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Hello, and welcome to the Dometic Q1 2021 Analyst call. [Operator Instructions] Today, I am pleased to present Juan Vargues, President and CEO; and Stefan Fristedt, CFO. Please begin your meeting.
Hello. Good morning, everybody, and welcome to this presentation of the first quarterly report for 2021. And without any delays, we will move into the presentation.I'm very happy to report a very strong quarter. If we look at the market conditions, market conditions are still very, very strong, and we expect to see that moving forward in the same way. We have an all-time high backlog as a consequence, on one side, of the high consumer demand, and on the other side, the fact that inventories used to be very, very low during the last 12 months since the pandemic broke in. We see all vertical end markets developing in a very positive way, no matter if we are talking about RV or Marine, general outdoor or residential, it looks very promising. Even hospitality, there's still negative but much less negative than it used to be some months ago. So all in all, a very, very strong development from that side.When looking at our own segments, all the segments are performing very well. And we go through the details later on. COVID is clearly having still an effect on our capacity to deliver week-to-week. Even if we see clear improvements, we had issues in general in Americas. Americas is doing very well just now, no major breakouts. On the contrary, we had breakouts -- pandemic breakouts in Europe in February -- beginning of March.And then for us, like for any other industry as well, we are still suffering from freight capacity. And we are still suffering as well from critical components -- of lack of critical components even if I would like to reinforce that we are not, by any means, in the same situation as many other companies in other industries like automotive.When looking at performance, very, very strong. Organic sales growth, 22%. And for sure, the strongest Q1 report, at least since the IPO. Distribution moving strongly, 29%. Service and aftermarket, we are extremely happy about plus 34%, and even OEM developing very nicely, 15% organically. EBIT ending up at 15% versus 10% last year, along with strong improvements in all the segments.We are also extremely happy to see that innovation index continues to develop positively. We are now at 23% versus 18% 1 year ago. As you all know, we have, as a target, 25%, and we are convinced that we are going to pass the 25% already, 2021.And last but not least, we continue to reduce our cost and our complexity. We have been communicating SKU and SKU reductions on a continuous basis. At the end of Q1, we reached 53% lower number of SKUs in comparison to the situation in 2018. So we continue to work on both complexity and reductions.Looking at sales. Total sales ended up 16% up with 22% organic. Currency effect did have a negative impact of 7%, and then we got 1% additionally through the Twin Eagles acquisition that we finished off in February. Very strong EBIT performance, ending up 74% over last year. And we, in my opinion, I'm very, very proud, obviously, of showing a very strong drop-through of 47% in comparison to the performance 1 year ago.EBITDA 54% up. Operating cash flow, obviously impacted negatively by the buildup of inventories that we have just now, in order to be able to deliver the high levels that we expect in Q2 and Q3. Leverage ending up at 2.3x and then also a very strong improvement on EPS being 140% up versus the situation 1 year ago.Then, of course, we need to remember that Q1 2020 was impacted during the last 2 weeks by the breakout of the pandemic across Europe and the U.S.Moving over to sales. Again, I will not repeat the global number, but when looking at the segments, Americas up 26%; EMEA, up 13%; APAC, very strong, 33%; and global up 27%. Now we will give some additional details later on.When looking at the application areas, we have clearly turned the corner. Food and beverage is up 30%. We see climate a little bit lower, 18%, and that's primarily impacted by the market in Europe -- the Marine market in Europe, which is still moving upwards, but not at the pace that the American market has been moving. And at the same time, pandemic breakout that we have in our window factory in Germany. But it's coming back. Backlog is there, it's just a time issue. Power & Control, very, very strong, 29%; and Other Applications at the same level, 27%.When looking at the sales channels. And as you know, this is the first time that we are introducing sales channels in a quarterly report. We are very proud to show the Service and Aftermarket is growing at a very high pace, 34%, but OEM is also running very, very nicely, plus 15%, and that's [ valid in ] all geographies, as well as distribution growing up 29%. So all as all, very, very strong development in all the sales channels.Looking at EBIT. I already commented that we ended up at 15%. And of course, that we see the strong development in all the sales channels having a positive impact, but also the mix. It is clear that we have higher margins, both in distribution and in service that we have on the OEM side, that has a very, very important impact on our EBIT margin evolution. We have pricing. We have as well the tariffs. We continue to work to reduce the tariff impact that we have in Americas and thus developing a positive way for us. And then we have all the remaining cost efficiency activities around the group.On the negative side, it's clear that we still have -- we are suffering from supply constraints even if they are limited, but they are still there. And we still have some