Edited Transcript of DOMETIC.ST earnings conference call or presentation 16-Jul-20 8:00am GMT

SOLNA Aug 11, 2020 (Thomson StreetEvents) — Edited Transcript of Dometic Group AB (publ) earnings conference call or presentation Thursday, July 16, 2020 at 8:00:00am GMT

Ladies and gentlemen, welcome to the Dometic Q2 Report 2020. Today, I’m pleased to present Juan Vargues, President and CEO; and Stefan Fristedt, CFO. (Operator Instructions) Speakers, please begin.

Good morning, everybody. Welcome to the presentation of Dometic’s interim report for the second quarter. As usual, I have Stefan Fristedt, CFO; and Johan Lundin, Head of IR, with me.

And without any delay, I suggest that we move over to the presentation. So second quarter’s highlights. From a market perspective, I would like to start by saying that this has been the most challenging quarter in my professional career. In comparison to the finance crisis, the finance crisis was a piece of cake. We really felt how the light disappeared here mid of March. April was extremely tough. May was tough. June, we saw a recovery and ended up at the same levels as June last year. So in other words, we saw a recovery faster than we expected.

And we — I’m happy to convey, it’s really that we saw a very, very strong aftermarket coming back in the quarter — in June despite the fact that the U.K. was still under lockdown. So if we exclude the U.K. numbers, we would have been close to mid-teens in organic growth in June from an Aftermarket perspective.

When looking at performance, strong focus, obviously, on corporate actions and protecting our cash flow. We continued to invest in innovation and market development, and I will come back to that. Innovation index reached over 18%; we ended up at 18.4%. We were close to 15% 1 year ago. We launched our new outdoor concept in Australia and in the U.S. Obviously, the impact of COVID also helped us to accelerate our activities in the digital area, and we implemented 9 B2C sales platforms across Europe. In the U.S., we already implemented that in Q1 in connection to the new ERP system, and we could see strong growth coming through the online store, of course, from a pretty low base. On the cost side as well, we continued our actions in regards to restructuring program, adding another 3 locations, bringing to 17 locations that have been affected so far.

When looking at the financial summary, 38% down in organic growth with no effects from FX or M&A. And our estimation is that COVID did have an impact of about SEK 1.9 billion. Of course, when looking at those numbers, I’m pretty pleased in showing what we consider to be solid results when you take into consideration the tough market situation that we have been facing during the last months.

EBIT before I.A.C. ended up at SEK 362 million, an EBIT margin close to 11%. When excluding the reversal of the provision for the earnouts of Kampa, we ended up at 8%.

And as I stated before, we have been working very, very strongly and fast to reduce our cost base. We had a number of weeks when we were below 5,000 employees, sending people home. And we have, of course, also continued to work on our business improvements on pricing but it’s difficult to compensate, obviously, when you see how the top line is really going down as dramatically as it did. So we estimate the impact of COVID to be about SEK 600 million in the quarter. And we also had a negative impact of tariffs that ended up at SEK 33 million in the quarter, which is still an improvement in comparison to the same period of last year.

EBITDA ended up at SEK 565 million. And I’m also pretty proud to show positive cash flow compared to what we believed at the beginning of the quarter when we saw, again, that the market was disappearing from us, and an EPS of SEK 0.42.

If we move over to the year-to-date, obviously, the year-to-date numbers are heavily impacted by Q2, ending up minus 27% in organic growth with 2% FX impact and no M&A impact, but bringing in the total impact by COVID to SEK 2.3 billion.

EBIT margin, obviously, quite much down, 10.4% versus 15.2% last year. And I will not repeat myself. Basically, we have — the upsides is that we have done what we consider to be a very good job in mitigating the negative effects of COVID. We have continued to work consistently on our efforts to improve efficiency and pricing. And then we had the U.S. tariffs ending up at SEK 109 million for the half year and then a COVID impact of SEK 720 million.

Cash flow, when looking at the half year, ended up SEK 490 million, which is of course far away to where we ended up one year ago. But still, a solid result considering the situation. And EPS of SEK 1.12.

While looking at the application areas, all of them have been negatively affected by COVID. And I will not stay there, obviously, because the graphs are self-explanatory.

Looking at sales growth over time, everything started obviously with inventory corrections in the U.S., moved into Pacific and Europe, then we got Marine during half year last year. And at the beginning of this year, we got COVID. So it has been, I would say, 8 negative and very tough quarters for us. And that has naturally an impact on the EBIT margins, again starting with inventory correction that was initiated in July 2018 and then we got the tariffs, and lately during this year, we got the COVID-19.

Again, is anything positive when looking at the chart is really that I — we feel that the aftermarket has been a very good cushion for us to have, and that has mitigated quite a bit of the negative impact that we had on the top line. And I think it’s pretty clear while looking as well at the quarter.

