Munters Group AB

STO:MTRS

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, welcome to the Munters Q2 Report 2019. Today, I'm pleased to present CEO, Johan Ek; and CFO, Jonas Ågrup. [Operator Instructions] Speakers, please begin.

[Johan Ek, Interim President, CEO & Director]

All right. Good morning, ladies and gentlemen. Johan Ek here. Very pleased to present Munters' second quarter results, and it's a strong quarter, significantly increased margins, significantly increased earnings, so we feel good about that. When it comes to order intake, we were underlying, which means, excluding the European Data Center business, we had flat order intake versus last year. In AirTech, we were up 5% versus last year. In FoodTech, we were down mainly because of the African swine fever, which we will talk about. It's also a quarter where we saw a very good effect from the Full Potential Program, and we're seeing that the results that we foresaw some 6 months ago are really coming in as planned now. So we feel good about that.And I think what I'm especially glad about is that we are seeing these in our increased margin and our earnings despite a little bit of net sales softness related to FoodTech, related to China with the African swine fever. So it's good to see that we are generating very good margins across the 2 businesses that we run. And as such, to be honest, I think it's a quarter that is exactly the type of quarter we were aiming for when we started the Munters performance improvement journey some 6 months ago. So that's, of course, a good thing.And I think really the big thing playing into the strong earnings increase is the Full Potential Program, so we will spend a little bit of time talking about that today. But in a nutshell, it's a 3-step -- 3-phased approach, and the first phase is coming really to a completion now towards the summer, and we are exactly on plan as we should be. And we start the second phase with a good kickoff around I think in August when we have a strong and hungry new executive team coming in headed by Klas Forsström; and our incoming CFO, Annette Kumlien. So we feel very confident about that as well. And I think the final thing I want to say is just when it comes to the financial outlook for the rest of the year, it remains intact. It also remains intact beyond 2019 and we still confirm that we will, in even gradual steps, approach our financial targets, which are 5% per annum net sales growth and an adjusted EBITA of 14%. So that is really where we are in a nutshell now.We will start going through the details, and I'll hand over to Jonas Ågrup to go through the second quarter more in detail.

[Jonas Ågrup, CFO & Group VP]

Thank you, Johan. So if we look to the next slide, we look at the second quarter, the financial highlights. Order intake increased 1%, as you can see in the graph. Net sales increased 1%. And here, we were negatively impacted by the exit of the European Data Center market or the intended exit.If we look at the adjusted EBITA, we posted a profit of SEK 245 million in the quarter. That was up 16% compared to the same quarter the previous year, and adjusted EBITA margin was 12.5%. Net income at SEK 84 million, this includes a nonrecurring item of SEK 100 million related mainly to the Full Potential Program.And then if you look at the cash flow, it was strong in the quarter. We had a cash flow of SEK 168 million. And leverage -- reported leverage was at 3.8x. And then the way we report to the bank in covenant definition, the leverage was 3.3x. If we then move on to the next slide. And on the following slide, we have made a comment on the growth rate, excluding the European Data Center business. And since we have intention actually to exit the Data Center business in Europe, and the numbers, excluding Data Center Europe, is actually best reflecting the real underlying growth. So if we look at the order intake bridge for the second quarter, we grew by 1%. Organically, we had a minus 4%. But if we exclude the Data Center Europe business, organic order intake in the quarter was flat. We had solid growth in Industrial subsegment in the U.S., and these are the Industrial food business, it's pharma, electronics and battery, strong growth in these areas. We continue to see good growth in Mist Elimination driven a lot by the boom in the Marine business, and we also had good growth in Services. We had some lower order intake in Lithium Battery subsegment in China, and we continue to see weak demand in the Supermarket subsegment in the U.S. And then as Johan mentioned, we had weak order intake in FoodTech in China. This is due to the African swine fever. If we then move on to next slide, this is the bridge for net sales. We saw increase also here by 1% in net sales. Organically, we were down 4%. But again, if we exclude Data Centers Europe, net sales increased by 5% organically. And we had strong growth in Industrial. Other Commercial, this is the DOAS area that we talked about a lot in the past, good growth in this area. Mist Elimination and also Data Centers in the U.S. had a strong quarter. And we have strong growth in Services. Net sales increased by 12% and we were up 7% organically. If we then move on to the bridge with the adjusted EBITA. We increased, as I said earlier, EBITA by 16%. But again, excluding Data Centers Europe, the increase was 28%. And the margin was 12.5%, and then again, excluding Data Centers Europe, margin was 13.8% for the quarter. And we saw good margin improvement in both business area, both AirTech and FoodTech, and this is caused by lower costs as a result of the Full Potential Program. We see improved gross margins. We have a good product mix. We have been able to increase prices to end customers, but we also see positive currency effect.If we then move to the orders received by region, these numbers are FX adjusted. If we look at Americas, in the quarter, we grew the business 5%, and this is mainly then driven by Industrial, as we talked about earlier, Other Commercial, Software within FoodTech and then the strong growth in Services. Order intake in EMEA, 3% up. APAC declined 26%, and this was mainly driven by China where we are affected by the African swine fever. And we also saw some lower demand in Lithium Battery.And by that, I move over to you, Johan.