outbreaks here and there of COVID, where we need to shut down a line for a number of hours, or a couple of days in some occasions.FX is having a negative impact, and Stefan will come back to that later on. And then last but not least, the very high demand that we have on all markets is leading to higher freight costs, not just delays, but also high cost on freight and raw material prices that have been moving upwards during the last 6, 7 months.Looking at different segments. Americas, a very strong 26% organically with growth in all the application areas. All the vertical markets are moving in a very positive way. Of course, I'm extremely proud to see Distribution almost double up versus last year, as well as the Service and Aftermarket growing at the same levels.We have been commenting the award that we got from automotive in the last couple of years, and we already commented in Q4 that it was starting to kick in. We saw an acceleration as well in Q1. So that's very positive for us. And the backlog remains at a very, very high level.In terms of profitability, a very strong improvement in comparison to Q1 last year, ending up a 7% EBIT, with more or less mirroring exactly the same positives as for the group and the same negatives as for the group, meaning supply constraints, COVID outbreaks, freight costs and raw material prices. A very good effort to compensate the additional cost that is kicking in, with additional pricing as well.Americas showing an organic growth of 13 (sic) [ 26 ]% with growth in all the application areas, but especially strong in Food & Beverage and Climate. Strong development in all the sales channels. I will not repeat myself. So this is valid in reality for all the segments. Strong EBIT improvement, plus 28% or reaching 14.2% and the same drivers as we had for the rest of the segment. So again, I will not repeat myself. But good to see that we are getting a very, very good drop-through in EMEA despite the negative effect that we have on FX.Looking at APAC, extremely strong, 33%. Keep in mind that we had pandemic outbreaks in Australia 3x during 2020 and a very, very strong underlying demand. That's what we see in our numbers. All application areas developing very nicely. All sales channels developing very nicely and an all-time high order backlog to be delivered in the coming months.EBIT at a very, very high level. And in the same way as in Europe, we also suffered from negative FX effects. Underlying, we also have a very positive drop-through in APAC.If we move over to Global, more of the same, very strong, 27%, driven very much by Marine. Here, as you know, we have the new vertical subsegment Residential, which is developing very nicely for us, and where we have the first time some numbers from Twin Eagles showing as well, very nice growth and very nice profitability. And the only negative, in that case, is Hospitality. As I said, it's still negative, but they're starting to creep closer to the same levels as we had 1 year ago.And then Mobile Deliveries, I'm also very happy to report that we have -- we are testing just now our approach with a number of customers around the world, and we should have feedback from these customers in the coming couple of months.EBIT improvement, very strong, 43%. EBIT margin ended up at 20.6%, and then exactly the same drivers as for the rest of the segments. So growth is one parameter, mix is one parameter, efficiency improvements one parameter and then least -- last but not least, pricing also one important parameter.When looking at the strategy, it is clear that we are showing in our numbers really the effects of the strategy that we took in and started to implement in 2019. So we see growth not just in RV, but also in the other vertical segments and in the other vertical -- the other sales channels. We see obviously a strong underlying consumer demand, which is driving just now the businesses.Twin Eagles, a stepping stone for us to grow in the Residential arena. And we also implemented the new software -- the new B2C software in the U.S. and saw very nice results during the first 2 months that we have been running.On the product leadership, I already commented and it ended up at 23%. We have a very nice pipeline of new products to be launched during the coming 12 months. And we will see more of that in future quarters.On the cost reductions, more of the same: keep reducing complexity, keep working on our cost. And of course, as you know, we are running the MFP program, and I will come back to that in a few minutes from now.One of the targets we have is to become much more consumer-orientated. And what we can see on the screen is really that we are driving traffic to our website. That we have a continuous growth of the numbers. And our ambition is obviously to convert many of these visits into businesses in our B2C channel, but very, very nice development during the last couple of years.The same is valid on social media, where we are investing all over the world, and where we see also very nice evolution. We used to have a very strong position on Facebook, now we are growing as well especially in Instagram and LinkedIn.On the outdoor area, which is one of our major emphasis in the future to come, we are growing our presence in more and more doors -- or stores, as you prefer, around the world. We are today present in more than 4,000 stores worldwide, growing heavily, both organically, but also growing through the work that we are doing on acquisitions. So Twin Eagles brought in another 400 retailers -- new retailers into the group. We're also growing on the e-tailer channel, adding new e-tailers. And as I already mentioned before, we implemented a domestic B2C