Dometic Group AB (publ)
STO:DOM
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Dometic Group AB (publ)
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Hello, and welcome to the Dometic Q3 2021 analyst call. [Operator Instructions] Today, I'm pleased to present Juan Vargues, President and CEO; Stefan Fristedt, CFO; Rikard Tunedal, Investor Relations. Speakers, please begin.
Hi. Good morning, everybody. This is Juan Vargues speaking. And welcome to the third quarter report for Dometic in 2021. Without any delay, I will move over to the presentation material, starting with the highlights for the quarter. So in regards to the market situation, we continue to see a very strong demand. We see [Audio Gap] ourselves. We also see a record high backlog for the period. At the same time, as we also report constraints in the supply chain that are continuing during the quarter. Looking at performance. We have a nice milestone. We just passed for the first time SEK 20 billion in 12 months rolling revenue. We achieved a 25% (sic) [ 24% ] sales growth totally, of which 11% organically. We continue to see a high M&A activity. In the quarter, we consolidated 6 acquisitions, and then we announced another 2 additional acquisitions. EBIT ended up at 14.2% versus 15.5% last year. One of the reasons for that is really timing in offsetting the cost increases primarily coming from freight and raw material by new pricing. I think we did a fantastic job in Q1 and Q2, where we were always ahead of the cost increases. In Q3, we were a little bit late and we have implemented new price increases to reduce that gap and eliminate that gap. I'm also very happy to communicate another milestone. For the first time, we also -- in our history, we also passed the Innovation Index of 25% by reaching 26% in comparison to a 21% mark last year. We continue to reduce complexity. And by that, our cost. And then last but not least, we're also very happy on the job that we are doing from an ESG perspective, reducing the CO2 emissions by 17% in comparison to the situation in 2020. If we move over to the financials for the quarter. We ended up 24% in total growth, which 11% organically, which had a negative impact of 2% coming from FX. And then on top of that, we also added 15% in M&A. EBIT before items affecting comparability ended up at SEK 785 million or 14% up. EBIT margin, I already mentioned previously, 14.2% versus 15.5% 1 year ago. EBITDA, SEK 987 million or 14% up. Operating cash flow of SEK 346 million versus SEK 1.043 billion last year, very much driven by the high inventory levels that we see just now and also as a consequence of the longer lead times that we see on freight, on sea especially. Leverage down to 1.5x versus 2.8x 1 year ago and a nice EPS improvement to SEK 1.50 in comparison to SEK 0.95 earlier -- 1 year ago. Moving over to the year-to-date numbers, 30% up totally, of which 5% FX, 8% M&A and then 30% organic. EBIT, almost SEK 2.5 billion or 68% up and an EBIT margin of 15.5%, which is a very nice improvement versus where we performed last year, 12.3%. EBITDA passed the SEK 3 billion for the first time or 53% up. A good operating cash flow considering obviously the inventory [Audio Gap] Looking at our sales growth, very pleasing to see that the organic growth continues and is complemented as well with M&A. We have very nice growth in all the segments. And when comparing with last year, I already mentioned previously, 11% organic growth, but also when comparing with 2019, the same period of 2019, we are up organically 13%. Looking at our application areas, all-time high in all areas, but Climate affected by now the recovery of the volumes that we lost in connection with one of the factory moves in America 1 year in [indiscernible] We are working hard to get to the same level as we had 1 year ago in that area. Other than that, again, all-time high all over. On the sales channels, very nice development as well. Service & Aftermarket up 19%; OEM sales up 23%; and Distribution, a strong 50%, which is also leading us to how the sales channel are evolving. And what we see here is obviously the consequence of a major transformation of the company towards less OEM orientation. We at 12 months rolling numbers, we are just now at 48% of Service & Aftermarket plus Distribution in comparison to 39% that we are coming from a few years ago. This is very, very important for us as a part of our strategy -- our main strategy to becoming less dependent on the OEM side, something that's going to lead to margin expansion and reduce cyclicality over time. On the EBIT side, we see obviously a good performance on the sales growth. At the same time, as we also see improvements on the tariffs, like-for-like. But on the other side, we also see a mix -- a negative mix influence coming from RV OEM, where we have the lowest margins. We also have a negative FX impact in the quarter. We are investing in a number of areas to build up both e-commerce and the new vertical segments. And then as I mentioned previously, we also had some timing in offsetting the cost increases that we will see improving in the coming months. On top of that, we also need to keep in mind that we are comparing obviously with a very low quarter in Q3 2020 when looking at cost. Just to give you some flavor, Q3 2020 was 14% down in SG&A versus Q3 2019. Moving at what is going on in the markets. I think you all are very familiar with raw material prices. You see how some of the commodities that are affecting us did develop over time with the steel prices at extremely high levels in comparison to what we have seen historically. The