Munters Group AB
STO:MTRS
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Munters Group AB
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Welcome to the presentation of our first quarter result for this year. I'm Ann-Sofi Jönsson, and I'm Head of Investor Relations. And I want to welcome for those of you who are listening in on the conference call and also for you who are on the webcast. Please note that for you on the webcast, you can place your questions throughout the whole presentation, and then we take it at the end of the presentation and when we also open up for questions on the conference call.And with me here today, I have our CEO, Klas Forsström; and our CFO, Annette Kumlien. And with that, I hand over to you, Klas.
Thank you, Ann-Sofi, and welcome to this quarter report presentation. Before I start, I just want to summarize the quarter. It was a quarter that delivered strong profitable growth in targeted market segments, a solid cash flow, and that while we were handling a challenging supply situation in a very good way. I'm pleased with the result that we have delivered and all the efforts our employees have done during the quarter.With that, over to the presentation. And the agenda will be like this: first, highlights in the quarter by me; and then after that, implementation of our strategy, some status updates there; and then I will hand over to Annette for the quarter financial highlights, summarize it and open up for questions.So the first quarter, there was growth driven by business area AirTech. If I pick 2 sentences or 2 highlights, it was a strong growth, improved market conditions. The order intake increased some 20%. It was driven by continued strong development in industrial segment of AirTech, an increased backlog orders and a net sales increase of 14%. Also here, AirTech, strong increase in the industrial segment, but also good development of FoodTech in China. The adjusted EBITA improved to close to SEK 200 million with a margin of 12.3%. A stable leverage.The improved market conditions were there, especially in the industrial segments. We had effects on the COVID-19 with shortages in the supply chain, and we expect those challenges remain for the coming months. We handled it well during the first quarter, and we expect to continue to be diligent in this area.The execution of our strategy continued with an optimization of our footprint in the supply chain. Here, in particular, a production site for Data Center operations. Also important, we have now a strategy defined for business area FoodTech. Going forward, we aim to accelerate the implementation both in the equipment area and the digital area of the business. If I take a little bit closer look into the order intake quarter 1, growth in China and U.S. are the main headlines. Take a look upon the well-balanced share now when it comes to the 3 different market regions. APAC leading the pack with 66% growth of FX adjusted, but also solid growth in EMEA and Americas. Annette will come back to the details here. But if I summarize, it's very much the industrials, it is battery, it is pharma, but it's also a bounce back of Data Centers, strong growth in Services and a solid development when it comes to China and the swine segment.A lie a bit more granular when it comes to recent market trends. The large chunk of industrials represents 37%, here, battery and pharma pulling ahead. When it comes to food processing, a slight decline, very much due to the COVID pandemic, but all in all then a good growth within industrials.Data Centers, a solid growth also there, driven by digitalization. Components, also driven by data center and lithium batteries. And when it comes to Mist Elimination, as earlier said, it is now leveling out, and we see some large orders coming back, but it's still weak in Marine. Services, good to see that it continues to grow.When it comes to FoodTech then, the largest segment, broiler, the U.S. market is temporarily slow. In swine, we continue to grow in China. But moving forward, as said already last quarter, I expect that we will level out during the year. Layer, pretty flat. And greenhouse, even if it's not large in our sales right now, 5%, it is a growth driven by increased demand.If I talk about the strategy, and you've heard me say that many times, we have our purpose for customer success and a healthy planet. It is about customers, be close to them, go-to-market models and pricing strategies. Innovation, that is the future of the company, continue to invest in R&D and prune out products that is not needed for the future. Markets, focus on the markets that we see profitable growth in.Excellence in everything we do, continue to drive it, step-by-step improvements in lean, but then also work with operational excellence and the footprint optimization. And people, that is very much about how we organize and how we drive our culture forward. In each and every one of those areas, I feel that we have taken good steps forward. To highlight some, very good that the markets that we