Munters Group AB

STO:MTRS

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to the Munters Q3 report 2018 call. Today, I'm pleased to present CEO, John Peter Leesi. [Operator Instructions] John Peter, please begin.

[John Peter Leesi, CEO, President & Director]

Thank you very much, and good morning to everybody, and welcome to the third quarter 2018 announcement for the Munters Group. Together with me, I have Jonas Ågrup, our CFO. Summarizing the third quarter is that we grew order intake, we grew net sales and we grew earnings. However, in the third quarter, our Data Center business made losses, and what we have done is that we have launched a comprehensive profit improvement program in Data Centers covering areas around commercial acceleration, operational stability and control as well as operational cost reductions. We have also appointed a new leadership as of this morning for the business area, Data Centers. With that, we move to the second page. And just sharing some of the headline numbers with the group, we have order intake, as you can see on the page, that's grew 14% year-on-year. We saw net sales grow 13%, and we saw adjusted EBITA earnings growing 19%. So now over to Jonas.

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

If we move to the next slide, Slide #3, we can see the order intake and net sales bridges. If we look at the order intake in the third quarter, the organic growth was 5%. As you can see, we had quite strong FX tailwinds. So that was 9% in the quarter, mainly as an effect of a weak Swedish kroner against the U.S. dollar and the euro. The organic growth and the order intake was driven mainly by Data Centers and AgHort. And if you look at the net sales bridge, you can see similar numbers also for net sales.If I then move over to Page #4, this shows the group, Munters Group, we have 4 business areas. As you know, Air Treatment is the largest one, representing 53% of net sales. And you can see the EBITA margins posted in the third quarter for the different business areas.

[John Peter Leesi, CEO, President & Director]

So with that, I move to Page #5, covering a few business highlights during the third quarter of this year. On orders, we would like just to mention a few orders that we feel are important for the business. We achieved a large order for SonarEcho, which is our connected farm solution with an important customer for our AgHort business in the United States. We also got a first order -- a first large order for indirect evaporative cooling solutions with NTT facilities in Japan. And in the area of Mist Elimination, as you might recall, we have this transition where we make ourselves less dependent on the flue gas desulphurization business for coal-fired power plants, and we're transitioning more to the Process and the Marine subsegments. And we've had several orders, even if they're smaller, we've had several orders in this transition, which is important to us. In terms of other things, our service growth continues with contract penetration improving of the installed base, and we reported 8% in terms of net sales growth in our Services business. We do continue to see some raw material prices impacting us and will also impact the fourth quarter. When it comes to our AgHort business, we do see some uncertainty in the sentiment around investments in climate solutions for agriculture and food caused by the trade war uncertainty between the U.S. and China, and we also see some uncertainty caused by the African swine fever where we have seen some outbreaks, both in Asia as well as in Europe.

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

Okay. If we then move to next page, Page #6, it's the order intake bridge. As we said earlier, the order intake grew 14%, organically 5%. We had good growth in AgHort, where we saw a growth of 11% organically in the quarter. And then Data Center, we had good growth and that was mainly caused by very lower order intake in the same quarter previous year. We saw lower order intake also in the Air Treatment business area, and this is mainly related to the Industrial subsegment where we had quite a few large orders in the third quarter last year. So lower order intake for the Air Treatment business. As we said earlier, major Data Center order won in Japan and also the SonarEcho order that we won in the AgHort business areas, the area for connected farms. If we then move to Page #7, next page, it's the net sales bridge. Net sales increased 13%. Organically, it was 5% up. And we saw a growth in all the business areas, except for Mist Elimination. And as I understand, the growth was supported by FX in the quarter. Strong growth in Data Centers related to Europe, where we had 2 large projects that were delivered in the quarter. And then net sales increased 8%. If I then move to the next slide, you see the adjusted EBITA bridge. We increased earnings by 19%, and we increased earnings in all business areas, except for AgHort where we -- we're roughly on the same level as the same quarter prior year. We had a positive FX effects also on the earnings, and we posted similar -- and similar to what we did in Q2 this year, we had some organizational restructuring costs in the quarter, and it amounted to, in total, SEK 7 million, and it was partly related to the Air Treatment business area. If I then move to the next slide, it's the first 9 months summary. If we look at the first 9 months, order intake decreased 4%. Net sales increased 10%. And the adjusted EBITA, we posted a profit of SEK 521 million year-to-date with a margin of 9.9%. So that was up 4% compared to the same period prior year. We saw a weak cash flow in the third quarter and also year-to-date, as you can see, and this is mainly caused by 3 things. The main part is a time lag between revenue recognition and invoicing in the Data Center business, and it's related to these large projects that we have in Europe. And we expect to see good cash flow in the Data Center business for the fourth quarter this year. We have also seen continued working capital buildup in China caused by the good growth that we have seen over the last couple of quarters or for quite a while actually in China. And we have also seen late payments from a large customer in the U.S., and that is also causing some weaker cash flows. So those are the 3 main issues when it comes to the weaker cash flow. If I then move to the next page, you can see the orders received year-to-date by region, and you can see APAC was up 21%. So we continue to grow in APAC, and it's mainly driven by China. The order intake in Americas declined 16%, and it's related to Data Centers, but also, as we talked about earlier, the Industrial subsegment within Air Treatment. And we have continued to see a low level of business within the supermarket end-market also in the U.S., and this is also Air Treatment. And then EMEA, order intake declined 7%, and this was mainly related to our Data Center business.