same is valid for aluminum and the same is valid with plastics. We could perceive a stabilization of the cost increases in May, June, but then coming back from vacation, the cost increases started to climb again. The same is valid for freight cost where we have seen a massive increase during the last 18 months even there. Again, we saw a stabilization this spring, but came back again after holidays. And at this point, we don't see any mitigation. We see Q3 still going through the roof. And this is obviously what is leading to this timing difference between cost increases and price increases. If we look at the different segments, Americas, 9% up organically, driven by Power & Control and Other Applications. We see a very strong sales in all the OEM vertical segments, and we see as well a good evolution in Distribution and Service & Aftermarket, which is also supported by the new acquisitions, Valterra and Zamp Solar. EBIT SEK 60 million in comparison to SEK 79 million last year. And a margin deterioration down to 3.5% coming from 6.3%, very much driven again by timing and offsetting the cost increases and raw materials, but also the delays -- and inefficiency caused by the delays that we see in the supply chain. And then on top of that, we also suffer from FX negative impacts in the quarter. Moving over to EMEA. Very nice organic growth, 10%, driven by Climate and Power & Control. Here, we saw RV OEM come in very, very strong in the quarter. And it is clear that the OEM suppliers are preparing themselves already now for 2022. CPV OEM was impacted by a stop of deliveries by our customers simply because they are lacking components from other suppliers. And then we are happy to see that Front Runner and Büttner are now part of the Dometic Group. At the same time, as we also announced the acquisition of Cadac that should be completed in Q4. EBIT-wise, SEK 243 million versus SEK 218 million last year or 14% in EBIT versus 14.4%. A little bit of the same effects are impacting our numbers. Meaning the timing on the pricing, which have the supply chain constraints, which have the FX effect negative in the quarter. And on top of that, in the quarter, we also have some M&A transaction costs. Moving over to APAC, fantastic organic growth, but then we need to keep in mind that Q3 last year was impacted heavily by the pandemic in both Australia and New Zealand. Still underlying, we see a very strong demand. We see also that all the sales channels are showing very strong growth, and we have a record high backlog. Very strong EBIT margin, 24.5% versus 16.2% or SEK 126 million versus SEK 45 million last year. Here, we have also a positive impact of geographical mix between Pacific and Asia, where Pacific is growing much faster than Asia. And then basically the same negative effects in the quarter as we have for the other segments. If we move over to global, 6% organic, growth driven by Food & Beverage and Power & Control. Even here, backlog at all-time high. Hospitality is also starting to move to positive. We saw really stabilization in Q2. And now we saw for the first time, positive growth during the last 18 months. We also see a very strong demand on our domestic outdoor residential offering, driven very much by on one side, organically, our new residential products, but also clearly by a very nice growth in Twin Eagles, the Twin Eagles acquisition. EBIT, SEK 354 million in comparison to SEK 347 million last year or 22.5% versus 24.5% last year. The same in this situation, it's really about timing, it's the supply chain constraints. Here, we are [ lacking semiconductors ] for our marine operation. And of course, marine has very high margins for us. And then we have also sales mix where with more OEM sales than we have on our Service & Aftermarket sales. If we look at the long-term strategic approach of Dometic, we see really that we are kind of walking our talk. Important for us to move more sales into Distribution and Service & Aftermarket, 48% on 12 months rolling number in comparison to 39% in the same quarter 2017. Already mentioned acquisitions and then implementing just now our B2C platform for e-commerce in Europe after implementation in both the U.S. and Australia earlier this year. Innovation, I already commented earlier before, very, very strong pipeline of new product launches coming for the remainder of 2021 and 2022. And then we keep on working on the complexity reduction and SKUs are down 59% versus 2018, which is much higher than what we had as original target, 40%. We keep investing in our social media efforts, and we see a steady increase, up 12% versus the same period last year, and now moving more and more into Instagram and LinkedIn. Another area where we can see the progress that we are doing strategically is really the number of stores where you can find the Dometic products. Nowadays, we are today after Q3 in 4,300 stores worldwide, increased our presence by 42%. And of course, Igloo will have a massive impact in those numbers. If we look at e-tailers, a little bit of the same. We have 54% higher presence today than we had at the end of last year. And our e-commerce sales is also growing from very small numbers, though we see a strong growth of 66% after implementation of the new platforms. And again, we are working just now rolling it up in both [Audio Gap] So coming back to acquisitions, very, very intensive period for us. Obviously, as a consequence of that, we are working intensively on the integration of all these companies, starting with our branding and what you see already now is that we have implemented branding in, I would say, 6 of the 8 