Munters Group AB

STO:MTRS

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to Munters Q1 report 2018. I'm pleased to present CEO, John Peter Leesi; and CFO, Jonas Ågrup. [Operator Instructions]

[John Peter Leesi, CEO, President & Director]

Thank you very much, and good morning and good afternoon to everybody and welcome to the Munters First Quarter 2018 Presentation. We want to start with a few key messages: the first key message is that net sales growth was solid during the quarter even if order intake was a bit softer with variations across business areas. We have talked about some major operational issues specifically around Mexico and our Data Center manufacturing in Europe. These issues have been handled and we see good improvements underway. Lower earnings in the first quarter, yes, earnings are down. However, this is very much in line with our own expectations. And for the remainder of the year, we expect favorable market conditions and we also see that our improvement activities that we are undertaking are delivering improvements and therefore, we believe that we will see improved company performance and improved earnings during 2018. So with these key messages, we would like to move to Page #2, where you have the key headline metrics or information. If we start with order intake, order intake reduced with 1% in the first quarter, but if we look at it organically, we actually had a growth of order intake with 2%. If we look at net sales, we see that net sales actually grew with 5% on a reported basis, however, again organically, we had a net sales growth of 7%. If we look at our earnings level, in terms of adjusted EBITA, it dropped by 22%, but organically, it dropped with 17%. And the 2 main reasons for the drop in earnings is a weaker supermarket especially in the United States but also lower margins in the Data Center business. So over to you, Jonas.

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

Okay, let's move on with Page #3, where you can see the order intake in net sales bridges. If we look at the growth, organic growth or order intake, you can see that we grew the business 2% in the quarter, organic growth, 2% and for net sales, we posted an organic growth of 7%. We continue to see some currency headwinds in the quarter and then you can see, for the order intake minus 4% and for net sales minus 3%. And this is mainly due to weaker U.S. dollar that we have seen in the quarter. And then we have also some structural effect plus 1% both for order intake and net sales and this is related to the acquisitions we made last year, MTech Systems and Kevin. If I then move over to Page #4, this is the order received per region in local currency. We continue to have really good growth in Asia and in APAC and this is mainly driven by China, 40% growth in the region. And you can also see that the share of the total orders for APAC is 21%, which is up 2 percentage points compared to Q4 last year. If you look at Americas, order intake was down 12% and this is mainly related to the commercial subsegment where we have seen as a weaker supermarket end-market in the quarter. But it's also due to the fact that we are exiting some products with non-core components in this products and we have talked about that earlier. Those 2 are the main reasons. And then in EMEA, we saw growth of 5% in the quarter, good growth for Air Treatment. AgHort had good growth in the main part of Europe, but we saw a weak market in Eastern Europe and also in the Middle East. If I then continue to Page #5, this is just an overview of the business areas, we have 4 main business areas, or [ core ] business areas. Air Treatment is the largest one representing 53% of the sales. And as you can see the split is roughly the same as we have shown before. These numbers are just for your information rolling 12 months numbers. In all the BAs, except for Mist Elimination, we see good underlying market growth and as you know, we have seen a weaker Coal FGD market in EMEA that also continued in this quarter.

[John Peter Leesi, CEO, President & Director]

Thank you. So let's move now to Page #6 where we want to cover a couple of business highlights and market comments on a high level. If we start with significant orders during the quarter, we're happy to conclude that we have won 2 large dry room orders for lithium battery manufacturing in Europe and in China. We've also won several large orders in the swine segment in China. Thanks to a quite long-term strategic focus on building our presence around swine in China, which is a big swine producer in the world. In terms of product launches, there is 1 product launch that we feel stands out. We have now actually launched a new energy-efficient data center cooling product. And we will cover -- it's called SyCool and we will cover this in some more detail later on in this presentation. We also have strong development in services, where we see order intake growth as well as net sales growth. And we can see that on a reported basis, services grew with 9% but organically, we actually see a service growth of 13%. In terms of other areas, we see gradual improvements now in our Data Center operational efficiency, which is really good. We are somewhat affected by increased raw material prices and some FX headwinds.

