Munters Group AB

STO:MTRS

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to Munters' quarter 3 report of 2019. Today, I'm pleased to present CEO, Klas Forsström; and CFO, Annette Kumlien. [Operator Instructions] Speakers, please begin.

[Klas Forsström, President & CEO]

Thank you, and welcome to this quarter 3 webcast.Me speaking is Klas Forsström, and together with me, I have Annette Kumlien.In short, this quarter showed stable demand, strong organic sales growth and improved profitability. I'm pleased with operational improvements made during quarter and step-by-step continuous improvement is something that we should deliver on. During the quarter, we also had to take additional costs related to closure of the Dison factory. I'm very happy to present some strong examples of important innovations in the area of digitalization and Software as a Service from both business areas, innovation being a growth driver for the future.With that then, moving over to the agenda, next slide. And the agenda today is highlights January to September 2019, I will carry that through; and then quarter 3 and year-to-date results handled by Annette; and update on Munters Full Potential Program also handled by Annette. I will end up with summary and an outlook and then open up for Q&As.Turning over to next slide and highlights during quarter 3.As said, stable demand at the high level. We saw strong demand for some areas in the industrial markets, Services as well as Data Centers and Mist Elimination solutions. We also see increased demand for digitalized solutions in the food industry, something that I feel is very pleasing. Strong net sales growth. Growth in Data Center business in U.S., growth in several subsegments in the industrial areas and also here Services delivering strong growth.The adjusted EBITA margin improved, driven by savings from full potential program; net sales growth and improved utilization rates; and then very important, operational improvements. We have also made some changes in the management, and I'm very happy to announce -- when we announced that Peter Gisel-Ekdahl, who has driven a successful implementation of the strategy within FoodTech, took over -- will take over as head of the AirTech. I'm really looking forward to see what Peter and his team will be able to create over the coming quarters and years.Moving over to the European data center operations that incurred additional costs. As presented earlier this year, we decided to close the European data center operation. And in this last quarter, we accrued for additional nonrecurring costs of some SEK 116 million. The cost relates to the closure of the Data Center factory in Dison, Belgium. And Munters, we have insurance solutions in place for this type of events, but the financial and cash flow net effect on Munters cannot yet be finally determined. We expect that in the coming months.Moving in more towards the business. Let me drill down in orders received, all here currency-adjusted numbers, starting at the upper right side: how is the spread in between the different markets, Americas being representing some 40% of the total order intake, EMEA around 36% and APAC just about 20%.In Americas, we saw a strong order intake in the Data Centers. And here I have to add I'm very pleased with the operational improvements and stability that has been created in that part of our business. The order intake in the Supermarket subsegment in U.S. remained weak. We saw also continued low levels of investments in the swine farms in U.S. then driven by overcapacity and uncertainties related to trade tariffs and the African swine fever.Moving over to EMEA, increased orders, order intake for Services and Mist Elimination. And also here I'm very pleased to say that Mist Elimination is developing according to plan with continuous improvements. Select parts of the European industrial market saw lower demand impacted by the weaker economic climate but then also somewhat lower investment rates in the region.And finally moving over to Asia then, high demand from the poultry industry as well as increased orders for Services. When it comes to the swine production, we saw a comeback to some extent from low levels during the earlier then hit by African swine fever.Moving over to Munters Full Potential Program, next slide. As you know, we launched in the beginning of the year the Munters Full Potential Program. It consists of 3 different phases: stability, profitability and growth. Annette will later on talk more in detail where we are in deliveries in relation to this program, but I can say like this that the program is in line with plan with the total run-rate savings reaching targeted levels for the year. We are now step by step moving into Phase 2 of the program, profitability, and I will talk briefly about that later on as well.To summarize it on a group level when it comes to financials. Order intake increased by 6%. Net sales for continued business increased with 16%. The adjusted EBITA increased up to SEK 248 million. And the net income reached SEK 104 million, both of those numbers then ahead of last year. The cash flow from operation was SEK 177 million, and we reached a leverage of about 3.5x.And then I will shift slide, moving into the real business, the different business areas.AirTech, strong net sales growth; a stable order intake organically, 5%. The strong net sales growth, organic growth, by 18% was driven through different growth in part -- in subsegments of industrials but even more in particular Data Centers U.S., Mist Elimination. And as I have already said, and I would like to underline this, I'm very happy to see the step-by-step improvements that we are taking in those areas. Services also increased. We ended up in an adjusted EBITA margin of some 12.9% driven by savings from FPP and volume growth.Turning slide then and coming into something that is extremely close to my heart that I think is part of what drives growth in a business, innovation. I'm very excited to see some golden nuggets taking place in innovation within our company, and this is one of them, the launch of AirC, an air controller. And what is this? It helps customer optimize energy consumption and allow service and system updates through remote access, in a nutshell user friendly. It is a digital display that gives operators access to everything from system status to the humidity controls. I call it accessibility. The control, AirC, also enables fully automated systems ensuring it's operated at an optimal efficiency level at all times, consistency. All this, I think, makes us [ venture ] in the very important journey from products to solutions and systems, and here very much driven by digitalization.Moving over to FoodTech, next slide, impacted by low demand in Americas. The order intake decreased organically with 7%. If we drill down here, the order intake in the layer and broiler markets increased, but this was offset by weak demand from swine market in U.S. and China caused by the ripple effect of the African swine fever but also effects from trade tariffs and overcapacity in the U.S. market. The net sales decreased organically with 2%. And here we had a positive development in the climate solution control business, something that I think will be very exciting for the future. The increased adjusted EBITA margin reached 15.9%, driven by mix and savings from full potential program. Also here, I think they have very good golden nuggets in innovation.And moving over to next slides -- slide then. Here we talk about an integrated system delivered from MTech. And what is this then? The Munters MTech solution manage every phase in the production supply chain from live operations to finished products through a service as -- software-as-service setup. It's about traceability all the way from the farm to the fork, to the table. It's about machine learning, optimizing, planning and forecasting. It's about using Internet of Things. It's not just monitoring. It is use the data being gathered. And all this then bundle into business intelligence, creating a smarter system that can guide our customers through analytics. It is very much about yield and maximized output in the full value chain. I do feel that we are taking clear steps to lead our industry forward here. I'm impressed what I see, and it's also on the journey from component solution systems into knowledge-driven [ things ]. Here I have high expectations for the future.With that, moving into next part of our presentation, I would like to hand over to our CFO, Annette Kumlien, and she will go through the quarter 3 and January to September results.

