Munters Group AB

STO:MTRS

Earnings Call Transcript 2021-Q3

[Ase Lindskog, Interim Head of Investor Relations]

Good morning, and welcome to Munters' third quarter report. I am Åse Lindskog, Interim Head of Investor Relations. Today, I have with me Klas Forsström, CEO and President of Munters; and Annette Kumlien, Munters' CFO. So Klas, the floor is yours.

[Klas Forsstrom, President, CEO & President of AirTech]

Thank you very much, Åse. And once again, very much welcome to this quarter 3 presentation. With me today, as always, I have Annette. Let me start to summarize the quarter in brief. Strong demand and market growth in our prioritized market segments. Both lithium batteries and data center markets are showing strong growth, and that will continue as markets for the coming years. We win in those prioritized market segments. That secures market share and technology share moving forward, building a base for future aftermarket service sales and upgrades. Our supply chain challenges continues as well as high prices in the raw material. We mitigate the market -- we mitigate the supply chain challenges every day, and we consecutively increase prices into the market. We predict that the supply chain challenges will remain until first half 2022. We also invest in capacity gains, efficiency gains and innovations. With that, let me go over to today's agenda. First, highlights of the quarter, some matters of implementation of the strategy, and then I will leave over to Annette for financial highlights and deep drills into the quarter. So once again, the quarter showed strong order intake and a lower margin. Stable net sales, the order intake grew strongly with 21%, predominantly in the prioritized markets, mainly Battery and Data Centers. The net sales somewhat after increase in AirTech, Battery subsegments and Service showed a good development. That mitigated then with negative impact from swine market in China. All in all, 3% growth. The EBITDA, as said, a decline. Margin decreased due to supply chain constraints, higher raw material prices, freight cost, changed business mix as well as the time lag of the impact of our price increases. I think you all have heard and seen what the supply challenges continues to do into the industry. And let me summarize that we continue to work with that and at current, we predict it to remain into the first half of 2022. Strategy, continued implementation in the right areas in AirTech. When it comes to FoodTech, the focus on climate and digital solution continues. When it comes to supply chain challenges, we can talk a lot about that. Let me describe it like this. We try to mitigate that every day. It is a from hand-to-mouth job. We are also implementing improved internal efficiencies to build a stronger base for the future. We see positive impact of high utilization rates and efficiency improvements, but that cannot balance off the supply chain challenges. And when it comes to what is our prediction for the future, you can look upon this that some, when we talk with them and when we investigate, say that this will start to taper off after the Chinese New Year. Others says that it will be a balance as late as end of next year. Our view in Munters that is it will continue throughout the first half of 2022. If I go into order intake then, good development in EMEA and Americas. And as you can see, Americas growing 25%; EMEA, 33%; and APAC then 2%. And let me shortly explain. We have a strong growth in AirTech, but that is then balanced off with a weak development in FoodTech. More details of this will come in Annette's presentations. Market trends then. And the trends here, it is current trends. But I will give you a little glimpses into some future trends as well when it comes to the market. Industrial, the order intake total represent 48% of our basket in the first 3 quarters, whereof Battery is 20%; food processing, 7%; and others about 20%. And here, coming back to Battery. We see a continuous rapid growth in all different regions from a market perspective. This growth will come in waves, starting very strong in Asia Pacific, building up in Europe and moving over to North America. Data Centers, at current, we are only operating in U.S., but we see a good development here moving forward as well as a market. And we, as I said, are taking a good chunk of that business. The other areas within AirTech are, at current, either somewhat up or stable. You have seen -- you may have seen that we did win a lithium battery project in Scandinavia. This is important from many different perspectives. First of all, it is important that one of the major players in this area are highly appreciating