When looking at the last quarter, if you look at the share of aftermarket, this year, Aftermarket ended up 55% of total sales in comparison to 47% of total sales 1 year ago. And then you have to consider, obviously, that the situation, both in the U.S., in Europe and Pacific with lockdowns really shut down most of the stores during 2 months of the quarter.

Moving over to the regions and looking at Americas. Americas ended up at 41% (sic) [minus 41%] organic growth with all application areas being negative. There is one product group where we could see organic growth, and that was Mobile Cooling, part of our outdoor efforts. We launched the new outdoor program, which is, on one side, containing parts of the products that we acquired through the Kampa acquisition, but also a whole bunch of new products that we have been launching in the last quarter, and I will come back to that as well. And then we saw very, very strong growth on B2C e-commerce.

From EBIT perspective, down 69% and ended up at SEK 124 million. The same, I feel good about what we did to mitigate the cost, but it’s very difficult to compensate for the loss of volumes and the tariff impacts.

Moving over to Europe — or EMEA, rather, ended up a minus 37% organic growth. Same, all the application areas were negative. We had, on one side, implemented our B2C e-commerce platform in 9 European countries and we have a few more to go. And I’m also happy to convey that we have initiated the regionalization of the Aftermarket across Europe. That will give us the opportunity as well to invest more on the field side, having more salespeople in the field in order to generate growth to penetrate the market on the new product areas.

EBIT ended up at SEK 190 million or 54% down. We continued in the same way, working consistently to improve our efficiencies, working on our pricing and continuing to adjust as well our cost.

Moving over to APAC, ending up at 21% (sic) [minus 21%] organic growth with Asia being much better. So we had a very negative evolution in Asia in Q1. Q2 was still negative, but much less negative, while Pacific instead became pretty much negative. And that’s also what has a major impact on our margins since we have pretty high margins in that region.

On the products, we also introduced a new outdoor program, and we have good expectations or strong expectations that, that will help us to generate growth in the years to come.

Looking at the EBIT, down 48%, very much as a consequence as well of the mix change in the regions, but also, of course, the huge volume loss.

And then a couple of words about the staycation. I’m fully convinced that all of you are reading, listening to these staycation trends. What we can say is that we saw the trend already a couple of years ago. We have been observing for years how the camping industry has been booming in the U.S. but also in the rest of the world, with both Australia and Pacific area and EMEA area growing in the same way.

On top of the traditional groups, we see millennials. In the same way as we have been talking about millennials in the RV industry, is very much millennials driving these outdoor trends in other areas of the business. And of course, COVID will fuel this trend even more. We see just now the 47 — this is pure statistics coming from outside, 47% of Americans that did plan for leisure trip will this year instead go camping. We see as well 75% of Swedes spending holidays in Sweden, either by renting a cottage or also using caravans and boating industry.

What does that mean for us? Well, in the short term, we don’t believe that it means a lot. We see, obviously, that rental is growing very, very much. We see that it’s very difficult to get hold just now on a mobile home or motor home or a boat. But on the contrary, we believe that in the medium term and the long term, this is going to have a major impact. It is clear that people planning for holidays in Thailand are going to think twice before taking the kids. We see as well how tourism is dropping dramatically in Southern Europe, is dropping dramatically in the Caribbean, and that will be, obviously, for the benefit of the outdoor business.

So if we move over to next slide. We believe that Dometic is very well positioned for a strong development in the outdoor market. We have already a leading position within the RV and the marine industry. We have the knowledge, we have the heritage and we have a trust. We have been supplying our products to the outdoor industry in different shapes for many, many years. And what we are doing today is that we are expanding our territory. We have been observing how the automotive industry has been developing. We see how the SUV market has been growing dramatically during the last 15 years.

Just looking at 2019, 28 million SUVs were registered globally. We also know that in 2023, the SUV market will be reaching 53 million of vehicles. And in the same way as we operate today in the boats and we are on the RVs, we would like to participate in the growth of the SUV market, and we believe that we have a good amount of products that are very much fitting into that industry, which is growing.

We have been expanding in the last 12 months our product portfolio. We got, as I mentioned before, quite a bit of growth through the Kampa acquisition. We have been developing. We have been looking for new products to introduce in the outdoor markets. And I’m happy that we are starting to see the effects of that in a number of markets.

And of course, we have our product quality with our design. And it’s also clear that we are one of the brands in this outdoor market gaining more awards whenever we are participating in any exhibition or contest.

What we mean, in reality, with vehicle-based outdoor activities is really that we have a lot of people spending one day with their kids. The kids are playing football or soccer. So there are a lot of people using an SUV to get out for one day. And we believe that we have a number of products fit in that need — specific need.

