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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the Dometic Q2 Report 2018. Today, I'm pleased to present Juan Vargues, President and CEO; Per-Arne Blomquist, CFO; and Johan Lundin, Head of Investor Relations and Communications. [Operator Instructions] Speakers, please begin.
Hi. Good morning. This is Juan Vargues speaking, and welcome to this web conference from a very sunny and hot Stockholm, which don't happen very often. We'll start with highlights for Q2. I have to say that we have a very solid performance with a very good organic growth, starting with Americas, all with 2 digits, but also very good growth in the EMEA region and APAC. Aftermarket did show a positive growth of 7% to 8%, especially in the RV and CPV areas. And we have to keep in mind here that we had a week in April where we compensated by strong months in May and June. The RV demand remains positive in most key markets and strong in North America markets. And then we have the -- as you all know, we have been investing in building up our segments, especially in North America, in various retail and CPV. We saw very strong results there as well.I'm also very happy to see EBIT improvements in all the regions as a consequence of pricing activities but also higher efficiency in most of the organizations. And I'm especially happy to see, obviously, a strong results in EMEA region since we have to remember that we had a weaker first half of last year that we have now kind of developed into the positive, and we have seen a solid development in the last 2 quarters. Strong operating cash flow as well. Very important for us and the future is that we appointed a new head of group operations that will be joining us later this fall. If we move over to the financial summary. Strong total growth of 33% with 9% organic growth, 3 percentage points of FX influence, and then 21% for M&A. EBIT improved by 41% to SEK 991 million (sic) [ SEK 919 million ]. We had EBIT margin of 17.5%, which is 100 basis points higher than what we were showing 1 year ago. I mentioned before, efficiency improvements. As you all know, we introduced an efficiency program in EMEA, which is kicking in, but we're also working very hard in the rest of the regions to keep up, obviously, with the headwinds that we have seen, especially on raw material prices. Operation -- operational cash flow, 65% up in the quarter, ending up at SEK 943 million, and a good evolution on the EPS, improving by 33% to SEK 2.13. If we look at the first half year results, it is approximately the same trends, so 31% in total growth with exactly the same organic growth, 9%; a slightly lower FX effect of 1%; and 21% coming from acquisitions. And in this case, we are talking specifically on the SeaStar acquisition. Same positive trend on EBIT, showing plus 46% and passing the SEK 1.5 billion, or 16% in EBIT margin, which is 160 basis points better than what we were showing 1 year ago and as a result, obviously, of activities that I mentioned previously as well. Very good operational cash flow as well, plus 74% after 6 months, ending up at SEK 916 million. And as a consequence, very strong EPS development, 30% up, ending up at SEK 3.39. If we look on a medium-term perspective, of what happened since Q2 2016, we have been showing a solid organic growth, giving us a quarterly average of 10%, which I think is a very good number considering the market situation. Still market [indiscernible].If we look at the EBIT evolution over time, we have also seen in the last 4 quarters a pretty good development. We have improved in rolling 12 months, 160 basis points. We have 100 basis points improvements in the quarter and 160 basis points year-to-date. So all as all, I'm very pleased with evolution during the last 6 months. Moving over to the market situation, specifically the RV market that obviously, we are very much aware is a point of concern for the market. The reality is that Dometic has continued to see a good growth in RV [ win ], especially in the U.S. where we showed 15% growth. When looking at 12 months' running numbers, shipments are up 16% in the U.S., registrations are up 11% in EMEA region and production is up 3% in Australia. When looking at the latest 3 months, we saw, though, a slower growth with RV shipments being up 6% in the U.S., RV registrations up 3% in the larger markets in Europe and the RV production down 4% in Australia. In May, RV shipments were down 3% in the U.S. We do believe that this need to be seen in the context of a prolonged and unusually cold winter, going on until mid-April in many places. Naturally, this had a softening effect on retail demand, and we noted some dealer inventory levels being somewhat higher than usual as shipments remained high in Q1. Even in April, shipments to dealers grew 12% year-on-year. So perhaps it was not surprising to see a correction of dealer inventory levels taking place in May. Having said that, we saw again a positive evolution in June and our RV OEM business grew close to double digit in the month. And when looking at July, it also looks positive. The same situations we observed in the U.S. market, we saw in Germany with registrations of RV being flat in May and coming back nicely in June by 9%, both for caravans and motorhomes. If we look at the heavy truck market, it had been flattish for a while across Europe, at the same time as we have seen high [ 2D ] growth in EMEA region. When looking at Americas, we see as well the market is growing. And even there, we have [ 2D ] growth ourselves as a consequence of investments that we have started in this area some months ago and they are starting to pay off. When looking at Marine, the growth on the market is still positive, 2%, and we are outperforming the market, both in EMEA and Americas. And I believe that it is important to remember here that at the time of the acquisition, we were mentioning the shift, the technology shift that the industry is going through moving from mechanical products to hydraulic and electronic, which is giving us an extra growth in comparison to the markets. Obviously, we see tariffs that will be implemented in EMEA, but still we need to see what kind of effect we are going to see. We don't have a lot of traffic in reality from the U.S. boats into the European market from our side. If we look at some of the most important marketing activities that have taken place during the second quarter, we have been investing in the digital area. Our organization is selling through distributors and dealers, and we believe that we need to use new technology in order to pay it forward and support our partners. We have seen a very, very high growth in number of visitors to our websites. America