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

We will move on then to Slide #7, where you can see the Q1 bridge for the order intake and you can see here clearly 1% down in order intake but organically, as John Peters said, we grew by 2%. We saw good growth in Air Treatment, 5% organic growth and AgHort 30% in the quarter. And we saw a slower overall Data Center market in the quarter. And we didn't sign any large orders in the quarter. And just for your information, in the first quarter of prior year, we had SEK 82 million order from a customer in the U.S. If I then move on to Slide #8, this is the Q1 bridge for net sales. You can see, it's up 5%. The growth organically was 7% and we saw a good growth for Data Center and AgHort in the quarter on net sales. And we actually reported organic growth for all the BAs except for Mist Elimination, [ which ] continue to have -- it's a weaker market in the first quarter as well. And then service net sales increased by 9% organically, 13% and this was driven by strong growth in rotors and project start-ups, but also in growth in service contracts. I'll then move on to Page #9. This shows the bridge for the adjusted EBITA in the quarter. And adjusted EBITA decreased by 22% compared to the same quarter prior year. We saw lower adjusted EBITA in the Air Treatment segments and this is due to lower net sales and negative product mix. We talked about the supermarket end-market which was slow in Q1 in the first quarter. We saw increased earnings in AgHort, as you can see, and this is due to higher volume, but it was also supported by the acquisitions we made last year. And Data Centers were impacted by remaining project costs from spillover from last year, but also redesign of the production workflow in our European Data Center factory. We continue to see some FX headwinds, the negative effect on the translation [ FX ] in the quarter was minus SEK 7 million and we actually continue to invest in sales organization. This is mainly related to Asia and China where we see good growth, but we also continue to invest in R&D and this is just in order to drive future growth.

[John Peter Leesi, CEO, President & Director]

We will now cover business area by business area briefly and if we move to Page #10, we will start with our business area, Air Treatment. And as we've said a couple of times now, we see an order intake growth of 5% organically. And if we look in what areas we have good growth, we see strong growth in the industrial subsegment where markets in food as well as in electronics where of course lithium battery is a big one, we see good growth. We also see growth in the component side as well as mentioned within services, however, then offset by weaker demand in the quarter in the supermarket end-market.Net sales then grew with 2% organically in Air Treatment and again relating mainly to the supermarket effect. Earnings then dropped from 11.4% in terms of margin, down to 9.6% and this is caused by the product mix as well as what Jonas talked about continued investments in sales as well as in R&D and some FX headwind.

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

We'll then move on to Slide #11 and this shows the quarterly pattern for the Air Treatment business area. Air Treatment has a very, often a quite weak first quarter and this is a clear seasonal pattern as you can see. If we look at the first quarter this year, it was actually stronger than the first quarter in '15 and also in the first quarter in '16. However, it was weaker than the very strong quarter 1 that we had in 2017.

[John Peter Leesi, CEO, President & Director]

