Dometic President and CEO Juan Vargues presented a confident picture of the company’s prospects amidst a ‘challenging global trading environment’ and affirmed plans for further acquisitions and significant restructuring
“Market conditions in the quarter remained similar to what we have seen throughout 2019,” Dometic President and CEO said in his opening remarks to investors for his report on Q3 results. “Despite a challenging global trading environment impacting us in the quarter, we are pleased with our underlying performance delivering net sales growth of 2%, continued high operating profit and a strong cash flow.”
The 2% rise in 3Q revenues to SEK 4.60 billion (€430m) is attributable to acquisitions, while organic sales declined -6%, offset in equal measure by 6% gain from positive foreign exchange impacts. The picture for the company’s first nine months of the year was very similar, with revenues from M&A activities up 3% year-to-date while organic sales were down 6% and exchange rate benefits contributed a 6% gain – leading to a total of SEK 14.58 billion (€1.36b).
Profit for the quarter (after taxes) was SEK 372m (down 14.5% from the same period last year) and for the 9-month period, totalled SEK 1.28 billion (down 11.3%). Dometic’s component and equipment business is concentrated in recreational vehicles (53% of sales) where it has faced significant headwinds over the past year particularly in America where OEM RV sales dropped sharply.
On the flip side, “Marine is doing great” said Varguez about Dometic’s marine equipment business which now accounts for 26% of the company’s sales.
Vargues said Q3 was weaker on the OEM side and much stronger on the aftermarket side. “When talking to our own [OEM customers], they are still very optimistic about 2020.” Overall, the marine segment has logged 12-month rolling growth of 20% (constant currency). “Leisure Marine has been growing at a 2% to 3% pace over the last 4, 5 years…. so we have been growing 2.5x to 3.5x faster than market.”
Tariffs have made a material impact on Dometic’s business over the past year. Noting a 5% drop in EBIT margin to 14.7% (earnings before interest and tax), Vargues explained, “the difference between Q3 and our first half is the additional tariffs of 25% in comparison to the 10% rate we had on the vast majority of the product groups prior to the 1st of July.”
In 2018, the company’s exports from China to the US were approximately SEK 1.5 billion on an annual basis ($250 million). In response, the equipment maker has built a plant in Mexico, where it is relocating production from China, in a phased process.
Vargues also outlined a major restructuring effort launched at the end of the quarter to reduce cost and drive efficiencies by cutting complexity in the business. The number of product SKUs the company has been selling over the last 4-5 years has been reduced by 37%, while the global headcount has already been cut by 1,100 over the past year in response to volume reductions.
Another 1,500 personnel across 20 plants will be impacted over the next 18 months as Dometic looks to reduce its footprint in terms of facilities, warehouses and offices. The total cost of the restructuring program is estimated at SEK 750m, generating annual savings of around SEK 400m. The CEO went on to say, “we are not just consolidating sites, we intend to outsource noncore activities to reduce the impact of cyclicality and seasonality in the business.”
Acquisitions on the Horizon
The other big strategic thrust for Dometic is diversification, particularly targeting the marine and aftermarket segments.
Despite the negative near-term outlook for revenues, Dometic says it is ‘actively building up an acquisitive pipeline.’ During the presentation, management confirmed Dometic was adding resources to its M&A team more specifically commented, “We have a pretty significant amount cash on hand, SEK 3.6 billion as of the end of Q3, which creates some flexibility for M&A activities going forward. On top of that, we also have an unutilized revolving credit facility of EUR 200 million.”
Fielding an analyst’s question about the level of debt Dometic would be comfortable in taking on for acquisitions, Vargues hinted at the type of companies that are on the radar. “Most of the companies in our industry are 40 to 60 million euros or dollars, so we’ll consider acquisitions of that size, unless something big came our way and then we would need to think in a different way.”