channel in the U.S. We are just now implementing exactly the same package in the Pacific area, and we will do the same in EMEA during the second half of this year.Extremely pleasing, obviously, that -- to see that all the efforts that we are doing to build up the outdoor market is really paying off. Very happy to see this award bring recognition [Audio Gap] On Residential, another of the main focuses moving forward, we introduced the Dometic MoBar in Q4 to the market, started sales in Q4, fantastic evolution during Q1. We believe that this product is going to contribute quite a bit in the coming couple of years. You can see as well that we are getting very, very nice design awards for this product and bringing a lot of attention from media. And if the introduction of MoBar was really the first major step into Residential, the second major step is really the acquisition of Twin Eagles. So all of a sudden we have a pretty broad portfolio for patio applications in Americas. Next step is to emulate that in Europe and in the Pacific area.Service and Aftermarket, another of our focus areas, very nice evolution after Q1, but we have seen a very, very positive evolution now for 3 quarters in a row, as a consequence of all the efforts that we are doing. We have a huge network around the world, 35,000 partners. We are driving centrally a project to really create a new ecosystem to grow service all over the world. It is also clear that our growth on electronics, Power & Control, is going to drive service moving forward. The more electronic we include in our products, the more aftermarket, we are talking about shorter product cycles and higher margins.We have also hired a new product management for Service to develop the service area. We never had a product manager for service, was always part of the different products. And of course, M&A acquisitions will play a crucial role. And it is really in this context that I would like to introduce Valterra, an American company having a strong position on the service and aftermarket business in the U.S., focusing primarily on the RV business, but also doing CPV and starting to look at Marine as well. That's part of the business. The second part of the business is really solar and energy saving driving applications, an area that is going to be crucial for our future. The more we talk about electrification moving forward, no matter if we are talking about automotive or if we are talking about Marine, the more you will need to have these kind of solutions in your vehicles. The same is pretty much [ about ] electronics, it's shorter [growth ] cycles and will drive our service additionally moving forward.The company reached USD 94 million last year. Showed enormous stability in the numbers in 2018 and 2019, when, as you know, the RV industry -- American RV industry was shrinking quite a bit. 2/3 of the revenues is pure service and aftermarket and a good profitability level, and we expect to close this acquisition during Q4 -- Q2, sorry, this year.Moving to products. We launched the first series of drinkware products to the market. This is also one more step to supply the market with so-called low ticket -- not low margins, low tickets -- high-quality products. We have seen a very, very good acceptance in the market and it is early days, obviously, but the last couple of weeks in March, we started to show sales in a number of markets. So happy to say that we are getting there.Another series of outdoor products is our new series of tents, bringing in also a number of new features that we are introducing globally from March this year as well.We have the intention to be the driving force in sustainability in our -- in the industries where we participate. We are implementing sustainability in all our processes in the day-to-day business. We are committed to be leading these efforts, as I said, in our industry. And as a consequence of that, we are committing Dometic to reduce the CO2 emissions by 50% by 2030. If we look at the first quarter, we reduced 3% in comparison to sales, in comparison to the same period of last year.We have also included sustainability targets in our long-term incentive programs for senior managers. And as I said, we are raising the bar. That's in reality what we are doing. When looking at the 4 KPIs that we are going to be reporting quarterly to the markets, injuries is coming down heavily. We have reduced the number of injuries by 30% from Q1 2020 to Q1 2021. We are on 24% of female managers, something that we are not very happy about, and we have a number of initiatives to increase that number to our targets.On SEC audits, we are also improving heavily. We were at 75% 1 year ago, we are at 84% after Q1 this year and we will be reaching 90% at the end of the year. And then as I mentioned previously, we have a reduction of 3% on CO2 emissions in comparison to Q1 last year.Moving over to the restructuring program. No locations or employees were affected in Q1. We took another SEK 10 million in the quarter as cost -- restructuring cost. We are working very, very hard. We are building up our local sourcing organizations. We are building up our supplier network in new countries. And obviously, the fact that we still cannot travel is delaying our process. We still stick to our targets that we have communicated. We communicated already at the end of Q4 that we see a delay of 2 to 3 quarters before we see the expected effects of SEK 400 million in annual savings. And we will, of course, as soon as the vaccination is all over the globe, and we can start traveling, we will accelerate the program as much as we ever can.And with that, I would like to hand it over to Stefan. Stefan, please?