is up close to 60%; EMEA, 50%; and APAC, 120%. And we foresee this evolution to be maintained moving forward. At the same time, we are also introducing e-commerce. During the quarter, we launched a new platform in the U.S. market to push even more for our development in the area of the Mobile Cooling. And we are just now running at SEK 1 million in sales through the new digital platform, which is about 70% higher than what we saw 1 year ago. We're also trying to get closer to the end users. Our end users, since we believe that they are great influencers for our products, we launched an ambassador program that has been a great success. It's attracting a lot of visitors to the social media. And we perceive ourselves to be market leading in this area. We have today over 320,000 followers on Facebook or 81% more than we had 1 year ago, and it is growing all the time. We have about 1.5 million followers -- sorry, visitors every month and continues to grow. So again, a very important area for us to develop even more. When looking at products, another area where we are accelerating innovation, we have 3 major product launches. We launched a new refrigeration program in the European region, which is innovative since it's a double-hinged door, meaning that you can open in both directions. At the same time, the main benefit is that this is the best-in-class cooling performance unit in the market. We also introduced a new program of awnings for the American markets, which is going to offer our customers a substantial weight reduction. And then last, but not least, as a consequence of the Oceanair acquisition that we completed about 18 months ago, we also introduced a new range of automatic blinds, which are offering much lower noise levels and improved darkening features. After looking at some of the most important activities on the marketplace, I would like to get back to the different regions with Americas showing consistent organic growth of 11% in the month -- sorry, in the quarter, with a very, very strong RV OEM development. I mentioned the number previously, 15%. SeaStar performing according to plan, but much better than the market as such. And as a consequence of the investments that we have been doing in the market, retail showed 60% organic growth and CPV, 10% organic growth. EBIT development, plus 73%, ending up at 17.4%, which is 120 basis points above last year. We continue to work on improving our distribution and logistics setup. At the same time, as we continue as well to build up the organization, and this is an area that we are just now focusing in North America, but we are also accelerating our segmentation, our focus on the different vertical segments across EMEA where we're seeing that later on. And clearly, we are seeing the same headwinds in terms of raw materials as anybody else. We saw prices going up dramatically during the last 18 months, then they stabilized for a while, but have been keeping growing. And I'm happy to see, obviously, that we are more than compensating in all the regions the raw material price headwinds as we already announced some months ago. If we move over to the EMEA region. Good organic growth of 6% with nice evolution on CPV, 20%. Nice evolution as well in Marine and this is very much obviously the old Dometic Marine. We see continuous growth in RV as well. And Aftermarket did show a pretty good development despite the cold spring, where I mentioned before that April was really very disappointing, but we compensated that in May and June. Very strong EBIT evolution, plus 21%, with a 110 basis points improvement on EBIT. It is clear that the pricing activities, but also the efficiency program that we have been running across EMEA, are kicking in, showing positive results. And we expect that to continue in the quarters to come. As mentioned previously, they're more than compensating the increase on raw material prices. If we move over to the APAC region. Also, very good growth, 7%, with the Aftermarket driving the evolution, especially on RV, Retail and CPV. Very high growth in China where we are at almost 60% organic growth after 6 months and then the second quarter continuing in a very good manner. And we see as well that on the RV market, we are outperforming the growth that we see on the RV market according to the association. I'm especially happy to see obviously that despite the geographical mix to lower-margin areas in Asia, we still improved the EBIT margin with 30 basis points, partly due to the growth on Aftermarket. So in the APAC region, we have a negative geographical mix, but we have a positive product mix affecting the margins. At the same time, we have also been working in pruning the low-profit products that we had 1 year ago. This has started to begin having a positive effect. We will see this continuing during the coming quarters. And then in the same way as all the others, we have the geographical -- sorry, raw materials obviously kicking against us but we are well compensating for that. On strategy, very important, after 6 months in charge, one of the things we are doing is to get more specialized resources, dedicated teams to develop the different verticals, which means that we are very, very keen on reducing our exposure to the retail market and growing all the other markets. We have seen the effects already in Retail, in CPV, but also in Marine. I'm also happy to see the new organization for R&D where we appointed a CTO a number of months ago and we are starting to see the plans taking shape, and we will see implementation moving forward as well. At the same time, we have been looking at SKUs, taking away complexity. This is going to be also very important in the future, but we have already seen during the quarter plans for reducing the number of SKUs in minibars with almost 50%, and that will have a very positive effect in our inventories and our costs in the long run. I mentioned operations previously, a very important role for the future. And at the same time, we are also focusing quite a bit on sourcing, getting a stronger organization across EMEA, getting to category management and focusing on a number of areas that we have not touched until now. And then last, but not least, the utilization, another very important activity moving forward where we are accelerating. I'm very happy to mention that we implemented the spare part module for the E&P systems across Europe. It's fully implemented in all the countries without any kind of disturbances, which I believe is quite of an achievement. At the same time as well, it's implemented during the quarter a new collaboration platform that will facilitate the communication within the group. And with those words, I would like to leave over to Per-Arne, please.
