Dometic Group AB (publ)

STO:DOM

Earnings Call Analysis

Current Market Challenges

Dometic faced significant headwinds in Q3 2024, marking a continued trend of declining sales. The company's organic sales were down 14% year-over-year, with all segments, except Land Vehicles in EMEA, experiencing negative growth. The Service & Aftermarket segment saw an 11% decline, contributing to overall weaker performance. The cautious demeanor of consumers and retailers alike has led to reduced inventory levels and hesitant purchasing behavior. As the industry approaches a low season, the outlook for Q4 remains precarious with expectations of continued volatility.

Financial Metrics Overview

For Q3 2024, Dometic reported adjusted earnings per share (EPS) of SEK 0.59, down from SEK 0.97 a year earlier. The company's EBITA margin fell sharply to 8.6% from 14.3% in the previous year. A significant factor contributing to this decline was the reduced sales volume, as well as inefficient manufacturing processes resulting from lower production levels. Cash flow remains strong at SEK 1.3 billion, although this is a decrease from last year, with a net debt-to-EBITDA ratio of 3, an increase from 2.9 a year prior.

Regional Performance Insights

Regionally, performance varied dramatically. The Americas segment saw a staggering organic decline of 23%. Land Vehicles APAC registered a drop of 19%, primarily driven by a regression in RV manufacturing in Australia. The Marine segment also experienced a decline, with organic growth falling by 13%. Despite these challenges, EMEA's Land Vehicles managed to maintain a modest growth level due to stable aftermarket services. The EBITA margins in this segment increased to 6.5%, partially mitigating losses from other areas.

Guidance and Strategic Focus

Looking ahead, the management does not anticipate major changes in consumer demand heading into Q4, which is traditionally the weakest quarter for Dometic. There is acknowledgment of an unsatisfied market demand, suggesting potential for a future recovery as economic conditions stabilize. The company's strategy includes reducing costs through restructuring efforts and enhancing their product lines to improve competitiveness. Dometic intends to increase R&D investments, focusing on high-quality, lower-cost products to cater to shifting consumer preferences.

Restructuring and Future Outlook

Dometic is set to implement a restructuring program to address the slower-than-expected recovery. This includes potential divestitures of underperforming segments, as well as adjustments to align their cost structure with current market realities. The outlook for 2024 appears cautiously optimistic, with expectations of a stabilizing RV market, anticipated growth around 3% compared to previous projections of 15% to 20%. The company aims to restore profitability and improve operational efficiency in the upcoming quarters.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to Dometic Q3 Report 2024. Today, I am pleased to present CEO, Juan Vargues; CFO, Stefan Fristedt; and Head of Investor Relations, Rikard Tunedal. [Operator Instructions]

Now I will hand the conference over to the speakers. Please go ahead.

[Juan Vargues, executive]

So good morning, everybody, and welcome to this presentation of the Q3 report for Dometic. Let's start immediately with the highlights. So the market remains challenging, clearly, despite the fact that the interest rate decreases have been announced. We feel that both consumers are still cautious with the purchases, as well as the value chain, meaning retailers and distributors, continue to be very, very, very cautious and avoid to build up inventories as much as they can, especially in front of the low season that we are approaching now.

Retail inventories, on the way down. Lower than last year already. But as I commented already, we feel cautiousness from customers. OEM, weak all over the place and in all verticals, which is not [indiscernible]. I have to say that, that part of the business was very much expected during the quarter. We already saw what happened in Q2 with both Europe and APAC coming down from an OEM perspective, and that situation accelerated quite a bit during Q3.

Looking at sales, 14% down organically, with Service & Aftermarket 11%. And basically, a decline in all segments with the exception of Land Vehicles EMEA. Distribution, equally down minus 10%, and a little bit the same weak in all verticals especially, as you all know, Mobile Cooling Solutions is the major part of the Distribution business. And then we are very much, as expected, 20% down, where we saw both the EMEA Land Vehicles organization and APAC coming down according to expectations.

EBITA margins down 8.6% versus 14.3% last year as a consequence of lower sales, also as a consequence of the much lower sales in the Service & Aftermarket and Distribution. That causes -- obviously, when it came as unexpectedly as it did, it causes some extra inefficiencies in our manufacturing that we are obviously working in order to correct. And that leads to a situation where we will accelerate even more our strategy implementation, and I will come back in a few minutes about that.

Cash flow continues to be strong. We came in at SEK 1.3 billion, which is lower than 1 year ago. But of course, our inventory situation is also different than what we had 1 year ago. And leverage as a consequence, ended up 3 versus 2.9, 1 year.

So looking at sales, SEK 5.6 billion or 14% down organically, with EBITA, ending up about SEK 483 million or 8.6% EBITA margin versus 14.3%. Adjusted EPS at SEK 0.59. And cash flow, as I already commented, ending up at SEK 1.3 billion. And leverage at 3.

Looking at the year-to-date numbers, SEK 19.8 billion or 11% down organically, with EBITA at a little bit above SEK 2.3 billion or 11.7% EBITA margin versus 13.4%. And of course, there, we have seen a deceleration in Q3, especially, let's just remember that the previous 4 quarters, even if the sales was down, we improved margins quarter-by-quarter. So we have seen quite a bit of a change, very much driven by the Service & Aftermarket. EPS, adjusted EPS, ending up at SEK 3.56, and cash flow that ended up at SEK 3.4 billion and a leverage of 3, as I already commented.