[John Peter Leesi, CEO, President & Director]

Okay, we will now cover each business area very briefly. If we move to the next page, Page #11, Air Treatment third quarter. And as we have said and as you can see, we see an order intake decline by 4%. Main reason for this is that the -- it's a stiff comparable to last year, where we had 3 fairly large projects that we won in the Air Treatment Industrial sector. In the supermarket order intake in the U.S., we have a marginal increase, but it's pretty much at the same level when we compare year-on-year. Net sales increased by 6%, organically adjusted for FX. It is a decline due to the lower shipments to the supermarket end-market, especially in the U.S. Adjusted EBITA or earnings did grow by 6%, and mainly due to improved gross margins.

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

Okay, we then move to the next page, and this is showing the trends, the trading patterns for Air Treatment. As you can see, we posted a margin at the same level in the third quarter this year as this third quarter prior year. And if we look at the seasonal pattern for the Air Treatment business, we see normally a quite weak first quarter. And then normally, what we see is stronger quarters and the third and the fourth quarter is usually quite strong for the Air Treatment business.

[John Peter Leesi, CEO, President & Director]

Moving to Page #13, looking at our AgHort business. What you can see then is that you have a healthy order intake growth by 19%, and this is then affected also by this large connected climate, the connected solutions, the order -- SonarEcho order we won in the U.S. Order intake in China that has been very, very strong during the year was a little bit weaker in China when we look at the third quarter. Net sales grew by 7%, and this is where we see the effect of the uncertainty in investment sentiment caused by the trade war issues as well as the African swine fever. Looking at the earnings then, the actual earnings are a tad lower compared to last year, even with the growth in sales, and this is a product mix, regional mix effect where the slower U.S. market affected a bit negatively, and we are actually continuing the investments in our software and digital offering in the AgHort business.

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

Okay, we then move to the next slide, that's Slide #14. We see the trading patterns for AgHort. And normally, we see strong quarters in the second and the third quarter for the AgHort business. And for the third quarter this year, we posted a margin of 14.7%, and this was mainly impacted by lower volumes in the U.S. but also some investments in the software business in MTech Systems in the U.S.

[John Peter Leesi, CEO, President & Director]

So we move to Page #15 and talk about Data Centers. And here, we can see obviously in the percentages, we see the big swings that we have seen historically as well. And in this quarter, of course, very high order intake compared to a low number last year. But one of the things again worth mentioning is that we won an important order with our strategic partner in Japan, NTT Facilities. We also saw net sales rolling at a good pace for the quarter, thanks to high deliveries on a number of key projects in Europe, whilst the actual deliveries and the utilization in our U.S. operations and factory was significantly lower. So this is then causing the earnings coming down this low volumes in the U.S., but also the fact that we had lower margins in Europe in this quarter. And what we have then said is that due to the situation with lower order intake here in the beginning of the year will actually affect and cause a lower factory utilization in Europe, and we then indicate that we will be making a loss also in the fourth quarter of 2018. We have appointed Michael Gantert, an American National with good experience from the Data Center business as the new President of the business area as of this morning.

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

Okay, then we move to Slide #16. It shows the trading patterns for the Data Center business. The Data Center business is a lumpy business and it will continue to be a lumpy business for a while, and there is actually no seasonal pattern in this business. And as you can see, we posted a negative margin in the third quarter this year of 6.4%.