Thank you. Starting now with the Dometic Group trends, you can see that both sales and the EBIT has had a very good development during, I would say, the last 6 to 9 months. We had a plateau in middle of June last year, but other than that, we have taken on to both improve EBIT and sales. And especially, I'm happy to see also that the operating cash flow now is improving well in the second quarter. You could see that on the graphic on the operating cash. If you then look at the business area developments, we're growing in all different areas. RV and CPV, Marine and Retail, Lodging. And if you take the Marine, for example, it's not only the growth in SeaStar that is good, right, I would take the Marine OEM business in EMEA, they're actually growing with 9% in the quarter right now. If you take the CPV, we have had a good quarter as well. So we are starting to see more growth. And we had a growth of 4% in the quarter in Americas, 10% in EMEA and 7% in APAC. So CPV start also to grow in at a higher pace that we can see in the 12 months rolling. And if you take the Retail and Lodging growth of 16% in the quarter, the U.S. retail was growing with 61%. So it's a good development, all the different areas and we see also other areas, in the RV, to grow at a good pace. The 5-year look since 2013 shows a good development, more than 100%, 110%, and that's improvement and this will continue to grow given that we have all the half year [ OCs starting to lift ] this. So this will continue to go upwards automatically. Even better to say that the EBIT is growing quicker than the -- let's say, so we are close to 150% improvement since 2013. And we are now pacing at close to SEK 2.5 billion in EBIT. Looking at the key ratios, I think worth mentioning here is the organic growth trend. Over the last 15, 18 months, we have been growing between 9% to 11% in organic growth, which I think is a strong trend. And I said it's not only the RV business that are growing right now. We also see a good development on the EBITDA. We are close to 20% in the EBITDA margin in the second quarter, more than SEK 1 billion in EBITDA. And that also supports then the good cash flow that we have with good control of the working capital. We are now close to SEK 950 million in operating cash flow. Looking at the LTM trend for EBITDA, it's now close to SEK 2.8 billion and means that cash flow is now pacing upwards now to SEK 2.1 billion, and this will continue to improve during the year. And we also have an EPS pace of SEK 5.84 right now. If we look at the quarter around the effects on sales, you can see that the FX has, of course, impacted this, not as much as we have sort of different sort of trends when it comes to the U.S. dollar and also euro. So we have a 3% effect on the translation. More positive effects for euro and negative from U.S. It has been very volatile during the last, I will say, last months. And -- but so far in this quarter, all in all, the effects from FX is pretty limited, if you look at translation, transaction and then the hedges that we are working with. Take a look at the regional results. Happy to say that we see improvements in all regions in this quarter, especially Asia Pacific, improving a very high margin already, going up from 23.3% up to 23.6%. And we know that we are growing outside Australia and New Zealand where we have the highest volumes. So it shows that it's a good cost discipline. It's a good discipline overall when it comes to also pricing that helps us to keep up the margin. You could also see good trend for the first half year, especially EMEA going up from 13.1% to 14.5%. And remember that the first quarter last year was not that positive, but we have changed that trend as Juan said here before, and we will expect further margin expansions in EMEA going forward. Earnings per share, I mentioned the pace before, but in the quarter, we're now at SEK 2.13. Taxes is slightly higher than last year, 26%. We have had, for the first half year, more of, especially when it comes to the paid tax, more of the one-off events. We have started to take out more cash from China and that we need to pay tax on this but we are doing that, it's 5% to 10% that we're paying for this. This affects the paid taxes. And we have also made some extraordinary taxes for the taxes in Germany. Over time, we will expect the tax rate to be around 25% and taxes paid, I will guess, will be between 15%, 16%, given now that we have a different situation with SeaStar coming in where we pay more taxes than we have done before in the U.S. Looking at CapEx and product development, more or less at the same level as we have said before. Slightly higher on CapEx, 2.4% compared to 1.8%, is nothing dramatic a change in this. We are looking at investing in the business and we have set up somewhere between 2% to 2.5% should be expected on CapEx. The same goes for the product development, around 2% to 2.5%, slightly lower now in Q2. But that's more a timing issue than anything else, we are not holding back on the investment. It's more that we are timing it in a different way, as we said.Working capital development, slightly higher as we said. To some extent, perhaps there's a small disappointment here that we are now back over 23%. If you exclude SeaStar, we are at 22.7%. This is expected to go down and I think that we have had a good control of the working capital in the first quarter, and we will continue to see improvement in the working capital. And especially, if you then look at the composition of the working capital today, it looks here superficially that we are at the same inventory level in the second and the first quarter. We're actually down SEK 170 million in inventory in local currencies, so we have seen especially the America U.S. -- the U.S. dollar increasing with 5% in this quarter. That