Munters Group AB (publ) (MTRS) Earnings Call Transcript & Summary

Hello, and welcome to the Munters Fourth Quarter 2019 and Year-End Report. Today, I'm pleased to present CEO, Klas Forsström; and CFO, Annette Kumlien. [Operator Instructions] Please begin.

Thank you, and good morning. And before I go into today's presentation, let me briefly summarize the quarter that has passed and the year. If I should pick one word, I will pick stable. It was a stable quarter and a year, setting a good base with a solid outcome. The stable quarter generated, as predicted, a somewhat lower growth, driven from industrials in Europe and consolidation in the lithium-ion battery in Asia. What was pleasing that it was a continued good delivery on savings and efficiency activities, linked to our Full Potential Program. That resulted in a strong cash flow and a good profit level despite a somewhat changed product mix during the quarter. All in all, this resulted in a good improvement on our leverage. And in that sense, it is what I see, we deliver step-by-step on the journey that we have set ahead. With that, let me go to the agenda. And the agenda today is highlights for the quarter. That, myself, will present. And then, I will invite Annette to go more into detail in the quarter and January to the December results. I will come back in regards to the strategic direction and then summarize at the end, before we go into questions and answers. So if we change slide then to Slide #3. The year 2019, a platform created strengthened for the future. Firstly, I mean the action that we have, that was the launch of the Munters Full Potential Program to improve group earnings. The outcome significantly reduced the overhead costs. Secondly, a new organizational structure with 2 business areas, resulting in a simplified, leaner and more performance-oriented company. Thirdly, an ongoing strategic review of the Data Centers and Mist Elimination; closedown of the old factory in Dison, Belgium; and the result during the year is good operational improvements and developments in Data Center U.S. and Mist Elimination. If I move to Slide #4, as said earlier, 2019 was a stable year. If I move over to the upper right, some 40% of order intake comes -- derived from Americas, 36% from EMEA and some 20% plus from APAC. And as I said earlier, about in the quarter, somewhat good growth in Americas, and as anticipated, a lower growth or decline in EMEA and APAC. All in all, over the year, a solid 6%, 6% and minus 8% change. More granular, the Americas, a strong order intake in Data Centers U.S. Order intake in the commercial segment, strong, coming back during the quarter, continued low level of the investments in swine farms in the U.S., driven by overcapacity and, of course, the uncertainties from new trade tariffs and the African Swine Fever. EMEA increased orders in Service, very pleasing and also, within Mist Elimination. And as I think we would know, the European industrial market weakened during the year. The demand from that weakened during the year. Asia then, lower demand from lithium battery industry driven by consolidation. If I take a look upon lithium ion battery industry moving forward, it's an industry that will continue to generate strong demands over the coming years. An increased demand from the poultry and layer segments and weaker demand from the swine market due to the African Swine Flu, as I said. I would also like to note that the coronavirus, as for many other companies, will affect us during the first quarter. It's too early to say what it will result in, but we monitor it and adjust our way of working moving forward, and currently adjust ourself to what the authorities in China advise us to do. Moving over to Slide #5. 2019, profitable growth and improved earnings. On the right side, the net sales in the quarter of plus 5% and an EBITA margin of 12.5%. Drilling in a little bit more there, the net sales increased in AirTech and declined at FoodTech despite good growth when it comes to FoodTech in Asia. The adjusted EBITA, slightly lower, but that's on the back of a strong quarter 2018 and change in product mix and temporary higher labor cost in areas with good growth. All in all, then as I've already said that the year resulted in net sales of plus 12% and an adjusted EBITA margin of 12% and very pleasing, a lower leverage, below 3.0x. Here, Annette later on will comment in more detail as such. If I move into next slide, #6. We are now moving into new direction for Munters. The year has been around the concept of stability, profitability and growth, labeled for the first phase of the Full Potential Program. It's about building -- securing, building and driving when it comes to those phases. And moving forward, the stability phase will go over into continuous improvement phase. And parallel with that, of course, we will drive and secure profitability and drive profitable and cash-generating growth. The focus on the refined strategic direction will be very much around securing a stable and profitable platform in parallel, as I said, improvements and accelerate the growth. Moving into Slide #7. We see solid opportunities for value creation in Data Centers U.S. and Mist Elimination. What is clear, that is that there are strong, good market development and underlying market for both segments. We have competitive technologies in both areas. And if I summarize this, I mean, during the year 2019, we have also seen strong progress in how we operate and how we drive performance in those 2 high project-driven type of businesses. So we will keep and develop that and see strong opportunities for continued growth and value creation within Munters. Perhaps, needless to say, but I mean, when you implement the performance-driven culture, of course, we will continue to oversee and evaluate all different units and businesses within Munters, and judge if they are giving up to the performance expectations we have on them and if they are generating the value that we expect on them. With that said, that is how we drive the performance-managed culture forward. So with that summary and elaborations, I hand it over to you, Annette.

