double-digit decline in the OEM and a negative dealer sentiment when looking at the comments from the dealer surveys that are carried out during the quarter. EBITA, still pretty solid, 19.6%, despite the drop on the top line. And the EBITA margin, the lower EBITA margin is a consequence, obviously, of the reduced net sales. Looking at Mobile Cooling, MPS -- sorry, MCS, organic growth, 10%. Again, we had a pretty bad weather both in April and May, a little bit improving in June, part of the deterioration. And then we have this production stop that in our estimation is costing us about 50% of the drop in the quarter. That was a temporary production stop caused by, again, pollution in one of the foaming tanks, the major foaming tank that we have in the factory. And it was corrected after a couple of days, but it cost us obviously quite a substantial drop in the quarter. Retailers, as a consequence of the weather, saw a weaker sell-through in April and May, while we saw also an improvement in the month of June. EBITA, strong 13.1% versus 12% last year despite the lower net sales and very much driven by the cost reductions that we have in the organization. And then moving over to Global Ventures, where even here organic growth -- negative organic growth of 11%. Part of that is caused by the changes on our portfolio. We stopped the deliveries of our generator product program during Q1, and that continued during Q2. It will have an effect -- negative effect during the rest of the year. And then we have also some major changes in some of the different segments as well. Happy to see growth in Residential. We have seen now 3 pretty strong quarters in Residential after a couple of years of negative growth. We saw a decline in Hospitality and Mobile Power Solutions from a growth perspective. And then looking at EBITA, profitability, 14.2% versus 15.1% with stable margins in both Residential and Hospitality, while we see a decline in Mobile Power Solutions. Looking at sustainability, very good progress. We are happy to see progress in terms of injuries being very much below our target. Our share of female managers is on target. We're also seeing good progress in the share of renewable energy in operations, 34% versus 35% that we have as a target. And even on the assessments of high-spend direct material suppliers, where we are running at 55% versus 65% for the target. And then innovation, we continue to invest in innovation and ended up at 22% versus 21% in Q1. Looking at innovation, I would like to point out a couple of examples of the products that we launched during the quarter. A very important launch for us is the premium series of Dometic passive coolers. This is very much in combination with using the competencies that we have in the Igloo organization and launching again a premium series of both passive hard coolers and soft coolers. The launch took place some weeks ago, and the products are available both in American markets and on the global markets on e-commerce. This is, again, a series of both hard coolers and soft coolers that are, in combination, creating a system that you can stack up and scale depending on your different needs. Very good performance. You can keep the cold for up to 8 days. And it's also we are using injection molding, which is much, much lighter in comparison to the traditional passive coolers from Dometic that used to be rotomolding. Again, this is really the collaboration that we have between the Igloo and the Dometic brand on the different products. As you may remember, we launched the first series of active coolers under Igloo brand last year, and now we are launching the first series of passive coolers -- premium passive coolers under the Dometic brand. We are also launching the first product in a new-generation series of furnaces on the American market in order to upgrade our HVAC programs for the American market. And this is leading to a much higher performance than the old series that we are just now starting to replace. Moving over to the restructuring program that we presented in December. As you may remember, SEK 750 million in expected savings, and the program should be fully implemented at the end of 2026. Until now, we have closed 1 manufacturing site and 2 distribution centers, so 1 more distribution center in comparison to what we communicated in Q1. 225 employees impacted. Running rate in savings, SEK 195 million in comparison to SEK 100 million at the end of Q1. And we had cash out in the quarter of SEK 34 million. At the same time, as we communicated the cost reduction program, we also communicated the portfolio changes. I commented, we stopped our manufacturing some months ago. We had an impact during the rest of the year, and we are working on the divestment program as well and working very hard and in negotiation with a number of counterparties. And with that, Stefan, could you please continue?