Thank you, Juan. So I move directly into the net sales and EBIT bridge, which I hope you will find useful. So if we start from Q1 2020, we see that in Q1 2021, we have had negative currency effects impacting SEK 303 million on net sales and SEK 94 million on EBIT before items affecting comparability, so quite significant effect. They have been leveling off slightly during the end of the quarter.M&A is related to Twin Eagle, and it's related to, let's say, a long month of Twin Eagle operations since we took over the company. And as you can see, it's a company delivering nice profitability here, with above 24% EBIT before items affecting comparability.Then we have the third column related to volume, price, mix, cost and other. Some color to that. First of all, all segments have been contributing positively to this development, all 4 segments. It's related to leverage from organic sales growth, it's leverage you will find in overhead structures included in cost of goods sold, but certainly also overhead structures in SG&A, including R&D.Then we have had a favorable sales mix. As you have heard, where Service and Aftermarket has been growing 34%, distribution with 29% and OEM with 15%. So that creates a positive sales channel mix.Tariffs continues to come down according to plan. So SEK 21 million lower than the same period last year. Then we have 2 effects that we need to look on in combination. First of all we have, yes, significant increases in raw material and also in freight and transportation cost. That's approximately SEK 80 million combined. And a majority of that has been able to be offset by price increases from our side. So we are happy with the performance of that so far in Q1. It's something that we will need to keep a very close control over going forward, to see if something additionally needs to be done there.So with that, I'm moving over to operating cash flow. And as you know, Q1 is normally not a very strong cash flow quarter for us. And despite an underlying strong development in the EBITDA profitability, we see more or less 0 in operating cash flow, and that's completely related to working capital development.So I will flip slide here, so we can take a look on the different components in the working capital. So starting on the bottom left chart, DIO, we see that the inventory levels is up to 118 days, and that is very much driven by, first of all, a ramp-up for us to be able to, yes, meet the delivery performance that we need to see. But another very important part of this is lead times. We have more or less doubled the goods in transit, which means inventory sitting somewhere on the ocean or in a railway wagon somewhere. So that's very, very significant.Moving up to the top right, DSO. We see an uptick, 57 days as we are exiting Q1 here. And that's very much mix-driven, as Service and Aftermarket, especially, is growing faster than OEM. We see typically longer payment terms for these customer categories.Moving up to the left top chart, it's DPO. And there we also see a nice development. We are up to 72 days. And that's the result of that we have really focused on improving that, and also working with bank promissory notes in China has significantly helped up this number.Going over to the next, where we have a summary of our cash flow for the period and working capital I've already been talking to. Just to give you some highlights on the taxes paid. That includes the majority of the settlement with a foreign tax authority, and that's SEK 603 million of the SEK 685 million. And then the difference, excluding that settlement, is then purely related to timing.Then on the row Acquisitions and divestments, that's SEK 505 million. That is completely related to the acquisition of Twin Eagle. And then the last row to comment on is net cash flow from financing, where we did pay back the SEK bond of SEK 1 billion in February.Moving over to CapEx and research and development costs. You can see that CapEx for the first quarter has returned back to levels that we have seen in the past. Two areas where we have -- want to highlight in the CapEx. It's on the one side on IT, and Juan has already talked about the B2C solution, which has been implemented in Americas and continue to roll out. So that's one component to highlight. And then it's also investments to bring new products into production and thereby market launch.Looking on the bottom chart, it's R&D expenses, including capitalized R&D. It's on 2.2%. So we continue to invest in R&D and product development. And we also see that showing up in the Innovation Index, as Juan mentioned before, is now on 23%.Moving on to the debt maturity profile and leverage. Yes, the only change in the debt maturity profile is that we have repaid the SEK bond, as I mentioned before, of SEK 1 billion. And then for your information, there is also an undrawn revolving credit facility of EUR 200 million.Looking on our net debt leverage. It ended up on 2.3x in Q1, and that's slightly up compared to Q4, and that's driven by 2 things. It's the acquisition of Twin Eagle and it's the settlement of the foreign tax dispute.So with that, Juan, I hand back to you to some concluding comments.
Thank you, Stefan. So summing up, a record start to the year with very strong sales growth, 22%; very high order backlog. We see an underlying strong consumer demand that will drive the business moving forward as well. We are very optimistic about the quarters to come based on that consumer demand. And we have a strong performance having a very, very nice drop-through on our growth.Strategically, we keep up the same pace. I'm extremely happy to see that our organization is driving change faster and faster now. We see the effects on our performance. Innovation is up, continues to go up. We see also our Service and Aftermarket is having a positive effect on our numbers. It is clear that we are also starting to see the acquisitions coming through. We have been working for 2 years building up the organization, building up the pipeline. It is there, will continue. And then last but not least, we intend, obviously, to finance a lot of the acquisitions with better performance moving forward.And with all that said, I would like to open for the Q&A session.
[Operator Instructions] The first question comes from the line of Agnieszka Vilela from Nordea.
I have 2 questions. Starting with the slide you showed, I think it was Slide #7, showing the progression in sales for different sales channels. I was actually a bit surprised seeing the OEM business being still quite depressed, looking at the last 12 months sales progression is still some SEK 2 billion behind where you were previously. So -- and then when I look at some RV producers, for example, in the U.S., they are already back at the old levels. So can you explain what's happening there? And also when do you expect this business to recover?
Well, you have 2 things. You have obviously delays between -- that we have been discussing for a couple of quarters. You have [ 1 ] site registrations, you have wholesalers, you have manufacturers and all of them are keeping inventories and then you have us. We see Americas coming through. We see EMEA starting to build up. We saw in our numbers that we were performing -- our sales were higher than [ previously ] announced in the last few months. So that's a good indication, and we see that the backlog is growing in EMEA big-time. We have a high backlog in the U.S., and we continue the improvements, and we see the same situation. So it's impossible to me to say why Winnebago is showing 34, 35 and we are showing what we are showing. What I can say is that we are catching up and that we don't feel that it is nothing strange by that. That's one.The second one is obviously that we have a supply and demand situation. And in a situation like that, it is important as well that we don't run and sell everything we can through low prices. So we are, of course, a little bit selective here and there. And that will continue moving forward.