Now we are talking about a staycation where we are putting together a product range for that specific purpose. And then we have occasion for more than 3 days. We have a number of product categories already that we are selling, and that we believe that are anchor products. We have been talking for a number of years about our Mobile Cooling, the power mobile cooling; we’ve got inflatable tents through the Kampa acquisition; we have the rooftop tents now; and the outdoor cooking, and more products to come, which is a little bit of the summary that you can see on the next slide with more than 600 products on the market that are driven through the outdoor business.

Then we have a question of the channels. Do you need to build up a new channel? The reality is that we have been participating on the retail channel for many, many years. And we are in most of the well-known premium chains all over the world. We talk about REI, which is one of the drivers for the outdoor industry in the Americas. We came in into the stores already 1 year ago and got 7 stores as a pilot. We are just now working on 36 stores. And just looking at REI, they have 156 premium stores in the U.S. and we have good hope that we will see the number of our penetration growing over time. We see just during the last 12 months that we have been growing considerably, beating 300% in that period of time.

As I mentioned today, on one side, we have the physical stores, but we also want to be a digital company. And we have been working on the B2B side all over the world for a number of years without being a part of our strategy in reality. This is becoming a part of our strategy during the last 12 months. And we see that, on one side, B2B is growing very much in North America and after the B2B implementation. But we see as well the B2C. As I mentioned before, we launched in the U.S. Now we are launching in Europe in — across 9 different countries and we’ll continue to develop in the same way.

If we move over to the Pacific area, exactly the same. We have a strong presence already today among the outdoor retail chains in the country, and we are working today to conquer more of the stores that we are lacking today. We are today present in about 500 stores of all the premium brands, and again, more to do moving forward.

One of the areas that we have not been talking about a lot, but we also believe is extremely important is very much connected to digital and very much connected to the B2C online channel is the heavy traffic that we have to our website. We’re expecting this year to reach 10 million visitors. We have seen a steady growth during the last couple of years, and again, moving from being a sub-supplier into being a brand on our own — for our own reasons. We have seen a growth during the last 12 months of 40%. And as I mentioned, we expect to reach 10 million visitors at the end of this year.

If you just take a comparison, if you look at some of the other companies in the outdoor market, we have a very, very strong presence. That presence, we will again utilize to promote our B2C channels going forward as well.

You see — on the right-hand side, you can see what happened in April when COVID kicked in and you see the number of visitors growing dramatically from April and moving forward. So we had a growth in comparison to last year, but the growth just multiplied after a couple of weeks. And we see as well how our visitors are looking 88% more this year than last year for their dealer locator. So that’s also telling you about the new needs that are popping up in connection to COVID.

Moving over to the restructuring program. We keep working. And as I mentioned during the last quarter, we could accelerate the program. That’s what we are doing. We added another 3 locations. We are affecting another 230 employees around the world. And we are making an accrual of SEK 61 million in the quarter, leading the total amount to SEK 261 million so far.

And then on the strategy, more of the same. So obviously, COVID is not changing our strategy. We believe in what we are doing. We believe this is nothing new, that we need to become much more of an aftermarket company having an OEM presence than being an OEM company having an aftermarket presence. This is, of course, as well, one of the reasons for launching new product areas. One of them is outdoor, and now we are up and running. And the same is valid with the channels. We believe in the B2C channel, and we will see more investments coming in to generate traffic and to generate sales in that channel.

From a product perspective, I’m also very happy with evolution. We are at 18.4% after 2 quarters. We believe that we are going to be at the 20% mark at the end of this year and 25% at the end of next year. And what is good is that we have a very strong pipeline of products to be launched during the remainder of 2020 and 2021.

From a cost reduction perspective, more of the same. I already mentioned the restructuring program. The move of the awning factory from LaGrange in the U.S. to Mexico has been completed in record time, which I’m very happy about. And then we continued to work on the complexity reduction, and we are just now running at 39% lower in [our SKUs] in comparison to the situation we had when we started at the beginning. So I’m very, very thankful for the efforts the entire team is doing to take away complexity.

And with that said, I would like to hand it over to Stefan, please?

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

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Thank you. So I would like to start to talk about the COVID-19 impact, which has been mentioned shortly here earlier in the presentation. But we have implemented a number of activities to reduce the effects, including the closure of factories and sales offices during parts of the second quarter. We have had people on short-term work furlough, kurzarbeit or forced vacation during the quarter. At its [peak] sometime during April, we were close to 5,000 employees who were impacted by these kinds of measures. We have naturally been having hiring freeze. We have also been ending contracts with consultants and temps. Also, the group and regional management have contributed by a reduction in their salaries.

We have been managing the supply chain and the inventory buildup, which is, as you appreciate, a very difficult task in these times when you have limited visibility to how the demand will develop.

We have also been balancing accounts receivables and accounts payable in a way that I’m really happy with. And then we have been strengthening the balance sheet in terms of that we have, as you know, already renegotiated the financing agreement with our banking group. And we have also during the quarter made an agreement with a bank on an EKN-backed facility, which I’m going to come back to.