So if we go to Page 9, just to give a high-level summary and compare to our midterm target. Basically, when we look at the full year, we're in line when it comes to our growth. Adjusted EBITDA, we are increasing and working towards the 14%, ended the year with 12.2%. And when it comes to the capital structure, looking at reducing our leverage coming down to 2.9x, after ending 2018 at 3.7x. If we turn to Page 7 -- Page 10, sorry, if you look at the order intake for Q4, that was flat on the back of a very strong quarter in 2018, a mixed bag, with certain areas going well, certain areas where -- with a little bit lower increase. If we look at the full year, we had good growth when it comes to Data Centers U.S., Mist Elimination and Services that pull through for the whole group. And as earlier trends we have seen, obviously, that FoodTech is lower than 2018. If we look at the sales, we're at basically flat for Q4. But if we look at the full year, we are well in line with the targets, as I said. And again, it's the Data Centers U.S., Mist Elimination Services, that are driving the growth rate. Services as a percent of total sales for the group is up 13%, more or less the same level as we have seen earlier quarters. If we turn to Page 11, looking at AirTech. AirTech has had a strong growth in 2019, with an order intake, particularly here for Data Centers U.S. and the commercial segment that have actually come through very well. And that also goes for the full year with Services in the fourth quarter being a bit flat, but looking at the full year, obviously, coming through strong. Net sales, following the patterns of the order intake, with strong order -- strong sales force, Data Centers U.S. and also, the commercial side. If we turn to Page 12, FoodTech. FoodTech, if we look at 2019, saw a market decline. And when we look at fourth quarter, we're actually on the back end of the African Swine Flu, we can see that China has come back a bit. If you remember, when we talked about Q3, we saw it actually leveling out, the decrease. And into Q4, we saw then a slight increase. But for the full year, we're still below 2018 outcome. If we turn into Page 13 and look at the adjusted EBITA. The work during 2019 has to be into stabilize and actually expect a wide footprint going forward. So we have seen an increase in EBITA for both our business areas and obviously, for the full growth, ending with a EBITA margin of 12.2% compared to previous year of 11.3%. The AirTech EBITA margin in Q4 was slightly down compared to Q4 in 2018, but that was on the back end of a very strong quarter 2018. Looking at next page, Page 14. When we look at FPP, the savings have gone well, and they are well in line with the plan, with where we spoke about an annual saving of SEK 210 million, split into DC, SEK 50 million, and continued business is SEK 160 million, and that has come true. Nonrecurring costs, we saw a slight increase in Q4 as we were looking into additional organizational changes as we took costs for. And at the end of the day, when we close 2019, we're talking about in total for the FPP, SEK 392 million in nonrecurring costs compared to the original plan of SEK 350 million. If we turn into page -- next page, Page 15. Again, when we look at the cash flow, we have had a strong cash flow during 2019, which is a combination of the show to growth and profit improvement that we have made, but also on the back of actually having worked a lot with our working capital to make sure that we get a balance sheet structure. That means at the end of the day, we got the leverage down to 2.9x, which is a good achievement for 2019. If we turn in to Page 16, this is just to explain a bit how we have worked with Munters since Q3, where we actually said that we would split the business into continued and obviously, taking then the closure of the DC Europe into a discontinued business. So basically, when you look at the company, adjusted EBITA for 2019 for the continued business is SEK 871 million. But if you look at the full company, including the discontinued, we're talking about SEK 237 million. So turning to Page 17 to conclude. In short, when it comes to delivering on our midterm target, we're on growth, achieving the targets, and we have done that for some time. If you look at the adjusted EBITA margin, we reached 12.2%, which is more than what -- it's about 1 percentage point increase compared to 2018. So we are working towards the 14%. And when it comes to the capital structure, the good work with -- combined with gross profit and also cash flow improvement, we now reached a leverage of 2.9x, which is then well below the 3.7x that we ended 2018 with. So with that, I just want to hand over to you, Klas, to continue.