acquisitions that we have completed. And remaining is Valterra that will be [ double-branded ] in a few months from now. Other than that, we are very much advanced in this area, which is also something very important since we want to build up a strong outdoor consumer-driven domestic brand worldwide. Another 2 acquisitions that were announced in the quarter, Cadac, barbecue company, South African barbecue company, turned in EUR 17 million in sales with a strong presence across Europe as well as Igloo that we communicated mid-September, an iconic U.S. brand, which is the global -- major company in the world, global leader in terms of passive coolers. And we expect also Igloo to join us in Q4 this year. Then a lot of the acquisitions, what we are doing is really to develop our outdoor vehicle-based activity concept, which is really a series of outdoor [indiscernible] products forming a new outdoor category. We are -- we have already put together a relevant product portfolio and we will continue to develop this portfolio, both organically and through additional acquisitions. But this is going to have a major impact in Dometic's future since, again, we are moving from being a sub-supplier to the OEMs into more of an outdoor lifestyle-based company. If we move over to innovation. Again, a new milestone for us, reaching 26%. Just a couple of samples of the products that we launched during the quarter. We have -- we are entering the heater market in EMEA with the first combined heater using separate burners for air and water heating, leading to high performance and higher energy efficiency. This is also completing the system together with a new series of AC that we are launching at the beginning of next year. If we look at the aftermarket side, this is a sample of one of the aftermarket products that we are launching. It's a handwave contactless toilet flush switch, ideal for retrofit and very easy to install for marine applications. And then even in the marine area, we are launching a new series of air conditioners for smaller boats as a continuation of the product launch that we had about 1 year ago for the bigger yachts. And in the same way, this is also reducing energy heavily for the same applications and having as well a higher sustainability degree by demanding less maintenance and higher lifetime -- or longer lifetime. Moving over to our restructuring program, a lot of preparation work is going on. We didn't have any impact in number of sites or employees this quarter, but we are just now -- we took another SEK 17 million in restructuring costs in the quarter, ending up at SEK 283 million and we are running just now savings at the pace of SEK 150 million after Q3 this year on annual basis, of course. From a sustainability perspective, we continue to drive these questions. We have seen a very positive evolution in terms of injuries. We are down 40% versus the same period last year. We, on the contrary, are not happy with our progress on female managers. We are standing still at 23%, even if we see progress at lower levels -- in different levels in the organization, but still totally speaking, we are not moving the needle, and we need to have even bigger efforts to get there. From an audit perspective, we are up to 81% in audits in low-cost countries, suppliers in low-cost countries versus 78% despite the fact, again, it's still very difficult to travel in Asia and parts of Americas, so making progress. And then very happy to communicate, obviously, that we have reduced emissions, CO2 emissions, by 17% that we added another site that is using renewable electricity, and we will continue that work. And we also committed in the quarter to reduce our emissions by 50% in 2030. And by that, Stefan, could you please give us some more insight?
Yes. Thank you, Juan. Starting off with the net sales and EBIT bridge. And currency continues to be negative to us, minus SEK 42 million on EBIT level in the quarter, equivalent to minus 0.5% on the EBIT margin. M&A, positive contribution, SEK 686 million in net sales, contributing with 15% of our total growth in the quarter. SEK 113 million in EBIT equivalent to a 16.5% EBIT margin, so contributing 0.3% on our overall EBIT margin. Then coming into the last bucket, volume, price, mix, cost and others, which is contributing with SEK 496 million in the quarter, but only SEK 24 million on the EBIT line. And so that means a negative contribution of 1.1% on our EBIT margin. What is behind this then? Obviously, sales growth is contributing positively. Less negative impact from the U.S. trade tariffs, in absolute terms, they are almost on par, but as we have higher volumes, it's in relation to net sales going down. Then we have cost-saving activities, thinking about what Juan just talked about on our manufacturing footprint activities contributing positively. Then we have the timing in offsetting rising freight and raw material costs with price increases, which is contributing negatively with approximately minus 0.4 percent units. Then we have the business mix in the legacy Dometic business, we have higher amount of OEM business in the quarter contributing with minus 0.6% units. Then sales and marketing investments in strategic areas, talking about B2C, Service & Aftermarket and outdoor, minus 0.4% units. And then we also need to keep in mind that we came into Q3 last year with a low cost base and the activity level in general was obviously driven by the pandemic lower. Okay. Moving on to the next. Some more information around our acquisitions. I've already mentioned the contribution of net sales, which is 15% of our total growth. EBITA