what Munters can bring. That shows that we are well established and we have technology set for the future. Secondly, it is also so important, as I said in the beginning, that we invest then in equipment into the marketplace. And thereby, we are establishing our technology for the future, and that will open up. Here is just one example for future service growth. And I can clearly say that we are in a clear lead when it comes to complete climate solutions in the production for the world's lithium batteries. Moving over to FoodTech. Here, you can see it is a more mixed bag of different markets moving up and down. Broiler, stable at current, and that is our largest segment. Swine, improving in Americas, but definitely weaker in China over the year. Last year was a very, very strong year, this year is a quite weaker year in China. Layer, somewhat stable. Greenhouse and Dairy, the 2 smallest segments in our basket then, showing stable growth as a market. An example here on -- from FoodTech. And what can I say with this example then? First of all, it sends easy-to-use, easy-to-choose capabilities. Listening to a customer talking about this is something that delivers energy savings, delivers efficiency, deliver a healthier environment for the chicken being grown there is something that we highly appreciate. And take a look upon, here, we have up to 85% efficiency in the heat recovery. Really, we are creating a sustainable setup for this type of business. Moving over to our strategy. You have seen this. You remember the wheel or the globe, and for customer success and a healthy planet in all those different applications and products, Munters' solutions are inside. And our focus is on customers. And here, you can say that what have we done? We have really been pushing prices. We have set strategies and ways of working for the future that didn't exist 2 years ago. And then due to current environment, we have also played a very, very defensive game, i.e., how to bring prices into the market. Innovation. This is very much about innovating into the future as well. I talked about a few examples that I think is very interesting. That is when it comes to carbon capturing. We are investing in new materials for that. We are also moving into digitalization and what that can deliver, especially for the broiler markets. And when it comes to markets, we continue to drive service and the capabilities for future service increases moving forward. And excellence in everything we do. I think here is the best way to highlight what we do. We constantly now invest to open up more capacity, both in Europe and in North America. And across the globe, we are working with continuous improvements to also generate efficiency and more capacity. And then, of course, the fuel of everything is our people. And here, we develop and implement more competencies by hiring and upgrading people. All in all, AirTech, growth in larger projects and prior test markets. FoodTech, being set for the next step, moving into not only climate solutions and equipment but also more and more into digitalization. FoodTech, at current, under pressure in the core areas. AirTech, very much into a market that is growing and where we aim to take further and further positions. And just to highlight it here. You remember me saying that we've set a target to reduce our product assortment for standard products that was to be delivered by end of this year, I'm very happy to say we have reached that target already now, and we are finding more potential day by day as we go forward. Sustainability. Sustainability is brought into our purpose, but also into our strategy in our daily work. It is about our people and how we work with them. Just to give an example here that we joined UN Global Compact gender equality initiatives. We put a new leadership program launched to develop the people in many different ways. And then moving into, call it, more hard facts then. We have started to drive and I see good impact in our initiatives to reduce our carbon dioxide emissions from our factories and our operations, and we are step-by-step moving towards the target to reach zero by 2030. And then when it comes to governance, I think it's mostly important here to highlight the preparations for the EU taxonomy and the reporting. I see strong, good progress in that improving day by day. And then we attract very, very good people. Grete Solvang Stoltz, coming from LKAB, brings in competence in the HR area and competence in the sustainability area. And I think she will be a brilliant person moving those areas further ahead in Munters. With that, Annette, over to you and a little bit deep dive into the quarter.