Yes. So basically, a timing effect and these inventory swings that affected your demand and then your kind of choice of the customers?
Yes, absolutely, which is not new. I mean, this is what we introduced in connection to the Capital Market Day.
Yes. That's correct. And then a second question, if you could help us with thinking about modeling Q2, maybe? I mean, it's getting a bit more challenging, given that comparisons are very different this time and you lost a lot of sales last year. Does it make sense in your opinion to look what's happened in 2019 between Q1 and Q2 and kind of assume similar performance, and even maybe a bit better given the strong demand that you see right now?
I think 2019 is definitely a good reference. 2020, I agree with you, it's very difficult, very difficult to compare with. Even though you have timing issues [Technical Difficulty] [ and you connect one and all the stable other one ] different timing. So I would look at 2019 as a good reference.
Yes. And then assume a similar kind of absolute change in sales, or a bit better given the demand. And then also, maybe a follow-up -- a quick follow-up on that. You mentioned the CPV business, the Americas, can you please...
Yes. Go ahead, sorry. I'll listen.
Can you just quantify the potential coming from these contracts in Americas as well for the year?
Yes. So at this point, our expectation in North America is that we will be ending up this year at around USD 25 million. And then the other comment I wanted to make, as you were talking, is really that it is important, Agnieszka, to get some more understanding for different vertical markets where we are in. I still feel that there's a lot of attention into RV, but we are not just on RV. As a matter of fact, if you look at the growth, we have much higher growth in many other segments, which means the mix a little bit difficult to grasp, obviously. So you have different applications, and you have different regions. And then on top of that, you have different end markets.
Yes. Understood. And just a clarification, the USD 25 million, that's the kind of incremental sales that you expect to get in 2021?
That's total effects. So you...
From the new contracts or from the olds?
Yes.
Yes. Okay.
From the new contracts. But keep in mind that we had many contracts 2 years ago.
The next question comes from the line of Gustav Hageus from SEB.
Two questions then I'll limit myself to. Firstly, so the longer-term perspective, you mentioned there you have 4,000 doors now with your products. On a global basis, I recognize your Swedish peer that reported yesterday, they have 35,000 doors currently. So that makes you think if there's substantial upside here to that number, if you really have to focus here. Could you talk a little bit about that, Juan? Is it comparable, could you sort of 10x -- go 10x number of doors, and what would that do then to your sales and also -- or do you maybe think that Dometic is more of a B2C or a -- going with global online retailers and it's not really relevant or -- and also if you can put a little in perspective of time span, if you think it's possible, what type of time span that we're talking about before you start to close up?
I think, I mean, obviously, Dometic historically has been extremely OEM-orientated. We put together strategy 2 years ago, and we are implementing the strategy. It is impossible to me to tell you today that we are going to be 35,000 or 40,000, and when. What we have the clarity upon is that we want to see those numbers doubling store-wise. And that we are accelerating. We are adding resources. We are launching new products, and then we have a very clear intention to spend time and money building up those channels. So I see -- and this is why we are also starting to report OEM, distribution and aftermarket. So if we are talking about doors, so we are talking about stores, that's very much about outdoor. Keep in mind, we open up for residential. We just started on residential. We have been growing now, Twin Eagles gave us immediately 400 new retailers. So I think the first target, I will be surprised if we cannot double the number of doors in the coming 3, 4 years. And then we will double again. B2C is going to be an important channel for us. But of course, that if you compare ourselves with Yeti, Yeti is basically 1 product, 1 channel, they are today on 50%. We are starting B2C. We are just now after implementation in the U.S., we are kind of running at 2%, if you forget the OEM. The rest of our sales on distribution aftermarket, 2% is coming from B2C. And we have just implemented the new B2C channel. So even there, we have great expectations. So we are moving from being 1 unique channel company to a very high extent, to a multichannel company, which is, I do believe the future. I think more and more companies will realize that you need to be on multichannel.
Yes. Okay. If I can have 1 more question, I'd like to ask if there's an impact in Q1 already from this rather large launch you have within air conditioners, as I understand it this year, or is that mainly coming into Q2, if that -- if you think that's a driver to price/mix going forward?
It is coming step wise. It's the same. I mean when you are launching a product, you are launching a new product which is replacing a new product, you will not get full effect the first month. It's coming through the entire year.
But when was the first month? Was that January? Or is that now?
Sorry, say it again?
When did you launch it?
We started to launch in February.
The next question comes from the line of Daniel Schmidt from Danske Bank.