Looking at the sales development, of course, not a very pleasant picture with 10 quarters with negative growth. And it's everywhere at this point in all our segments, we saw negative growth. Again, the surprise was not the OEM, but rather the Service & Aftermarket and Distribution businesses that came down after, I could say, a positive development in Q2, we turned back to negative in Q3 again.

Looking at different sales channels, no major changes. In reality, the change is that the Distribution business is weighting a little bit higher since it is dropping less than the other 2. We see as well that the RV OEM business represents today 21%. We are coming from 22% approximately 1 year ago. Other than that, it's very, very similar.

Let's have a look, the real surprise for the quarter. I mean as you can see on the upper chart, we see 2019 and the typical seasonality that we see year-on-year. We see as well 2024 getting very, very close to the same seasonal pattern as we have seen historically, being 2022 and 2023 really exceptions. We have expected, really, Q3 started to get close to 2019. That never happened as, again, it's difficult to understand. We have spent a lot of time trying to analyze reasons. We can only find 2 reasons talking to our dealers, talking to -- and the view on how consumers are behaving.

What we hear is that where consumers normally did upgrade and replace all products, just now they are preparing on the hope that the product is going to last for 1 more year and then see what happens on the next season. But of course -- so that's from a consumer perspective. From a dealer perspective, it's very much prone to avoid it and up inventories now, especially when getting close to the end of the season in Q3. And that's also what, just now, we don't expect any major changes on Q4. Seeing what happened in Q3, we believe that even Q4 will continue to be volatile and weak.

Moving over to EBITA and EBITA margin, of course, disappointing to see that after 4 consecutive quarters, where we were improving on our margins despite lower sales, Q3 came in as a negative surprise. And we will, of course, work hard to repair our margins again. Lower sales is one of the reasons, but the other main reason is, again, the lower sales on Service & Aftermarket. We have been working on reducing our expenses, and they are down. But as a percentage of sales, of course, they are coming up, and we will work on that to take it out again.

Looking at different segments, Americas, down 23% organically. Service & Aftermarket turned back after a positive -- or rather positive, I would say, Q2, turned down to a negative in Q3. OEM continues to be weak. We saw also expectations for 2024 coming down as well as expectations for 2025 [indiscernible] coming down as well. EBITA margin, minus 8.2% versus positive 1.7% last year. Here, obviously, we are working on doing everything we can to turn it to positive as soon as we can.

If we move over to Land Vehicles EMEA, organic growth down 12%. This is really the exception confirming the rule. LV -- Land Vehicles EMEA. We saw Service & Aftermarket pretty stable. We, on the contrary, saw also a deceleration of the OEM business, something that was announced. We have been talking about that now for a couple of quarters. Started already in Q2, accelerated in Q3. EBITA margins, 6.5% versus 2.6% (sic) [ 12.6% ] as a consequence of the much lower levels in our factories, and something we are working also to correct as we speak. And of course, the lower volumes are creating additional inefficiency in supply chain.

If we move over to Land Vehicles APAC. Even here, we saw an acceleration of the OEM negative growth. Totally, we ended up at minus 19% in organic growth, and it's very much driven by the RV manufacturing decline in Australia. Australia went up basically from an average of 22,000 units for years into 31,000 units during 2021 to 2022, and we see that it's coming down to normal levels again. EBITA margins in LV APAC ending up at 25.9%, which is -- we are very happy, obviously, to maintain those high margins despite quite a hefty drop on the top line. And we see even here, obviously, the impact -- negative impact of the lower sales and the negative Service & Aftermarket as well.

Moving over to Marine, 13% down organically. I think we need to compare those numbers with many of our customers that are seeing both 25%, 30%, and some of them even 40% down in negative growth. So again, the technology transformation helps us to maintain still a moderate drop in comparison to our peers or our customers. Even here, we saw a decline in Service & Aftermarket, again, from a more positive Q2 to a negative Q3. And OEM, still very, very, very weak. EBITA margin, even here we are happy to see that we are mitigating the negative effects of the volume drop, and staying at 19.3% versus 24% last year.

Mobile Cooling Solutions, minus 9% in the quarter. We saw an improvement in Q2, and then we saw a [ deceleration ] in Q3. Prior to Q2, it was very much about inventory readjustments at our main customers in the U.S. market, even if sell-through was pretty good. In Q3, we saw something else. We saw really sell-through from our customers to consumers coming down. And then we saw as well that our customers, retailers really postpone their orders. We are seeing some improvement during the first couple of weeks of October. But again, the market is behaving very, very, very volatile. So we have to be careful. And we see we continue to take share on the markets where we already have a very strong position.

The EBITA margin, 7.3% versus 10.2%. And we are launching -- we have launched a new series of cooling boxes. We launched one new series in Q2. We are launching a new one in Q3, and more growth in the pipeline.

And then finally, Global Ventures, even here, down 19%. We declined in the residential business but also declined in Mobile Power Solutions that have been holding up very, very well, but now impacted also by the RV and Marine situation. EBITA margin of 9.2% versus 16.9%. We had a very, very strong Q3 last year. That's also true. Hospitality developing well and holding very well margins. And we continue -- this is one of the areas, obviously, we will continue to invest and accelerate our investments in product development.

If we move over to innovation and product launches. I commented, we launched the new CFX2 series during Q2. Now we are launching the CFX5, while the CFX2 series is really there to address the need for lower priced products. So still high-quality, but less features. CFX5 is really the ultimate cooling box, active cooling box, that Dometic -- the best product that Dometic has ever produced before. And is already now launching on the U.S. and Australian market, and also we are working on the European markets.