So if we then look on the effects, as Juan already mentioned, we are estimating on net sales the effect of COVID to be SEK 1.9 billion in the second quarter and approximately SEK 600 million on the EBIT level. This takes us on a year-to-date basis to SEK 2.3 billion in net sales and a little bit above SEK 700 million on the EBIT level.

We have, of course, been making use of various types of programs that have been offered by governments around the world. We are making a distinction between government grants, which is — yes, support measures that have been recorded directly in our income statement, which is making up SEK 31 million. And then we have taken other support measures, which is the majority is related to short-time work and furlough, which has been making up SEK 143 million for a total of SEK 174 million year-to-date, where the majority, of course, is related to the second quarter. On top of that, we also have SEK 95 million which is positively impacting the cash flow, which basically means deferral of payments of various tax expenses and social security fees.

Moving on to the next slide, talking about working capital. Negatively SEK 90 million in the quarter. And I would like to say that in the light of the exceptional situation we have had during the quarter, we are okay with it, which would not have been the case under normal circumstances, of course.

But moving on to the next slide, we have the different components of working capital. So up on the left-hand corner, DPO, we have been able to extend payment terms with suppliers around the world, working with our suppliers and working with other kind of tools in the toolbox to increase the days.

DSO, I’m really happy to see that we have been managing the situation during the second quarter here in an exceptionally good way, I would say. We have been very, very proactive, working with our customers and managing the payments from them. So we are actually even a slight lower than what we were at the same period last year with 47 days. And importantly enough, 52 days to our suppliers, 47 days from our customers is, of course, a good balance to have.

Looking at inventory, 112 days is, of course, the situation under normal circumstances that we would not be happy with. But you need to appreciate, as I mentioned before, that it is exceptional times. It is a very challenging task to manage the supply chain when you have a limited visibility to where the demand is going to end up. Also keep in mind that when we went into this year, we were planning for ramping up to normal high season, and that high season has been pretty significantly compromised by the COVID-19 situation.

Moving on to CapEx and product development. I would like to say and label it that we — you can see, we have been careful in how we are spending both CapEx and product development resources and have been reducing them compared to last year but also to the sequential quarters. But I would still like to say that we have been selectively offensive. So we are really trying to pick very carefully the projects where we are investing money here exactly, as Juan has been alluding to earlier in the presentation.

Moving on to cash flow. Still, SEK 311 million compared to SEK 1.4 billion at the same period last year is, of course, not a nice comparison. But as Juan mentioned before, in relation to our expectations, we are satisfied with how the cash flow — the operating cash flow development has been evolving during the quarter.

Moving on to the next. Our net debt leverage ended at 3.15, which is lower than what we actually did expect. But that has been fueled, of course, by the fact that we financially have been performing better than what our original expectations actually were.

The one news that we have in the — in our debt portfolio is that during the quarter, we have signed a new EKN-backed credit facility on SEK 2 billion, which has a maturity going over 3 years. And this is a measure to, yes, basically maintain flexibility for the times to come and also being able to be offensive in the areas where we actually choose to bid.

Moving on to the next. The maturity profile is, of course, as I’ve said before, a very nice profile to have in these days. What has happened during the quarter is that we have used an option to extend one of the U.S. dollar tranches with 1 year, so that is now maturing in 2025. So even that is then improving our maturity profile.

With that, I’m handing back to you, Juan, to summarize.

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

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Thank you very much, Stefan. So in summary, a very, very tough quarter even if we saw a year coming better than we expected. I believe that we have demonstrated that we are good working on costs, reducing our cost and doing that rapidly. Time is of the essence when things turn. We are working hard to reduce our tariff exposure, and as you all know, we’re expecting to have much better second half than we saw 1 year ago. So all in all, I believe that we are delivering solid results at this point, an extremely tough market situation.

And then moving forward, we are aware. We are talking to customers. Obviously, we are getting feedback. We see just now a lot of push in the short term. Then, of course, we need to remember that we are coming in a situation where markets were locked down, where manufacturers were shut down for 2 months. So the question we see just now, is it underlying demand? How much is underlying demand? How much is a catch-up effect? Because keep in mind that COVID really kicked in at the beginning of the season.

So our expectation is, again, much less effects from COVID in Q3, Q4 still to be seen. I think it’s too early to judge just now how Q4 is going to look like.

From a strategy perspective, it’s more of the same. So we continue to work on the growth areas, what we consider to be growth areas for us moving forward, outdoor, residential, mobile deliveries, at the same time as we continue to protect our position in existing areas. We believe that there is a space for these new product areas, but also for channel development. This is one of the reasons for entering now the B2C channel with a quite considerable number of products.

We feel good about what we are doing in terms of competitive reaction. We see that. And we see also the innovation, how this is kicking in now quarter-by-quarter. So it feels very, very consistent.