And let's move to Page #12 , which is our Data Center business area and as we always say, we have this lumpiness in the business and as you can see, we are having lumpy effects also in Q1 2018.We have an order intake reduction or decrease of 48% organically with no large order signed during the quarter. However, this doesn't mean that the activity level is low. We still been active in the markets with quotations and so on. There is bit of a comparable issue again where we had a good high order intake in Q1 last year with the mentioned SEK 82 million order from a major digital customer in Americas. Then on the net sales side, deliveries have been good and we've seen growth in terms of sales, 24% growth in our net sales and this is relating both to deliveries in Europe as well as in the United States. Earnings are down -- are down markedly and it is relating to the cost overruns and all the activities in terms of production workflow re-designs that we've been working on for 2 quarters now. What we want to say is that we want to be clear on the fact that, this is according to expectations and what we're happy with, of course, is that we have been able to turn the tide and we have a better earnings in the Data Center business than we had in Q4, Q3 and Q2 last year. Gradual improvement here quarter-by-quarter.Now let's move to Page #13 and we're going to do a little bit of a deep dive in our Data Center business in terms of talking shortly about the new product that we launched at the Data Center World in London earlier this quarter. It's called SyCool Indirect Thermosyphon Cooling and it's a new way of actually cooling Data Centers that we have developed within Munters. It is especially interesting when the supply of water is either limited, difficult, unreliable or expensive. So SyCool does not need water in terms of creating a cooling effect. So how it roughly works is that you actually use a syphon effect and gravity where you create a refrigeration cycle by using the excess heat and the exhaust heat from the Data Center, which is sufficient to drive a refrigeration cycle and gives the possibility to cool the air in the Data Center side. And it actually has similar levels of energy efficiency as our leading Oasis products that work then with water.And going forward, we are going to develop this product with this product's family into variations, which will include split systems, which is interesting from the fact that it will probably -- we will be able to provide an option to replace traditional chiller and computer room air handling installations and being successful in this, we will be able to tap into the retrofit market in the future. So we are excited about this product. We believe that we will be able to start manufacturing towards the end of this year and we expect to start seeing orders in the beginning of next year.So moving to Page #14, we just wanted to put Data Center into a higher level backdrop and we wanted to describe the Data Center business road map from the simple past, present and into the future. And if you look at the past and look at where we come from in Data Centers, we were a custom air handling unit manufacturer where the technology that we developed around the indirect polymer based heat exchanger was mostly intended to be used in air conditioning applications. We had manufacturing in the U.S. all of it manufactured inside, no outsourcing and it was a very small American business. So that was like the past and the business start-up phase.If we move into modern times and the present situation, the fact that operating temperatures in Data Centers has created an opportunity for more efficient cooling. We have developed this technology to address this opportunity. We have expanded manufacturing from the U.S. into Europe and we have also addressed new big digital as well as colocation customers. In addition to indirect evaporative cooling, we have also seen direct evaporative cooling growing due to the efficiency of that. And we have developed a broader portfolio of these economizer solutions. We have increased the level of outsourcing, but it's still limited to sub-assembly outsourcing. So here, we're in a phase in the present time, which we call emerging global business.Looking then into the future, we have now developed as our previous slide showed, a new technology for indirect cooling. The SyCool product, which will bring us into the future. We have also established a manufacturing footprint in Asia, in China and now we're a global manufacturer and supplier of these products. And what is important is that this new product development gives us the opportunity to actually start building a service business and addressing replacement opportunities in the marketplace because our business in Data Centers up till now is around new builds. And we will also increase the level of outsourcing to make ourselves more flexible to the lumpy nature of this business and this is the phase we call the future or a truly global and diversified business.

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

Okay. If we then move to the next slide, this shows the quarterly trading patterns for the Data Center business. As you all know, Data Center is a lumpy business and it's very much driven by large orders and there is actually no seasonal pattern in this business.In the first quarter this year, we've returned to profitability after 3 weak quarters.

[John Peter Leesi, CEO, President & Director]

So with this, bit more of a deep dive in Data Centers, we will now move to our AgHort business area on Page #16. AgHort had a good quarter in Q1. We had 13% organic growth on orders and this is swine in China being the primary driver. You should also keep in mind that the U.S. and the important layer market, is still being weak.Net sales grew by 11% organically. And again, mostly driven by China. U.S. again, on the net sales and delivery side, was little bit weaker. And here, you can see the strong development in adjusted EBITA where we have a 54% improvement in earnings. And this is mainly driven by the higher volumes and the operational leverage we get out of this.

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

If we then move to Slide #17, it shows the quarterly trading pattern for AgHort and here we have a clear seasonal pattern where the second and the third quarter are the strongest quarter in the AgHort business. And the reason for that is that we are present on the Northern part of the globe, and during the summer quarters, we see much stronger business than during the winter quarters in Q1 and Q4. So Q2 and Q3 are the strongest quarters for the AgHort business.

[John Peter Leesi, CEO, President & Director]

And with this, we move to Page#18, which is a coverage of our Mist Elimination business, and here you can see that we have a drop both in order intake, 9% down organically and 7% down in net sales. And this is then mainly related to the FGD or the Flue Gas Desulphurization projects that we have seen being especially weak in China.Earnings are down as we can see and we just want to highlight that we are in the midst of this strategic transition, where we will make ourselves less dependent on the FGD, the Flue Gas Desulphurization and the coal business, and focusing more on marine exhaust gas cleaning as well as the process and mass-transfer industries.