[Annette Kumlien, Group VP & CFO]

So if we turn to Page 13. We have -- if we look at the order intake. As we have said earlier, we have had a stable demand, and you can see that the organic growth has been 1% during this quarter. AirTech had a 5% growth driven to a large extent of large orders received from the lithium battery industry. And we also had a very good growth when it comes to Services with an 8% in the quarter. Partially that offset with a weaker demand for Supermarkets. But all in all, AirTech plus 5% in the quarter.When we look at FoodTech. As you are well aware, we have been impacted by the African swine flu, and we have also been impacted by the weaker demand in the U.S. or Americas driven by overcapacity and also uncertainty about the consequences from the trade tariffs. What was positive in the quarter there was actually that China and APAC bounced back a bit after the African swine flu breakout.If we move to the next page and we talk about the net sales. As earlier said also we have a very strong growth. We are talking about 11% organic growth in the quarter, with AirTech driving ahead with an 18% growth basically following the demand in the -- demand that we have and the order take side, with Services growth, but also data center solution in the U.S. have been very good in the quarter, and also Mist Elimination. Again, when we look at the commercial sector, we see weaker deliveries and also for components delivered to OEMs.When it comes to FoodTech, again following the order intake path, we're talking about a 2% contraction on the net sales, with again Americas being affected by the investments in the swine market in the U.S. but also uncertainty about the trade tariffs and also the overcapacity. When it comes to the climate solution controllers that we have in FoodTech, they've actually [ contracted positive recent and ] that was quite strong, which you will see later on has impacted the margin.If we turn then to Slide 15, looking at the profitability side. As you are well aware of, the full potential program that was launched earlier in the year, it's paying off. So when we look at the adjusted EBITA, it has actually increased 33% versus last -- versus the same quarter last year. If we look at the margins, we're now reaching almost 14% compared to 12% last year.AirTech improvements have turned out very good when it comes to the FPP program, but also the growth in net sales has impacted the positive margin development. And also when it comes to the utilization rates in the data center in the U.S. operations as well as the Mist Elimination operations have also impacted the profitability in a positive way. And then looking at AirTech, we have actually gone from 11% to 12% during the results quarter versus the quarter previous year.When you look at FoodTech. The margins have gone from 14.7% last year to 15.9%, again driven by the full potential program but also by a mix from having more share within the quarter. We also saw operational improvements in our facility in Mexico which had a good impact compared to last year.So moving ahead then to just a summary on the full year-to-date figures that you find on the next slide.Organic growth stable, as we have said, when it comes to order intake, about 4%. Net sales, strong. We're talking about 8% organically. And when we look at the margins, again we had a very good development going from 10.7% to 12.1% this quarter. Cash flow from operations have improved substantially. So we're talking about almost SEK 400 million. And when we look at leverage, we have 3.5. And obviously, the impact from the costs that [ we never sold for ], and that was also informed into the market last -- or yesterday evening, that could have been [ to ] leverage of 3.5.If we move to Page 18 and move to the full potential program.We are well in-line when it comes to deliveries on that, reaching approximately SEK 155 million year-to-date. The run rate that we have so far implies also that the "end of the year" delivery will be definitely in line with what we have said earlier. In addition to the SEK 160 million which was connected to [ kind of like ] the continued business as we're talking about, we also were seeing the impact of SEK 50 million coming from the Data Centers, which should be well in-line.If we look at the nonrecurring charges. We have here stated on this page the ones that are really related to the FPP program and then also clearly with the [ reservation ] that we did because of the solution issue that we have -- that we informed you about yesterday. We're talking about [ roughly costs ] approximately SEK 326 million which is related to the pure FPP program. And when we look at end of year, we are looking at slightly above what was communicated earlier and that is talking about SEK 375 million.So if we turn then to Page 19. As you're aware, we have decided to split our performance into continued business, which shows the [ pure ones performance ], obviously business that we are working on going forward. And when it comes to DC Europe, we have taken that up as discontinued business.To understand the figures. If we look at the stated EBITA in the -- in this quarter, we're talking about SEK 137 million negatively. Adding back then the IACs from discontinued business, SEK 325 million; adding also back the adjusted EBITA from discontinued business; and also adding back IACs related to the continued business, we're then talking about a SEK 248 million adjusted EBITA for the continued business. I mean in essence, if you start to look at this clearer, you can say that, if -- the way that we can say the results earlier, you should -- you can say that we've never have gone from SEK 230 million to SEK 240 million. If we look at year-to-date data in same analogy as we have talked about after the quarter, we have actually today an adjusted EBITA of SEK 641 million, which if we take -- if we add on the discontinued business, the results would have been in the level of SEK 582 million.So this is how the resulting would have impacted us. And the new levels to watch out for is the SEK 641 million from year-to-date and SEK 248 million for the quarter, in summary.So with that, I will hand back to Klas to [ sign off ] and listen to what's for the future.