margin is 20%, which is above the Dometic Group average of 15.9%, which is in line with what we have been communicating earlier. Then we have M&A transaction costs. The material M&A transaction costs, which is equivalent to SEK 6 million has been booked as [ items affect ability ] in the quarter. On top of that, we have SEK 5 million, which is included in the normal EBIT, which is related to the smaller acquisitions. I'm not going to go through the table on when the different acquisitions have been announced and from when they are included, it's for your information. Moving on to operating cash flow. We have a cash conversion of 34% in the quarter, which is obviously low compared to what we have seen in the third quarter historically. It's working capital-driven. Inventories are on its way up. And we also have a higher business volume, of course, which is driving the buildup of working capital as such. So going over to the details of DPO, DSO and DIO. You can see DPO is increasing, but in the shorter moving graph, it's going down, which is very much driven about timing of purchases and where these purchases are actually happening as we have the highest DPO days in China. DSO, we are happy with that development. It's a stable development, and I feel that, that is well under control. DIO, as you see, is increasing with the quicker moving graph, 130, but also the last 12-month rolling graph, 106. And it's, of course, driven by longer lead times, we have a lot of inventory on the ocean. And then we have some strategic decision where we are securing stock so that we can ship it when we are going into the high season in the beginning of next year. Then you can see total working capital, 87 days is obviously not anything that is extremely out of the picture looking historically. Moving over to CapEx and research and development. As expected, we are increasing in both areas. And still in relation to net sales, 1.7% on CapEx is still moving in the areas that you have seen historically. And investments is, as an example, driven by B2C investments and other miscellaneous IT investments. Moving over to R&D, 1.9% in relation to net sales, and there is a clear connection, obviously, what we are spending here and that we are driving our Innovation Index, which is now 26% as Juan mentioned, and its investments in driving our outdoor ambition in global platforms and also in the Marine segment to mention a couple. Moving over to the cash flow for the period. You can see what I mentioned before, we have a change in working capital contributing negatively with SEK 474 million for the reasons I mentioned before. Investments in fixed assets is up compared to the same quarter last year. Then looking on acquisitions, SEK 549 million related to Front Runner and Büttner, which was closed in the quarter. Then we also have a strong positive contribution from net cash flow from financing. And I will mention a little bit more about that on the next page. So moving over to our debt maturity profile and leverage. As you have seen, we did successfully issue a 7-year euro bond of EUR 300 million to 2% flat rate, which is, yes -- which was received very successfully in the market. So now we have improved our maturity profile quite a bit here. Looking on leverage, 1.5 in the quarter, and it has been increasing slightly from Q2, driven by the 2 acquisitions that I mentioned before of Front Runner and Büttner. You know our target is to be around 0.5x over a business cycle. So with that, I'm handing over to you, Juan, to make some concluding summary.
Thank you, Stefan. So summarizing, strong performance despite the supply chain constraints and the freight and raw material price increases, we passed for the first time the SEK 20 billion mark. We see a record-high order backlog for this period of the year. We also see the underlying -- strong underlying demand on the markets and low inventory levels at the same time. And the main question moving forward is obviously supply chain and what is going to happen in the months to come. Obviously, we believe 6 months ago that it was going to improve. We believe 3 months ago that it was going to improve, but just now, nobody can say when it is going to improve. So I think that we need to live with the situation and mitigate as much as we can, the negative effects of that. We are happy about our strategic agenda and the progress that we are doing in that area. We see Distribution and aftermarket -- Service & Aftermarket just now up 48% LTM. We are happy with the acquisitive journey that we are driving. We continue to improve our Innovation Index, standing just now at 26%, and that's always a good tool to see how things will be improved moving forward. We keep working on reducing complexity, and we are down 59% in SKUs that will also lead into savings stepwise and we will continue to drive our agenda to reach our financial targets. And with that said, I would like to open for the Q&A session after Rikard's reminder.
Just a reminder, we will host a Capital Markets Update in Stockholm, November 30. So please look at this link for registration and more details. Thank you.
[Operator Instructions] Our first question is from Lucie Carrier of Morgan Stanley.
I have 2 questions and will go one at a time. Thank you for data on raw material and freight, but perhaps could you help us or provide us with a breakdown of your cost base and how that relates to the increase to this number because I think it would be helpful for us to have maybe a bit more visibility around the breakdown, of course, so we can forecast a little bit more accurately some of the potential headwind.