We also launched during the quarter the first cooler new generation Dometic soft coolers. That's another product area where we are investing quite a bit, and we continue to do so since we believe that that's an underlying growth market. We are also very active in terms of channels. We have a new partnership signed with Volkswagen, where we are going to be the partners with a number of our products in connection to the launch of the new California series of panels.

And then looking at sustainability. Good to see that all parameters are better than target, with the exception of ESG audits that we will put a lot of attention to in Q4 to get in line again. Very nice to see as well a Product Innovation Index. You may remember that we were up to 26%. Then we got the pandemic, because of the inventories, we were postponing a number of product launches, and now we are improving quarter-by-quarter. And we are moving towards our target of 25%.

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

[Stefan Fristedt, executive]

Thank you, Juan. Starting off with taking a look on our income statement for the third quarter. The gross margin is down approximately 3% units versus last year, driven by lower volumes, which is causing supply chain inefficiencies and including factory cost variances and the higher logistic costs in relation to net sales.

On operating expenses, we are below last year. However, as the net sales is down, it increases in percentage of net sales. And we continue deliberately to invest in R&D in our strategic growth areas, which you also can see as the innovation index continuous upwards. Then we have the line, amortization and impairment, obviously, a significant number in the quarter, driven by the goodwill impairment of SEK 2 billion related to the segment Land Vehicles Americas that we communicated on Friday last week.

Then moving on to the net financial expenses, it's almost on par with last year. But looking a little bit closer into it, we can see that the net interest on bank loans and bonds is coming down. It's SEK 154 million versus SEK 198 million last year. Then we have some FX for valuation and other items making up the rest. Taxes, minus SEK 60 million compared to SEK 192 million. And the tax rate is, of course, impacted by the impairment loss. Then the adjusted year-to-date tax rate is 32%, which is compared to 29% last year. And this is driven by country mix as well as nontax deductible interest cost, which is obviously going to be mitigated over time with that the interest cost is on its way down.

Moving over to cash flow. We had a robust operating cash flow of almost SEK 1.3 billion in the quarter. Not at the same level as last year, but that's what we have communicated before that we didn't expect that either. But it's driven by continuous working capital improvements. Moving a little bit further down into the cash flow statement, looking on income tax paid, it's slightly higher than last year, but that's more related to timing effects than anything else.

Then we have on acquisitions and divestments, SEK 56 million, and that is related to a payout of holdback of purchase price, which was there to cover any potential claims against the warranty and guarantee catalog but as were no effect according to that, we paid that out now during the third quarter. On the financing side, we are almost negative SEK 1.5 billion, and that is driven by that we have paid back USD 100 million according to plan in the beginning of the third quarter. And last year, we did a repayment of a bond of EUR 300 million.

Going to the next, you see the operating cash flow laid out over time. And there, you can see that the almost SEK 1.3 billion in Q3 is a good Q3 quarter, looking in a historical perspective, going further back than 2023, obviously. So happy with that. Looking into working capital. We can see that the working capital the last 12 months is 30%, and it's down 2% on units versus net sales. On accounts payable and accounts receivable, it's a stable development.

Looking into inventory, we have in the last 12 months down the inventory balance with SEK 1.5 billion. And the number of days inventory outstanding is now 139 compared to 146 last year. We continue to work on optimizing working capital, especially on the inventory side, and we see further potential in this area.

Looking on CapEx and research and development spending. CapEx is 1.7% of net sales compared to 1.6% 1 year ago. And the last 12 months is 2% of net sales. so slightly down in Q3. On R&D spending, we are on 2.7% compared to 2.3% of net sales. It's including capitalized development expenses of SEK 13 million. And as I mentioned before, we are deliberately continuing to invest in structural growth areas, and this means that the last 12 months, we have had 2.5% of R&D spending in relation to net sales.

Moving on to the next. We have our graph sharing our net debt-to-EBITDA leverage ratio. It ended at 3.0 compared to 2.9 1 year ago and 2.9 in Q2, so slightly up on a sequential basis. Obviously, reduced EBITDA is having a negative impact, but it's partly offset by robust cash flow and somewhat also on the fixed development. We continue, obviously, to have a high focus on -- in the organization on protecting margins and reducing working capital, and we can just repeat that we are committed to move towards the leverage target of around 2.5x.

The last is showing our debt maturity profile. As I mentioned before, we paid back USD 100 million on July 1, 2024. And the average maturity is 2.3 years. If we include the extension options, it's 2.7 years. And the average interest rate is on its way down and is now on 4.9%.

So with that, Juan, I'm handing back to you to summarize.

[Juan Vargues, executive]

Thank you. Thank you so much, Stefan. I mean, before that, I would like to comment a little bit more about our strategy implementation. Since 2019, we have been working very, very hard to implement the strategy that we announced in May 2019. We have changed enormously in the state that we have in the company, reducing our exposure to OEM it seems, Service & Aftermarket and increase in Distribution. Of course, is when you look at the sales partner in the last 10 months, it's disappointing to see negative growth. Having said that, we get a pandemic every 100 years statistically. And hopefully, once we are live in this post-pandemic situation behind us, we will see that Dometic is a much more stable, much more resilient company than we used to be.

We see innovation index coming back again after the pandemic. So we are very happy about. We believe that, that will generate organic growth down the road. We have reduced our cost base by taking down the number of factories from 28 to 23, and also by obviously adapting our workforce to a new situation in the market. Just as one comment, we are -- we have reduced more than 3,000 people in the last 3 years as a consequence of the pandemic.