[Annette Kumlien, Group VP & CFO]

Thank you very much, Klas. So let's dive into our performance so far. So just to highlight, we have grown 10% in net sales during the year, which you have seen, and that's because of a strong start of the year. Q3, as you've seen, is more flat. EBITDA margin, same level as last year, around 12.7%, again, a strong start of the year with a somewhat weaker Q3, as earlier indicated. And then when you look at our leverage, increased during the third quarter. Two things that are driving it. Growth. When you grow, you grow operating working capital. And also obviously, the supply chain constraints that we see throughout the third quarter. And also, as Klas said, will probably pertain into the second quarter of last -- next year. So going in then to the details around order intake and net sales. Again, we had a very strong growth, mainly driven by the Battery segment, but also the Data Center in the quarter. FoodTech, we had good growth in Americas and EMEA. But when you look at FoodTech, it's being offset by the development in the Chinese market, where the Swine segment is becoming quite soft. So year-to-date, when you look at the order intake, it's actually up at 21%, again, driven mainly by the AirTech business. Book-to-bill for the group, same as we have seen previously. But when we look into the different business areas, you can also see that AirTech is growing. Net sales, basically stable during the quarter. Again, supply chain constraints hindering us a bit to get the products out into our customers. Again, when you look at it, AirTech battery is obviously growing. Service is also having a good development. Again, when you look then at FoodTech, they are being negatively impacted by the development of the Chinese market for Swine segment. So all in all, when you look at the net sales, again, plus 10%. Same factors that are driving it, as we have seen earlier on. And when you look at the order backlog, it's actually increasing 34% versus earlier, FX adjusted. Diving then into AirTech, I think the highlight there, again, and we're going to repeat it quite often, is the Battery and the Data Center business, which is really driving. It's again the megatrends that we are driving on. But it's not only the project sales, it's also actually OEM sales that we have seen coming in during the third quarter. Services, again, is something that we have been focusing on for quite a while, and you can see that it's still growing. And you can see also that is now reaching about 21% of net sales in the quarter, whereas year-to-date, we're talking about 20% for the AirTech group. When you look at the order backlog, here, you can see really that the high order intake of 36% and with the supply chain constraints that we have been seeing, at least book-to-bill still continues to grow. So actually, we're up at 1.3 here. And you can see also how the order backlog has grown with the 43%. But AirTech growing quite heavily with the Battery and Data Centers. But then obviously, from a pure getting the business out, we have the supply chain constraints that comes into play. FoodTech. When you look at FoodTech, we have a negative development, both when it comes to order intake and net sales, both when it comes to net sales in the quarter and year-to-date. But also when you look at the order intake, it is flat actually coming in there. So what you can say is that the China business, we can see in the third quarter, it has been accelerated when it comes to the negative development in the swine market. The good thing is when we look at FoodTech, as we have been speaking about earlier, is that the U.S. business is continuing to grow. And that is across the board when it comes to both Dairy, Greenhouse's and also the Swine segments. EMEA is also having a positive order intake, which is good to see, and that's also related to the controller business for the U.S. market. So again, strong demand when it comes to AirTech and then sales rather net -- rather flat, which means that when we look into the third quarter, the margins in the third quarter have come down with about 3% versus last year. And a big part of that are their supply chain constraints. We have higher raw material prices. We are working a lot. We're making sure that we can get the materials in and get the materials out to our customers. We also have increased freight cost. And also, we have a change in the business mix, both from the point of view getting battery orders in, but also with the higher project sales. But also coming in when you look at the mix change, in particular, FoodTech going with less Chinese business. We have continued with the price increases throughout Q3 as well. And you have heard us talk about that earlier also, but most of that will come into play in 2022, as we have talked about earlier as well. So when you summarize then where we're standing today, you can say that we have stable margin year-to-date, but it's also impacted from this by -- that we have a strong start in the year. So when you look at it, we have been particularly impacted in Q3 by the supply chain challenges and the mix impact. Then supply chain challenges started in Q2. The consecutive price increases that we have done from Q2 and then throughout now Q3, they will come into play in 2022. Obviously, then hitting the margin in Q3, as you have seen. We have high utilization rates in AirTech. You can see that from the order intake. You can also see that from the sales that are coming through. So that has a positive effect on the results. And then when you look particularly at FoodTech, then obviously, the margins have been impacted negatively by the soft Swine segment in China. So the increase in the U.S. have not been able to offset the negative impact from China. So when you look at AirTech then, actually, the margins year-to-date is stronger than what we had last year. And if you look at FoodTech, then it has come down year-to-date with some 4 percentages. Going then into delivering our strategic journey. As we talked about earlier, we have made some changes when it comes to how we're doing the business. We did first AirTech and secondly, we did FoodTech. The programs are running well. So, so far, we have realized about 70% of the AirTech business. We have -- from a timing perspective, we still expect that we will be able to deliver the rest by end 2022, beginning of 2023. If you look at FoodTech, the journey has started -- just started. So basically, the implementation is going according to plan, but still early days on it. If you look then at cash flow. Yes, cash flow has come down a bit. But again, there are 2 things that are impacting it, the growth of our business and then the supply chain challenges. And those things obviously have impacted working capital to increase, with about SEK 300 million in the quarter and year -- and during the year, around SEK 400 million. And that obviously then leads to that cash conversion has come down a bit. But you should remember that a good business normally have a cash conversion around 70%. And obviously, when the business is growing, it's coming down a bit. And if you look at us today, we are around 66%. And the work that we have done previously, as you have seen over the past 2 years, has paid off in that the culture within Munters have changed to become more focused on growth, profit, but also on the cash side, which means that, that should impact, at the end of the day, growth. Leverage, yes, it has increased for the main reasons as we have talked about before, and it's coming down to the growth of the business and also the supply chain challenges. So with that, I would like to hand over back to you, Klas.

[Klas Forsstrom, President, CEO & President of AirTech]

Thank you, Annette. And let me make a short summary before we open up for Q&A then. Continued strong demand in quarter 3 in prioritized areas. It sets us for the future and future aftermarket sales. Strong demand, especially in Battery and Data Centers. The margin decreased due to supply chain constraints, higher raw material prices, freight cost as well as changed business mix. And without being too repetitive, supply chain challenges continue and it's full speed ahead on our strategy execution moving forward. So with that, I would like to open up for Q&As and welcome, Åse.

[Ase Lindskog, Interim Head of Investor Relations]

Hello. Thank you, Klas. Thank you, Annette. So then we're ready to open up for questions. And let's hear if our operator has any questions for us.

[Operator]

[Operator Instructions] And our first question does come from the line of Mats Liss from Kepler Cheuvreux.

[Mats Liss, Equity Research Analyst]

Yes. A couple of questions. First, regarding the orders. I guess you have quite long lead times in some of the orders you take. And I was just wondering how you try to balance the cost increases in those projects? Or do you have sort of raw material clauses and so on that kick in gradually? Or do you sort of make an estimation about how these costs will affect you in the final project. That's the first one.