So okay, so the breakdown of the different costs, we don't -- we were not envisioning to actually go into that level of detail. But as I mentioned before, in the quarter itself, we have a negative effect as of the arbitrage between rising freight costs and raw material costs of -- and our mitigating price increases of minus 0.4%. But if we look in the near term, I mean, the big driver in this is obviously transportation cost, which has been increasing. We're taking a jump up to the next level, basically, talking about the ocean freight from China to Europe and from China to U.S., in particular. On road transportation, which is more the outbound side of things, there is a cost increase as well, but not as significant as on the ocean freight. Then another big cost driver in this is obviously electronics and where you have to operate on the spot market. And there is single examples where you're seeing certain components. I would say that, that is the normal, but the extreme cases, we're looking at even 60x compared to what it was before the pandemic. I don't say that, that is the general, but it's an extreme example. So I think that's how I would like to summarize it.
And just maybe if I can have a quick follow-up on that question. If you cannot provide the breakdown of costs, are you able to provide how much of your procurement and of your production is subjected to this long distance freight that you are mentioning?
What would you say, about 50%?
40%.
40% to 50%. Yes.
40%.
Okay. My second question was...
If we look -- sorry. Sorry, just to fill in. If we relate to the legacy Dometic, obviously, it's smaller on the new Dometic. But if you look at the legacy Dometic, it is about 40%.
And so you said -- sorry, the old Dometic is -- sorry, I got confused. What...
40%.
40% on the new Dometic?
No, no. The new Dometic is much more local companies where we have a lower impact.
Okay. Understood. My second question was around the backlog and the visibility you have regarding how firm this backlog is versus the OEMs or the dealer because we seem to understand from Winnebago that they say that the dealers can cancel orders in the backlog without penalty yet at any time. So how does that work for you? Do you see a risk maybe that the OEMs or all the dealers are overordering to make sure that they will get the supply they need ultimately when they need them?
You're breaking up a bit, Lucie. I think you need to repeat the question, please?
Sure. So my question was regarding the backlog. And I was just wondering what's your visibility on how firm this backlog is? Because we understood this week from Winnebago that they were saying the dealers can cancel orders in the backlog at any time without penalty. And so I was just wondering how that works for you, whether you see any risk that dealers or even OEMs are kind of overordering because there's so much supply chain constraint and they want to make sure that they have the components of the equipment whenever they need it.
The risk is there and that's valid for all the industries, I would say, no matter you are talking about RV, marine industry, CPV, it's all over the place. It is clear that all of us, including us, we are ordering just now in advance because if you don't place the orders, you will not get the deliveries. If we are talking about electronics, we are talking about lead times of between 12 to 18 months. So of course, there is a risk. At the same time, what we can see is that the underlying demand is there, but all the forecasts for the future at this point are positive. So it's a delicate balancing act, obviously, between waiting and making sure that you are going to have the componentry in place. And just now, I think the entire world is trying to secure the deliveries for the coming quarters. And then we will need, obviously, to adapt our forecasting on a weekly basis, I would say.
Our next question is from Agnieszka Vilela of Nordea.
First, I would like to ask you about the headwinds to the margin that you mentioned for the quarter including, obviously, cost inflation but also business mix even to a larger extent and the sales investments. How should we think about these headwinds getting into Q4 and even H1? Will they still persist? Or will they ease in your opinion?
I mean we are talking about the investments that we are doing in building other segments, they will continue as far as we are optimistic about the future. It is clear, of course, if the situation deteriorated moving forward, and we saw that the economy is deteriorating, that the verticals are getting more pessimistic then we will need to adapt our cost. But at the same time, we need to build up our outdoor business. We are building up our e-commerce. So that will continue. Then, of course, on the timing that we have between cost and pricing, I believe that we have proven now for a couple of years that we are doing a good job in that area. Then this time, we really had a delay of a number of weeks simply because our estimation back in May, June was the cost was stabilizing and then came back again. So we will do anything we can to eliminate that gap in the coming quarters. Then we have FX, difficult to evaluate as well. I mean we have seen the currencies moving back and forth during the last 12 months, but the comparative is getting somewhat easier going forward.
And lastly, maybe on business....
And then we have the sales mix. Sorry, Agnieszka, then what we didn't mention yet is obviously the sales mix. And of course, as you all know, our lowest margins all over is in the RV OEM side. And we see very, very strong growth just now on the RV OEM side. Then you could raise the question, could you do less? Well, I mean there is a link in the OEM side and our service and optimized market side over time. So what we are doing, as we speak, is that we are really looking at every single piece of the OEM side and starting to analyze, okay, how much aftermarket is each of these areas bringing in? And should we be even more careful in where to invest more from a [ product perspective ] within OEM and where we should invest less. But OEM is having a major impact in our numbers in Q3.
All right. Perfect. And then my second question is on the acquisition of Igloo. I calculate that it will be also -- it will also be a drag on your margin of some 1 percentage point or even maybe a bit more than that, at least initially before the synergies kick in. So you said that you will close the transaction in Q4. When should we start consolidating that in the model? Do you know already when it will be in your books, so to say?
