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Munters Group AB
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Ladies and gentlemen, welcome to the Munters Q1 Report 2019 Call. Today, I'm pleased to present CEO Johan Ek. [Operator Instructions]Johan, please begin.
All right. Thank you very much. Good morning, ladies and gentlemen. I'm pleased to present our Q1 results, and it is the quarter that is well in line with our expectations.A couple of highlights. We have strong order intake driven by AirTech. Our earnings are well in line with our previous communication and expectations, and the Full Potential Program is well on track. This means that we have no change to our outlook as everything is progressing as it should.What we thought we would do is start with the Q1 numbers and then talk a bit more specifically about the Munters Full Potential Program. But if you allow me -- if you turn to Page 3, I also want to highlight that from now on, in our reporting, we are now reporting 2 business areas that have been reorganized and renamed. So what was previously called Air Treatment is now AirTech, and that includes the Data Centers and Mist Elimination segments. AgHort, as it was previously known, has been renamed to FoodTech to better capture our food offering to our customers.So with this, I hand over to our CFO, Jonas Ågrup, to go through the Q1 numbers. And I will then return to describe the Munters Full Potential Program as well as a summary at the end.
Okay. Thank you, Johan. Then we will move to page or Slide #4, first quarter 2019 financial highlights.If we look at the order intake, we saw an increase of 19%, driven by the AirTech business area. Organically, the order intake grew 11% in the quarter. And if we look at net sales, net sales increased 4%, and we saw a positive currency effect, roughly 8%, which means that the organic growth -- net sales growth in the quarter was negative minus 4%. Backlog, up 6% in the quarter, and order backlog. And if we look at adjusted EBITA, we posted a profit of SEK 107 million, corresponding to a margin of 6.4%.If we look at the net income, it was minus SEK 22 million. We had onetime items related mainly to the Full Potential Program of SEK 61 million in the quarter.And if we then move on to the cash flow, it was in line with expectations. We had a small positive cash flow -- operating cash flow effect, reported SEK 14 million. And if we look at the leverage in the end of the quarter, we were at 3.6x net debt to adjusted EBITDA. And this leaves us with a good headroom. And we have the consent from the lending banks. And we have, when calculating the net debt over the leverage, we have adjusted for the IFRS 16's effects that we have now in the first quarter.If I then move on to page -- Slide #5. We have the AirTech business area. We saw a strong order intake in the quarter, up 22% organically, driven by a very good order intake for the Data Centers business in U.S., and that's the part where we will remain with the Data Centers business. We also saw a very good order intake in the Industrial segment in EMEA. For Mist Elimination, the Marine subsegment continued with very strong growth in the quarter. And we also saw healthy growth rates in our Services business in the quarter.Net sales increased by 4%. With the currency effects, the organic growth was negative 4%. We had no net sales in our Data Centers business in EMEA. And we also saw continued low net sales leverage in the supermarket end market in the U.S.If we then move on to net sales for Services, we saw a strong growth, organically up 8% for Services. And where we saw good growth was actually within service contracts, which is a very important area for us to grow the service business. But we also saw good growth in the spare parts sales in the service business.Adjusted EBITA increased. If we take away the losses that we had in the Data Centers business, we saw a good, healthy increase in the adjusted EBITA in the first quarter. So adjusted for the Data Centers business, adjusted EBITA actually increased SEK 30 million in the quarter. And adjusted for these items, we actually saw an all-time high first quarter for the business area AirTech.I'll then move on to Slide #6. We looked at the first quarter for FoodTech. We saw a lower growth, but we have stable earnings in the business. Normally, as you know, quarter one is a seasonally weak quarter for the FoodTech business. The order intake decreased 4% organically minus 11% in the quarter. And we saw an impact of the African swine fever in China, which had a negative effect there in the first quarter.Net sales grew by 4%. However, organically, we saw a decline of 3% in the quarter. We saw a stable market in the U.S. And as I said, the continued effects of the -- from the African swine fever in China, but we have seen positive developments in the U.S. within the, for us, very important layer subsegment.And then if we look at the adjusted EBITA, we posted a profit of SEK 46 million, corresponding to a margin of 9.9%. And we improved adjusted EBITA partly as an effect of some -- of the addition for cost control within the business.With that, I'll leave it over to you again, Johan.