[Klas Forsstrom, President, CEO & President of AirTech]

Thank you, Mats. And let me take that then. In all our project business, we always adjust prices to what we have right now in raw material cost and what we see for the near future. So with that -- from that side, we constantly increase prices moving forward, so to speak, i.e., to balance it. And in regards to the lead times then, I mean, as you have seen, we have built backlog then. But besides that also, it is -- if I would do an estimate, I normally have said always, it is in between 3 to 6 months that when we started the lead time. And then I said we are from 3 up to 9 months. And now I would say we are more and more, for some of the larger projects, we are hitting the 9-month backlog/delivery times. The promising thing that is a lot of our customers or all our customers, they are accepting those prolonged lead times. And I don't see that this is a buildup due to, call it, any building up capacity or anything like this. It is more investment-driven for a market change that takes place, i.e. Data Centers and Batteries.

[Mats Liss, Equity Research Analyst]

Yes. And then just to get a feel for the sort of finish of the year, I guess the orders are strong, but it seems that a large part of that is sort of for 2022. Or how should we see this sort of development sales side in the finish -- well, final quarter here?

[Klas Forsstrom, President, CEO & President of AirTech]

And Mats, as you know, we avoid to give strict forecast for the coming quarters. But let me say it like this, we have built up a strong order book. The order book is, of course, then affected by longer lead times. We have increased raw material costs, et cetera. We invest in increasing capacity and we try to mitigate the supply chain constraints day by day. So I mean, from my perspective, we will do our utmost to eat off the backlog. But as long as the supply chain constraints remain, I think we have to see this type of, let's say, backlog situation.

[Annette Kumlien, Group VP & CFO]

And you can also add that it's not only the supply chain constraints that we experience, our customers have the same thing also. So we can see in some instances also that the customer asking us to send it later on. So it's a whole chain of events.

[Mats Liss, Equity Research Analyst]

Yes, I understand. And just -- I mean you probably -- well, you answered that my final question as well. But I guess higher costs will continue to affect you in the fourth quarter, of course, and going forward. But do you expect it to -- the momentum to continue to increase? Or is it sort of peaking at these levels and could you give some flavor there?

[Klas Forsstrom, President, CEO & President of AirTech]

Our largest raw material cost is related to metals and, to some extent, also, into plastics and stuff like that then. But really, we have seen that the raw material prices have started to level off. But with that said, we're constantly monitoring it and we are moving forward price increases as we talk. And yes, there's perhaps an anecdotical notice then that is, in FoodTech, we started to increase prices and we didn't really see any competition doing the same. Now they are following in our path. So in the FoodTech arena, I mean, we really started to move these price increases. And it's only in this quarter we have seen competition moving in the same direction. And I think that is encouraging that we are the market leader, and we take the first. Then you can always say, am I happy with how fast we have implemented prices in the market? We can always be better. I think that is my summary of that.

[Operator]

Our next question comes from the line of Lucas Ferhani from Jefferies.

[Lucas Ferhani, Equity Associate]

So I have a few as well. And just to start with the first one. Can you detail the level of price increases you're looking to give? So we have a better idea of the tailwind for full year 2022. And also, generally, the attitude from customers, is it easy to kind of pass on those price increases? You just mentioned competition following, so I assume that that's helping. And also maybe the difference between what you have in kind of lease prices which can go up and then the impact is quite immediate? And then on projects, kind of how do you handle that, let's say, the projects you get today when you know that you're running a much higher cost on them? Are you able to already kind of put price increases to those? And really my idea behind this is kind of the backlog margin, are you able to follow that?

[Klas Forsstrom, President, CEO & President of AirTech]

Okay. Let me try to take the question by question, and please, Annette, step in here as well then. I mean if we take the different price increases, and here I have to be illustrative to put it through. If we take FoodTech then, depending on segment, depending on market, we have moved prices up in between 9% up to 15% in a few particular areas actually hitting the 20% price increase. But that is -- it varies in between markets. It varies in between different products. It is very much a cost-mitigating activity, but we have topped it up as well then. Then when it comes to AirTech, the large majority of the AirTech business or a large chunk of the AirTech business, and especially a larger chunk of the AirTech business during this year has been more project-based. Here, as I said earlier, we implement price increases each and every time we go into a project, i.e., we kick up prices depending on what we see in the raw material or cost situation at current and a few months ahead, and that will then single out in between, let's say, 6 to 9 months later. Then we have revisit some of our contracts, and we have tried to negotiate it, renegotiate some of the cost situation. Sometimes we have been successful, but quite often, we have not been successful. But that is sort of the balance on that. Anything to add on the prices, Annette?

[Annette Kumlien, Group VP & CFO]

No, I think you covered most of it, so.

[Klas Forsstrom, President, CEO & President of AirTech]

And then when it comes to -- I think I touched also on the other part then when it comes to projects, how we handle this, it is very much -- when we take a project, we do an estimation, where are we right now and what type of prices do we need to bring out. And then, of course, we also invest more and more in value selling. So I mean in -- when it comes to Data Centers or Batteries, et cetera, I mean, what beside cost increases can we implement.