[John Peter Leesi, CEO, President & Director]

And then we just wanted to -- on Page #17, we wanted to give you a first look at our profit improvement program that we have put in place with some rigorous work internally, also with some external support. So we have a solid plan now in terms of how we want comprehensively to address the profit need -- profit improvement need in Data Centers. This one covers then the mentioned areas around commercial acceleration, operational improvements and control as well as cost reductions. We mentioned the fact that we have a new leadership, and we expect to see earnings improvements in Data Centers in the business area, generally in 2019. But specifically talking about this program, costs for the program will be taken mainly in 2019, throughout 2019, but we will also have some costs in the fourth quarter of 2018. And the full impact of this program in terms of benefits and earnings uplifts, we will see towards the end of 2020. That is the full impact. So with that, we'll move to business area Mist Elimination on Page #18, where we can see a bit of a softness in the order intake, which is then again caused by the weaker market for coal and FGD, in particular, whilst partly compensated by the increase in Marine orders and the Process side, which look quite healthy even if the orders are smaller. Sales dropped as well because of the same reasons. And here, we see the drop mainly in China, and again, partly compensated by Marine and Process business that is picking up. And the earnings then had a good improvement, but mainly then driven by an overhead cost reduction.

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

Okay, then we move to Slide #19, and this is the trading patterns for the ME business. There's actually no seasonal pattern with this business. And if we look at the margin in Q3 this year, it was on the same level as we saw in some of the quarters in 2015 and 2016. So we posted a margin of 16.3% in the quarter.

[John Peter Leesi, CEO, President & Director]

Thank you, Jonas. And that brings us to the last page, which is #20, which is a summary of what we just said. So let us repeat the messages in the third quarter is that we had order intake, we had net sales and we had earnings growth. In terms of earnings growth, all our business areas contributed to the improvement in earnings with the exception of AgHort, which was just a little bit lower. We have losses in Q3 for Data Centers, and we have launched a strong profit improvement program that we have started executing, as we speak, and we have appointed a new President for the business area. So with that, thank you for taking the time listening to us, and we will be opening up for questions and also answers.

[Operator]

[Operator Instructions] The first question comes from the line of Agnieszka Vilela from Nordea.

[Agnieszka Vilela, Research Analyst]

I have a question regarding Data Centers and the restructuring program that you announced. Starting maybe with the appointment of the new head, can you share his experience and competence and how he can contribute in turning this business area around?

[John Peter Leesi, CEO, President & Director]

Okay, happy to do so. Michael Gantert is -- he's been with the company for 9 years. He's been heading up -- he's been the Commercial Director of the Data Center business, which means that he's been responsible for the application, engineering and the project management activities being at the center, the hub of the wheel, when it comes to actually delivering projects to our customers. He's done that in the U.S., where we have been successful in executing this. But the problems that we had in Europe, he has very recently taken on the global responsibility, also taking responsibility for application engineering and project management, including Europe, and we've seen some good improvements there. So this is a man that comes originally from the U.S. Army, and he also has worked 9 years in the Data Center business. And it's an internal promotion, and we're very happy to have him at the helm of the Data Center business.

[Agnieszka Vilela, Research Analyst]

Great. And then I wonder if you could be a bit more detailed when it comes to the -- quantifying the costs for the program and also the savings that you project. And also help us a bit with EBIT bridge into 2019. You say that you expect some profits improvement in the division, but what kind of assumptions do you make for sales then? And obviously, how much this cost savings program will contribute to the -- to EBIT in the coming years?

[John Peter Leesi, CEO, President & Director]

Right. The -- and I will repeat a little bit what we just said that we -- in the business, in general, we're going to see an improvement in 2019. And the full impact on a net basis, including costs and everything, we will receive this full impact of that coming towards the end of 2020. So that was a repetition of what we just said. When it comes to sharing the details of this program, we have a very comprehensive program in place. What we want to do is that we want to allow new management to refine the views of this, and we want to start executing on this program. And our intention is to share some more detail around this project -- this program when we announce the fourth quarter report in the beginning of next year.

[Agnieszka Vilela, Research Analyst]

Okay, I understand. But just in the light of decreasing order backlog, do you project your sales for that division to fall next year or to be stable or to increase? Any kind of thinking about that?