And then I’m also very good, obviously, that after 9 months running the restructuring program, that we are very much on time and now we see how the cost reductions are starting to begin in the areas where we already initiated some months ago.

And then I also believe that we did a pretty good job on the financing of the company when, again, the light was switched off at the beginning of March. So I think that Stefan and his team have done a terrific job with that.

And with that I would like to open for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Daniel Schmidt from Danske Bank.

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Daniel Schmidt, Danske Bank A/S, Research Division – Research Analyst [2]

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A couple of questions from me, and starting then with the short term here with the trend in the quarter. You’re saying that, of course, you had a dreadful start and then it looks like — I think you said that it was basically flat in June with Aftermarket being up and hence, OE being down. And if you would exclude the U.K., the Aftermarket, as I understood, it would have been up like 10%, 15% in June. Just so I got that right, please confirm that.

And then what are you seeing entering July, given what you said about the U.K. and sort of the reopening of that country? And what has that done to your performance entering Q3?

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

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We feel good about July. I mean obviously, we see — we hear our customers talking about the push, talking about retailers, asking for delivery from OEMs and OEMs asking delivery from us. So we — still there is an order book. But as you are aware of, our order book, our backlog is normally 2 to 3 weeks. So what we can see, it looks good at this point.

So if we try to summarize Q3, we are — we feel good about Q3. Then again, my question is, is it underlying demand or is it still catch-up? Keep in mind that we didn’t have positive growth in June. We just matched last year’s numbers. At the same time, we see — we feel the push. So my — our concern just now is much more Q4 than Q3. Q4 is more of a unknown.

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Daniel Schmidt, Danske Bank A/S, Research Division – Research Analyst [4]

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Yes. But it sounds like you’re saying that so far — it’s been a very short-time period here, but so far, you’re seeing positive numbers for Q3. Is that correct?

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

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I never said that, but I see a much, much better numbers than what we saw at the beginning of Q2. And we hear our customers talking about retailers asking for more deliveries. We hear (technical difficulty) talking about low inventories, both on the RV side and on the Marine side. But still, we need to see that coming in, coming through.

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Daniel Schmidt, Danske Bank A/S, Research Division – Research Analyst [6]

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And on that subject, if you look at the U.S., there’s comments from dealers and maybe also OEMs that inventories are too low, that basically dealers don’t have vehicles to display on their lot and sort of the season is moving on. Do you feel any risk that you’re not going to be able to supply to the dealers, that they will sort of miss out in terms of selling to the end consumer just because they don’t have the goods?

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

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Daniel, I’m talking to our customers. Obviously, in the same way as you are reading, I’m talking to them and they are expressing more or less the same. At the same time, if we look at the retail numbers on May that are the only numbers that are public, retail was down 25% and manufacturing was down 29%. So let’s wait until we see the numbers from June and then we will see really if the underlying demand is there. But May, the latest numbers we have are that public are showing minus 25%.

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Daniel Schmidt, Danske Bank A/S, Research Division – Research Analyst [8]

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Okay.

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Juan Vargues, Dometic Group AB (publ) – President & CEO [9]

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Wonderful. I’d say as well that everybody seems to be very, very positive and we will see that coming through the numbers. But so far, we don’t see it.

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Daniel Schmidt, Danske Bank A/S, Research Division – Research Analyst [10]

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No. Okay. Good. Moving on then, you mentioned these 4 major product categories within sort of vehicle-based outdoor products that you’ve launched in the past 12 months. Could you give us any indication of how big a part of sales that is today? And what you think that will be in a year’s time?

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Juan Vargues, Dometic Group AB (publ) – President & CEO [11]

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Still very small. It’s obvious that we have been introducing step by step, and of course, that COVID event stopped our plans quite a bit. But I’m fully convinced and we are fully convinced as a company that this is one of the areas where we will see a lot of progress moving forward. Again, we have already the channel. It’s about becoming much more relevant than we have been until now. Until now, basically, we were in this channel with our (inaudible) boxes. Just now, we are moving from active cooling. We will be on passive cooling. We will be on [Dreamweaver]. We are already on the rooftops. We are already on the inflatable tents. We are on the cooking. So we believe that this is going to be kicking in more and more in a couple of years. But again, we will see a progress evolution. It’s not a big bang here and now. It takes us — as I said, I mean, if you look at REI, we were in 7 stores 1 year ago. We are in 36 stores today and they have another 120 to go. So we will see it growing over time.

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Daniel Schmidt, Danske Bank A/S, Research Division – Research Analyst [12]

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Is it fair to assume that half of Kampa maybe and your Mobile Cooling revenues, is that what you’re referring to that you have today? And then, of course, that will be probably much more in a year’s time. Is that the starting point?