takes it up. But what is good then is that the underlying inventories goes down and what we have seen increases in is then the accounts receivable. And that will come back very quickly now in June, July and also August. So that will also strengthen the already strong cash flow that we have showed in the first quarter. And talking about the cash flow, you can see that in the quarter, we had a cash conversion of up to 90%, so this is very, very good. And we continue to focus on this cash flow to be able to improve our leverage but also be prepared for other investments in M&A in the future. Leverage, it's the same as in the first quarter, partly down driven by the negative impact from the movements in the U.S. dollar. Over time, this will settle itself. We have a 5%, 6% difference between the average rates that we're using and also the closing rates, average rates are lower. So eliminating the FX effects, which should have been down at 3.2%, you can see that we have been using the RCF, our revolving credit facility, in the first and second quarter. This will be paid down in the third quarter and not utilized more this year. Finally, then, the financial targets. We are -- or at 9% when it comes to net sales growth, which is above the 5%, that is our target. We are at 16% now, so we are above the 15% that we have us made a long-term target for the EBIT margin. Net debt, of course, a bit higher than our target. We said that we would come down to 2.5 end of this year and then come down to the target around late Q2 and the beginning of Q3 next year. So Juan, please, then summarize the quarter.
Thank you, Per-Arne. So summarizing, a very solid organic sales growth of 9%. We saw a good Aftermarket evolution as well despite the cold weather that we saw in April. Improvements, profitability improvements in the 3 regions, but most especially in EMEA. That's very much due to the program that we initiated in the last part of last year but also that we are becoming [ keener ] on executing operational activities. Good integration of SeaStar, and with my background, I think this is a very important one. It is important to keep on growing the company acquisitively and a precondition, obviously, is that we are good at integrating the companies that we are acquiring. And I do believe that these are very good examples of how to do it. Last, but not least, we believe in decentralization, but we believe in coordination, and we are working hard to strengthen a number of the group positions in order to get even better on the operational arena moving forward. If we look at the future, we have seen an RV OEM growth of 12% in the first half of 2018. Going into the second half of the year, it is very hard to say how market will develop. We don't know if we are going to see a plateau, continued growth or potentially softer markets. We also hear the talk about a slowdown for RV, but so far we haven't seen any changes in our order book. As late as June 4, the RVIA, the American Association, gave the most recent outlook, expecting the year 2018 to show a growth rate of 7%. We have seen some manufacturers taking a week extra holiday and so might run for 8 weeks. We see this primarily as an inventory correction. We also have important events coming up in August and September with a trade show in Düsseldorf and the open house in Elkhart, providing good indications of all the situations in the market. If I move to Marine, there were some discussions 2 weeks ago connected to the comments from one of the major manufacturers about the slightly lower outlook for the bigger boats over 70 feet. Dometic still sees a positive demand and growth in both the U.S. and EMEA. The Marine market for us is mainly represented for the smaller boats and that represents about 2/3 of our sales. We have obviously exposure to larger boats within the air conditioner growth area, but we have so far not seen any negative indications on our sales. In all the other business areas like CPV, Retail and Lodging, we have not seen any changes in the underlying demand. We also need to make sure, obviously, to utilize and develop our strong Aftermarket position with many thousands of distributors all around the world, an installed base which is more than 50 million RVs and 8 million boats, we believe that we have a good installed base to keep on growing, even if the market slowed down moving forward. This is a prioritized area within Dometic and our target moving forward is to become even more specialized on the Aftermarket area. I can assure you that we are just as cautious as you are. We follow the development in each market very closely every single day. And we will make sure that our local organizations are ready to adjust and adapt to any changes that may happen. All this taken into consideration, we keep our outlook of 5% organic growth for 2018, while we keep also our target of 15% EBIT during 2018, at the same time as we also believe that our leverage will be down to 2.5x the end of the year. And with all that said, I would like to thank you for your presence and open for the Q&A session.
[Operator Instructions] The first question comes from the line of Erik Karlsson from Industrial Equity Partners.
I have one on pricing and one on Aftermarket, please. If we start with pricing, you mentioned [ sizing ] initiatives in your comments. Can you tell us how much have increased prices and when this came into effect, please?
Well, it has not been once. It has been several times, and we will keep increasing prices as raw material prices move as well. Our estimation is that we are getting out the majority that we are getting, which is compensating or more than compensating the negative impact of raw material prices.
So just to be clear, so you think you're fully compensating and more than compensating on the pricing side?