have focused on, batteries, data center, service and then recently, pharma as well, are really showing growth. Innovation. As I said many times, that is the driving force for increased customer value. We will continue to invest in innovation moving forward. And our solutions are so important in many, many for the customer critical processes. Very often, climate control solutions are also energy consuming, and our products are reducing that consumptions. When it comes to priorities, continue to work with modernization, take out the products that is not needed. When we develop products, focus them on increased energy efficiency towards the customers. And last but not least, develop connected equipment both in AirTech and in FoodTech. Some highlights: we have inaugurated a new R&D center in Kista, and their efforts when it comes to assortment reduction continue according to plan.Innovation is not only products, it is also how you go to market. This is an example of a greenhouse solution being sold in Italy. What is very pleasing with this, that is it balance the sun and the colder climate during the year. So the farmers can have a balanced climate and delivering improved productivity. It is the first order, but it's very much a reference order. I hear a lot of good feedback when it comes to these type of solutions in the marketplace. Sustainability, one of our most important road maps going forward. We focus on 3 areas: it is about resource efficiency, responsible business, and people and society. And in each of those areas during the year -- last year then, we record this once a year, we made strong progress. Moving forward then, it is about integrating this 100% into our strategy. It is about setting clear goals. It is about strengthening the management, being better in analyzing and delivering on set targets. With that short update on implementation of the strategy, I hand it over to you, Annette.
Thank you very much, Klas. So if we look from our performance point of view and look at our midterm targets, we had a growth of 14%, excluding FX. We had a margin of 12.3%, and we had our leverage remaining on 1.9 compared to end of last year. When you look at the performance of Munters, bear in mind, from a growth perspective, obviously, that China closed down in the first quarter last year and opened up towards the end of it. We do have, as we said also in last year, Q2 and Q4, those quarters were mostly impacted by actually customer pushing out their investments. And then if you look at it from this year then, obviously, the issues when it comes to freight, both from a capacity point of view, but also from a pricing point of view, impacts us. So if we go into the growth side, we had a growth of 20% when it comes to order intake, FX adjusted, mainly driven by AirTech when you're looking at the battery segment, looking at the pharma segment and also data center. Remember now, as we are always saying, is that data center is a project business, which means that from time to time, it's up; from time to time, it's down compared to the same period last year. The one business that is remaining with a bit of a struggle is obviously Mist Elimination, and that's particularly linked to the Marine side. FoodTech continued with good growth in the swine segment in China. And also, which was quite nice to see, was actually that the swine segment in the U.S. is picking up. From an FX point of view -- from a net sales point of view, FX adjusted, we had a growth of 14%. So you can see it's trailing on from the order intake side. Services is now approximately 14% of the group's total sale. And as you can see also, order backlog remains healthy with a healthy growth of 11%. Diving in then to AirTech. As we said, the growth was really good, it was 23%. Part of is actually, as I said, we did have in last year, in Q4, a bit of a hesitance from a customer side placing orders. And we can see that picking up into the quarter this year. Battery is remaining good and had a very nice growth, obviously. And then we also see DC coming back on trail. And if you look at Services as a percent of AirTech, obviously, it remains a bit higher. It's about 18%.If you look at net sales, healthy growth, 17%, again, driven by the Services side, also driven by Data Centers. We also had the battery and pharma, obviously, with a very nice turnout to the customers. And again, one thing to remember when you look at order intake side, impacted by customers coming with orders this year that probably were delayed from last year. If we move into FoodTech, continued good growth in China. We also had a very nice growth, as I said, when we looked into the swine segment in the Americas and the dairy segment and the layer. The one thing that remains a little bit sluggish is the broiler market, and that is back trailing from the high timber prices. Obviously, building new houses when timber prices are high is something that is being -- setting on the backlog. Also, what is nice to see is actually that EMEA is picking up from a greenhouse