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Juan Vargues, Dometic Group AB (publ) – President & CEO [13]

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Absolutely. So I would say that if — what we call default for retail stood for somewhere 9% to 11% depending on the quarter. And you have the Kampa and all the new products that we are adding. I mean I would be surprised if that business, the outdoor business doesn’t become a 20%, 25% of the company in a couple of years from now.

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Daniel Schmidt, Danske Bank A/S, Research Division – Research Analyst [14]

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Yes. Okay. Good. And then sort of back to the cost side. And obviously, you’ve done much better with cost reductions than what market expectations were sort of implicitly thinking, and at the same time, you’ve had this B2C platform e-commerce rollout in EMEA. Has that been a costly exercise, would you say?

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Juan Vargues, Dometic Group AB (publ) – President & CEO [15]

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No. It has not. And the reason for that is that we have already a software that we were using in one country and we have expanded that into a number of different countries. And that’s, for us, also a first step. We have another program in place that we are going to be implementing in the coming 12 months which is a global platform. We want to have more customers interacting with each other, no matter where they are.

So what we have done just now is that we have taken a shortcut in order to create traffic, to connect it to our website and to learn ourselves so we can really start moving. And then it will be a second phase where we will implement a second phase of this with a new global platform that we are already working on, by the way.

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Daniel Schmidt, Danske Bank A/S, Research Division – Research Analyst [16]

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Okay. And then finally, on the cost side as well, as you mentioned, tariffs, there was still a headwind, of course, in Q2. But if I get it right, that should be a tailwind in Q3 and onwards, is that correct?

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Stefan Fristedt, Dometic Group AB (publ) – CFO & Executive VP [17]

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Yes. I mean for the second quarter, obviously, the tariff costs have been impacted by the volume drop. But we are basically following the plan as we have been communicating earlier that, compared to the quarters last year, that we are going to see an improvement during Q3 and Q4. Of course, depending on how the world will develop, but we are sticking to that.

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Daniel Schmidt, Danske Bank A/S, Research Division – Research Analyst [18]

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On a like-for-like basis, there should be an improvement, of course.

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Stefan Fristedt, Dometic Group AB (publ) – CFO & Executive VP [19]

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Yes.

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

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Keep in mind that we are moving a number of products from China that we started already 1 year ago and they kicked in. Now what is going on is obviously the efficiency numbers are coming up — are climbing dramatically in the last weeks. So even (inaudible) it takes a while before you get efficiency. We are getting the efficiency gains now.

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Operator [21]

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Our next question comes from Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [22]

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I will go one at a time. I just wanted to follow on kind of your new range of products that you’ve been launching. It looks to me to be a bit more kind of what I would call light camping equipment versus what you were doing more historically on the mechanical or more heavy components for outdoor vehicle.

I was just trying to understand a little bit your positioning in this area, because you’ve spoken a lot about premium positioning throughout the presentation, but also it seems that you think the growth is more going to be targeted to millennial type of customers. So I was just trying to understand how we would reconcile these 2 area.

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Juan Vargues, Dometic Group AB (publ) – President & CEO [23]

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I think we — again, historically, we have been into both in the boating industry and the RV industry, supplying devices to those customers. And that’s good, and we will always be there. But we also believe that we need to be much closer on our development moving forward. If you look at how the RV industry is developing over time, from peak to peak, the growth of the market, the underlying growth, if you look at it both in industry, peak to peak, underlying, we need to find other ways of growing the company. That’s the opportunity to do that. Is it dramatically different products? Well, to some extent, some of them are. We were not into inflatable tents, but then we have the Kampa acquisition and became one of the global players, we’re now saying a global player, on inflatable tents.

If we are talking about coolers, we already are market leaders globally on [passive cool] and active coolers. But we believe that if we are really going to become relevant to the American markets for coolers, we also need to be on passive coolers. And that’s one of the areas where we are working.

On cooking, we have always been in cooking. So we have products, even if you have an RV, you can cook inside, but you can also cook outside. So we are doing is that we’re adapting products from the inside to the outside.

So I wouldn’t agree that it’s totally new, but we are now going to deliver, obviously, a fridge — a standard fridge to somebody that is going to put it in a vehicle. It’s a different product.

So I mean coming back, Lucie, to what we explained during the Capital Market Day, what we are using is our core competencies. We are good at cooling, we are good at heating, we are good at the steering systems and we are good at air conditioning. There’s a lot of stuff more than we can do based on those competencies.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [24]

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Thank you for the color. Apologies if my question was a bit unclear, but I guess it was more around to understand the strategy you have now on these new outdoor products, because it seems you are positioning them quite a lot on the premium side of things, but at the same time you were also highlighting that a lot of the demand is coming from the millennial community. And obviously, according to a lot of studies, they are the one who are probably going to be the most hit by the aftermath, I would say, of COVID-19. And just to give a simple example, in the U.K. where some of your chairs have retailed at about GBP 80 or GBP 90 versus camping chair elsewhere at about GBP 20, this is quite a big difference. Just trying to understand a bit more the positioning you’re taking versus the trends you’re seeing in the market.