Juan and Stefan, 2 questions from me then. Could you give us any guidance in terms of what you think about the mix going forward? Of course, you saw sort of the aftermarket being very strong in Q1. And that, of course, impacted your profitability a bit. Should we see sort of an even more even trend in the coming quarters? Or what do you expect?
My expectation is that we will see OEM coming up, but we will still see a strong service and distribution areas moving up. So I think that the gap is not going to be as big as we saw in Q1, but will still be a gap, positive to higher-margin business.
And historically, Q2 and Q3 is strong aftermarket quarters.
Yes. So still a gap, but maybe a bit less so. Do you think that this bit of a less of a gap could be compensated by more savings coming through in the program?
Of course, that we are working towards the targets. When you have efficiency gains, it's a little bit the same. You don't get everything in one go. You are implementing different activities in different countries, in different segments. So it takes a while before you get full effect. But I mean, if you look at our numbers, of course, that you see a very positive effect just now, Daniel. But it has always been a positive effect. The problem has been, obviously, that we were shrinking our volumes. So as soon as you get some growth, you get an underlying pretty hefty improvement, which is what you see in our numbers. So we will keep working on our efficiency gains. We are not done by any means. We will keep working on our pricing, so we don't get hit by raw material prices or freight costs and so forth.
Daniel, keep in mind that as we communicated last quarter, we are 2 to 3 quarters late on the program that we launched in Q3 2019 due to the COVID situation where we cannot travel.
Yes. Sure. No [ but I can see ]...
Yes. Something positive perhaps to mention as well, is what we see on the tariffs that despite the fact that Americas is growing heavily, we are improving on the targets in comparison to 1 year. So that's telling you, obviously, that when you're running a new factory, it takes a while before you get full efficiency.
That was some start-up cost.
Yes. Good. And then my second question, Stefan and Juan, regarding the acquisition yesterday, could you -- you're saying good margins, could you say anything about if it's at the group average or above or a bit below? Or how do you sort of -- could you give us any guidance on that -- and any guidance if there's any synergies to be extracted from this acquisition?
Daniel, we can say that on a stand-alone basis, it's slightly better margins than the group average, slightly better.
Yes. And synergies going forward?
Yes. There -- I mean, we expect synergies from a sourcing perspective. We expect synergies from a sales perspective, clearly. We are huge in aftermarket. This company is huge in aftermarket. Together, we should be able to do a little bit more, but the same. I mean, we are not calculating massive synergies in 1 quarter from now. They are coming time after time. The company is doing well. So you don't want to get into the company and start moving things around. And then losing part of the management. So as you know, both Stefan and myself have been working on acquisitions for many, many years. You will see improvements, but you will see them over time.
And the demand situation for Valterra is, of course, similar to what we see in our own business.
Yes. And sorry for having a sub-question more here. Is it a similar price tag as what you paid for Twin Eagles?
We can say that we have been paying multiples for this company, which is significantly below our own valuation. And more than that, we will not comment on.
The next question comes from the line of Fredrik Moregard from Pareto Securities.
First off, a question on EMEA. I appreciate the comments that you made with regards to the breakouts that you had in Germany, perhaps disrupting your operations with sales as well. I mean, at the same time, there's also been some sort of lockdowns in the markets, some motor home dealerships being closed. What sort of impact do you think you've seen from that? And is it possible that Q1 sort of -- is depressed from that and thereby under the -- below the underlying trend in the market?
Yes. I mean, if we look at EMEA, it's clear, as it usually is, right? I mean, you have -- when you're comparing American market and the European market, Americas is always much, much faster-reacting, on the way down and on the way up. And what we see in EMEA. I mean, in EMEA, we didn't see -- even if we were getting the same registration numbers as you were looking at. We saw Germany. We saw many markets, and the total number of registrations 2020 reached 20%, right? At the same time, the manufacturing numbers, the numbers produced by our customers were 6% down in comparison to 2019. So you have a hefty delay between registrations and manufacturing. We saw the first indications of growing volumes in reality at the beginning of November. At the beginning of November, customers started -- I'm not talking about all the customers, some customers, started to place orders in November. So we -- I expect to see an acceleration of the growth in Europe in the quarters to come. So -- and the backlog is much, much higher now than it was just 2 months ago.
Sure. Then a follow-up on the previous question on Valterra. Clearly, I mean, it seems to be sort of technologically complex products in the power segment. At the same time, you've been launching the drinkware category that you've been developing organically the way I understand it. Could you perhaps just tell us something about your line of thinking as to what extensions or expansions you plan to do organically? And where you think M&A is a crucial part of the journey going forward?