I mean it's obviously not totally in our control, but the best estimate we have right now is that from November -- so November and December, it will impact Q4. Then you also need to keep in mind the seasonality of Igloo because Igloo's historical sales pattern means that approximately 14% of their yearly sales is happening in Q4. So that's obviously something that you need to take into consideration. And also historically, in the fourth quarter, they have been making losses. So that's something that you need to factor in when you evaluate this. But that's, of course, something that we have been aware of and it's a normal seasonal pattern that they have.
That's very helpful. And then if I may only, I'm a bit curious, and I don't think I asked that question when we had -- when you had the conference call about this acquisition. Were they any -- were there any competing bids for Igloo, so some of the others that wanted to buy? Yes.
Absolutely.
Okay. And then lastly, maybe on the -- also acquisition capacity. After that, how do you feel about doing acquisitions in the future given the fact that you are -- you have so many companies to integrate now and your leverage is going up a bit? So what should we think about that in the near future?
Yes. If we are talking about the integration perspective, what we see is the vast majority of the companies that we have integrated are local. And of course, we have local management in place. We cannot be sitting in a headquarter integrating those kind of companies. There has to be in every single segment. And of course, integrating a company in Sweden has nothing to do with a company in Italy. So from that perspective, I see no roadblocks whatsoever to keep on our journey. Then, of course, we have Igloo. Igloo is [indiscernible] and that will be my task together with Stefan and together with our team to get it done. So of course, that you should not expect another Igloo in the coming 6 months. Let's put it that way. On the contrary, we are not stopping our acquisitive journey simply because we believe that we have -- and what we have seen historically is that we are pretty good at deleveraging. Historically, we have been between 0.5 to 0.7. And the prices that we are paying for the standard company, we are doing about 0.1 to 0.2. So again, don't expect a transformative acquisition in the coming months or perhaps not even in the coming year, but you should expect that we will keep working on the smaller acquisitions.
Our next question is from Rizk Maidi of Jefferies.
Two questions too here. I'll start with the first one. So Juan, interesting comments on the backlog earlier. I think it all comes down to retail demand. And I think one of the main questions that we're getting from investors is how much of COVID boost the entire RV industry has benefited from? And as now sort of economies are opening up and global travel is sort of slowly coming back, do you see any changes in retail demand on both sides of the Atlantic? So if you look at, I think, U.S. we see dealership footfalls sort of a little bit slowing down. We have some internal data on that. And in Europe, I mean, clearly Germany, you see demand coming down, but that is also due to supply chain constraints. Any comments on retail demand and the boost from COVID?
No. I mean when we are talking to our customers and when we are talking even to our aftermarket customers just now, the issue is not lower demand, it's simply lack of supply. So that's what is really stopping even higher volumes. Then -- I mean, if you ask me, do you see anything in front of you? My main concern just now is really inflation because it is clear that our customers are passing prices, it is clear that we are passing prices to our customers, and it's clear that our suppliers are passing prices to us. Somewhere, sooner or later, the end consumer is going to pay. So to me, that's my main concern, which is no different to the car industry or the truck industry or any other industry. I think that's perhaps -- I mean, nothing keeps me awake, but if there is anything that I reflect about, it's where are we going to be in 8, 9 months, if this continues? So on demand perspective, I don't see is -- just now, it's really -- as I mentioned before, I mean we are just now, in some cases, stopping deliveries simply because our customers cannot take deliveries from us since they are missing deliveries from other people. So that has a negative impact on the top line and our margins as well. Now we cannot deliver at the pace that we would like to deliver.
Understood. And then perhaps just if you look at that price to cost equation, I think you gave us sort of the headwind, which is 40 bps in Q3. Given the price increases that you're putting through, like how should we think about this item in Q4? And more importantly as well, sort of 2022 because these cost inflation headwinds are carrying over now into next year's EBIT bridge.
Absolutely. It's -- but we -- as Juan mentioned before, we have been responding with strong price increases to mitigate this last jump here. And I mean just to give you a flavor of what we have been doing this year, I mean, it is a range between 5% to 20% depending on which product, which market and so on that you are talking about. And it is clearly so that we are going to see an increasing impact of the price increases in Q4 and in the beginning of next year. So depending on what is happening with the cost side here, we -- I mean, you take a decision based on something and then the next day, that assumption has changed. So -- but what we can see now, I mean, that effect is going to be somewhat less. But it's going to depend on how the costs are moving here. I mean it's a dramatic situation out there.