[Lucas Ferhani, Equity Associate]

Okay. That's helpful. And generally, like you said, the price increases is mainly for cost mitigation. Let's say that kind of cost inflation is leveling off at this point and we're at peak inflation. Can you help us try to think about margins next year? Not necessarily the first half where you still have kind of supply chain issues, but can you come back generally to the margins you had previously? Is this level of price increases enough and the efficiency also you're having to kind of come back to margins that were similar to the levels you achieved in 2020?

[Klas Forsstrom, President, CEO & President of AirTech]

I look very much upon when you run the business, our 3 main medium-term financial targets. It is growth of -- a CAGR of 5% organic, it is to be on the leverage and it is to reach the EBITDA of 14%. I mean we constantly work with that. On the first 2 that I mentioned, we are there. I'm very confident that when we drive our efficiency operations and projects, when we invest in more capacity, when we drive price increases onto it, I mean, we will step-by-step move forward to our midterm target, also when it comes to EBITA.

[Lucas Ferhani, Equity Associate]

Okay. And the last one was on the Chinese business. I mean some of it is due to the African swine fever kind of coming back. Do you have any kind of detail on the situation you're seeing? Is it kind of short term? Is it kind of under control? Just to help us think about kind of the outlook for the Chinese business there.

[Klas Forsstrom, President, CEO & President of AirTech]

That is a very good question. And let me expand the question a little bit wider and not only talk about FoodTech because I think this is fascinating when it comes to China. I mean if we take a look upon AirTech and the battery business, I mean, that market is really, really advancing. And why is that then? It's substantial investments made from the Chinese government. I mean they are moving ahead when it comes to electrification of the automotive fleet, et cetera, et cetera. And there, we grab and take business, market share and technology share. So that is one type of business then. Then the other part, then moving into FoodTech, I think, first of all, as I think you all are aware of, the FoodTech or the Swine business, that is always cyclic. And from that perspective, we had a real uptick last year. And if I remember it right, we started to say that somewhat bottom around midyear last year that this is a very strong year. We didn't expect the same type of development during this year. Then we have topped that off with African swine fever then coming back. And in the beginning, it was not too much talk about it, but now it's clear that it's official also talked about it in China. And then to add a little bit more spice into it then, you have heard about the energy crunch and, to some extent, the debt squeeze in China. Here, I think it's very logical how the Chinese government authorities do. In certain areas, they put a lot of money in, i.e., to simplify it for us, batteries. In other areas, they may have a little bit stronger squeeze. So my point here that is it is a little bit more than just the normal business cycle that is affecting the Chinese swine market. But the long-term perspective of the Chinese market from a swine perspective, that is they need to have our type of solutions. We are so set for the Chinese swine market when it returns. Anything to add?

[Annette Kumlien, Group VP & CFO]

Yes. I think, I mean, again, when you look at the swine market in China, it has been the African swine fever obviously. But what we have seen now lately is also increased electricity prices, increased feed prices. And then for a farmer, when they're working with swine and obviously, the P&L starts to be very unbalanced. Plus also, that the credit (sic) [ energy ] crunch that Klas was talking about is coming into play. So that has all happened quite kind of like accelerated during the third quarter, and hence, why we have this -- the Chinese market coming down. So again, as Klas also said, then that, obviously, we view this as short term, but it is a crunch that has come into play and not only the African swine fever for FoodTech. And then obviously, in prioritized markets -- prioritized businesses like battery, we see the boom coming in. So that's why we also have a business mix actually going for us in China.

[Operator]

Our next question comes from the line of Anders Roslund from Pareto Securities.

[Anders Roslund, Analyst]

Okay. I have a question regarding the margins. As I see it, there are 3 items behind the decline, costs -- pure cost increases from raw materials freight costs and then the supply issues of not getting deliveries of key components. And number three, as you mentioned here also that you deliver more project orders now where margins are weaker. So my question is simply, what will happen next year? You say you have implemented price increases now, will you not be able to fully compensate the cost increases next year? Or is it that you see delays in your sales, your deliveries that is sort of reducing your margins? Or is it that you deliver more project orders? Just to get a feeling for what size of each of those 3 areas of sort of margin decline.