What we are doing just now is twofold. On one side, we are looking at a new restructuring program it is clear that the recovery that we expected is moving slower than we believed. We need to adapt our cost base to a new situation. At the same time, as we announced a couple of years ago, our intention as well to divest a number of areas, something we have been working on. We have a couple of them already ready for the market. At the same time, we will increase or we are looking at increasing the number of areas that there are potential divestments going forward. We intend to spend the coming couple of months working on all the details, and more information will be shared with all of you during the quarter or the latest in connection to the Q4 report.

And then summarizing the situation. More of the same, the market still is challenging, remain challenging and volatile. Difficult to predict what is going to happen, again, with the exception of the OEM, which is quite predictable. We believe is going to stay in the same situation during Q4. We -- as I commented, we saw that our customers, dealers, distributors are very, very cautious on building up inventories. Hopefully, when it turns, we will also see an acceleration of that. We see also consumers during the last months being as well, very, very cautious in spending the money in average replacement or products.

Clearly, we are not satisfied with the profitability that we showed in the quarter came, as I said, a surprise when Service & Aftermarket came down at the same time as our factories did suffer from the lower volumes for the OEM. Keep in mind that our factories are primarily driven by the OEM businesses. And that's why we are looking at the restructuring program. Strategically, we keep investing in our structural growth areas, and we will accelerate our strategy implementation.

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

[Operator]

[Operator Instructions] The next question comes from Fredrik Ivarsson from ABG.

[Fredrik Ivarsson, analyst]

I got 3 questions. First 1 on Marine. You obviously referred to a tough market environment here with, I guess, customers down around 20%, 30% on average. And then when I look at the sort of market expectations of these peers or customers, if you will. I noticed a quite steep expected improvement in Q4, still maybe negative and not positive, but an improvement from Q3. And then positive growth as we look into the beginning of next year. And I'm curious to hear whether you have the same view or what kind of visibility you have when you look into the coming, say, 3 to 6 months in Marine?

[Juan Vargues, executive]

So we'll start with the first question, Marine. I do believe that we need to be very, very careful. I mean, of course, some of the Marine customers might see some improvements depending on where they are coming from and the subsegment within Marine. But I mean we had one more report yesterday, as late as yesterday, coming from Polaris expecting minus 40% for this year. So I think it's a mixed bag. I don't expect any major improvements in the short term.

On the contrary, I mean, we need to keep in mind that the marine markets, if providing that Q4 is going to be negative, which I believe is going to be negative as an industry. Of course, that will show that we have 18 months of drop for Dometic, and we will have about 2 years or drop for the industry. So of course, as soon later, it will stabilize in the same way as it has stabilized on the RV industry.

If you look at the RV industry is not developing as expectations, but it's stable. So keep in mind that the expectations for 2024 for the RV industry was 15% to 20%, and the market is going to end up at [ 3% ]. And I believe that we will see most probably the same evolution of Marine. So again, I believe that we need to see some less volatility, and we see some more continuity before we can foresee what is going to happen in 2025.

[Fredrik Ivarsson, analyst]

Yes. Makes sense. And then second one on margin. EMEA was down 6 percentage points year-on-year, quite steep drop, especially when looking at the previous quarters when you sort of expanded the margin. Can you really talk on this sort of soft margin a little bit? I appreciate the inefficiency comments and so forth, but some more color on this margin drop.

[Stefan Fristedt, executive]

It is obviously driven by the fact that the utilization in our factories were on the low side. I mean it's the combination of that we -- obviously, I lost my track here, sorry. No, but it's driven by the low utilization in the factories and then also that we still are seeing higher logistics costs. And then you need to keep in mind that logistical is not only what we pay to the freight forward, so there is also some big cost factors in this type of cost.

And then we see, especially on the CPV side, lower margin. And yes, to compensate ourselves with different surcharges and so on, it's a little bit more difficult in that customer space thinking about higher application costs from China, for example. So I would say that that's -- I was saying before that it is lower demand, obviously, but combined that we are also reducing inventory quite a lot, which is obviously, also, yes, making the utilization in the factories lower than what they would normally be.

[Fredrik Ivarsson, analyst]

Okay. And then last question from my side. On the impairment in the U.S. Is it any specific of the acquired companies that this relates to? Or is it the whole sort of portfolio, if you will?

[Stefan Fristedt, executive]

Is actually not related to any of the acquired companies. It's related to intangible assets that was created as far back as 2011 when the current Dometic structure was inaugurated when EQT took over. So nothing related to the newly acquired countries.

[Operator]

The next question comes from Daniel Schmidt from Danske Bank.

[Daniel Schmidt, analyst]

Stefan, a couple of questions from me then. Just coming back to what we just talked about in terms of utilization being lower in the factories as you lower the inventories, which has, of course, created a good cash release for the past couple of quarters. How should we look at that correlation in the coming quarter or quarters?

[Stefan Fristedt, executive]

Yes. I mean in terms of working capital, as I said before, we still have too high inventory levels. So that we -- even if we have done a very good job in reducing inventories, there is still more to come on that side, and that's something that we will continue with. That it's not the same for all segments, right? It's -- where we have high inventory levels is still in LVA, to some extent in Land Vehicles EMEA as well. Then for the other segments, it's more of a continuous management from to quarter-to quarter.