Our commitment is really that we will mitigate this gap, that we have done it historically but in this case, we lost a number of weeks and that we will recover that. And I think in the organization, I mean, one of the issues is, obviously, that you have never experienced this kind of situation historically. So of course, you're increasing prices to be ahead, but then you have a cost, which is increasing even faster. And then it is very, very difficult to say, okay, now we do it again because obviously, it takes a lot of energy to pass prices, to increase prices to customers once a month. I mean you can imagine the kind of discussions that we have. On one side, towards our customers; on the other side, towards our suppliers. And that it is there when you have the time gap in this case. But again, historically, we feel confident that we have done it many times before and that we will do it this time as well.
Our next question is from Fredrik Moregard of Pareto Securities.
Just a follow-up question, first off, on the previous speaker. Your order backlog is clearly very strong, continues to be strong from previous quarters. Could you please tell us a little bit about the pricing situation in the order backlog? Or is this -- are you able to raise prices of the current orders? Or is there sort of a backlog of orders below the prices that you need to work through before you can realize a new pipe to compensate on that side?
No, it is both. So on one side, obviously, we have a backlog with high cost. At the same time, we increased prices months ago. At the same time, we are also looking, depending on the customer, depending on the products, we are also going back and reviewing the backlog and going back to customers. So it's both. And then we implemented new price increases as late as 1st of October again. And we implemented new price increases 1st of September again. So I think that we are -- we will see that gap coming down. Then the question is, is it going to be totally in Q4? Or we will see that also in Q1? That depends very much on how the cost increases look like moving forward. Now we have seen a stabilization of the cost increases in the last couple of weeks. And hopefully, it will stay there. And then we will be able to catch up much faster.
Okay. That's very helpful. Secondly then on the restructuring program, I mean, you've seen some delays on that. Surprising, given travel restrictions and so on. Could you just provide us with an update on how far behind you are on the original plan and cost savings related to that?
Yes. So we are 2 to 3 quarters behind our original plan. As we mentioned, we have out of the SEK 750 million that we announced, we are just now running at SEK 283 million on cost. And out of the SEK 400 million in savings that we announced on an annual basis, we are running at a going rate of SEK 150 million. So we are about 35% of the total plants. And we have a number, obviously, of bigger plants that will be affected moving forward which doesn't mean that we are not working. We are working on preparation. We are working on the product side. We are working on the supplier side. But as you just said, it's difficult to move factories when you are not allowed to travel into one country.
Our next question is from Johan Eliason from Kepler Cheuvreux.
Yes. Just a few questions. I think it's good that you show on the acquisitions you've done so far that they are supportive to the margin versus group. Now obviously, this will be the last quarter they will do that, I suppose, when Igloo comes in and dilutes it. But if you look at these smaller acquisitions, if you look at the whole year because, obviously, there's a seasonality pattern to their earnings profile as well. Would you say that they support your 16% to 17% margin target already today?
The answer is yes.
Yes, no doubt.
Good -- and then on pricing, are you seeing different ability to push through pricing in your different channels, OEM versus Service & Aftermarket and Distribution?
Yes. I mean it is clear that some of these channels are a little bit tougher. You will enter into tougher negotiations and is back and forth, no kind of doubts.
So does that imply that...
Sorry, just wanted to comment that the seasons are kind of different for different channels as well. If you are into distribution or retail, normally, you are discussing prices by now for beginning of Q2, so to say. If you are on the OEM side, you are normally discussing prices in the first half of the year. Now of course, we're in a totally different situation where you discuss prices every day. So that was what has changed, so to say. So just now pricewise is a totally different pattern that we are used to.
That is understood. But I think also, historically, that we have seen that you every now sort of lag cost inflation in the pricing. And I think it's a fairly normal pattern we see in sort of consumer durables type of companies. But I was wondering if as your mix, channel mix, is changing -- I mean, your ambition is to increase distribution and aftermarket [indiscernible] OEM. Do you think these will improve or make your pricing actions worse going forward?
I think the less -- I can say the following, the less dependent we are on the OEM side, the easier it's going to be.
Okay. Then you also need to mention that you have some large counterparts also on the Distribution side, obviously, I mean, we are talking about now with the Igloo, the Walmarts of the world and so on. So it's...
Yes. But still, I mean, if you look at the OEM side, in principle, you have 20 customers in every continent roughly.
Our next question is from Karri Rinta of Handelsbanken.
Sorry about going back to the pricing in the U.S. because if I look at the OEMs, RV OEMs and the RV retailer in the U.S., they are and have enjoyed record-high margins for quite a few quarters in a row and, for example, Camping World Holdings, they have doubled their gross margins from the sale of new vehicles. So haven't you not been a bit passive or late with your price increases? And who is actually taking those pricing decisions? Is it the local organization? Or is it sort of at least overseen by Stefan and you, Juan?