[John Peter Leesi, CEO, President & Director]

We will come back to that, Agnieszka. We are not in the position to comment to that right now.

[Agnieszka Vilela, Research Analyst]

Okay. And then my last question is on the balance sheet. I can see that your net to EBITDA is again at 4x. Can you show your financial covenants? If I read the IPO prospect, they were at around 4x, but my question really is have you negotiated these covenants with the banks and have more favorable covenants right now? And also how do you think about the dividends in the light of quite elevated in that invest?

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

Well, when it comes to the covenants, it is 4. And how we calculate it in the bank's definition is actually 3.8. So it's a little bit lower. So -- but that's where we are now. The covenant we have not disclosed, so -- but it's higher. But we are now, as we said, it's 4. And when we calculated that's according to the bank definitions, that it's a 3.8. And as I said, we have these 3 main reasons for why we have this negative cash flow now in year-to-date this year, and we expect good cash flow in the fourth quarter. So I expect the working capital to come down in percentage of net sales in the end of the year. And then when it comes to the dividend, I think it's more up to the board and then the Annual General Meeting to decide on the dividend. So I cannot comment on that, really.

[Operator]

And the next question comes from the line of Jack O'Brien from Goldman Sachs.

[Jack O'Brien, Equity Analyst]

So also I want to focus on Data Centers and the bigger sort of more existential question as I see it, which is really if we look at the first 9 months, obviously order intake down 40%. I'm just interested to hear your views on why you think some of the larger scale Data Center orders are not coming through strongly anymore. Also, we noticed a large Facebook order in Singapore. And so we'd really love to hear, given what an exciting sort of divisional prospects this has, sort of what you're seeing from a competition perspective, whether pricing has got tougher, if you still see your technologies as relevant. Obviously, you won that nice Japanese order. But just looking to understand a bit more about how your -- the environment in Data Centers is evolving here and whether Munters will still participate in that as strongly as was once envisaged.

[John Peter Leesi, CEO, President & Director]

Yes, Jack, a very relevant question and let us try to shed some light on that. When it comes to looking at the end market, we see a continuous growth, and we've actually done -- as part of this comprehensive profit improvement program where we've had some external help as well, we're taking a broader view not just looking at our own profit improvements, but we've done that in the light of how we believe that this market is developing, right? So what we see is that we see a quite consistent picture of the addressable market that we are addressing is actually going to grow somewhere between 10% and 15% per annum going forward. That is a general view in the market. We believe that, that is a positive place to be, even if we've struggled with profitability. Let's remind ourselves that Munters has grown its Data Center business with 55% per year, even if we've struggled with profitability. I don't want to say we're good, but we'd actually been able to grow at least with the market, which is positive. Looking at the dynamics when it comes to customers and when it comes to technology out there, we see -- in terms of customers, we see the hyper scalars, the people that build very big data centers. We see their share of the total market increasing, and that is the place where we supply solutions. Secondly, we see also the edge data centers growing some traction, where the proximity and the latency in data speeds become more important for certain applications. So we see both these areas developing that we are stronger in the hyper scale segment. The other thing we see in terms of technology and products is that we see that -- we see an evolution on the technology side, where we see other interesting things coming in besides what we call then economizers based on direct and indirect evaporative cooling. These are the sweet spots and the heart plan of what Munters does. But what we see is that we see an increasing change in customer preferences, where they also want to look in what we call dry solutions where they want to see efficient cooling products and offerings that don't use water. The second thing we see is that big colocation data center operators, they also look for more flexible and scalable solutions so they can build out their capacity over time. And within these 2 areas, we are now strengthening our offering as a part of this profit improvement program. And one of the things you've heard before is that SyCool is a dry solution addressing the needs of customers while water consumption is essential, and that's why that is an integral part of getting that product out in a few variations. The second thing is that we have a collaboration on the more flexible and scalable solutions, which are called fan wall cooling solutions where we work with a strategic partner in the U.S., but we actually now won a number of orders as well. The lack of announcing big orders, that is true. We've been used to -- we announce orders when they're above 100 million. The NTT Facilities orders is a little bit lower than that, and therefore, we did not announce that one. And again, it is the lumpiness with these big projects, and we haven't seen those over the last quarters, but obviously we hope to see some of those going forward.

[Jack O'Brien, Equity Analyst]

Brilliant. That's extremely helpful. And just on the -- is there any comment you can give on that Facebook Singapore order, because obviously they've been one of your biggest customers in the past and whether there might be a Phase 2 where you could win some work or...