segment point of view. So when you look at it, growth in FoodTech, from an order intake perspective, 12%. And also the backlog, very healthy growth of around 15%.If you look at net sales, however, this is where, as I said, we need to remember looking at how COVID-19 are impacting us. And FoodTech was more impacted by actually the delivery situation than AirTech was because of the transportation issues as we can see in the supply chain. If you look at Americas, good growth in the equipment side. Again, it's the swine, layer and dairy business that are driving it, whereas the broiler remains a bit sluggish. EMEA, a bit weaker development, but that's basically because of the less -- the weaker side on the broiler side in the U.S. market where we have controller sales not picking up that much. If we look at EBITA, as Klas said, we do have a solid improvement. If we compare to last year, we have a margin of 12.3% compared to 8.3%. FX impacted, yes. So basically, if we didn't have the FX impact, we probably would have been almost 1% higher.AirTech is the one that are leading the -- or driving the change, and it's basically because of the good growth, but also because of the strategy implementation that has been going on since last year and continued, obviously, cost control.If we look at FoodTech, margin dropped a bit. But here, again, to remember, we did have an FX impact on FoodTech. The gap between this quarter compared to last year probably is, half of it, FX. And then as we talked about also, transportation costs coming out, and we did have a mix impact also from the controller sale with the sluggish development on the broiler side in the U.S. Moving then into delivering on our strategy journey. As you remember, we did implement a program mid last year, aiming to sharpen the customer offering and footprint optimization. It is running according to plan. In total, we're expecting cost of almost SEK 180 million with an annual saving, once realized, of about SEK 70 million. We're basically halfway through. So a bit more than half of the savings impact has been put into effect. All the annualization comes next year, obviously. Given that development of the good profit, but also continued focus on cash flow, we had a good cash flow development. Again, remembering now that COVID-19 is impacting us from a supply chain point of view, which means that part of the increase that we see in our cash flow is then being offset by increased inventory to make sure that we can manage the supply situation towards our customer in the best way possible.That means that when you look at cash conversion, that remains on a high level. Again, when we looked at end of last year, we had a very good December month, that took us to the peak. But in general, if you look at turning in almost 90% in cash conversion, that's very good from a company that has taken 1.5 years to clear things up, which means that we're down now to 1.9. We have been able to remain on 1.9 since end of last year even if we have been hit by FX in the wrong way and even if we have also have to manage and increase inventory because of the COVID-19 situation.So the financial stability of Munters has picked up over the past 1.5 years, and we are very pleased with the development from the company side. So all in all, if you look at back at it, good growth in the quarter, good impact from the strategy deployment, meaning margins are moving up, and again, meaning also that at the end of the day, leverage is coming down. With that, I would like to hand over back to you, Klas, to wrap up.
Thank you, Annette. So before we move into Q&As, let me summarize. A solid first quarter with improved market conditions. There is a mixed impact from COVID-19. The major impact is, as Annette talked about earlier, in the supply chain. We expect those challenges to remain for the coming months, but we have handled it very well so far. We have shown strong growth in prioritized market areas, delivering improved profitability and good cash generation. We continue to manage our long-term strategy. We invest in R&D. We optimize our footprint. And also important, now we have defined our FoodTech strategy, and we will start to implement it both in the equipment and the digital area of the business. You will hear more about that in our upcoming Capital Market Update in mid-May. We are really well positioned in long-term growing markets, driven by an increased need for sustainability, energy efficiency and digitalization. With that, I open up for Q&As.
[Operator Instructions] We have a question from the line of Carl Ragnerstam from Nordea.
So I had actually really, really bad line, so I maybe missed a few things. So first of all, of course, really strong growth in AirTech. Could you, first of all, help us understand how much of that growth is driven by vaccine or the pharma, as you said?
If you go into that, at current, then the pharma segment represents an order intake approximately a little bit short of 10% of order intake. So it's not a large part of it, about 10%.