Yes. Thank you, Juan. So starting off with the income statement for the second quarter and really happy to report that we have a 1.3% unit improvement in our gross margin, which is driven by sales mix, effects of the restructuring program, but also other efficiency measures related to logistic costs, sourcing and also the fact that we have been adjusting capacity in our factories over and above the restructuring program, which is a normal course of business. On the operating expenses side, SEK 982 million. In constant currency, that is a reduction of 6%. And then it is, of course, still increasing in relating to net sales because of the development of the net sales. And we are continuing to invest in strategic growth areas. So it's not holding back. Everywhere where we feel that we have to invest, we are continuing to do that. Moving over to net financial expenses, which are continuing down according to plan. Based upon that, how our debt level is developing and coming down step by step. Then on the tax side, we have an effective tax rate of 32% in the quarter, which is consistent with the first quarter, however, 2% units higher than Q2 last year. So moving on to the cash flow. Really happy to report a strong cash flow delivery in the quarter. And on the operating cash flow side, we are continuing to work with improvements in our working capital. We had a cash-out related to the restructuring program of SEK 34 million in the quarter. It's now totally, from the start of the project, SEK 129 million in cash-out relating to the SEK 400 million total cash-out that we have been communicating. So obviously, the rest is going to come mainly during 2025. We are carefully prioritizing where we are investing, but still have the feeling that we do what makes sense from a strategic point of view. If we look on the other components in free cash flow, the paid and received interest is trending down, and we have also been paying less tax. Then we did a repayment of the remaining bond that we started to repay in the first quarter of almost SEK 500 million. On the next slide, you can see how our free cash flow has been developing per quarter. And it's really nice to see that we are almost on par with Q2 last year, which was our second-best quarter ever. So now we have our third-best second quarter ever here in 2025. Taking a look on the working capital development. It has been coming down to 27% of net sales, which is the same that we have in the quarter stand-alone. As you can see, the inventory balance is significantly down from SEK 6.7 billion to SEK 4.8 billion, and the number of days is now 128 compared to 141 in Q2 last year. We still have further possibilities to optimize the working capital, and the long-term goal is to be around 20% of net sales. And if you look on the different components here, you see that we have a stable situation on accounts payable. Inventory is trending down, and we also have a stable situation on the accounts receivables. So moving on to CapEx and research and development. We are a little bit higher compared to last year, which more has to do with the timing of Q1 and Q2 CapEx in 2024. So we are on a normalized level. And as I said before, we are able to spend what we need to spend. So it's not that I feel that we are compromising there in any way. We are on an LTM figure of 1.8% in relation to net sales. The same comment basically goes also for what we spend on R&D. It's a little bit less in the quarter, but more related to timing than anything else. So the LTM level is 2.7% of net sales, and we continue to invest in important strategic growth areas as you could hear from Juan's report on the loan [indiscernible] in the last quarter here. So moving on to our debt maturity profile here. We have repaid, as I said before, SEK 500 million of the remaining part of the SEK bond that we started to repay in Q1. Then on the USD loan side, which is the $4.5 billion chunk that we have in 2028, $233 million of that, we have an extension option to 2029, which we will exercise in the beginning of next year. The average maturity rate increased from 2.1 years in Q4 to 2.4 years now in Q2, which is obviously relating to that we have done some refinancing actions, especially in the first quarter here. Average interest rate is on 4.8% of our debt portfolio. We have our undrawn revolving credit facility available of EUR 300 million. And then we have also updated our EMTN and certificate program during the quarter. Moving on to our net debt-to-EBITDA leverage ratio. We ended on par with Q1 here on 3.3x, 0.4x higher than the same quarter last year. This is driven by the EBITDA development, mainly driven by the net sales development. We have partially been able to compensate that with a strong cash flow driven by working capital improvements. And we continue to keep high focus through the whole organization in protecting margin and reducing working capital. We stay fully committed to our leverage target of around 2.5x EBITDA. However, it's difficult, with the current macroeconomic situation, to talk about the exact timing of that. But we stay fully committed on that. So with that, Juan, I hand over to you for summarizing the quarter.

Thank you, Stefan. As a company, we need to control what we can control. The market is something that we can do about. But of course, I'm not happy to see that 1 more quarter, we are shrinking as a company. At the same time, I feel very, very proud of the job the organization is performing, which is leading to a robust performance. We've maintained EBITA margins despite the lower net sales. We are also happy to see the cash flow continue to deliver a very high level in a tough macro environment. And of course, the situation with tariffs is affecting, as I commented before, consumers, is affecting the value chain, dealers, and everybody is very, very careful in building up any kind of inventories. The uncertainty in the market is still there. But we have seen a stabilization of the order intake. We see as well easier comps during the second half. So again, in normal -- under normal circumstances, we should expect a gradual recovery in Service & Aftermarket and Distribution. But again, the question mark, the main question mark is the tariffs and the effects that tariffs might have on consumers' and dealers' sentiments. Strategically, we continue to invest in our growth areas, both in product development, innovation, our sales organizations in a number of areas, and we continue to do so. And we are also happy to see, obviously, that the global restructuring program that we launched in December is kicking in and having a very nice effect on our numbers. And with that said, I would like to open for the Q&A session.

[Operator Instructions] The next question comes from Johan Eliason from Kepler Cheuvreux.

Yes, it's Johan at Kepler Cheuvreux. Juan, Stefan, I'm out in [indiscernible] testing your equipment, working well so far. I have just one question regarding the free cash flow. I hope you can hear me well. Was there anything particularly impacting the free cash flow in this quarter? And how do you see the cash flow pattern in the second half of the year? Is it a normal seasonality? Or is there something we need to bear in mind?