[Klas Forsstrom, President, CEO & President of AirTech]

Anders, I can start and then Annette can also share more granularity into this. I think your -- I think the 3 subjects you mentioned, they are sort of ballpark 3 of the largest impacts. When it comes to cost and when it comes to raw material prices and mitigation of that, I think we have covered that. I mean we do it consecutively. And we will have the majority of that then handled and taken care of during first half or next year then. Then when it comes to supply and that situation, I think here, it is a little bit wait and see. And what I mean with that, that is we do mitigate it, i.e., I am in calls with suppliers, my colleagues are in call with suppliers. Sometimes, we do have to reprioritize on the day due to that we have late deliveries. And this we can look upon as it is a cost burden right now. When that will disappear, i.e. internal inefficiencies that creates by that, of course, I mean that is an opportunity to improve our margins, so to speak. Then we have the other one, the last part, that is projects. And yes, projects do have a slightly lower margin, but at the same time then, project comes and goes. At -- right now, we have quite a lot of projects in our portfolio. But later on, it will balance off with, call it, more aftermarket and not that many projects. But please, Annette.

[Annette Kumlien, Group VP & CFO]

And I think also just when you look at it, I mean, AirTech and FoodTech from that perspective, to a certain extent, have the same issues, but also to -- there's also differences, obviously. Because if you look at FoodTech, they have a big impact, obviously, from the supply chain challenges, which includes then also the time lag of when pricing impacts the result but there is also an impact for FoodTech from this mix of countries, which means basically, when you look at the Chinese business coming down, particularly in the third quarter, and obviously, that has hit FoodTech. And if you look then at AirTech, as Klas said, the bigger thing is really then the optimization of the supply chain constraints, getting products in and out and actually being able to get the products out to the customers. The other part is the -- is obviously the -- again, the time lag in when our price increases comes into play. And the third thing is also then the business mix. But one should also remember in AirTech that there is a positive side actually coming from the increased volumes. Obviously, because of the economies of scale that has helped and offset a bit the margin squeeze from the other factors. But again, I mean, when it comes to input prices on our components that we buy for our products, it depends on where the market is and the metal prices, they are swinging quite a bit depending on where the demands come from or the -- and if you look at, for instance, just an e-car, that uses 5x as much copper as a normal [indiscernible] driven cars. You can see that there's a basic demand side also on the steel components. So -- and for us to speculate, that's a bit hard where it's coming into it, obviously. And then when it comes to the freight on the logistical side, I think we all know that there is -- it's going to take a while until it actually corrects itself. And for us, when we look at those constraints, we see the first half of next year also having issues. But again, also, as Klas said earlier, we are trying to push out as much as possible from our factors to our customers to make sure that we support our customers in their growth.

[Anders Roslund, Analyst]

Yes. Thank you for this complete answer. But I just want to follow up on this first half of next year. Is it mainly cost increases? Or is it the supply chain issue that you won't get out sales at the level you expected? What sort of -- is it lower sales we should and sort of postpone that for the second part of next year? Or is it just that your cost level will be -- continue to be high, but sales catch up?

[Klas Forsstrom, President, CEO & President of AirTech]

Anders, as you know, it is a combination of that. And it's -- my view is very much like this. I mean when it comes to the order book, it is a squeeze in the full market. It is that we see on all different projects, both, I mean, smaller projects and larger projects, it is a longer lead time. So that means that built into the system from the order is taken to the sales is executed that has prolonged. So that is clear. And that will continue then during next year. What is promising and really good here that is we don't see that customers are sort of saying no to our prolonged lead times offer, so to speak. And then -- but I can also say that some customers we say no to because they have too high expectations on lead times or they have a too low expectation on price, if I put it like that. Then on the other side, then when it comes to cost, I mean that is a mitigation. But Annette, do you have any comments on that then?

[Annette Kumlien, Group VP & CFO]

No, I think we have repeated most of it. At the end of the day, it's -- when we talk about the lead times of our orders, they're quite long in AirTech. And obviously, if you have taken an order a couple of months ago with maybe the input material being priced a bit lower then, obviously, it takes some time until you get it out. So that's why you have that time lag of the impact of the price increases. So again, it's -- I mean, if you look at it, we have some lead times which are up to maybe 8, 9 months. And if you take 8, 9 months from now, obviously, it's -- we're in the second half of [ the year ].

[Klas Forsstrom, President, CEO & President of AirTech]

But Anders, just to add a flavor on it. Of course, we are also working with mitigating costs internally. We are driving efficiency. We have -- we are cleaning up the assortment, et cetera. And that, of course, will also work to balance certain things, but we cannot balance this 2 times, so to speak.

[Operator]

Our next question comes from the line of Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, Analyst]

Yes. I'm a bit interested in looking back a few years at all the different targets that you, as a company, set out to improve through internal efficiency measures and so on, and the supply chain and those decisions taken in the decentralization process and everything. I'm just a bit interested in understanding, let's say that all of these actions were put into place earlier this year compared to how it looks today. Has this had a notable impact, do you think, upon your ability as an organization to adapt to these kinds of market conditions?