[Klas Forsström, President & CEO]

Thank you, Annette.And then turning into summary and outlook then, turning to Page 21.If I summarize it, good underlying order intake and net sales growth, with a softer order intake expected in quarter 4 this year, as said earlier, impacted by somewhat weaker economic climate in Europe and the trade restrictions. Munters Full Potential Program well on track. We foresee significantly improved margins and earnings and significantly improved group adjusted EBITA expected for the full year of 2019, which should full impact from 2020. The group leverage, expected to be in line with our midterm financial leverage targets for 2020. It's a firm path towards increased earnings over the following years to achieve the revised midterm financial targets.And then if I flip side -- slide to Page 22. The focus for me, our management team and the company for the remainder of 2019 is setting the strategic priorities for the future. It includes the finalization of the strategic evaluation of Data Centers and Mist Elimination. I'm happy that we are making progress in performance in Data Centers and Mist Elimination. And as I've said earlier, it's more a matter of if we are the best-suited owners of that type of operation. Before the quarter -- year-end result is presented, we will come to a conclusion about this. It will also be a focus on operational excellence to ensure needed acceleration in innovation pace. It is innovation is a core for us. It's about specific core technologies but also about digitalization in different ways.So coming back to stability, profitability and growth. Phase 1 is coming closer and closer to an end, but then it's about changing the culture and the way we behave and operate within Munters. It's about moving the culture towards continuously step-by-step improvements. I mean the way you run an industrial company in a great way sliding in parallel into the phase of profitability, which is about improving performance. It is about assortment. It is about value selling. It is about the product mix, the customer mix and the way to the market. Customer focus and innovation is the name of the game. Then moving into the third phase in some of our segments, in some of our businesses already in growth. It's about attractive segment geographies; and then taking opportunity to utilize the force of cooperation, cooperation coming from partner-up with customers, partner-up with external sources or in some casing also -- cases also partner-up in a way that we move into M&A activities. This is the way to work on it.And if I shift slide again. It is very much about sustainable operations. The core of Munters is to help customers become more efficient in a sustainable way. We see growth areas driven by need for more sustainable and efficient operations. It's about energy savings and customer value. I do feel we're well positioned to capture that moving forward. Examples of that type of market drivers are lithium batteries for electrification, animal welfare, human health, increasing data traffic and so on.And to sum it up. I am excited about the future: together with the organization, gradually step-by-step improve our performance, constantly with a customer focus, innovation and operational excellence always at mind. With our strong base built on people and sustainability, that is what generates a sustainable operation for the future.With that, I would like to end up this presentation and move into questions and answers.