But Carl, to your question also, I would say that the main growth was really driven by battery, although supported by pharma. And then also remember, as I said, DC is a project business. And DC had a good order book building in the quarter, which was very nice to see. And then also, we have services that are coming in. But the main driver was really the battery segment if you isolate into one segment.
Okay. I think my line is quite bad. I couldn't hear the answer, but I will try a final one from my side. Also, is it fair to assume that a substantial part of the margin uplift in AirTech is driven by the strong pharma growth rather than service because services is, as I can see, down as a percent of sales year-over-year?
And Carl, you may have missed when it comes to the pharma. Pharma represents roughly 10% then of order intake. So saying that, that will drive -- that would be the majority of the improvement, that is not right. It is many different areas that has driven improvements across AirTech.
So...
Okay. Perfect. I couldn't hear that one either. Okay.
Okay, so I -- now I step in here. We do have some problems on the conference call line, and I'm really sorry for that. So for those of you who are calling in on the conference call line, do please also send me your questions, so the questions in the webcast, and I will try to make sure that we catch them in the webcast. We do have some more questions from Carl, actually, that I would like to put to you. Your order intake is also looking quite strong. Could you comment on whether any large order is included in it for the first quarter?
In this quarter, it is not any substantial large order as data center orders or battery orders, but it's many midsized orders. Especially, you can see battery has really increased in Asia, but it also has grown in other markets.
Very good. And we continue to see an upwards trend in steel prices. Could you comment if you have, during Q1, implemented any price increases and also what you plan to do in Q2? And I guess that Q2 will be the quarter where it might be impacting you, given that it takes some time for you to work through your inventories and get it out to customers, et cetera.
It's correct that steel prices has influenced us, both when it comes to pricing, but also when it comes to some of the deliveries. Already last year, we started to implement general price increases. And those price increases has carried on during this quarter. And during the year, we will step-by-step continue to improve it. But as said already, quarter 4, we have a backlog, and the backlog is, to some extent, very difficult to catch up. But I'm pleased with the activities we are driving here.
Thank you. And the U.S. swine market has been a bit slow. Could you comment on the development that you now see in Q1 and whether you expect a similar bounce back there as we have seen in the swine market in China in recent quarters?
I mean when it comes to the market, we are not giving exact outlooks. But as I said -- myself and Annette said already end of quarter 4 last year, that is that if you -- if it follows the normal pattern when it comes to the swine market in North America, I mean then, during this year and especially during the end of the year, it will have a pickup in that market. And now we see some first evidence on that.
And the interesting thing also when we see the pickup is that it's larger constructions as well, which is good if you look from our point of view. So it's nice that it's level -- it leveled out in Q4 and started to pick up this quarter.
But it's too early to say that it's a clear trend.
Yes, yes, yes.
Okay. So I don't have any other questions for the moment. I don't know if we can -- maybe we can try to open up the conference call, if there are any ones that still want to place a question on the call? It seems that we have some problems with the conference call line today. Now we have a question from Lucas Ferhani at Jefferies. Can you provide more details on the key areas where you're seeing supply chain constraints? And also, what products that you mainly see that it is affecting?
I can start and, Annette, please pitch in. I mean, first of all, it's a general supply squeeze, I think, that goes across all different industries. So I'll start with that. When it comes to AirTech -- FoodTech, it is more container-related in transportation back and forth to Asia. When it comes to Munters, in general, it is some of our metal plates and steel deliveries that we have a squeeze. We are not exposed to semiconductors in the same way as other industries. Yes, we use semiconductors, but it's a different type. And here, we feel very, very, let's say, safe on that side. But it's more a general one. But please, Annette, if you have any more.
And I think it's also important to say that what we have worked with is obviously our supplier strategy and broadening the supplies. And that, together with intense work to make sure that we move the goods in the back chain of it, has made it possible to stay the way we are. But obviously, we're working very hard to make sure that we contain the issues.