All right. Thank you very much, Jonas.So if you please turn to Page 8. I will go through the status on the Munters Full Potential Program, and that is where we'll start. Just a very quick recap for those who may not know all the details, it is a 3-step program that we launched in December. As here, first phase is the stability phase, securing a stable and profitable platform. The second phase is pushing for more profitability. And the third one is then pushing for growth when we see that we have checked stability and profitability phase and are able to proceed further on the growth of this business.If you go to Page 9, I think the short summary is that we are exactly where we should be in securing a stable and profitable platform. We said we were going to strengthen the leadership team, we have done that. We were going to simplify the business. We have now moved from 4 business areas to 2. We were going to move for more efficiency in the business areas. We have done that throughout the quarter and are well on our way of accomplishing that portion. And then finally, we communicated our intention to close the Dison facility, and that is also well on its way. And this is a way to kind of reduce the overcapacity that we had and to focus on the performance uplift based on our U.S. market operations.If you go to Page 10 please, just a couple of words on the organization and leadership. I'm very glad to report that we have appointed Klas Forsström, who is currently the President of Sandvik Machining Solutions Business area, as the new CEO of Munters, effective no later than mid-October this year.In addition to that, we have a CFO recruitment ongoing. And here, we will, together with Klas Forsström, finalize this within a fairly short term. We will inform you about that in due course.The third point is on the business area management. We now have 2 strong business areas. We have 2 leaders for those business areas. And in general, the former group management has been reduced from previously 13 members to now 6 to ensure that we are all hands-on and that we have kind of full visibility and control in the best way. But we have also completed that change.If you please turn to Page 11, I'll just give a quick recap of the numbers that we will see coming out of this Munters Full Potential Program. As you may remember, the full run rate improvement coming out of this program in 2020 is SEK 210 million of the EBITA uplift. This is divided in 2 portions: SEK 160 million coming from general efficiency moves across the business and then SEK 50 million of EBITA improvement coming from the Data Centers restructuring that we're carrying out. So all in all, in 2020, SEK 210 million of profit uplift. 50% of this is already coming in 2019, so SEK 105 improving the 2019 numbers. All of this at the onetime cost of some SEK 350 million, out of which 60% is coming in the first half of the year and 40% in the second half of the year and generating a payback time of roughly 2 years.With these changes in Data Centers, we are expecting Data Centers to be back in profit by 2020. But as a result of this, there will also be a corresponding revenue drop of some SEK 300 million in that business.If we go to Page 12 please, just to comment a bit on the progress. And I'm now talking about the SEK 160 million, which are the general efficiency measures. Actually, all items on that list are progressing according to plan. We are exactly on schedule when it comes to FTE reductions and other general cost reductions. All are in line with where they should they be. We must mention that there have been SEK 61 million of onetime costs taken in Q1. We have now organized the 2 business areas, and that have been implemented. And also, when it comes to the Data Centers portion, there, everything is progressing as it should in Dison. The reason we are not communicating further details on that is that it is a process where we focus on our dialogue with the unions and are not be able to report all details on that as of now.If you then turn to Page 14 please, a quick summary. Like I said in the beginning, a strong order intake during the quarter, driven by AirTech, solid earnings in the business, albeit impacted by the anticipated loss in Data Centers, which we had communicated to you before. Secondly, the Munters Full Potential Program is well on track. We've done all the management changes that we communicated, and the savings are well in line where they should be. This mean that the outlook is unchanged, and we are expecting a significant improvement in the group's adjusted EBITA for the full year 2019 versus last year. And we are expecting a full impact of the Munters Full Potential Program by 2020.As previously communicated, the group leverage is expected to be in line with our midterm financial leverage target by -- in 2020 as well. And then just to conclude, we see that we are on a strong path towards increasing our earnings and hitting our financial targets for the midterm.The last thing I want to say is that we have a Capital Markets Day on May 9 in Stockholm. So that will be an opportunity for us to go through many of these items more in detail. And we hope that as many as possible of you will be able to attend.With that, I now open up for a Q&A session and turn over to the switchboard. Thank you.