[Johan Ek, Interim President, CEO & Director]

All right. Thank you very much.If we look at Page 9, AirTech Q2 results. I think in summary, a strong margin improvement. But not only that, I think the underlying order intake growth was 5% year-on-year. Net sales underlying growth was even more than that. Another good thing is that service keeps on growing. It follows the plan that we have. So essentially, I'll surely note more and more service business across the -- our business units continues, and we saw a positive growth in that segment as well. But really the highlight, I think, for AirTech is a very strong increase in margins. This is coming from lower cost. This is coming from higher gross margins, so we saw a very strong adjusted EBITA growth in the quarter here, which is exactly in line with plan and, of course, very good to see. If we then move over to the FoodTech side, it's a bit more mixed messages. Like Jonas was already explaining, we had the African swine fever that has put a bit of pressure on order intake, and net sale was pretty low as well. Despite that, we're seeing competitive group margins here, which is something we're very pleased about that we're able to improve margins despite the somewhat challenging market, especially in China.And then also very good news on the Software side. As you know, we've been talking quite a lot about increasing our Software side. So we're very glad to receive a SaaS order here in the month of June, which is a little bit of a kind of testament that we are building momentum in this area. And this is, of course, a big focus area for the second half of the year as well. So we feel very good about that. But it's also important to say that as we have predicted before, we expect the African swine fever to kind of dampen and keep the sales at the lower level in China, as we have predicted already before, and we expect this to continue throughout the year.Looking then at the first 6 months on Page 12. I think we're seeing a fairly good first half year where order intake -- the underlying order intake grew 6% and then 7% on sales, which is pretty much as we were hoping for. We are seeing also on the first half a good EBITA increase. Of course, the first quarter of the year is always a bit lower. And also in the first quarter of the year, we didn't really have any effect on the Full Potential Program. So from that perspective, we are quite happy with the results on the first half this year. Also I think good to see that we're generating good cash flows starting last year.I think it's important to just have a quick recap on the Full Potential Program as that is really kind of fueling the earnings growth that we are seeing now. And just a quick recap on this. As you know, and some of the have, of course, already saw a few time already, but we started this program in December last year. It was introduced on February 15. We then explained our approach, which stays on course, which is a 3-phased approach: with first phase, stability phase; then a profitability phase; and then a growth phase. And I think over the past 6 months, we have, of course, put a really strong focus on the first phase, which is the stability phase. And on the next page, Page 15, you can see that we are really well on our way to execute on this program. There were a couple of key items here: strengthen the leadership team; simplifying the Munters structure, going from 4 to 2 business areas; driving leaner structure, driving for more cash efficiency; and then focusing on the U.S. side of the data center market. And I think on all these levers, we are doing well, and that's what we are seeing also in the increased margins. I think just a quick note also on the U.S. Data Center piece, we continue to have good order intake and good performance here, which of course is good. If you turn to Page 16, just as a recap here as well. We moved from 4 business areas to 2, and the former Data Center and Mist Elimination business are now part of AirTech. AgHort -- the former AgHort was moved into FoodTech, and these 2 businesses are, as we said, really increasing margins in the way that we were hoping to see. On Page 17, just a few words on the leadership team. We're delighted to have our good, high-caliber, top management team in place. First, we announced this year, of course, Klas Forsström coming from Sandvik as our new CEO with a background of running machining solutions at Sandvik and then a very good all-round profile. In addition to him, we have Annette Kumlien coming in as the CFO with listed experience as the CFO from both Höganäs and Pergo. So a very good background and a very hungry top management team here. We have successfully now worked on a handover during the past several weeks. And I can guarantee that there is very good continuity when it comes to how we regard the strategy, how we regard the business plan for the remainder of the year and how we see the financial outlook and commitments going forward. So I think we are really well set for the second phase of the Munters Full Potential, which Klas will then of course spearhead. When it comes to myself, I will then transition back as a Board member of Munters and will be helping the team from that capacity. Moving on to Page 18, just a recap on the numbers. As you probably have heard before, but the annual savings coming with full effect in 2020 is SEK 210 million, out of that, we're going to see SEK 105 million in this calendar year. The onetime costs have not changed. They are the same, SEK 350 million to carry out this program, out of which 30% of the restructuring cost will come in the first half and 70% in the second half. You would note, earlier in the year, we had an expectation that a bit more of this restructuring cost will already come in the first half. This has just kind of moved in a little bit more into Q3 and, therefore, it will be coming in, in the second half instead. But the numbers are such the number is intact, and this gives a cash payback time of approximately 2 years. If we then turn to Page 19, I think you've understood it by now, we are tracking well on plan. And all kind of sub-streams and work streams are already in effect, doing what they should. So we expect this program to continuously to run on track.Finally, on Page 21, in conclusion, so in summary, the Munters Full Potential Program is well on track. It's starting to deliver the type of earnings and margin increases we were hoping for. We're seeing a stable to good underlying order intake with good underlying net sales growth, especially in the FX side, and all of this despite the fact that we're having a weaker situation with FoodTech in China. Now when it comes to the outlook, we are expecting the situation in China and in -- on the FoodTech side to kind of continue to be subdued for throughout the year. But nevertheless, we will see a significantly increased EBITA for the full year 2019, as we have stated before. And we will see the full impact of the Munters Full Potential Program in 2020. This will also bring leverage down to the levels that are in the range of our financial target. And we are, as I already said in the beginning, well on track to kind of gradually grow into our financial targets, which are a 14% adjusted EBITA.So with that, we will now open up for the Q&A session, so feel free to ask any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of William Turner from Goldman Sachs.