Great. Lucas also has a question about cash conversion. And cash conversion, can it be maintained around 100%, around the 100% mark going forward?
I would say that a good company stays probably above 70%. We have made really good inroads to move things when it comes to cash. As you know, we're also moving things to improve our margins. So I would say that any company that delivers above 70% is good. And then once you remember also in December, we had one actually order where we've managed to both invoice and collect in -- within basically 20 days, and that's probably not so common, I would say.
Very good. Thank you. We have a question from [ Filbert Vesias ]. I'm sorry if I pronounced your name incorrectly, but it's regarding the SEK 61 million insurance compensation that we got in the first quarter, if it is included in your -- in our adjusted EBITA in AirTech.
It's not included in the adjusted EBITA. As you know, we're very, very particular about making sure that adjusted EBITA shows the trend of where the company is moving. So no, it's not.
Good. Thank you. And then we have another question from Francesco Cavallo. Can you please provide some comments on the expected development of the service business as a percentage of sales going forward? What is your midterm target in this metric?
You have heard us talking about that we would like to move up Services. And our target is to move it up to 30% over a longer period of time. But as you know also, we don't give guidance in the shorter time period, but this is what we're trailing towards.
And a good company, I've said it a couple of times, if we can -- we aim to increase it roughly with 1% to 1.5% units per year. And then on top of that, if we can acquire service companies that are part of our strategy, I mean that is on top of that. And if you go back a couple of years, that is what we have delivered.
Thank you. We have another question from Mannat Chopra, who is congratulating on the great results. Is the margin growth you have seen sustainable, your 14% margin target feels very much in sight? Or do you expect weakness throughout the year as raw material inflation is felt?
Thank you for the question. And I mean we have a firm look on our midterm target, and that is 14%. And in order to become a very, very good company, not only quarter-by-quarter, but in the long run, we will continue to invest in R&D. We'll continue to invest in service organizations. We will continue to invest in digitalization. So the correct answer is, yes, I'm very confident that we will reach the 14% midterm target during that period. But that is really how we look upon it.
Yes. And I would say also, as you have heard us talking about, we are on a journey to improve Munters. And obviously, there are different activities. You take the low-hanging fruits and then you work with the longer activities. But our main goal is to move it upwards.But you could have periods of where you're actually hit a bit. You can look at FoodTech this quarter, for instance, where the freight costs are impacting us. We also have a certain activity, as we said, when it comes to making sure that we invest in the future, looking into R&D and digitalizations cost us, which temporarily could also kind of like delay it a bit. But again, we're on a journey. I think that's what we all need to understand when we look at Munters.
And just one additional. If you take a look upon AirTech, during this 1.5 years, I think it is showing that we are progressing very well. So I'm very confident moving forward.
Very good. Does Q1 have a special catch-up effect? Or is the growth trend we're seeing reflecting a general increased customers' appetite?
As I said, when we presented, is that part of it, there is a catch-up effect, particularly when you look into AirTech side. If you remember, when we talked about Q4, we said that basically, when you look at 2020, Q2 and Q4 was actually the one where we're most impacted by customers actually pushing out their investments a bit. And part of that actually ended up now in Q1.But we have -- underlying, we had good growth. I mean we are riding on the megatrends of digitalization. We're riding on the megatrend of e-battery vehicles. We're running on the trend of -- if you look in the pharma industry, obviously, when COVID-19 with the test sticks and so forth. So there are underlying trends that are moving us upwards. But from time to time, we could be impacted, like this quarter.
Very good. Then we have another question from Filbert, and that is if you can comment on the competitive environment in the battery segment in our 3 different regions or geographies.
A very good question. What differentiate Munters from all competition? If I listen in to what customers are saying, that is our application knowledge, our capability to add on value at the site, that is what all our customers are saying. At current, you may have heard me talk about that in China, a couple of years ago, battery was moving up, and then it was a consolidation. Now it's moving up again. China and Asia, they are in the lead when it comes to the battery transformation. Then we have Europe that is coming more and more and also U.S. I -- we foresee that the battery segment will continue to be a strong segment moving forward for many years.