[Operator Instructions] Our first question comes from the line of William Turner from Goldman Sachs.
My first one is during -- in your 4Q '18 results, Data Centers and Mist Eliminations were highlighted as being into strategic reviews for potential partnerships or divestments. Is that still the case or you've kind of made a decision that you think you'll keep the businesses?
No, this is still being evaluated, and we will inform in due course when there's more to communicate on that.
Okay. And then in FoodTech, the 11% organic order intake decline, how much of that was due to the Chinese swine market? And then how much of it was from other businesses or other end markets?
The decline we saw was from the Chinese market, and we saw a stable development in the U.S. and Europe.
But then -- so the Chinese market declining. And then how did the other end markets like the layers perform?
Layers we saw a positive development in Q1. And as we've said and also wrote in the report, I mean we have seen positive effects in the layer market, especially in the U.S.
And then finally, within the AirTech division, obviously, you gave a sense that Mist Elimination order intake was strong. How about the other air treatment businesses, excluding then the core Air Treatment?
If we saw -- if we look at the Industrial segment, which is very important for the sort of previous AirTech business or Air Treatment business area, we saw a stable development in Industrial in the U.S. We saw a very strong development in the Industrial in EMEA, in Europe. And we had a fairly good quarter also in Asia in Industrial, where we started to deliver on the quite large lithium battery order that we received in Q4 last year. And then the service business also continued healthy in the quarter.
[Operator Instructions] The next question comes from the line of Anders Roslund from Pareto Securities.
I had just a question regarding Data Centers. You mentioned specifically that you had losses in that part in the first quarter. How about the earnings development for the remainder of the year? You had indicated a little bit stronger losses in line more with the fourth quarter. So how should we look upon the earnings development, specifically in Data Centers for the remainder of the year?
Well, if we look at Data Centers, we have losses in the first quarter, which was then related to the European business. The U.S. business continues in a healthy way. And the U.S. business is where we would like to invest and stay on for the future. And then we have a large order in Europe that will be delivered now in Q2. And then the plan is to close down the European business after the delivery of this large order.
Okay. So there's no more comments about when losses will be sort of -- you've just talked about the improvement of SEK 50 million versus last year, an improvement...
That guidance is still valid.
Yes. And then we should talk about the minus SEK 80 million from the -- in the old Data Centers division. So it means that you should have some minus SEK 30 million then for the full year 2019, and you already had minus SEK 26 million. So it means that you should be reporting somewhere a positive outcome during the second part of the year in Data Centers.
That's correct, yes.
And next question comes from the line of Peter Testa from One Investment.
This is a question on foreign exchange impact on profit in the 2 divisions. Can you give some understanding as what the impact was from foreign exchange on each of the 2 divisions' adjusted EBITA number, please?
It was roughly 7% positive effect -- currency effect.
That's on revenue or profit?
No. On revenue, it was 8%. So profit 7%.
For the group as a whole?
Yes.
Adjusted EBITA, okay. And then within the Air Treatment business, I mean you mentioned the Industrial part. I was wondering if you can give the other parts of Air Treatment as well as the extent to which how those performed in terms of the quarter.
Well, our Components business continued strong. In the commercial subsegment, we saw continued weak development in the supermarket end market. But for the other parts of the commercial subsegments, we had a fairly good development in -- for example, in the DOAS business. And then Services was strong, as I said. And then Industrial was fairly strong, as I commented earlier.
Okay. And then on the -- were there any particular large orders during the quarter? How was large order performance in the quarter...
I mean we announced large orders with an order value about SEK 100 million, and we haven't announced any such order in the first quarter this year.
Right. Okay. And last question just on AgHort. If you look at the impact of swine flu going forward, do you have any particular view as to what if you might have to make some business adjustments related to that? Or is that going to be absorbed within the development of the business units overall?
I think it's -- I mean we are adjusting the business now with the Full Potential Program. And then, of course, if -- we need to monitor this closely, and we expect the African swine fever to continue for the rest of this year. That's our forecast.
As there are no further questions, I'll hand it over to the speakers.
All right. Thank you very much for attending. And we look forward to seeing you at the Capital Markets Day or over the phone in the next quarterly update. Thank you very much. Buh-bye.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.