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

We move then to page, Slide #19, where you see the quarterly trading pattern for Mist Elimination. There is actually no strong seasonal pattern for this business. And the reason for the lower margins -- as you can see, the last 4 or 5 quarters is the lower net sales level that we have seen in the business. And this is mainly driven by lower coal FGD market in both the U.S. and China.

[John Peter Leesi, CEO, President & Director]

And now we move to the last page of the presentation, which is the wrap-up and a summary. And we would like to summarize the quarter by saying, we had solid net sales growth, but softer order intake with the variations that we've been presenting around the different business areas. We have been talking over 2 quarters previously about operational issues having a big impact on our earnings. These major operational issues in Mexico and [ Bisong ] manufacturing of data centers have been handled and improvements are underway. Lower earnings in the first quarter. Yes, but in line with our expectations, and going forward and for the remainder of this year, 2 things; we continue to see favorable market conditions, and our operational improvements will help us improve the company performance, and our earnings during 2018.So with that, we conclude our presentation and open up for questions.

[Operator]

[Operator Instructions] We have a first question from Jack O'Brien of Goldman Sachs.

[Jack O'Brien, Equity Analyst]

My first question is just on data centers. Obviously, well flagged the one quarter profitability. Just a question on how you're thinking about full year profitability and particularly the margin. How should we think about recovery there is -- these operational issues sort of subside and volumes continue to come through? And secondly, just on data centers, just if we think back to the IPO, obviously, you were very favorable on the indirect evaporative cooling opportunity and the outperformance there, has anything changed in the last 12 months, you are as bullish now as you were then or perhaps more so or less so, and how is the competitive environments?

[John Peter Leesi, CEO, President & Director]

Jack, thank you very much. Let's start with the improvements in terms of earnings going forward. We want to be clear on the fact that we will see gradual improvements. We will not see massive impact changing things when it comes to our operational difficulties and so on. I think, we need to see, we have gradual improvements over the coming quarters in our Data Center business and we have now turned the business from a quarterly loss to a quarterly profit and we will continue to improve that profit. So that is the guidance we want to give on the margin level on Data Centers. When it comes to the technology and the markets and relating back to what we talked about that the IPO, we continue to be positive around the market development. We've talked about the market that is growing on the economizer side of things where our technology plays in, to grow somewhere between 25% and 30%. That, we remain with that outlook, so we remain positive. I wouldn't say, we're less positive or more positive. We are at the same level. When it comes to indirect evaporative cooling, we don't see any difference there either. So we don't see a bigger swing within the economizer segment that indirect is more or less important in the segment. It is the same. So by and large, Jack, we see our view on the data center market is similar to what we had before.

[Jack O'Brien, Equity Analyst]

And would you expect these [ circa ] SEK 500 million to SEK 600 million of order backlog in data centers to be delivered through the rest of the year? That's a sort of underpinning sales forecast?

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

Yes, we expect the backlog to be delivered during the second and the third quarter this year.

[Jack O'Brien, Equity Analyst]

And perhaps, just 1 more before I pass on. You saw some decent growth in services, and obviously, you have a huge installed base to tap into there. How should we think -- how are you sort of aligning the business to go and generate more revenues from services? Are you taking on more employees? How are you organizing yourself to capture that opportunity?

[John Peter Leesi, CEO, President & Director]

Yes, the large installed base we have, and we have talked many times about our relatively low penetration rate when it comes to service on our installed base, and we are going to grow the penetration of the installed base by continuing to grow the contract-based business, and that is also something that has grown. So see now more contract-based business growing than we saw before, which is a good thing. And -- so yes, it's been a good development with 13% sales growth in that sector.

[Operator]

Thank you. The next question is from Henrik Nilsson of Nordea Markets.

[Henrik Nilsson, Senior Analyst of Capital Goods]

Firstly, one on the order intake and the backlog in Air Treatment. I mean order intake came down to the weakest level in, I think, 5 quarters. However, the backlog has increased to 19% year-on-year. Should we be concerned over the dropping order intake? And how should we think about the delivery of this backlog for the coming quarters?