Correct. And again, keep in mind that raw material prices are moving all the time. So we increased prices at the end of last year, and we increased prices again at the beginning of the year and that's kicking in as we speak. At the same time, raw material prices are moving and we will keep on increasing prices again. So our expectation is that we will not see any negative impact.
And just to be clear, in the first half, we did see some negative impact, but in the second half, we won't?
We didn't see any net negative impact to the raw material prices. We saw positive net effect.
Okay, perfect. And that will continue in the second half of the year?
That will continue, absolutely.
Very clear. And one question on Aftermarket as well, if I may. How have Aftermarket, which is important here in the summer month, how has that performed here in June and July, please?
Very positive. So of course that we were disappointed when we saw the numbers in April since April is normally the first month when Aftermarket is growing big time. But those weak numbers were very well compensated in May, June, and we see a continuous positive evolution in July.
And that goes for EMEA and also America as well, we have the peak season right now.
The next question comes from the line of Peter Reilly from Jefferies.
I've got 3 questions, please, all on the U.S. Firstly, I know you don't have a crystal ball in terms of the RV market outlook but maybe you can help us understand what's happening with your market share with your customers. It's obviously hard for us to judge because we didn't see the detailed production numbers, but I get the impression you're winning share with the U.S. RV makers. So maybe you could talk about what's happening in the market share trends there? And then secondly, you've made reference to the -- making investments in the U.S. CPV and Retail and Coolers and so forth. Can you give us some idea of the scale of margin that's being invested in those initiatives? And then thirdly, on a related note, you've been talking positively about U.S. CPV, I think mainly on the OE side. I assume that's more contracts that are going to come downstream maybe in '19 or '20 that -- maybe you could give us more color in terms of what's happening with the U.S. CPV and what it is that's making you positive about the future?
Yes. We start with market share, is obviously very hard to say because we are saying -- we are selling many different product groups. Our estimation is that we are in par with the markets. I think we are gaining some market share in some growth areas. We are obviously as well getting out our prices to the market and perhaps getting some negative impact in some other growth areas. But all as all, we see -- we are growing faster than the market. So that's the -- I mean, obviously, that we have -- we are moving in some growth areas, and by that, gaining some market share. But again, I don't -- I wouldn't take -- I wouldn't overestimate how much faster than the market. I think we are on par. And the second question was, could you please repeat?
Investment in the RV and CPV, what we have done.
Yes, yes. Yes, so we are putting together a team, both -- a sales team both in Mobile Cooling and in CPV, and we are talking about a couple of million dollars. And that will continue in the months to come. So this is an investment, obviously, that we are doing for the future. And you all know we have been clearly mentioning that we want to get less exposed to the RV market and this is part of that -- those initiatives.
And that was, if you look at the investments we are making in the U.S., it's also the [ home IT ] systems, trying to support the Mobile Cooling. And as -- Juan said, we talked about, perhaps USD 2 million, USD 3 million in the quarter. With the U.S. CPV...
Yes. I am personally very optimistic. I mean, on one side, we are obviously starting to transfer a lot of the competence that we have built up across Europe for decades. We are investing in putting together a team. We are -- I'm very happy to see the resources that we have been brought in to the company. And exactly as you said, what we have seen just now is just the top of the iceberg. So I expect very good results in the years to come.
And you may not want to answer but when you talk about positive developments, are they -- is it just interest from the customers, because I guess, if it's mainly OE we're talking about, there's obviously a lag between a customer agreeing a project and you starting to deliver product. Is it just interest or are you actually signing contracts for future production?
Yes, we are signing contracts.
And what is mainly it's all about is, as we say, cooling compartments for SUVs, and you can see there's a big market for this. And then over time, it will also be in trucks. But it's very much SUV and cooling compartments right now.
And if I just come back briefly on the market share issue in the States. One of the reasons I was asking is you had talked on some previous occasions about some of your smaller competitors having capacity issues, and obviously, you're bigger, more global with a more diversified supply chain. Are you having any capacity issues in the U.S. given the ongoing fast pace of the market, May notwithstanding, or are you able to keep up with demand?
No, not really. We don't see any capacity constraints today. Keep in mind as well that we have other factories around the world. And in reality, what we are doing is that we have complementing the production in the U.S. with production in other parts of the world, partly to mitigate the effects of the legal constraints that we have seen in Elkhart, specifically, but also, obviously, to be even more competitive.
The next question comes from the line of Peter Testa from One Investments.
I have 3 questions, please. One was just on labor cost as you mentioned some constraints in North America. I was wondering whether you could give some thoughts on what you've managed to do regarding productivity versus labor inflation around the group and how you feel about that going forward. Then secondly, just on the market, given your comments around some inventory adjustments, I was wondering if you had any sense of what inventory days had done in the RV market or downstream in distributors for yourselves over this period just to get some views on that. And then thirdly, on the cash flow, there's obviously cash flow conversion, quite good. There's also a SEK 97 million noncash positive in the cash flow, which I was curious to what that was. I was wondering if you could give some thoughts on that and SeaStar's sort of cash -- inherent cash-generative characteristics versus the RV business, existing Dometic business.