I think, Fredrik, that it is not this or that, is this and that. You cannot just wait for the perfect acquisition in order to get into a new market. You need to learn a market. And the best way of learning a market is to become part of the market. But if you really want to get critical mass, that's where acquisitions are coming in. So in the same way as we developed MoBar, and that was fully organic, right, we acquired Twin Eagle because all of a sudden, we have a product portfolio, but we are also getting access to an existing distribution channel through Twin Eagle. So I think you will see both. If we are looking at outdoor, the fact that we are introducing drinkware or that we are introducing more products on the outdoor business, doesn't mean that we are not going to do acquisitions on outdoor companies. We will. The fact that we are working with Power and electronics, you can find the numbers in our report, doesn't mean that we are not going to acquire companies doing electronics.We will accelerate those. Electronics for us is crucial for the future. Again, electrification is going to have a major impact on our industries, and we want to be part of that. On top, electronics drives service. The level of service on electronic products, when you have product cycles of 5, 6 years, in comparison to mechanical products where you have product cycles of 15 to 20 years, you cannot even compare. So strategically extremely important that we increase our growth in power, control, energy saving businesses.
Sure. I appreciate that it will be a combination of organic initiatives and M&A. I was basically thinking about if there's any specific way you're thinking about prioritizing M&A or organic initiatives in any specific categories. But the way you said is that it will be fairly opportunistic.
Well, no, no, that's not what I said. What I said is that if you have 2 companies at the same time, I mean, you're working with a pipeline. And normally, in your pipeline, you have 40, 50 companies that you are talking to. And all those 40, 50 companies are interesting. Keep in mind that what we did in the last couple of years is really to build up an M&A organization. We are not waiting any longer for sellers. We are building up relationships, and we are working with companies. Then, of course, if 2 companies equally important to us are to sell at exactly the same period, then you need to have a priority, and that will depend on our market position. Of course, if we have 25% of the market, and we can acquire company delivering EBIT numbers of 14%, and we have another company in another vertical market delivering 10%, then, of course, we will shoot for the 14% company. But if the 14% company is not there, then it is equally important to get the 10% company when we have the opportunities, when we have the synergies. So again, I will not say that this is opportunistic. Opportunistic is to my extent, when you are buying something in one continent opportunistically simply because somebody wants to sell, but you have no intention of building up a global business. Anything we are doing today is to try to build up global businesses. Without critical mass, you will not get the synergies. Without critical mass, you will not elevate your EBIT margins. No, that I think that, that's the other way around. We -- I think Dometic historically has been very opportunistic. We want to sight before we shoot. But there are a number of targets. You can hunt moose and you can hunt rabbits. Normally, not the same day.
And not with the same gun.
And not with the same gun, yes.
Sure. Sure. Yes, I was mainly thinking about whether or not you are going to do that organically or through M&A for specific category, but I think I understand your answer.
It's both. Again, a way -- it's difficult to buy companies in a new market if you are not part of the market. You need to be able to judge, where are the synergies. How could you possibly calculate any synergies if you are not part of that?
The next line comes from the line of Johan Brown from ABG Sundal Collier.
Just -- you touched on it just now a bit, but I was wondering if you can put -- I mean, you've commented on the M&A pipeline being very large lately, and we've seen some activity as well. So I was just wondering if you could put the pipeline in a historical perspective, how many targets are we looking at currently? And how has it looked if we compare it to historically?
May you can mostly probably multiply by 10.
Next question comes from the line of Viktor Trollsten from DNB.
Juan and Stefan. Firstly, just on your pricing strategy, I think very impressive work to compensate for raw materials and freight costs in the quarter, judging from the gross margin development. Could you just comment a bit on the outlook for raw materials and freight costs going forward, given that on a year-over-year basis, I think that imported raw materials will be a heftier headwind for you. Are you still confident that you can defend gross margins going forward also?
Yes. I think when we look on the 2 components that you are talking about, I think we see that the increases are maybe not increasing in the same pace as they did in the beginning of the year. If that's going to be the end, we have to see, but we are following this very, very closely. So I think from that point of view, the measures we have taken so far to mitigate that with our own price increases, we are satisfied. But if things would accelerate again, then obviously we have to take a new view on that and maybe adjust the prices a second time. On the freight situation, I think it looks like maybe that's going to take a little bit longer to get the capacity situation under control, in relation to what we thought in the beginning of the year. But there, we are working with surcharges and so on, so that it's clear for our customers, from that point of view, what it is related to. So I think we have found a good structure on how to handle this and also be transparent to our customers what it is related to. So it's something that we follow every week, that's for sure.
Okay. That's a clear answer. And then just a quick follow-up on that, just in terms of the pricing strategy, given that the Innovation Index increases in a very good pace and stuff like that. I'm just thinking that -- do the pricing increases that you do just to compensate for raw mats, that sort of disturb the additional price you can take, so to speak, as a growing component.
No, that's a separate work stream, if you want. But it is like you say, if you have a high Innovation index, I mean, then you always have something new to talk to the customers about: new functionality, new features and so on, so you can have a value-based discussion with the customers based upon that.