I think you have to phase this. You have one phase, which has been very much in the segments. You have a second phase where Stefan and myself are very much involved, I would say, on a weekly basis. No doubt about that.
But I mean, your first part of the question -- I mean, it's -- I mean this is what we have said also earlier in the call, that we had a feeling that we were very well on par and mitigating the cost increases up to sometime in Q2 and then when the next level came then, obviously, as Juan said before, we reacted a little bit late, but that has been corrected now.
Then, I think, you have another factor you need to keep in mind, Karri, and is obviously what kind of inventories do companies like Camping want? Of course, if they are carrying a lot of old inventory, they don't have the cost increases. If they pass the prices, they will have a positive effect. So that's another factor to consider.
Sure. No, I'm just thinking that you keep referring back to costs, but that was given that you might sort of -- I'm not saying that you aren't in that business for the long term. But since you maybe want to deemphasize the OEM business, maybe you should have moved a bit more sort of opportunistically with pricing, but yes...
Yes. I mean that's a good point. But at the same time, we also need to keep in mind that you need to plan for those kind of moves. So I think, Karri, that is very much we were a few weeks late in taking another run simply because we saw price stabilization, and that's what we need to recover. Is it a little bit more in Americas than in other places? The answer is yes. I do believe that we were a little bit slower in Americas than we were in other places.
All right. Fair enough. And then the freight cost -- yes, just a very quick one on freight cost. What kind of contract structures do you have? So when will we see the full impact from these recent increases? And is there any difference between Europe and Americas when it comes to your freight cost exposure?
Yes, we have twice as many containers going from Asia to the U.S. and going from Asia to Europe. So that's another factor deteriorating profitability in Americas. And then we don't have long-term contracts. We are just now -- we have been thinking back and forth about contracts. We believe the contracts in the long term has more downside than upside. And that's why, in our opinion, we have been doing a pretty good job historically in passing prices because the problem is obviously that when you're sitting on contracts, you will always have a delay. You have normally much longer delay when you are passing the prices immediately.
Our last question is from Stephanie Vincent of JPMorgan.
Thank you so much for answering all the questions on pricing. I just actually have one on CapEx given that we're going into, I guess, a new taxonomy for things like refunds, et cetera. Just looking forward to your CapEx for the end of this year and 2022. Do you have a number that you're willing to share externally about what percentage of CapEx is going towards sustainability projects, et cetera? I realize everything is going into making things more environmentally efficient, but if you have some number that's very explicitly allocated to sustainability, that's helpful.
I don't have an exact number for you right here. But what we can see, I mean, you can see when we're reporting the sustainability KPIs here, we are ahead of our plans on reducing the CO2 footprint. And that's of course also requiring CapEx investments. If we are taking some examples, we are investing in our Chinese factories in solar panels and other measures to improve. And we are also then moving to green energy, which is maybe not always coming up in the CapEx, it's coming through the OpEx line or cost of goods sold, obviously. So -- but then you also have CapEx-related investments in R&D and basically in all our new product launches that we are presenting now, there is a clear sustainability target there increasing energy efficiency, material usage, et cetera. So it's -- but I think your question is triggering something by us that we should probably make sure that we have that number because it's obviously an important number. So -- but today, I cannot give you an explicit number more than giving you these comments here.
We will be prepared for the Capital Market Update. Again, that's a very relevant question. That's a very relevant question.
And just on your net debt leverage, arguably, it's been below your 2.5x through the business cycle, even in a pretty weak, I guess, demand environment, let's say, going into the last year. As we recover from the pandemic, what are your views on capital allocation? You've obviously been putting it towards bolt-on acquisitions. Is there some plan, I guess, to be more aggressive with the cash in terms of investment cycle or the shareholders? That would be useful as well.
Absolutely. It's actually, as you know, as we mentioned before, we are going to close Igloo during the fourth quarter here. And that will mean that leverage is going to go up to approximately around 2.8x. So -- and then filling in with what Juan said before that we are maybe not going to do another transformational acquisition within the coming 12 months, but we are certainly going to continue to work with the smaller and medium-sized acquisitions here. So I think we are -- with the things that is already decided, I mean, we are going to take -- the leverage is going to go up. And as we have said, around 2.5 and that can vary over time. I mean going significantly above 3x is, of course, something you need to have respect for and need to have a clear plan if you would consider doing that. But the target is around 2.5x.
There will be no further questions at this time. Please go ahead, speakers.
Well, thank you very much, everybody, for your attention. We appreciate your interest in Dometic, and we will keep working in delivering strategic agenda and to reach our financial targets. So thank you very much for today, everybody.
Thank you very much.