Thank you. He also has a question about data center and if data center had any sales in Europe in the first quarter.
We have concentrated our business on North America. We are maintaining contact. And we are, to some extent, then resupplying to existing customers in Europe. So it's a small part of the sales, close to nothing, really. We are now -- have invested in a business development manager in Europe to start to reactivate Europe when we feel ready. But all in all, I mean the large majority is from North America.
Thank you. And he's also wondering if we -- when we talk about M&A and acquisitions, if we're looking for acquisitions in the greenhouse segment, in particular, of FoodTech.
We have a broad M&A agenda. It is 3 buckets. One bucket is technology-driven. Another bucket is very much service-driven, the string of pearls. And then we have complementary business. And in that bucket, of course, greenhouse is also fitting in. But please, Annette, do you have any additional comments?
Yes. I mean just to say that, obviously, we have our focus areas where we believe that we can enhance Munters, and those are the areas also where we're looking out for the M&A activities.
Thank you. And then now, we also have another question regarding seasonality of the business. And generally, Q1 is not such a good quarter for the profitability in AirTech from a seasonality, historical perspective. Could you elaborate a little bit on this?
I mean the larger seasonality effect that we have in Munters, that is really connected to FoodTech. And here, it's always the fourth and -- historically, always the fourth and the first quarter that are the weakest quarter. When it comes to AirTech, I mean the seasonality pattern has actually varied in between different years. But I agree, this is a very, very strong start to the year in AirTech. But please, Annette?
Yes. I mean -- and it's again coming back to, obviously, that we had good growth, and that obviously turns down to your scalability also from a profit point of view. Then we have our strategy deployment that this can like underlining and moving things up. And then one thing to remember also in the strategy deployment, we actually took the decision last year to close down the non-Walmart commercial business in the U.S., which was not performing that well. So that is also a third layer that actually moves the margins up. But again, if you have a 20-plus increase, then it starts to come through also.
Perhaps I should add something to data centers. I remember last quarter, it was, to some extent, we worry about that, that we didn't have a strong order intake. I think the most important thing when you manage data center, that is, from my perspective, it is not really ups and downs in order. It is how well you are then loading the factories. And here, I think we have made strong, strong progress over the years. So we have a constant load in the factories, and that drives both predictability and the mix as such.
Thank you, Klas. For the moment, we don't have any more questions. And I think the telephone conference line, unfortunately, was not very solid today. So with that, I would like to thank those of you who were on the webcast and on the conference call. And now I actually got another question. Okay, we'll take this last question then. Could you please -- it's from Mannat. Could you please split out the margin improvement between operational leverage and self-help? So operational leverage from growth and actually efficiency improvements in the business, if you could.
I would say -- I mean, if you look at a growth of 14%, obviously, it gives a lot of loading to the factory. I mean that's the nature of running a factory, basically. So I would say a lot of it is pertaining to that. But again, Munters is on a journey. We're here to improve the margins, and I think we have made inroads, and that actually amples up -- amples it up, obviously. But a big part, if you have 14% growth in AirTech, you load your factories with 14% more products coming out of the doors...
Then you should have a good leverage, and that we had.
Yes, then you should have a good leverage.
Thank you very much. So with that, I say thank you for those of you who have listened in to the webcast and also for those of you who were on the conference call line. We will have a Capital Markets Update on the 11th of May, and I hope you will listen in then. It will be webcasted live. And well, thank you. So with that, can we have some words from you, Klas?
Thank you very much. And as I said earlier, we leave a strong quarter behind us. And I would also like to take the opportunity to say a big thank you to our employees that have been able to balance both the current market situation with the implementation of our long-term strategy. So with that, look forward to meet you all in May. Thank you very much.
Thank you.