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

Well, if we start with the delivery of the backlog, I mean, we have received a couple of the large orders. It's mainly within the lithium battery sale, but it's also other areas where we have received a larger orders, and these orders are planned to be delivered during this year, during the coming quarters, this year.

[Henrik Nilsson, Senior Analyst of Capital Goods]

And coming to DC. I mean, your previous products was to my understanding mainly suitable in large data centers, very large data centers. So it's non-urban data centers. But I spoke to some players about the new cycle products and they were really excited and then primarily by the opportunity to split the cooling side from the heat-sink side. And you mentioned that it will allow you to tap into a completely new replacement market, and I think that might be related to you being able to address more urban data centers as well. Have you got an estimate for the size of this market compared to your current target segment?

[John Peter Leesi, CEO, President & Director]

Good question. The honest answer is, right now, no. I'm not able to share market data around that, but you are right. And I wouldn't talk so much about rural or urban or whatever. I think, that the product in its first phase addresses situations where water is a concern. In the Oasis product, on indirect evaporative, we use water. We see pockets in the world, where water is the issue. And therefore, we developed this product and this technology and that's the first instance it is addressing, right? So we will continue to sell our Oasis product range into situations with slightly higher efficiency. But when water becomes an issue, we now have a proposal. Okay? Secondly then, which takes a little bit more development, is that we're going to do the split system. And this is when we're tapping into the retrofit and the replacement market. And that will help us with also managing this lumpiness of the business. So I don't know Henrik, if I answered your question, but I still hope that that give some clarity.

[Henrik Nilsson, Senior Analyst of Capital Goods]

And maybe one last thing with data centers, order intake was weaker than I had expected, and you're approaching now a time where, you need to rack up more large project wins in order to be able to fill production for the second half. How is activity level and what you think the outlook for you to actually succeed in filling these production slots?

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

As John Peter said earlier, I mean the activity level has been fairly high in the quarter and the backlog -- or sorry -- the pipeline is still good. The structure of the pipeline is a little bit different from before, where we saw before quite a few large orders. Now it's more smaller orders and mid-sized potential orders. But still the backlog is large and healthy.

[Operator]

[Operator Instructions] We have a next question from Oscar Stjerngren of Danske Bank.

[Oscar Stjerngren, Analyst]

Starting with the question on AgHort, do you know that the -- it was a very strong order intake in Asia, but you said the orders were lower in Americas and Europe, and in particular there was some weather effects in North America, can you just talk a little bit about what would you seeing in terms of the underlying demand and your leading indicators going forward for this market, in particular, in Americas and Europe, please?

[John Peter Leesi, CEO, President & Director]

Well, if we start with Europe, I mean, as I commented earlier, I mean, that the market in Europe has been fairly okay. We have seen a weaker market in Eastern Europe, Russia and also in the Middle East and the main reason for that is lack of financing and weak currencies. And then, when it comes to the U.S., the very important layers, [ like ] sub-segments, as we have not seen so far any pickup in that business. It's some -- it's mixed messages in the market. But we have not seen a pickup in the very important layer market yet. And then, we continue to see very a strong business mainly in China where the large -- mainly swine producers are investing on very high levels.

[Oscar Stjerngren, Analyst]

And you mentioned also it was the weather effect that impacted the quarter in the U.S., do you think that will swing back in the second quarter or is that for lost sales.

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

Normally, we see sales of pads on a good level starting in March, April, in the year and this year, the weather has been -- it has been very cold in the U.S., and it has been snowing, at least, last week. It was snowing in some states and then one part of the U.S. And that has affected the investment level for us in the U.S. in a negative way.

[Oscar Stjerngren, Analyst]

And then following up on the data center discussion, I just want to touch upon China, and your new production facility. Can you talk a little about is it operational, or what are the plans to fill that up, what kind of market activities are you doing?