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Juan Vargues, Dometic Group AB (publ) – President & CEO [25]

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Even among millennials, there are people that can afford to buy premium products and there are people that are buying other products. I mean you have a very good example. You follow a company called YETI, you will see that they are attracting millennials and the prices are not low. But they are buying a brand. They are not buying a product, they are buying a brand. And we want people — we want our customers to buy a Dometic brand. That’s why we are communicating more and more to end users. That’s why our website, our digital channels are going to be so important to us. We want to create a brand, not be a part or supplier of another brand.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [26]

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Okay. Very clear. My second question, I was hoping if you could kind of maybe give us some details around the government scheme that you have been kind of subscribing to or accepting. Does that require from you any type of commitment in terms of potential redundancies in the future, plant closure or even dividend payment considering you have taken those government programs in a lot of different places, I guess?

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Stefan Fristedt, Dometic Group AB (publ) – CFO & Executive VP [27]

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No, in the big scheme of things, no.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [28]

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Would you mean in the grand scheme of things?

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

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Yes. We can skip the first half, but we don’t have anything that we — that is going to compromise the plans that we have.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [30]

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Okay. So we’re saying you can take that help without giving any counterpart or without having to give the future any counterpart.

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Stefan Fristedt, Dometic Group AB (publ) – CFO & Executive VP [31]

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Yes. Right.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [32]

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And just also, if we could come back to the refinancing, can you maybe provide us with kind of the updated condition on the refinancing, maybe notably on your covenants as part of the new refinancing deal that you’ve secured?

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Stefan Fristedt, Dometic Group AB (publ) – CFO & Executive VP [33]

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Yes. But I mean that is basically a pure extension of the lines that we have. And the conditions in that is very much following along with our current agreement with the bank group. So if we look — if I give you the average financing cost for our total portfolio now, it’s moving below 3% so — a couple of tenths below 3%. So that’s where we basically stand with the financing portfolio now.

And I mean the reason to do it is to continue to be in a good position to be able to be selectively offensive in all different aspects. I mean we have been talking about we need to — or that we also have developed products. We have new products in the pipeline. We also need to be able to continue with our manufacturing footprint program. And then we also know, even though that may be not exactly where we stand right now, extremely active on the M&A side, but we believe that, that is something that could pick up again later in the year. So it’s — that’s the back of it.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [34]

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And what is your covenant on that existing plan or on that plan again? Is it still around 4x or…

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Stefan Fristedt, Dometic Group AB (publ) – CFO & Executive VP [35]

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This covenant program — I mean as you know, we did amend our financing agreement in April and I mean this new line is basically following along with that. So we have been creating some flexibility for the 4 quarters or up to Q1 next year, and that is basically following along with what we have agreed with the bank group there. We have not exactly disclosed how that looks like. We have only said that we are satisfied, that we have a good level of flexibility, and that’s basically going to be the comment that we have for this one as well.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [36]

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Okay. So you cannot disclose the covenant, the net debt-to-EBITDA covenant, basically?

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

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We are happy. We are happy with the current level that we have. That’s the comment.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [38]

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Okay. But you wouldn’t be giving a number, fair enough. Okay. And just maybe my last question, around the differential in margin between Aftermarket and OE, you made clear during the presentation that you are quite keen to push further the Aftermarket sales. That has been the strategy for a long time. I understand there’s a lot of very different businesses within Aftermarket and also a lot of very different businesses within OE. But are you maybe able to give us on a normalized basis what is kind of the difference — or maybe a range of difference in terms of profitability for the aftermarket versus OE across the portfolio, please?

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Juan Vargues, Dometic Group AB (publ) – President & CEO [39]

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More than double. Aftermarket brings double margins — more than double margin than the OEM side.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [40]

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So would that be kind of suggesting that OE is close to 0?

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Juan Vargues, Dometic Group AB (publ) – President & CEO [41]

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No. Absolutely not. I mean are you looking at the quarter or are you looking at a normal business?

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [42]

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Yes, this is why I was asking on a normalized basis.

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Juan Vargues, Dometic Group AB (publ) – President & CEO [43]

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On a normalized, it will not. So you have a percentage on OEM. What I’m saying is that the margins for the Aftermarket are more than double up (inaudible) on the Aftermarket specifically. That’s different for the Marine. Marine is much more profitable than OE.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [44]

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Yes. But on average, you say it’s more than the double than OE for the group.

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Juan Vargues, Dometic Group AB (publ) – President & CEO [45]

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Yes.