[John Peter Leesi, CEO, President & Director]

Yes. I mean, we're fully aware of that situation. And this is a place in the world where Facebook apparently have taken a decision to work with another type of technology addressing the same needs that they have. But that doesn't mean -- or we believe that doesn't affect our relationship in general with Facebook. But I think we need to live with the fact that this marketplace is becoming more competitive. We have competitors that have similar solutions to what we have, and in some cases, we will see customers at certain places around the world going with competition rather than going with us.

[Jack O'Brien, Equity Analyst]

And just one final question on Air Treatment, if I may. You had flagged previously that the -- you are expecting some weakness from the supermarket segment, but similarly other areas like lithium are growing quite well. In terms of the various end markets within that division, I'm not sure I caught it earlier, but do you still -- what sort of prospects are you seeing by end market?

[John Peter Leesi, CEO, President & Director]

Well, as we've said, in the Air Treatment business, we have 3 main subsegments: one is the Industrial space and one is the commercial space. The industrial space, we focus on food, pharmaceuticals and electronics. And by far biggest in electronics is, of course, the lithium battery. We believe that the lithium battery opportunity is going to be there for the long play. There is nothing indicating in the world that you don't need very advanced and special climate solutions for manufacturing lithium batteries. So that one remains positive. When it comes to food and pharma where we see more of a normal growth level, we don't see anything affecting that. We will see some industrial variations going up and down, depending on economic cycles, but our view on this remains strong. We're also now focusing a little bit more on our aerospace sector, where we've been able to win some orders, which is also interesting for us. Moving then to the commercial side, in the commercial side, as you know, we are needing the general air handling side where we don't have specific Munters technology inside, but we are quite dependent on the supermarket segment in itself. And as you have noted and we have said, the supermarket segment is a little bit lower or is lower, especially driven by our biggest customer in this segment, which is Walmart. Generally, Air Treatment, even with some variations and over time sometimes lower order intake, we remain very positive around the opportunities for Air Treatment very clearly.

[Operator]

And the next question comes from the line of Mats Liss from Kepler Cheuvreux.

[Mats Liss, Equity Research Analyst]

Just a couple of questions. First, you mentioned within AgHort the impact of swine fever and -- et cetera. Have you seen the full impact of that? Or is it sort of a forecast going forward that you sort of have an impact? I guess, orders are still pretty good, but could you say something about that?

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

Well, we have seen some uncertainty in the market. We have also seen some broad testing delays and some also installations being delayed because we are not be able to sort of visit farms because of the Asian -- or African swine fever. But I think this has -- I mean the trade war and the African swine fever has caused uncertainty in the market, and then we have seen some effects in Q3. I think we would expect to see more effects also and some effects in Q4 actually before we have seen -- before this has sort of settled and been resolved.

[John Peter Leesi, CEO, President & Director]

And I just wanted to make one more additional comment around the swine fever. Generally, everything around if it's swine fever from Africa or it's avian flu from Asia, generally, all these things in the long term are good when it comes to controlled climate. Controlled climate is one way to mitigate the impacts of these things, right? So even if we don't look upon these diseases as something positive, but from a business perspective in the long term, it's actually good to have a controlled climate. However, as Jonas said, in the short term, this creates uncertainty and less willingness to invest.

[Mats Liss, Equity Research Analyst]

Okay, somewhat good news there then. And then regarding the trade war there and the China impact. Do you see new competition coming in? And do you see price pressure? Could you say something about that?

[John Peter Leesi, CEO, President & Director]

Sorry, can you just repeat it? We didn't hear the first part of your question, if you could repeat that.

[Mats Liss, Equity Research Analyst]

It was regarding the trade war like situation. Do you see sort of the new competition or increased capacity of trying to get orders in that market, maybe generating some price pressure?

[John Peter Leesi, CEO, President & Director]

I -- it's -- first of all, it's a little bit difficult to assess the impact of it. And I wouldn't say that we've clearly seen some new competitive dynamics in the marketplace because of this. What we see is this caution when it comes to investments, that's what we see.

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

And what we have done also in China is that we have, for now, for some time, been working on localizing more of our production in China. And as of probably around Q2 next year, we will have most of our production localized, and I think it will be around 90% of the production in China. What we sell in China will be produced locally in China, and I think that's important.