[John Peter Leesi, CEO, President & Director]

Yes, as we explained earlier, our move into the Asian markets is something that we started earlier with, and we are talking across the whole region not only China, but we are definitely working with customers in China as well as in Japan and other areas of the region. The reason we built the manufacturing was, of course, to get closer with the lead time issues and the transportation issues of actually supplying for years now, products from U.S. and Europe doesn't work. So what we have is a factory outside Shanghai, in Yang Yin and it's a new factory. And it doesn't only produce data center products. It is actually going to produce other products in our portfolio as well. We are now starting manufacturing there on our first project. So we haven't been manufacturing data centers in China. We're starting that now.

[Oscar Stjerngren, Analyst]

And in terms of marketing activities, what does the sort of the plan look like and what kind of discussions are you in with customers at the moment in the region?

[John Peter Leesi, CEO, President & Director]

Well, we are. We have appointed since a few months back, a new heads of data centers that we've recruited in the region. So we are working across our key markets being China, Japan, Australia, Singapore and so on. So we are doing various types of marketing activities to tap into the opportunities in that region. We also have a strategic partnership with NTT in Japan to help us with these activities.

[Oscar Stjerngren, Analyst]

I would just like to follow-up with a couple of detailed questions also, if I may. Working cap, you had, you said, you had a payment that was spilling over into Q1 from Q4 of [ EUR 26 million ]. But still the working capital was quite negative in the quarter. Can you just talk about what happened there?

[John Peter Leesi, CEO, President & Director]

Well, we saw 2 effects, actually on the working capital. One is that we have invoiced the data center projects. And as we invoice, we release or book -- we also release on the advanced payments as we invoice the projects in data centers. So that's one effect. Then we didn't receive any major orders in the data center business with advanced payments in the quarter. So we were lower on advances from customers. That's one thing. The other thing is that, we see an inventory buildup and it's mainly related to China, where we have very good order intake and we have long lead times on many of our products in China. So we have seen an inventory buildup in China, and we have also seen an inventory buildup on pads related to U.S. and that's both for AgHort and Air Treatment and since we have seen this very cold climate during this quarter. We have not seen sales at the level that we expected, but we have built inventory for the season.

[Oscar Stjerngren, Analyst]

Right. So [indiscernible] if you sell those products in second quarter.

[John Peter Leesi, CEO, President & Director]

Yes.

[Oscar Stjerngren, Analyst]

[ And just far as the detail ]. Just one final question, I just want to talk about the comparables for [ Walmart ]. You had pretty good sales in Q1. And if I'm remember, correct, you had good sales also in the second quarter and then it is or slowed the sales to Walmart. If you guys can confirm that.

[John Peter Leesi, CEO, President & Director]

Yes, we can confirm that.

[Operator]

The next question is from [ Max Liss ] of Kepler Cheuvreux.

[Unknown Analyst]

Well couple of questions. First, you indicate, you have had some impact of the production problems and data center issues in the first quarter. Could you just give some more flavor regarding the earnings turnaround to be expected in the second quarter now when the issues have been solved as you indicated?

[John Peter Leesi, CEO, President & Director]

Yes, I think, it's -- we have undertaken a number of activities to improve production efficiency in our European data center operations, right. These have been quite significant and we will now see gradual improvements over the coming quarters. So it's not going to be a huge bump in improvement, we're going to see gradual improvements, but it's important to say that the production, efficiency and the production line re-designs which been quite significant change that we implemented has been completed to a large extent.

[Unknown Analyst]

And then Air Treatment, you indicated a mix. It was unfavorable in the first quarter and it could be expected to be that going forward, I guess as well. Is it -- well…

[John Peter Leesi, CEO, President & Director]

I think, we should say that the mix effect just to repeat ourselves is that it's the supermarket segment in the United States, which is the major part of our supermarket business has been weak in the first quarter, but we want to say about the future is that it remains uncertain. We need to be clear on the fact that it remains uncertain and that's what we are preparing for.

[Unknown Analyst]

And then about Data Centers, of course, I mean you talked about the production [ volumes ] having made earlier this year and do you see customers waiting for these new features or is it more like you are moving into new segments, so the tender backlog is not affected by these launches?