Yes. No, there was nothing particular more than that. We are working very, very hard with optimizing this. And so obviously, inventory has played an important role this quarter as well. But then we also did a very good job on the accounts receivable side this quarter, which is something that we are obviously working with on a continuous basis. So I would say, I mean, the way that the cash flow should continue to develop here in the coming quarter, I mean we need to consider our seasonal pattern, where Q2 is obviously our strongest cash flow quarter. But I still see that we are going to continue to deliver robust free cash flow numbers here, not to the level that we have been doing in the last couple of years, but still robust.

Okay. And in the second half of the year, anything in particular that will impact coming from the restructuring program? Or is it sort of gradually also in the second half?

It will be gradual measures that will be having a gradual impact on our numbers.

So I mean, in general, I mean the restructuring program, as we said before, is according to plan. And we are following the plan that we have been playing out. So as you remember, Johan, SEK 300 million is the target for 2025.

The next question comes from Henrik Christiansson from DNB Carnegie.

I have a question on the gross margin improvement. You sort of highlighted the restructuring program, and that has contributed to the improvement year-over-year. And then you also talked about these other efficiency measures. Could you talk a little bit more about that? And to what extent that is temporary or also structural and permanent?

Absolutely. No, but I mean, we have -- I mean there is different components in this. I mean, first of all, you will see that we are down a number of FTEs a little bit more than 800, and half of that is, you can say, factory related or GP related. So we are, of course, over and above the restructuring program, keep on adjusting our capacity and looking for continuous improvements here. Then we have on the logistics side where we are both optimizing our logistics footprint, which is obviously a part of our restructuring program. And then we also see that we have been pretty successful in some areas on our sourcing improvements in 2025 here. So that are the main components of that. Then you obviously also have a mix effect here as I mentioned. I mean even though Service & Aftermarket did not develop according to plan, it's still a larger share of the total than -- because of the development on the OEM side. So that are the components, Henrik.

Great. And then my second question, just an update on the legal situation on the earnout. What's the latest and greatest there, please?

Yes. I mean it's no news. I mean we have the date in September here, which we are working towards. But other than that, from our point of view, there is no change. So we still believe that we have a good case.

Great. And just related to that, what's the amount that you have on your balance sheet booked for that earnout?

For the time being, it's around USD 66 million. But that, of course, doesn't have anything to do with what we believe the outcome is going to be. It's just something that we work with the auditors on a continuous basis.

[Operator Instructions] The next question comes from Daniel Schmidt from Danske Bank.

Sorry, I just wanted to say, first of all, that I missed most of this call. So maybe I've been -- I'm asking questions that have already been asked or addressed in your prepared remarks. But Stefan, you did mention that the savings program was running according to plan, and it sounded like maybe you were even doing better than you expected on the FTE side in production. Did you also mention how much of these SEK 300 million have been realized already as of H1?

Yes, we are on SEK 195 million on an annualized pace now. So we are moving towards the SEK 300 million in a good way.

And then you mean annualized as of Q2 being annualized or you mean H1?

I mean if you -- as of -- the pace, I mean we are expecting to be on a pace of SEK 300 million. It doesn't mean that we are going to see SEK 300 million in -- but -- so of the target of being on the SEK 300 million pace when we come to the end of the year, we are on SEK 195 million now.

Yes. So that means basically that you did around SEK 50 million in Q2 then?

Yes.

Okay. Good. And you also, of course, write about the production stop that you had in Q2 in Igloo. Is that entirely behind us now?

Yes, it is.

Yes. And then maybe some sort of regulatory questions, might be difficult to answer. But there's, I guess, 2 things happening, if I'm not mistaken, and maybe things have changed recently again, but as I understood it, at least a couple of weeks ago, there was supposed to be a 50% tariff on steel and aluminum content in appliances as of the 23rd of June. Is that now in effect? Is that impacting anything in the market in terms of market dynamics? And then on top of that, I think the Big Beautiful Bill that came out is suggesting tax deductibility on car loans, which I assume also impacts RVs. Do you have any thoughts around these 2 factors? And any sort of implications or any talk about it that you heard so far?

Not more than we are obviously trying to figure out what that means to us. And so far, it doesn't mean a lot, simply because we are still under USMCA protection with our products -- the vast majority of our products, I would say. And then what we can say is that we have kind of changed our surcharges to the market. I think this is the fifth time in the last 6, 7 weeks since the first time. So it's a lot of changes. So unfortunately, that's the problem just now in the American market, uncertainty that this creates -- these changes create. From a European perspective, we don't import basically anything. So there is no exposure, so to say. So we feel confident. And that's the reality. We feel that we are working very, very close to the market and we have a lot of people spending a lot of time trying to figure out and that we are in continuous dialogue with our customers.

And then concerning...

Sorry, go ahead.