[Klas Forsstrom, President, CEO & President of AirTech]

If I go back to before Annette and myself arrived and after we arrived, I'm very confident that bringing out the full value chain to our business areas has improved our agility. So from that perspective, even if I'm never pleased in how or what we deliver and we can always do it better in some of those areas in order to mitigate, call it then, supply chain constraints, price increases, et cetera, I think that we are much more agile in certain areas. If we wouldn't have started the assortment reduction, if we wouldn't have started the drive to create supply optimization, moving more and more to set it up on a regional level, et cetera, I think that we would have been in an adverse situation. And I still remember a lot of questions, let's say, 2 years ago, are we late cyclical or early cyclical and how do we handle that then? With that said, my summary is that a lot of what we have done has put us in a better place to handle this. At the same time then, I mean, there is still a lot more to be done, and we are working with that. But any additions, Annette?

[Annette Kumlien, Group VP & CFO]

Yes. I think the work that we have done throughout the value chain, I mean, with the assortment reduction and also the understanding of how you work to make sure that you do a good cash conversion, that is really what you can see in the numbers today. Because obviously, when we talk about supply chain constraints and that we're pushing every day, we have everybody pushing on it, and people know how to work through the value chain, actually to make sure that we don't move our -- that we don't move in inefficiencies. Because obviously, with the operating working capital, if you didn't know how to do it, it could look worse. But everything that we have done throughout the value chain, you can see that whatever increases we have, it's not because people don't know what to do, it's actually because there is a growth or because we have hard time getting -- kind of like we have to plan how to get the components in and actually increase certain levels of our component inventory in order to make sure that we can get it out. So yes, I would definitely say that it's a much agile organization we have today than we had 2 years ago.

[Klas Forsstrom, President, CEO & President of AirTech]

And then you can always speculate -- sorry Karl, you can always speculate and say, I mean, if the current situation with the supply chain constraint, the current situation with certain other sort of issues we have talked where would we be there, and for me, that is pure speculations. I think really what I see, a lot of the issues that we are battling with right now and handling in -- and I have to give compliments to all our people that each and every day are battling certain areas of the supply chain constraints, as an example, I mean, when we have battled this through, this is an opportunity as I look upon it. Because when we have put the price increases into the market, I mean, the clear idea from our side that is -- I mean, we will not decrease prices as much as we increased it when it's over. So for me, it is a future potential. But I mean, this is a little bit of a theoretical dialogue. For me, it is, I think, that we were much better set to handle this. Yes, we can handle it even better into the future.

[Karl Bokvist, Analyst]

All right. And a follow-up on that, it's -- we discussed the topic in many aspects today. But just to understand, let's say, you win an order today, wherever that is going to be delivered in 6 months from now or 12 months, but what is your ability on orders that you've won this year to adjust prices and also adjust the cost base on that order upon delivery compared to, let's say, 1 or 2 years ago, too?

[Klas Forsstrom, President, CEO & President of AirTech]

In some cases, we are successful in adjusting price increases also or the price to the customer also after the order has been taken. But generally speaking, we are more working for long term, and that is then how to compensate it by efficiency, i.e., drive down the cost that is created inside the company. And then, of course, every time we take an order, I mean, have the correct price not only that cover the prices at current but also have a prediction of what we believe the prices be.

[Karl Bokvist, Analyst]

But do you have any ability to lock in the input cost for orders that you book so that you can match sort of, let's say, the selling price with the input prices?

[Klas Forsstrom, President, CEO & President of AirTech]

In some cases, we do that. But in current situation, I mean, it's not that many suppliers that are willing to -- when you have a squeeze like this, that are willing to lock prices then more than on a certain order. And then, of course, I mean, then we get deliveries on that, but it's very difficult to say, okay, for the coming 3 months or for the coming 6 months, we lock this price delivery setup because they are in the same situation, many of them. So I think it is hand to mouth. Of course, we negotiate each and every time. Even myself sometimes are involved in tougher negotiation when it comes to deliveries, as an example.

[Karl Bokvist, Analyst]

And just 2 more questions from me. The first one on component shortages. Do you notice any particular components that, therefore, have had a significant impact on the entire supply chain, so to say? Or is it a bit more widespread?

[Klas Forsstrom, President, CEO & President of AirTech]

It's very difficult to point out. It is not that we have semiconductors that is [ domain ] as an example. It is very much into -- it could be fans, it could be certain pumps, et cetera. So it's a little bit more widespread. And really, what it's all about that is that the lead times as such -- the components are there, but the lead times as such in most of the areas are -- has increased, basically.

[Karl Bokvist, Analyst]

All right. And my final one has to do -- we recall the Capital Markets Day a few years ago with the realigned focus and stability, profitability and growth and less focus on projects going forward. And now, of course, you book projects in attractive growth areas. But just to understand the -- your view on project risk today, the way you look at projects when you book them, your ability to assess the cost and the final price of the delivery.