[Daniel Schmidt, analyst]

Yes. I just mean should we expect the same impact in terms of underabsorption of fixed cost, which is probably, as I understood it, what you're referring to happened in Q3? Is that -- should we expect an equal impact? Or is this mitigated by -- you talk about structural cost savings coming to that before the Q4 report. Is that something that could sort of be implement then you would see a better balance between taking inventories lower and not having the same impact on absorption of fixed cost in production?

[Stefan Fristedt, executive]

Yes. But I mean, in the very short term, of course, I think we are also writing in the report that we don't expect any dramatic change in demand for the coming quarter, right? And it's also from our smallest quarter in general because of seasonality. So -- but then in a little bit more medium term, of course, the program that we're already going to come back with in Q4 or in conjunction with the Q4 report, that is, of course, to address this situation.

[Daniel Schmidt, analyst]

Yes. Okay. Okay. Then maybe sort of what -- as I understood, what surprised you was really sort of the Service & Aftermarket segment coming down the way it did. Was that very sudden as we got into sort of August, September? Or could you give us any sort of -- shed some light on the sequencing of what happened Service & Aftermarket and what you see going into the last quarter of this year? I hear you that you're saying not that much has changed, but sort of how that progressed in the quarter?

[Juan Vargues, executive]

It was a stepwise deterioration. We saw July come in weaker. We saw August coming considerably weaker. We saw an acceleration in September, clearly. And I guess that our assumption is really that what happened is that our customers and dealers is -- once are consumers being careful, as I commented, but also dealers, looking that Q3 didn't develop from the beginning as expected and didn't reorder for the quarter. So that's our interpretation of the situation.

And I have to say, I mean, question for you will be, obviously, what you expect in Q4? I don't expect any major changes, I have to say. I believe they're looking at volatility, looking at -- what I believe consumers is just now waiting to see the interest rate decreases in the world.

[Stefan Fristedt, executive]

And as I said, keep in mind that Q4 is seasonally our smallest quarter, especially on Service & Aftermarket.

[Daniel Schmidt, analyst]

Yes.

[Juan Vargues, executive]

At the same time, I do believe -- at the same time, I have to say that obviously, now if we look at the trends and we look at the charts, it's clear that we have seen a trend moving to the minus 10, then minus 10 -- minus 1, sorry, minus 11. So we need to believe that there is an unsatisfied demand out of the market. So sooner or later, it's going to turn. And I think that all the negatives that we have been suffering from we were seeing turning into something positive. The question is when are we going to see. We believe that we were going to see that and it never came. So that's why -- I'm sorry, but I believe that just now we need to be a little bit careful and we need to see some consistency in the numbers before we look at the crystal ball.

[Stefan Fristedt, executive]

As Q4 is the smallest quarter, then we know that we see some starts normally sometime at the end of Q1. And Q2 was obviously the largest Service & Aftermarket quarter that we have, so we're thinking a little bit ahead.

[Daniel Schmidt, analyst]

Yes. But would you say -- when you look normally at Q3, would you say that sort of the rebalancing when it comes to inventories at retailers and them being more reluctant to take on inventory as they head into the low season, is that rebalancing -- is that decision and rebalancing normally done in September? Is that constantly done through the end of the last quarters of the year as well? Or is that big sort of decisions taken in September?

[Juan Vargues, executive]

I mean normally, with Service & Aftermarket. Distribution is a little bit different. While Service & Aftermarket is very much done already when you see how the season is developed. So I think Q3 is very much -- if you take the first part of Q3 is already when people feel how floor traffic looks like, how sales and orders are looking. I mean one of the things that we are hearing from many dealers is that the waiting times for a loading bay where you are repairing your RVs is coming down quite dramatically recently, which is obviously telling you that people are doing what is necessary to change, to get their RV or the boat to last for 1 more year. But as I said, they are not upgrading, they are not replacing. And of course, sooner or later, we'll see that change.

[Daniel Schmidt, analyst]

But I'm just trying to get to sort of the retail cautiousness. Maybe the bulk of that is already been sort of decided on and more drama probably is not going to happen in Q4. I'm not saying it's going to get better, but we've done that reset.

[Juan Vargues, executive]

Well, there's also -- I mean, they know how it looks like until yesterday, but they don't know what is going to happen tomorrow. So I mean provided that you -- I mean, you need to measure floor traffic, how the order intake is coming down to your bays. So I don't think that you should try -- I think, is very, very difficult. Something happens to and you have to do something, right? So to me, it's very difficult to foresee.

Again, I foresaw 3 months ago that Service & Aftermarket would continue to move upwards, but it didn't, it turned negative. So just now, I do believe that we need to look at what we are getting in every single week. Again, the value chain just now is expecting changes, but the changes are not taking place at the speed that we would like to. None of us. I don't think that our dealers are happier than we are.

[Rikard Tunedal, executive]

Okay, Daniel?

[Operator]

The next question comes from Martha Ford from Jefferies.

[Martha Ford, analyst]

I just had a question on your restructuring program. You mentioned the divestments to form part, and you already had a couple of those lined up. So I wondered if you could give more detail about what they could relate to. I know you've mentioned LV Americas as a potential area for divestments.

[Juan Vargues, executive]

I'm sorry, but obviously, in terms of divestments, we have not communicated. What we have communicated is that we have a number of companies that we have been working on. And of course, we need to be very, very careful. You know that we have many people in our organization and to reveal which areas we are looking at might have a negative impact. So that's a piece of information that we keep for ourselves.