We will start with the labor cost. It is clear that we have seen labor constraints in Elkhart. This business is obviously seasonal. And we like, in many other companies, have been using temporary workers for the peaks. And obviously, when you have to change a situation, people are coming and people are going. We are moving temporary workers to permanent jobs, that has been a way of mitigating. We have also been adapting, obviously, our wages to the labor market in order to be competitive. And at the same time, we are working on lean. We are accelerating lean. We have a number of programs going on. At this point, I believe that we have a slightly negative effect in Q2, which is kicking in. But at the same time, we also have activities that we believe are going to get back what we lost in the first 2 quarters. So that's on labor and productivity. In terms of inventory in the market, I wish I could answer. I think that we are asking the same questions every single day and it's not an easy one. You have shipments from us to the manufacturers, then you have -- and the manufacturers are shipping, sometimes on inventories, they are sending to the dealers. So I think I'm coming back to what we described before. We saw a correction in May, but at the same time, the volumes came back strongly again in June. So I simply believe that we need to wait and see and follow this closely. I cannot give you -- unfortunately, I cannot give you a more accurate answer to that one. And then on the cash flow?
Yes, that is connected to unrealized FX effects, because that's what we usually have in all the [indiscernible]. Sometime, it's plus. Sometime, it's minus. But even without this, we had a very, very strong underlying cash flow.
Can you give, please, also just looking at SeaStar's cash conversion, whether that's -- when you look at the cash conversion tipping up from the 70s to the -- to about 90%, whether that's SeaStar related or other factors? And maybe thoughts on how SeaStar would change the cash characteristics going forward, now that you've got more experience with it?
I think that there's more to come from SeaStar. This is basically the, what we call, the old Dometic effects on the cash flow.
The next question comes from the line of Klara Jonsson from SEB.
I have a question about tariffs. So you ship some of your products from China to the U.S. and considering the new tariffs we have there, could you provide us some indication of potential impact for you?
We can give you some thoughts. As you know, this has been moving back and forth in the last weeks. We have a flow of goods of about SEK 1 billion going from China to the U.S. We have factories in the 3 continents, and our estimation is that we could move tomorrow about 50% of that SEK 1 billion. So that would give us 50% less, so SEK 500 million. Of the SEK 500 million, we need to look product group by product group, device by device, to be able to calculate. We assume just now the worst-case scenario, that we go up 10%. That would mean, obviously, about SEK 50 million -- SEK 50 million to SEK 60 million on annual basis. And then we would need to, obviously, to start looking at the remaining part, what we could produce in the U.S., whether that's going to have some negative impact on our costs or not. So it's early days but we are working hard to get more accurate numbers ourselves. But it's very, very time consuming, believe me.
Yes, I understand. Looking at the new EU tariffs from -- on the recreational craft, are you impacted by them?
Sorry, could you repeat...
The new tariffs between the U.S. and EU, so when you ship goods from U.S. to EU?
We have a very, very little inflow of goods. That's primarily air conditions and marine industry. And we don't have a look of flow. We are manufacturing air condition both in Europe and the U.S., and they are serving primarily their own markets. So of course, it happens that somebody is asking for American motor, but it's very, very limited at this point.
Exactly.
All right. I also have an additional question on SeaStar. So you're saying that your SeaStar is performing according to expectation and you're growing above the market in Marine, if I understand correct. So if you look at OEM and Aftermarkets within SeaStar, could you give us an indication of growth of it there?
Exactly the same number, yes, to the both on OEM and AM. And again, what we have to remember there, I think it's a very important comment, is that SeaStar was very, very clear at the time of acquisition, that we have a clear technology shift in the industry. We are moving from low average priced products into high. So again, a hydraulic kit is 4x more value than a mechanical kit. An electronic kit is 20x higher than a mechanical kit. So that's having, obviously, a very positive impact. And we are still on early days, so we don't see that stopping tomorrow.
The next question comes from the line of Rasmus Engberg from Handelsbanken.
I wanted to ask you, firstly, where is your focus in the second half of the year? Obviously, you're heading now a very diverse company with lots of bits and pieces. Where is it important that you focus in these early days for you?
I mean, if you look at our company, as you know, I am coming with a solid background but I don't have the feeling that this is so much different to what I was doing before. I mean, we have a number of technologies, we have a number of segments, and we have a number of markets, and we are playing on it. So I mean, you asked me, give me one. I would say just now is focus, if you get more focused on the segments, but again, this is one company with many different areas. So from a market perspective, it's really segmentation. I believe that we need to get our teams to become much more specialized. We need to understand the language when we are talking with Marine customers, in the same way as we are doing when we are talking to the RV market or CPV and so forth. At the same time, I also believe that we need to focus much more in efficiencies. That's obviously factories, that's lean, that's automation, that's putting in place a number of KPIs. In the third place, we are talking about digitalization. We need to become a more modern company. And again, when I'm meeting competitors and I'm meeting customers, it is not that we are out of pace, the other way around. We are most probably ahead in this industry. But if we compare ourselves with many other industries, there is so much more to gain. So sorry for being perhaps not as clear as you would like to. I believe that in a company, you need to have different people focusing on different things. We need to get the market organization to get more specialized. We need to get the operational organization to put much more emphasis in reducing cost. And we need to get digitalization because that's going to be the future, both from a market perspective and from an efficiency perspective.