[Klas Forsstrom, President, CEO & President of AirTech]

But it's a very good question. And let me put it like this. I mean if we go back to the projects that were in the data center market in Europe before we arrived, I mean, then we talk about some projects that had the value of SEK 500 million, even larger in some cases, extremely large projects. Here, the largest projects we talk about now, they may be at the value of around SEK 200 million. So in the comparison, we are definitely less risk taking now and it's more balanced project portfolio. And it is not done in the way that it was done before. I'll oversimplify that, sometimes we took the project at that time without really having the full delivery capacity or the understanding of how should the final product look like. Now when we talk about this, I mean, we have the deliveries. We tell our customer what is the delivery date and it is with a set assortment, a set type of technology. So I'm much more confident that the project basket of today is completely different than the project basket that we had to clean up then when we arrived.

[Operator]

[Operator Instructions] And we have a follow-up question from the line of Mats Liss from Kepler Cheuvreux.

[Mats Liss, Equity Research Analyst]

Just final one, I guess, from my side. I mean the energy prices are sort of very high in many areas, and you have a very cost-efficient, energy-efficient offering. And do you see this is -- I mean, this is a long-term opportunity, I guess. But short term, do you see that customers are squeezed by these energy prices, especially maybe smaller customers in farming and so on and they are not able to invest? Or do you see it as an opportunity short to midterm also that you -- or customers try to adapt to higher energy prices?

[Klas Forsstrom, President, CEO & President of AirTech]

Very, very good question, Mats. And let me go back then to the example I showed in regards to the chicken farming then or chickens. Here, you have the heat exchanger and heat recovery setup that took back 85% of the heat generated and brought that back into the farm house, so to speak. That is an example of where future efficient, sustainable farmers are going. So that is an opportunity for us, i.e., to sell on energy consumption, to sell on animal welfare, so to speak. Then the only market where we see at current where it is a risk in the energy pricing/shrinkage, that is China, as we talked about earlier. But that is less, I would like to say, due to energy prices. It's more due to energy, call it, availability in China. So from that perspective, there is -- that is the only market, and then we see it more as opportunities. Annette, any...

[Annette Kumlien, Group VP & CFO]

No. And I think also when it comes to the swine market in China, it's also obviously because of the pork prices has gone down. So when input prices go up, you get this imbalance coming in. But otherwise...

[Klas Forsstrom, President, CEO & President of AirTech]

And maybe, Mats, then if we go into other areas such as data centers, such as lithium batteries, but especially data center that assumes a lot of energy in the operations. From that perspective, of course, if you have an energy-efficient solutions that save energy consumed, brilliant, and that is what we have. So from that perspective, no one really likes energy price increases and energy shortages. But from that perspective, I mean, we deliver energy, less energy consumed with our products.

[Operator]

We have another follow-up question from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, Analyst]

Just to be interested in understanding the dynamics that you see in the pharmaceuticals and general food production space, mainly particularly in pharmaceuticals given the year we had in 2020.

[Klas Forsstrom, President, CEO & President of AirTech]

Thank you, Karl, also a very good question in regards to -- in the beginning of the pandemic, then it was a boost of [ natural ] reasons then into the pharmaceutical industry. It was about the COVID test, it was about the vaccine, et cetera. We saw a somewhat damped demand in pharma. But now we can see tendencies that it's not, I mean, declining, it is leveling out at a quite high level. What is that due to then? Some of it is, of course, due to that the pandemic is not yet over. But the other side is, from our perspective, I think it is a higher awareness of what you need to have to produce pharmaceuticals in a good way. So let's call it a stable demand. If you go in -- and the second area was...

[Annette Kumlien, Group VP & CFO]

Food processing.

[Klas Forsstrom, President, CEO & President of AirTech]

Food processing. And food processing was hit during the early phases of the pandemic. Now we are growing. I don't have the exact number, but I think it was close to 8%, 9% growth in food processing AirTech. And we predict that, that is an area that will grow for the future. Not short term, but for the future, it's more and more opportunities in how you handle the food processing. It's everything from powdered milk to more, call it, fresh food that needs to be handled in a good environment.

[Operator]

And as we have no more follow-up questions, I'll hand back to our speakers.

[Ase Lindskog, Interim Head of Investor Relations]

Thank you very much, operator, and there are no questions from the webcast. So by this, we conclude the Q&A session. And I would like to hand over to you, Klas, for the concluding remarks.

[Klas Forsstrom, President, CEO & President of AirTech]

Thank you very much. And I go back to where I started. We have, in targeted markets, a very strong underlying growth that we predict will remain, especially for the data center and the battery business as markets. We have a strong backlog, and we have put market share and technology share into future service deliveries. We will continue to fight the supply chain constraints. We will continuously implement the price increases. And I'm so, so happy of all the efforts our people in our organization are doing to mitigate and to drive deliveries out to the customers in the best possible way. Thank you very much.