What I can share with you is that we are talking about either nonstrategic areas, meaning old acquisitions where that fit very much into the business 15 years ago, but they don't fit anymore now when we are performing more of a consumer business, right? Or areas where we have lower margins and very, very little Service & Aftermarket revenues. So there are very, very small recurring revenues over time. So those are the 2 areas that we are prioritizing.

[Martha Ford, analyst]

That makes sense. And then just to understand your performance in Mobile Cooling Solutions. It's a bit surprising given one of your key peers has seen pretty strong development there and is expecting like further strength. So how -- why is [indiscernible]?

[Juan Vargues, executive]

But is -- yes, no, I understand where you're coming from and I understand who you are referring to. So it is clear that they are basically 60% D2C, we are 10% D2C, not to say that we have. They are over 50% [indiscernible], whereas [indiscernible] is about 10%. So that's another upside, but we are not there. So those are the major differences.

If we are talking about hard coolers, which is really what it is coming from, we are improving our market share even today. So even if the market is coming down slightly, we are improving. So again, the comparison to our most important peer, I would say, is twofold. Is one [indiscernible], where there is above 50% of the revenues is [indiscernible] and the other one is the trend, while we are 10% on it.

[Operator]

The next question comes from Gustav Hagéus from SEB.

[Gustav Sandström, analyst]

I'd like to circle back to the impairment of the [indiscernible] that you announced the other day. Is it fair to assume that you're taking on book value for your U.S. RV or U.S. Land Vehicle business from, say, 6.5 to 4, 4.5? And referencing that, why now? I mean this has been a market that has been troublesome for quite some time, but it seems like registrations are -- or shipments are improving, right, and we're at the bottom of the cycle. What drove you to sort of look over the book value at this time?

[Stefan Fristedt, executive]

Yes. Now that it's correct, the numbers that you are [indiscernible] all so correct. Then concerning why now, I mean, this a continuous process that we are exercising more or less every quarter that we obviously have to review the value of our assets. And as you know, the value of intangible is obviously driven with -- when we're looking into to the plan for the future, and obviously, the development that we have seen so far and recovery we have, adjusted our assumptions there. So it's adopting to the market situation and what we basically believe is realistic going forward here.

And also, yes, it is something that is ongoing on a continuous basis. And it is this quarter when we saw that we came to this conclusion. Obviously, our plans for 2024 was different than how it has been playing out so far and then very much also driven by the development, obviously, in -- versus the RV OEMs, but also on the Service & Aftermarket. So it's -- that is what has been flowing into this. And as we also noted in our annual report last year, this was the segment with the smallest margin on -- in the impairment test.

[Gustav Sandström, analyst]

Sure. And looking at Valterra, is it fair to assume that of the remaining for SEK 4 billion, SEK 4.5 billion working capital is probably like SEK 1 billion, SEK 1.5 billion. And then Valterra, you said that this mainly related to legacy assets tens of Valterra. I guess the majority of that is still in that segment. So you're actually writing down everything, but those 2 items by more than half. Is that how to interpret it, yes?

Okay. And staying with U.S. RV, can you shed some light on the development in market shares by sort of the verticals? It seems like it's quite well known now that you've been struggling a bit in terms of market shares for awnings and refrigerators. And I assume the latter one, at least, is a bit structural and more international competition. But in terms of the other subsegments, ACs, spares, what have you, how have they developed? And also if you could add a bit of comment on how entangled are they in the rest of your organization in terms of common R&D program, common production sites and so forth with other segments that we [indiscernible] here?

[Juan Vargues, executive]

I think if you look at our entire organization, it's really -- Land Vehicles Americas, we have seen the entry, as you just said, of new players, where we have seen, obviously, a dramatic drop on volumes, which is driving pricing down big time. We opted for not to participate in that price war, which means -- I mean, again, there is no secret. We have lost market share in very much in those 2 growth areas that you commented.

And when looking at the rest of the segments, we already commented Mobile Cooling, I think that you take LV EMEA or LV APAC, we are very much in parity. We might be losing 1% in 1 product area and then we will gain another 1% in a different area. So I see that is pretty stable. On Marine, exactly the same. So I think it is very much on the LVA -- sorry, LV Americas segment, where we have been seeing, on one side, structural changes in the market, but also a price were very much driven by a 40% drop in the market.

I mean keep in mind that even if you yourself commented that the market is growing, it's growing by [ 3%], the expectation for this year was [ 15% to 20%], the expectation for next year is another 4%. So I think that the people having heavy structures are just now trying to keep the structures only by pricing. We believe, in the long run, that's not right, especially if you want to maintain your position as a premium brand.

[Gustav Sandström, analyst]

And circling back to sort of the overlap or entanglement with the rest of the organization from U.S. RV, to what extent...

[Juan Vargues, executive]

Very, very little. I mean, if you look at the Marine business, the Marine business is totally dedicated people, so there is nothing and the same is value with Mobile Cooling. So this is one of the things that we have been doing since I joined the company, we have been really getting organizations that are fully dedicated. I mean you might perceive Dometic has been in one industry. Well, we are not in 1 industry, we are in several industries.

Mobile Cooling has very little to do with RV, apart from the fact that you as a consumer might buy an RV from an OEM or a dealer to an OEM, that you might buy a cooling box in 3 years from now. But that's the only reference. I mean it's like you're thinking about your own home, your own house, if you are thinking about the roof being the same industry as your TV. Again, you buy your product, your home with a number of products installed and then you're equipping your home. That's exactly the same connection that we have been cooling boxes or portable products, and then the OEM side. It's different industries. And that's why we have organized thereafter as different industries.