So you can say that it's 4 different areas. I mean, product development, segmentation, digitalization and efficiencies.
Yes.
And another kind of more big picture question. Do you guys see that we are heading towards a situation where organically, so to speak, the Aftermarket actually starts to outperform the OEM shipments in the second half of the year and thereby maybe help giving a bit of a tailwind with regards to mix for your margins?
Well, that's clear. I mean, we see that purely mathematically. As soon as the OEM comes down, the AM will have a major impact on our margins, percentage-wise. So that's not a secret. And obviously, that's one also -- I mean, anything that we are doing just now is obviously to work proactively to reduce the weighting of the RV market in our numbers. We have a huge installed base. I do believe that we can become much, much better in driving the Aftermarket. And then even in terms of service, we need to get much more parts and parts sales into our products. We need to develop high-grade kits. This is going to be one of the focus areas in the coming 2, 3 years to come.
And Rasmus, remember now that we have had a very good growth in automotive this quarter. I mean, that's been between 6% to 10% in different regions. It's not bad. It's just [indiscernible]
It's the weighting. So our problem is not that we are not growing the Aftermarket, it's that we are outgrowing on the OEM market.
The next question comes from the line of Johan Eliason from Kepler Cheuvreux.
This is Johan. Just a question on this comment regarding Asia Pacific, that you are walking away from some low-margin products, but you still have a negative geographic mix. Will it always be that growing China, rest of Asia, will have a detrimental impact on the average margins for the division? Or are you adjusting the product portfolio now, so eventually that effect will be less going forward?
I think personally, I have been exposed to those markets for 20 years. You are totally right that we have a number of projects just now ongoing to [ add capital ] products to the region. Nevertheless, we are competing with Chinese companies. Chinese companies are pretty good, are running very, very, very lean. As you know, we are applying legislations and that means that it will be very difficult to compete on the same base. So I don't expect our margins in Asia or in China to be -- again, if you look at the Singapore, we have good margins. If you look at Hong Kong, we have good margins. But as soon as you move into Korea, you move into China, you move into Indonesia, it's a totally different market condition. It's a different game. So I don't think that, that would change. On the contrary, what we can do is that when we see that we are not making money enough on some products, then we will discontinue as we are discontinuing just now, that this is a product group which is going very much to automotive while we are competing with automotive suppliers, Chinese automotive suppliers. And no matter what we do, we will never make any money. And then I do believe that we need to be consistent and take the decision, the tough decision of letting it go and then trying to develop other areas. So I don't think that from that perspective, we are different to any other Western companies in China.
That's why I think also that if you take the Q2 right now, for whatever -- it's a very, very good result because we had done it. We are growing quite a lot outside the PAC area, in Asia and Australia. Still, we haven't [indiscernible] with efficiency, but it will be dilutive to grow outside Australia.
Good. Then on these CPV efforts in North America. I guess, initially that will hamper margins, but over time, do you think the CPV business in North America can show better margins than the RV business is doing?
The CPV business we have today is not diluting margins on OEM. It's having a positive impact on our OEM margins. And that has been...
In North America?
In North America. It has been in purpose as well. We have some issues a couple of years ago. We corrected that during the last 12 months, I would say. We have been focusing on the right products to the right customers. And what we're adding just now is that we are putting also an organization behind.
The next question comes from the line of Josh Bretherton from Morgan Stanley.
Can I just go back to the performance of RV in the Americas? So you had pretty strong plus 15% growth in RV OEM, which is quite considerably higher than what we saw in the RVIA data. So can we -- can you just talk about how you outperformed in this area? Like, what were the drivers behind that discrepancy?
I think, again, you have different average prices for different products. So that's why it's so difficult to say 0 market share because we don't have any competitor which is competing us with all the product areas where we are. If you compare us with our peers, so core peers like [ Leapers ]. They are much more in the mechanical products and we are much more on the electronics or high value, whatever you call it. So it's practically impossible. I believe that we are, in part, always slightly better in the product areas where we are competing. So I wouldn't read our numbers as we are outperforming totally the market. I don't think that's the reality. And I think on purpose as well because we have seen -- we have stated a number of times that we don't want to grow at the expense of losing margins. We want to have sustainable growth. So you could say that we could grow even faster. Yes, we could, but we will not do that. We believe that it is important as market leaders that we are consistent on our pricing. And we cannot just absorb all the raw material price increases and that has obviously a cost in some way.