[Mats Liss, Equity Research Analyst]

Yes, good. Just jumping to the Mist Elimination division there. I mean, we have seen some quite substantial improvement there in Marine scrubbers. And have you seen the full impact for you in that area as well? Or is there more to come? I mean, could you say something about the lead times there between vessel orders and well, when you get the fees for...

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

Well, the lead time for -- the lead time in the Mist Elimination business could be quite long, especially in the FGD business because when they install new scrubbers, it's normally when they have these, the shutdowns, and they usually have these shutdowns maybe one or twice per year. So if we get an order, especially then for -- within the FGD segment, it could take up to 12 months before we do the installation. So we have -- from orders to delivery, it's probably -- I mean together with the Data Centers, it's one of the business areas where we have the longest lead times in the -- between order and delivery.

[Mats Liss, Equity Research Analyst]

Okay. And finally there, about raw material prices and tariffs. I mean, is it something that you will feel more in the fourth quarter? Or will you be able to pass it on to customers, do you think? Or could you say -- elaborate a little bit about that?

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

We will continue to see -- I mean, we have seen the negative effect of raw materials actually increased over the quarters this year. I think I commented during the Q2 presentation that we had a little bit more than 1% negative on what we purchased in indirect materials. In the third quarter, it has actually accelerated a little bit. So it's around 1.5%, and we expect that level to continue also for the third -- for the fourth quarter. Then for next year, we expect -- then we have the higher levels also to compare with, so we expect the material price FX can sort of start to level out during next year.

[Mats Liss, Equity Research Analyst]

But I guess the problem is the same for your competitors. Is that also -- I mean...

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

Yes, I would assume. So, yes, yes.

[Mats Liss, Equity Research Analyst]

It probably create some sort of inflationary pressure in the...

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

Yes, yes.

[Operator]

And the next question comes from the line of Max Fryden from Danske Bank.

[Max Fryden, Analyst]

Max Fryden here at Danske. I just have a follow-up question on the Data Center market. The overall market growth trajectory has slowed down slightly, some -- what you estimated at IPO. There's also a demand, as you say here, for other products now compared to your products. You're developing dry solutions in order to tackle with that. You're developing to be more flexible and scalable solutions. Just give us a view of your current production set up today of your sort of -- I don't want to say legacy, but your current products and your new products. Does this require any big changes in the manufacturing footprint when you do this shift in order to meet this sort of new customer demand?

[John Peter Leesi, CEO, President & Director]

Thank you, Max. When it comes to the total market and the guidance and what we've talked about 18 months ago and what we talk about now, I just wanted to repeat what was said earlier, and the whole point we're trying to make, Max, is that it's not a big difference. We're pretty much a line when it comes to the total market development than what we say today and what we said before, and let me qualify that a little bit. We said 1.5 years ago that we expected the market could grow somewhere between 25% and 30% going forward. There was specific mention of 27% or 29% growth in this market -- in this total market that we are addressing. We also said that, that growth in the market was going to be very front-loaded that we were going to see a stronger growth in the early years like '15, '16, and so on, and we would see a stagnation -- not a stagnation, a reduction in the growth rates already in 2018 and going forward. And that is what we now see when we say that it's going to grow between 10% and 15%. So I -- we actually do believe that we're pretty much in line with what had been said previously. When it comes to the manufacturing footprint, we, today, have our main manufacturing in Virginia in the U.S. for Data Centers. We have it in Dison in Belgium for Europe and some export, and we've just built a manufacturing facility in Xinyang, which is 1.5 hours northwest of Shanghai. So these are going to be the main hubs for our manufacturing. It will also be the main hubs for our manufacturing of the new products and the new solutions. So that thing doesn't change. What we need to do, however, is that we will, of course, see how we can make our whole manufacturing and supply setup more flexible, transferring more fixed cost into variable cost in order to meet the volume variations that we see in this business.

[Max Fryden, Analyst]

That's okay. But also just to understand the magnitude, and I know this is a very flexible production with a lot of sourcing, but is there any risk of write-down in the balance sheet for the existing technology as you move more into dry solutions? Just give us some granularity on how big this shift is from customers, really.