[Rikard Tunedal, executive]

Okay, Gustav?

[Operator]

The next question comes from Agnieszka Vilela from Nordea.

[Agnieszka Vilela, analyst]

Perfect. So just circling back to Americas. Two questions from me on that topic. Do you expect to regain some market share after you move the production or part of your production back to Elkhart, I think it's awnings? And then also, if you can provide us with the kind of update when it comes to the transition to compressor fridges in the U.S., is that move completed now? Or do you still have some volumes at risk? And also, what is your kind of refrigeration sales in the U.S. mix, if you could share that with us.

[Juan Vargues, executive]

So let me say the second question. The first question was -- sorry?

[Agnieszka Vilela, analyst]

Moving back production to Elkhart, if you can...

[Juan Vargues, executive]

Yes, we are expecting to gain share back. That's totally correct. On refrigeration, we still sell absorption. We don't see the transition being 100%. And that's for several reasons. I mean people that want to be upgrade will opt for such an option. The question is how big is the market. We keep selling. That was the second question. And then you had another one...

[Agnieszka Vilela, analyst]

Just how big is the refrigeration business in the U.S. mix for you?

[Juan Vargues, executive]

Small.

[Agnieszka Vilela, analyst]

Small?

[Juan Vargues, executive]

Yes, small nowadays. Yes. So mean if you look -- coming back to the question from some of your peers, where we have lost market share very much it has been on refrigeration and awnings. On the awnings, it's not structural. It's a question about competition, and that's why we moved back part of the production closer to our customers in Elkhart. On the refrigeration, it's clearly structural.

[Stefan Fristedt, executive]

And on refrigeration, it's -- the volumes that we are running now is mainly on Service & Aftermarket. We have to keep in mind that there is 11 million vehicles on the roads in the U.S., and many of them have absorption technology installed from the beginning. So some of them would, of course, like to keep that as you have to basically reconfigure your RV if you want to run compressor instead of the absorption, so it's -- yes.

[Agnieszka Vilela, analyst]

That's very helpful. And then Stefan, just a question to you. I mean now the net debt to EBITDA is at 3x, but just looking at the typical cash flows development in Q4 and Q1, it's usually not that good, and EBITDA probably will be pressured also by this kind of market situation right now. So can you guide us in any way to what to expect for this ratio in the coming quarters, like Q4 and Q1?

[Stefan Fristedt, executive]

I mean, for Q4, it will not be below 3, right? So that's my expectation. And normally, what you see in Q1 is obviously that we are flat or we are down like 0.1. So it's -- so it will follow that pattern. And then we are obviously taking measures on different areas where that could potentially have an impact, but something that we need to talk on when they were talking about when we are occurring. So leverage will remain on 3 or a bit higher for the coming quarters.

[Operator]

The next question comes from Douglas Lindahl from DNB Markets.

[Douglas Lindahl, analyst]

I wanted to circle back to Marine. Just to clarify, we've had obviously hurricane season now in Florida. And I was just curious to hear if you had heard anything in terms of how that's impacted the production sites? Yes, in general, impacts for the marine industry in general, any comments on that?

[Juan Vargues, executive]

Whenever you have a hurricane hit in our customers, of course, you have -- on one side, you have a delay. So obviously, we are fully occupied in getting back to business. And then normally, what happens as well is that your aftermarket will -- I mean, unfortunately, it's always when you have a tragedy, it's always tough, right? But normally, for business, it has a positive impact down the road is when are you going to see that? Are you going to see that in Q4? Are you going to see it in Q1? But normally, over some time, it has a positive impact.

[Douglas Lindahl, analyst]

Okay. But we have...

[Juan Vargues, executive]

Sorry, go ahead.

[Douglas Lindahl, analyst]

Yes, on the factory side from the OEMs, you haven't seen any factories being damage or anything like that?

[Juan Vargues, executive]

No, no major damages. On the contrary, we have some damages in some of our suppliers.

[Douglas Lindahl, analyst]

Okay. And then sticking to the U.S., I read that you haven't said anything basically on the Eagle lawsuit. But just -- yes, you're wording on what's going on there or what has changed in recent time would be useful.

[Juan Vargues, executive]

What we have seen is really that, again, we saw a clear improvement in Q2. We were running close to 0.

[Stefan Fristedt, executive]

It's on the lawsuit.

[Juan Vargues, executive]

Oh, the lawsuit, sorry.

[Douglas Lindahl, analyst]

Yes, sorry. It's on the lawsuit, specifically. Yes.

[Juan Vargues, executive]

I was on what -- on the lawsuit, no news whatsoever. So we had expectations still that we will know more by April next year.

[Douglas Lindahl, analyst]

Okay. Good. And then my final one is basically shifting away from what's going on right now and just looking at a future where your balance sheet is back to a good situation and volumes are solid again. I was just curious to hear what -- if stars are aligned again, what would be an ideal acquisition for Dometic? And where do you see the business increasingly focused over the next 5 to 10 years, ideal acquisition is the question basically?

[Juan Vargues, executive]

But we have been investing -- if you go back in 2021, 2022. We were doing quite a few investments, on one side, on the portable product area. Moving more away from high discretionary spend into low discretionary spend. So that was one of the targets. The second one was Mobile Power Solutions. And those are, together with Marine, the 3 areas where we see more investments coming through. And of course, I mean, again, you should never say never, right? But we have seen that we don't see the need of having more factories. We don't see the need of having more OEM-driven businesses, we see more distribution, more consumer basically.