Okay. And then can I just ask kind of what visibility you have over the European RV market so far in July and kind of going forward a bit further? Because we've seen some slightly more cautious commentary from some of your customers coming out in the last month or so.
I think is what we said before, if we look at May, May was weak. We hear that some of the manufacturers are taking 1-week extra holidays. But at the same time, we also have forecasters still saying plus 6% versus last year. So we don't see any drama. We saw strong numbers in June, and July looks good so far. I mean, this is -- I know this is the question of a million. We're just as curious and keen on knowing as you are. But we don't see the clarity. We don't see that this is -- still, it's May. We have 1 month that was weaker than we have seen year-to-date. Our numbers came back in June.
And I think it will be important, as Juan mentioned before, that we have this launch in August and that is a rough -- of a very good indication of what will happen in the coming years. So I think that we are looking at that, at the same time we are looking at the open houses in Elkhart coming up in September. That will really be a good indication of how manufacturers are looking at the future.
Okay. And then just one last question, a bit more specifically on tariffs. So we've seen that there's potentially tariffs going to be implemented on air conditioning products for motorized vehicles manufactured in China exporting to the U.S. Can you give us a rough indication of what percentage of the manufacturing of your air con products is in China? And would that be included in the 50% that you said you could move kind of tomorrow out of that region?
No, air condition is outside.
Okay. So all outside China?
Yes. Today, it is, yes.
Everything is produced in China, so yes.
We have one last follow-up question from Peter Testa.
Just 2 things. One is just on the margins, on the underlying like-for-like margins of base 16.5% for Dometic and -- for the period and for this period now. You mentioned that labor was slightly disadvantaged, price versus raw mats slightly positive. So let's just call it kind of flat. Given the good growth, can you just help us understand how mix versus operating leverage plays on your margins, maybe using this as an opportunity to understand those dynamics a bit better, please? And the second question was just to complete the story on tariffs, in the extent to which your customers are shipping both from U.S. to Europe, if you have any sense from that because of where product is registered or Aftermarket is registered, whether there's much flow?
I mean, if we talk about mix and labor constraints, I mean, what we see is obviously that we had specifically in the Elkhart region, difficult just to find people. And as you know, the whole industry is in the same place.
Sorry to interrupt you, I was asking a slightly different question. I'm assuming the labor productivity kind of works out versus the slight positive you had on raw mat versus pricing. I was trying to understand the mix between Aftermarket and OE versus operating leverage, just to understand how those play out.
That has a massive negative impact. When we are growing by 15% on RV and we are growing by 6%, 7% on Aftermarket and we have a substantial difference in gross margins or even EBIT margins with those 2, again, what you would see if the market slows down is that our EBIT margin will go up. Our gross margins will go up.
So operating leverage is offsetting that though?
Yes, for us as for many other industries.
So you can understand that if you take the U.S. for example, where the OEM is more than double the size or the Aftermarket in the second quarter and that is growing with a 50% on the [indiscernible] to 6%. Of course, it's a really negative impact on this.
It's a substantial difference.
Yes.
Okay. And would the operating leverage factor play the other way around? If OE came back down, you'd be offsetting the -- the mix -- positive mix will offset by different operating leverage or do you think it will be a more advantageous situation than that?
I will say it will be more advantageous. Also, I think that we are working with efficiencies all the time. An example is if you are running on high utilization for ships. I mean, I think that you could be more efficient and with a better balance.
I think we are discussing just now the U.S. but you have a similar situation in Europe. I mean, unemployment has been coming down in Europe dramatically in the last couple of years. So it is a little bit of the same. We see headwinds even on labor in Europe and we are, of course, compensating that by efficiencies all the time. So this is not a unique situation. I think what is important to remember is that the higher OEM numbers we get, the more pressure we get on our EBIT margin and our gross margins. The higher aftermarket, the higher EBIT margins we're going to have.
Right, okay. And then the other thing on just the customer flow in boats, do you have any sense of the extent to which on the Marine side this customer flow from shipping product from the U.S. to Europe inside vessels?
We have a very little sort of -- the [ majority, more so the underlying engineering ] question about flow of boats to -- from U.S. to the Europe or...
Yes. I mean, I understand your direct shipment is very little, but I didn't know whether your indirect through customer product was something else you knew about.
No, no, no.
Unfortunately, we cannot comment, Peter, because there is nothing that we follow. And then when talking to organizations and, of course, even if the boats are built in the U.S., we will need to have Aftermarket on them sooner or later. And after discussing with the organization, we -- they don't see a negative impact at this point.
There are no further questions at this time. I hand the conference back to the speakers.
So thank you very much for your attention, all of you. And again, we are very pleased with our results in Q2. We are pleased with the first half year results. And we have remained optimistic about the future. We have many activities ongoing. We have an organization which is triggered by success. And we will continue to work hard in that sense. So thank you very much, everybody, and I...
Have a nice summer.
Have a nice summer, all of you. Thank you.
Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.