[John Peter Leesi, CEO, President & Director]

If I start with -- Jonas will cover any needs for write-offs here, but when it comes to -- when you think about the dry solutions that we will be offering to our SyCool solution is that the -- if you can use water, either in a direct evaporative system or in an indirect evaporative system, you get higher efficiency in cooling capacity, right? So that is the preferred. If you don't have issues with water, you're actually going to have more energy efficiency through that system. So what we are tapping now into with the dry solution is to capture a market segment that is evolving that we couldn't capture before. So we don't see necessarily a huge cannibalization or anything here. We just see that we tap into a real opportunity.

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

Okay. And when it comes to the balance sheet exposure, I mean we are developing the SyCool product now and we are activating some of the R&D expenses into the balance sheet. But going forward and the plans that we have for the coming years, we expect SyCool to increase when it comes to sales volumes, and we expect it to be one-off together with the fan wall solutions will be a good complement to the direct evaporative cooling that we have and also the Oasis system. So we don't foresee as it looks today and with the plans that we have today that we need to do any write-offs.

[Max Fryden, Analyst]

Yes, that's clear. Just a follow-up on the ag market, primarily on layer in the U.S. We saw the egg prices increased last year, and they were developing very well during spring. Then, of course, we had the delayed investments in general due to the trade wars and whatnot. So what is the outlook for you looking into the 2019 spring season? Do you see that there's a pent-up demand to be filled?

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

Well, like I said, it's hard for us to comment on that because we expect some time that we would see a second boom in the cage-free investments in the layer market. But when that boom will come, as we saw in 2016, we haven't seen any sort of signals that it will come and when it will come. It -- we are pretty sure it will come, but when it will come, we don't know. So -- and then how long this trade war will sort of influence and affect us, and it's also hard to say because I think if it will continue, I think we will see more investments in markets like local markets like Mexico, maybe Canada, maybe China and less exports out of the U.S. And I think it's a little bit too early to say, actually.

[Max Fryden, Analyst]

Okay, I just wanted to see if you had anything in your sort of...

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

No, we haven't. No, we haven't seen it.

[Max Fryden, Analyst]

Okay. Just finally from me on the Air Treatment and the commercial side and specifically on Walmart. When I look at their CapEx development in the past 10 years, it has declining steadily up until this year. And at least if I look at what other analyst estimates, it looks like there's going to be recovery here going forward, but you say it's more of a flattening out. Any comment towards that? Do you see an increased activity at all from that particular customer?

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

No. I mean, the levels we have seen so far this year, it's sort of on a very low level, and actually a record low level for us. And there is large installed base out there, and it needs to be replaced sometime. So what -- I think we have communicated also earlier, what we expect going forward is that we will -- gradually, we will see higher volumes with Walmart going forward, but how -- which levels it will be, it's hard to predict. But we believe that the volumes going forward will be higher than we -- what we have seen for this year.

[Operator]

[Operator Instructions] And the next question comes from the line of Jack O'Brien from Goldman Sachs.

[Jack O'Brien, Equity Analyst]

Just one more for me. I don't mean to label this Data Center point. But if I look at the revenue progression in the last years, obviously it has been an exciting growth market and you did roughly SEK 700 million of revenue in Data Centers '16; SEK 850 million, '17; nearly SEK 1,200 million for -- or SEK 1,150 million, this year. Obviously, given that order intake number, what is the right number for '19 to be thinking about? Because consensus has revenues for Data Center of SEK 1.25 billion next year, but it strikes me, given the order intake, we could be back at like 2016 levels. I mean why would it be more like SEK 700 million, given the lead times? So it strikes me that revenues could be back at '16 levels on order intake, unless I'm misunderstanding something.

[John Peter Leesi, CEO, President & Director]

Yes, and -- well, our only answer in this is that we see the market continue to grow at around 10% to 15%. And when it comes to our own numbers, we somehow -- we don't want to give the guidance of growth numbers or growth assumptions for next year. And the reason for that is quite simple for us: due to the lumpiness of this order intake and depending on how these big orders come in or don't come in, if they're delayed or if they come early, that has a big impact. So whatever number we say at this point in time will be subject to volatility. And therefore, we -- since we can't give you a qualitative answer on it, we don't want to give that guidance.

[Operator]

And as there are no further questions, I'll hand back to the speakers.

[John Peter Leesi, CEO, President & Director]

Okay, thank you very much. And again, thanks for taking the time and we wish you a good day. Thank you.

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

Thank you. Bye.

[Operator]

This now concludes the conference call. Thank you all for attending. You may now disconnect your line.