So again, I think unfortunately, we got a pandemic in the middle, right? But if you see what we have done in the last [ few ] years is a lot to change our mix from high discretionary spend into low or lower discretionary spend. Of course, the pandemic is changing or statistics is challenging, all facts that we have prior to the pandemic. But that's where we need to go back. And that's why also we are communicating as we are doing that we want to invest more in the underlying growth areas. We see that anything having with energy is going to be a growth area. No matter just now the automotive industry has not is coming and it's going to be much more than we have today, even if it's not going to be 100%, right?

We see that the expectations for coolers up to 2030 are 8% for several years. So of course, we want to be part of that journey. We know that we are underrepresented on Dreamwear. We would like to be a part of the DreamWear market, which is very much consumer-driven. So I think we have a lot of clarity on where we want to invest. But that also means that we need to be focused even more -- even faster. And looking at the situation that we have seen in the last quarters, it makes it even more actual to hurry up. We don't want to be in the same situation on the next cycle.

[Operator]

The next question comes from Stephanie Vincent from Bank of America.

[Stephanie Vincent, analyst]

A lot of them have already been answered. But I was wondering about the servicing business versus the OEM business. So on your customers' inventories -- it's a bit of a question. We realize the inventories at the dealers are fairly high. But I was just interested in do you guys keep up with like the average age or holding period of recreational vehicles, and sort of where you believe the underlying demand or replacement cadence is? And maybe if that's been -- I mean, we know it's been pulled forward by the pandemic, but just interested to know if the RVs and Marine products that are outstanding are mostly newer now than they were before?

[Juan Vargues, executive]

Yes. Yes. We know that quite well. We know it by the whole industry, looking how the fleet has been increasing in recent years prior to 2022, obviously. And at the same time, we also know the cadence for every single growth area, or the growth area where we are working, obviously. So you don't have the same cadence for refrigerator that you have for air condition equipment, for instance. So you have high frequency and low frequency.

And that explains as well, when we are talking about exiting, when we are talking about divestments, that's one of the -- obviously, one of the areas where we are looking at. It's not the same you have low margins for recurring revenues for the year, but if you have low margins on the OEM and then low recurring revenues. So that makes a huge difference.

[Stephanie Vincent, analyst]

And how can we think about the sensitivity to your customers to interest rates. I know that you're saying that you're expecting demand to be pretty stable in the coming quarters. But what -- how can we look at that moving forward now that we've gotten some rate cuts?

[Juan Vargues, executive]

I think of that even if the rates have been announced, I believe that just now a lot of people are waiting to see those lower rates in the pockets. Normally, it takes some time. You have a delay, right, in the system. So I simply believe that a lot of consumers on one side are waiting for even lower rates. I mean at this point, it's going to be another -- sorry, 0.25 or 0.50 in the U.S. when Fed comes next time, right? We don't know that yet. And I think that's the kind of reassurance that consumers need to see.

So I think it's, on one side, getting more signals, but also seeing the effect on your pockets. Then of course, we will see a difference between the Service & Aftermarket, that I believe is going to be much faster, and then the OEM. On the OEM, you already have -- today for North America, you have a forecast from the association, which is talking about 7%. You have another forecast from Baird, which is talking about 4%. If you just go back a few months back, they were expecting 20% for this year and is coming -- 2024, and it's going to become 3%, and they were expecting close to 15% for next year, and now we are returning to 4% to 7%.

So I think you have a delay on the OEM. It's nothing to drop. It's getting more stable now, but I believe that we should not expect the OEM side to get back to 400,000 a during the coming 1 or 2 years. I think it's going to take a while. I think our Service and Distribution are going in a different cycle, that will be much faster.

[Rikard Tunedal, executive]

Okay, Stephanie?

[Stephanie Vincent, analyst]

That's very helpful.

[Operator]

The next question comes from Johan Eliason from Kepler Cheuvreux.

[Johan Eliason, analyst]

Yes. It's Johan here. I dropped out of the call suddenly a bit early, so I might have missed your reply. But coming back on the issue of the market share losses, we've understand the structural change on the compressor fridges. How does this transition look like in Europe? And is fridges an important part of the profitability in Europe?

[Juan Vargues, executive]

I mean if you look at the European market, it has been there for a while. But the difference between Europe or Australia and the U.S. is the size. So the American sizes, you think about RVs in the U.S. or the sizes in Europe or in APAC are totally different. An American RV, you have a lot of space where you -- and that's what we have been seeing, right, it's very much the entry or residential companies or -- sorry, Chinese companies manufacturing residential refrigerators that in size and features compressor-driven are very similar to what you are using a home.

We don't see that happening in Europe or in APAC, by any means at that kind of speed, simply because the vehicles are different, sizes are smaller and it takes some major investments to adapt to this small industry. The U.S. industry on one side, you have the size of the industry as such, which is twice the size of the European industry or 10x or 15x the size of the Australian industry, but then also the size of the vehicles makes a difference. And then on the profitability, profitability of refrigerators in Europe is not very high, either.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Juan Vargues, executive]

Well, thank you very much to all of you for attending this call. We know that this is a busy -- a very busy day for many of you. And what we can reassure you is that we are doing anything we can, obviously, to restore our profitability after this weak quarter. It came as a surprise for us, and we are doing anything again to get back to where we are coming from. So thank you very much for your attention, and have a great day. Goodbye.