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Operator [46]

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(Operator Instructions) The next question comes from Johan Eliason from Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division – Analyst [47]

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Yes. This is Johan at Kepler Cheuvreux. Just coming back a little bit on sort of staycation and midterm demand, et cetera, going forward. Obviously, right now, that’s a positive and consumers probably have had money to buy new RVs or marine equipment. But global GDP growth looks to take a hit and I expect in a year’s time, the positive mood might be less among the consumers. But I think rentals could still be the bright spot in the midterm. As you point out, instead of taking a packaged trip, they might do a rental back home with an RV or a boat, et cetera. How big share of the sort of end market in your OEM business do you think rental is normally. I’m not saying this quarter, but sort of normally. Is it a 10% of the RV, 5% of Marine or…

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Juan Vargues, Dometic Group AB (publ) – President & CEO [48]

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We believe that it is somewhere between 10% and 12%. Of course, growing…

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Johan Eliason, Kepler Cheuvreux, Research Division – Analyst [49]

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10% and 12%?

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Juan Vargues, Dometic Group AB (publ) – President & CEO [50]

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Yes. Of course, growing in a situation like we are seeing just now. And the question is how will the rental market be influenced over time due to this, because obviously if you are, as somebody said, a millennial and have — feel, so to say, uncertainty about whether you are going to keep your job or not, you’re not going to buy an RV. You will most probably rent an RV instead of going to abroad.

But we believe that on the medium term — I mean, again, I think are very much an uncertainties just now linked to COVID and the fact that there is no vaccine. Once the vaccine is there, we will see what happens.

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Johan Eliason, Kepler Cheuvreux, Research Division – Analyst [51]

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And then just a final question. Raw materials, do you think there will be significant tailwind coming for you in the second half or 2021?

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Juan Vargues, Dometic Group AB (publ) – President & CEO [52]

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If we look at the raw material prices, as far — I mean, normally, there is always a link between growth — market growth and raw material prices. We have seen raw material prices developing in a positive way for us, obviously. And we see the numbers in May and the numbers in June were still positive for us, of course. And now the situation is changing in the last couple of weeks and we will see what happens. But just now, it has been positive for us. So I think even there, COVID will be decisive for what happens with raw material prices. But so far, so good.

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Operator [53]

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Our next question comes from Fredrik Moregard from Pareto Securities.

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Fredrik Moregard, Pareto Securities, Research Division – Analyst [54]

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Just one question on budgeting and product development. You said, Stefan, that you have been cutting some costs with regards to product development, which we also saw in the presentation. Can you tell us something more about what sort of development projects have been postponed? Are you going to accelerate that going forward once markets normalize? And what has the reasoning been in deciding which products you should postpone or which should be continued throughout the crisis?

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Stefan Fristedt, Dometic Group AB (publ) – CFO & Executive VP [55]

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I think that we have, of course, been looking on which trends are the strongest right now, and we have been assured that we have been allocating resources in the best possible way there. But now depending — I mean first of all, we ended better than what we expected in the second quarter. And now we, of course, have to adopt also the investments that we are doing going forward so that we are matching the development. I mean I said that we would like to be selectively offensive. So that is exactly what we are trying to date, that we are harder than usual prioritizing the projects that we have on the table. So we are spending quite a lot of time in managing this process in the best possible way.

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

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So project generation, if you look at our new project generation, it takes somewhere between 2.5 to 3.5 years to launch from the start of the project to the product launch. And of course, you have a pipeline, so you are working on a number of projects. So we are doing just now is obviously pushing through moving forward on the products that we were spending to be — expecting to be launching in the coming 12 months. We have been a little bit more careful, obviously, on the products that are more long term. So that’s a reality. We knew that we had — that we were entering the tunnel and it was very much about reacting fast.

So again, on product development, the cost reduction is not coming from the products that we were intending to be launching in the months to come, but more the ones that come in 2 years from now where we can still catch up, obviously.

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Fredrik Moregard, Pareto Securities, Research Division – Analyst [57]

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Okay. So it’s rather down-prioritizing projects which have a long lead way rather than specific application areas.

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

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Correct.

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Fredrik Moregard, Pareto Securities, Research Division – Analyst [59]

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And on the development side as — well, sorry, I lost my train of thought.

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Juan Vargues, Dometic Group AB (publ) – President & CEO [60]

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No worries.

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Fredrik Moregard, Pareto Securities, Research Division – Analyst [61]

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I’ll have to get back on that one.

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Operator [62]

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Thank you. And I return the conference to the speakers for any closing remarks.

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Juan Vargues, Dometic Group AB (publ) – President & CEO [63]

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Thank you very much, all of you, for your attention. It has been a very tough quarter, but the quarter is over now and I feel very, very proud about the team, the efforts done by everybody. And I would like to thank the entire team for their support, for their commitment. And now we are in Q3 and we will keep fighting to improve our results.

So thank you very much, everybody, and enjoy your holidays.

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Stefan Fristedt, Dometic Group AB (publ) – CFO & Executive VP [64]

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Thank you.

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