[John Peter Leesi, CEO, President & Director]

No. Our existing backlog is not affected by this, because we are addressing a targeted opportunity where water is the issue, right. So if you don't have reliability or issues with water, we still feel that the current product range is the best one to use. When it comes to the competitive pressures and so on in the marketplace, as we've said all along, we see competitors coming into this market because of the high growth rate and that continues to happen. So we see competitive pressure in the marketplace, that's clear, but that's how it’s been for a while.

[Unknown Analyst]

And I guess, my question was also regarding the potential cannibalization or there is a [indiscernible]

[John Peter Leesi, CEO, President & Director]

No, no, I understand your request. And that's why we are -- when we launch this product again, it targets a segment of the market where we can fulfill the customer needs that have problems with water. Today, you can come with a water solution to a customer that has huge problems with water. Now we're opening up that opportunity, so we see little cannibalization here at the outset.

[Unknown Analyst]

Good. And finally, just a bookkeeping one about potential or the expected FX currency impact going forward, if you can give some flavor there.

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

Well we saw. As we commented, negative FX headwinds in the first quarter as it was the U.S. dollar was weaker or roughly 9% weaker than the first quarter, prior year. We have seen a stronger euro up 5% in the quarter roughly compared to the first quarter, prior year. Going forward, I mean, we have seen the U.S. dollar strengthened a little bit since, now in the beginning of April. So if this level continues, we will see a little bit lower FX headwinds, but it will continue to be FX headwinds, but maybe on a slightly lower level.

[Operator]

We have a follow-up question of Jack O'Brien of Goldman Sachs.

[Jack O'Brien, Equity Analyst]

Just a couple of quick follow-ups. One on Air Treatment margins, obviously the first quarter down year-on-year. I think, probably consensus has for the full year sort of flat. So do you think, that still achievable i.e. can we catch up in the remaining 3 quarters given organic sales growth forecasts and drop through? And then the second is obviously your balance sheets in pretty good shape. You have done bolt-ons in the past. Should we be think, you've anything major this year, what are you planning, if anything at all?

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

Well if we start with the M&A activity, we have a dedicated person working full-time on M&A and there is quite a few things going on and we have the pipeline with the acquisition target, but so far, we haven't closed anything. But the activity level is much higher, I would say, this quarter than we have seen over the last couple of years, since we now have this person on board, dedicated, working on acquisitions. When it comes to Air Treatment, I mean, we have a backlog. We have the effect of the supermarket end-market which has been [ built in flow ] and on a low level, but going forward, during the year, we expect to see gradual improved profit levels also in the Air Treatment business.

[Jack O'Brien, Equity Analyst]

Okay, that's clear. And just following up on the M&A point. The types of businesses you're looking at still be in the kind of software type areas or which areas would you be sort of focusing on, if you can say?

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

We are looking at actually both, so it's -- a lot of bolt-on acquisitions where we see that we can strengthen certain segments and it's also software companies. So it's actually both adjacent and bolt-on acquisitions.

[Operator]

Thank you. We have no further questions. I hand back to the speakers.

[John Peter Leesi, CEO, President & Director]

We just received a question that Jonas will cover as well here.

[Jonas Ågrup, Chief Financial Officer and Group Vice President]

I've got a question here about interest expenses and tax rate for the full year relative to the first quarter. And when it comes to taxes and this is mainly then driven by the lower tax rates in the U.S. Groups tax rates are expected to come down from 35% down to roughly 30%. And if we look at cash tax rate, we have been on a level of 26%, 27%. We expect that level to come down to 24%, 25%. When it comes to interest expenses, we are on a slightly higher level now this quarter and we will actually be a little bit, even a little bit higher the coming 2 quarters, due to that net debt has increased to a certain level, which means that our interest expenses will be 20 basis points higher than it has been. So the average interest expense has been around [ 380, 385 ] in the quarter. It will be 20 basis points higher for the coming 2 quarters, but then it will drop in the end of the year.

[John Peter Leesi, CEO, President & Director]

So since there is no further questions, thank you everybody for taking timeout to listen to our presentation and we wish you a good day. Thank you.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call is being concluded. You may now disconnect.