[Operator]

[Operator Instructions] Your first question is from [ Timothy ] from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

Okay. This is Kenneth Toll from Carnegie. Maybe -- can you hear me?

[Klas Forsström, President & CEO]

Kenneth...

[Kenneth Toll Johansson, Financial Analyst]

Sorry. Yes, so a mix-up...

[Operator]

Sorry about that, sir.

[Kenneth Toll Johansson, Financial Analyst]

Yes, no problem, yes. So my question was on the data center Europe, the costs, the SEK 116 million that you take. Do you see any risk that there will be similar costs for other completed projects that you've done in Europe where you have also made sort of tailor-made solutions?

[Klas Forsström, President & CEO]

Thank you for the question, Kenneth. We have now, during my first quarter, thoroughly gone through the operations, and I feel safe, secure in that I cannot see any similar events taking place. I think it is regretful that we have to take this, but I put it as learning lessons from how we operated the European operations. And I would like to remind that we have an insurance, but we need to work out how much will that cover, but I'm positive that it will generate at least some [ coverage ].

[Kenneth Toll Johansson, Financial Analyst]

Okay. Then I'm curious. Your background is within Sandvik Machining Solutions. And one thing that, that business is very, very strong at is modularization. And then when I've come across Munters' products in the last couple of years, I get the impression that some of the products are developed for a single market. So you may have different products solving the same problem in the U.S. And then you have other products for Europe and that might have third products for the Asian markets. And I'm -- so I was wondering, do you have a program to make here the products more global and working more with modularization in order to simplify the product range that you're offering to get costs down and so on?

[Klas Forsström, President & CEO]

This simple answer is yes. We are starting that path moving forward -- or I should say it has already started. I think we have to be open and honest ourself. That is the mantra that we have for all new products being developed and being brought into the market. When it comes to, I mean pruning or bringing it together, there is also a program saying that the differentiation that we have that is not driven by specific, call it, performance, yes, of the product. We will also step-by-step adjust our existing product towards that. And I think I can add here one very good example that is [ Sadlib ]. They have very strong products when it comes to data centers. [ And except but that ] they have over in North America, I'm truly impressed by the low-quality problems that they have received from those products. And in hindsight, I think, if we would have their modularization program in place that we'll have taken the lessons learned from one region to another, that would have increased our, call it, success in Europe, but we should not cry over spilled milk. We should look forward instead.

[Operator]

[Operator Instructions] Your next question is from Mats Liss from Kepler.

[Mats Liss, Equity Research Analyst]

Two questions, please. Klas, you mentioned the strategic review here of the data center and Mist Elimination. And well, I guess, if you could give some indication there when this review is, well, finished. Or you're ready to give some sort of indication of how you see them going forward.

[Klas Forsström, President & CEO]

Happy to answer that question. During the quarter, this quarter, we will conclude on how we look upon this. And if I go back to what we earlier talked about by last quarter, we said like this, that we know that it's an underlying strong market. We know that the solutions that we have are doing fine and are good performing. It's more about, I mean can we improve that performance. Can we take even more out to the market? And finally, is it -- are we the right owners to drive that? And by the end of this year, in -- well in line for next -- the year-end resulting presented, we will conclude on that and then communicate how we look forward. I can say that I'm very pleased to see how well the 2 different operations are reacting and moving forward in generating value.

[Mats Liss, Equity Research Analyst]

Okay. Great. And secondly, you mentioned the European orders or order intake was expected to slow during the final quarter. And could you give some sort of indication what you mean by that?

[Klas Forsström, President & CEO]

In -- for us, it's very much in-line what we announced after quarter 2. We said that the second half for the year will show a slight dampening of the order intake compared to the beginning of the year. So nothing more dramatic than that. It is in line with what we early communicated and that -- and then I think everyone is aware of that, the European manufacturing industry, it's slowing down, and then we have the trade tariffs. But don't interpret that as anything else compared to what we communicated after quarter 2. We see the same pattern moving forward.

[Operator]

[Operator Instructions] There are currently no more questions in queue, sir. Please continue.

[Klas Forsström, President & CEO]

Good. Then I would like to say thank you very much for, everyone, attending, and myself and Annette and the whole company are looking forward to interact with you in various occasions moving forward. So thank you very much, and have a good day.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all now disconnect.