I mean, whenever we are producing a new product, no matter if it is a totally new product or it is a replacement for an old product, we have 2 very, very clear targets: one, to increase prices; two, to reduce cost. And this is across the entire tollgate process. We have a clear process to drive product development. And already in the early days, we have a very, very clear cost target, and we have a clear price target.
That's very clear. And secondly, and maybe more conceptually, so to speak, on the M&A side, now a third interesting acquisition with margins at or above Dometic group level, steadily the way I see it. Given that your margin target includes dilutive acquisitions, does the sort of, I'll call it really focused M&A agenda leave an upside to that target in, I'll call it, the mid-to-long term? Or how should we think about that?
I think you should think, as soon as we are in the window of 16 to 17, we will get back to you. We are just as keen as you are in making even more money.
The next question comes from the line of [ Luba Dennecke ] from [ Battenhall ]. Can you hear us? Can you go ahead with your question please [ Luba Dena ]? No problem. Next question comes from the line of Gustav Hagéus from SEB.
Thank you. My questions all have been answered.
The next question comes from the line of Rizk Maidi from Jefferies.
So I'll start one at a time. So firstly, Juan, maybe just a big picture question. Given that your European RV customers' production has been sort of lagging registrations. Do you see any issues around the European RV players in adding capacity? Is this a capacity issue? Or you think that they're just sort of late at putting through the orders?
I think it's just timing. I mean, when talking to the different customers, they are pretty bullish about 2021. They are bullish about 2022. So I think it's just a timing issue.
Understood. The second one that I had is on the raw mat and freight, and perhaps I got this number wrong. But I think Stefan, you mentioned SEK 80 million sort of headwind in the quarter. How should we think about that in the second quarter and the remainder of the year, as raw material headwinds are actually going to increase? And then secondly, on pricing, you said the majority of that SEK 80 million recovered through price increases. But I guess that's 1.5% roughly pricing? Is that the same number that we should expect for the remainder of this year?
Yes. But I think what you should -- how we should think around this in relation to net sales, at least for Q2, you should assume around the same level, maybe slightly increasing on the raw material side. But then you should also expect pricing to also kick in to a higher rate. Because there is -- for some customer categories, there is always a certain delay, so due to contract situation, et cetera. So I think the net effect of it, you should maybe keep around the same.
Okay. Understood. And then lastly just on the mix -- sorry?
No, for Q2. So we have to watch this going forward, obviously, for the coming quarters, but that was a comment related to Q2.
Okay. And then lastly, just I was wondering whether you could elaborate on the mix in your current backlog from distribution and aftermarket? Sorry, I got kicked out of the call earlier, maybe you've tackled this. But just how should we think about the mix between aftermarket and OE in coming quarters?
So you have -- I would say that 75% of the backlog is OEM orientated. The aftermarket and distribution have shorter lead time cycles. If something happens to your product, you want to fix it here and now. There is no time to wait.
Okay. Juan, were you surprised by the higher mix of service and distribution in the first quarter?
No, because we have seen it now for another 2 quarters. So this is the third quarter. I mean if you look at our profitability, it has been -- I mean you see just now because you're comparing with Q1 last year that was even lower. But if you compare Q4 2020 with Q4 2019, you have a clear underlying EBIT improvement. If you look at Q3 versus Q3 2019, you see a clear EBIT improvement. So I don't think of this as a one-off by any means. I think this is the consequence of a lot of activities that we have been driving now for a couple of years. The difference is obviously that when you have -- when you move from losing 8%, 9% of your top line, to gaining instead, you have a fantastic dropthrough.
But keep in mind, there is a natural cycle over the year, obviously, Q2 and Q3, is more service and aftermarket-related. But that's, of course, what we are working on trying to...
And that's totally correct.
Even out a little bit, but you still need to keep that a little bit in mind, obviously.
So this is one of the reasons why we are getting questions about why manufacturers are showing some numbers, and we show some other numbers, is that manufacturers, they are trying to level out the manufacturing. That's why they are building up inventories in the backyard, while we -- and that's much more even, so to say, than the Service and Aftermarket. The Service and Aftermarket, you have a very, very clear difference between Q2, Q3 and Q1, Q4. Q2, Q3 is very, very high season. And Q1, Q4 are low from a Service and Aftermarket perspective. The underlying growth is there, and we have seen that growth there now for 3 quarters.
We have come to the end of the Q&A, so I will pass back for any closing comments.
Well, I would like to thank all of you for your attention, and just ending up by giving big, big thanks to my organization. It is tough times. One year ago, it was very much about the pandemic. It was very much about shutting down capacity. Now it is very much about being able to deliver despite all the disturbances that we have with pandemic breakouts, with freight delays and so forth. I'm extremely proud of what we are doing. I think that this organization is showing that we can increase the speed, then we are moving faster. And that we have a great future in front of us. So thank you very much, all of you.
Thank you very much.
Thank you for attending. You may now disconnect your lines.