[William Turner, Research Analyst]

I have a couple of questions. The first one is the strong performance in Mist Elimination, what has been driving that? In particular, for example, it's powered out substantially lower share of the business. So what's going to drive that? And then my second question is, when do you think you will have fully exited the Data Centers Europe business? And then I guess finally, and I suppose we'll find out more once Klas joins, but is the Data Centers business and Mist Elimination still kind of under a portfolio review?

[Johan Ek, Interim President, CEO & Director]

Yes. If we first take the Mist Elimination, as you know, we've had very strong order intake throughout this year, already in Q1. This has continued in Q2, pretty much of that coming in the Marine segment where we have been -- has been quite successful. And then we have share -- very good order backlog, so we are seeing a good performance in Mist Elimination.When it comes to Data Center Europe, as we have said, there is an intention to close the facility. This is subject to usual union negotiations, and this is ongoing. This is going exactly according to plan as well, and we will come back to this in due course as soon as we are able to do so. But this -- kind of there's -- it's following exactly the time line that we indicated earlier this year. When it comes to strategic evaluation of Mist Elimination and Data Center as a whole, this is still ongoing and we will be back here in due course.

[Operator]

And the next question comes from the line of Kenneth Toll from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

A follow-up on that. Your indebtedness, your net debt to EBITDA is still a bit high despite a strong cash flow performance. And you write that you have sort of negotiated with banks that you, for a period will -- time will have high indebtedness during this restructuring phase. But those divestments -- or the strategic reviews you have on Mist and Data Center U.S., you don't need to sort of divest those in order to lower your debt to make the banks happy, so to say.

[Jonas Ågrup, CFO & Group VP]

Kenneth, no, that's not in the plan. I mean we are at 3.3x now, and that is adjusted for the IFRS 16 effect and also for the pension liability that we have, and the covenant level that we have in the bank agreement is 4.5x. And as we have been communicated in the past, earlier, we foresee it to be in the range at the end of next year, and that is excluding any sort of divestments.

[Kenneth Toll Johansson, Financial Analyst]

And then on the FoodTech side, you talk a lot about development in China and so on. But what's happening in the important U.S. market? Are there any signs of a recovery there?

[Johan Ek, Interim President, CEO & Director]

We see some signs of recovery in the layer market, and that's an important segment for us because it's a very profitable segment. And then we see also some positive signs in the broiler segment in the U.S. But we continue to see a quite weak development in the swine industry.

[Operator]

[Operator Instructions] And as there's no further questions, I'll hand back to the speaker.

[Johan Ek, Interim President, CEO & Director]

All right. Thank you very much, ladies and gentlemen, and we look forward to getting back to you in the third quarter. And that time, it will be run by Klas Forsström. So thank you very much.

[Jonas Ågrup, CFO & Group VP]

Thank you. Bye-bye.