Thank you, Annette. And then flipping into strategic direction and fastly moving it then to Slide #19. Moving forward, we have a refined strategic direction for Munters. And Munters is a company with a very strong brand. We're well positioned in markets with solid long-term growth prospects; market-driven by climate change, population growth and digitalization; markets that create the need for energy efficiencies, solution and sustainable customer products and operations. We have quite a lot of strength. And just to highlight a few. Highly skilled employees working very, very close to our customers, daily giving application of us; a unique application knowledge, represented not only by the people close to the customer but also by our R&D and the development organizations; a strong global market position with local presence. And all this generates a lot of opportunities. Some opportunities are very much in our hands. It is about continuous value chain efficiency and improvements in our own operations. It is about growing the service moving forward and growing the aftermarket moving forward, utilizing the strong installed base that we have. It is, all in all, about a stronger focus on sustainability and digitalization, both internally but then also in the right markets and segments. And if I move to Slide #20, Munters' strategic priorities moving forward, here represented by a globe and a circle and experience around innovation, markets and customers. It is a passion for excellence in everything we do, driven by the right organization and the right people allocated to the right areas, whether being in the best effects. If you do this in the right way, closeness to customers, driving innovation, driving what the needs you see for today generates the future for tomorrow, bring it into the market in a faster go-to-market model, that can deliver a lot of gains for the future. We have a couple of enablers that will strengthen the platforms. And moving then to Slide #21. One is organizational redesign and people development. Another, as I mentioned a few times, that is our focus on sustainability. And the third one is a higher focus and a higher investment drive when it comes to delivering initiatives for growth. Moving into Slide #22 then, talking about the enablers. And the first one is organizational redesign and people development. As we announced yesterday, we are now bringing in Munters to be -- have a clearer business ownership linked to our 2 different business areas. It is in the business areas, that can work with the customer, that can bring forward solutions and you generate the result, all the way from customer to delivery to the customer. And then to support this and to drive efficiencies and synergies where applicable, we will have 3 group functions: strategic Operations, innovation and commercial excellence, that should support and challenge all that. Moving into next slide then. Another enabler, our focus on sustainability. Munters is a company set up to deliver a sustainable path moving forward. It is a two-pronged approach. It is about our products and solutions that can -- and what we can deliver to our customers, the lower-energy consumption, the cleaner air, the more sustainable end user products and performance towards segments like batteries, wind mills, farm sufficiency, all in all, a healthier environment. It's also about our ambition to drastically reduce our carbon dioxide footprint. It is how we operate within ourself. Here we will, during the year, set clear ambitions and target and start to implement them step-by-step. About this, you will hear more during the year as it goes forward. The third enabler, moving to next slide, is investments for the future. I mean we are on this for a long journey. It is about research and development, focus on speeding upgrade of innovation and release on new products, the go-to-market. It's about establishing a better, more transparent management system through the full value chain. It is continuously and [ resentless ] work with our product portfolio alignment, to prune out the products that are not working and not delivering. It is to drive capital efficiency, reduce inventory and so on. So if I should summarize that more or less, moving to Slide #26. 2019 was represented by stable demand and improved earnings and good underlying order intake and net sales growth, the Munters Full Potential Program delivered well in line with target. We continue to move this into transition of continuous improvements and investing for future growth. And supporting that, we have an organizational structure that enable capturing of synergies and value drivers for the group. If I go into 2020 and beyond. It is about innovation. It is about, as I said, investing in the future. But it's also about the assortment adjustments. And if I look ahead a few years, I expect that we should be able to reduce our assortment with some 30% to 40% compared to where they were in 2018. It is also about customers. Very straightforward, but it's about focusing on the right customers in the right segments. It is about generating value on both sides, pricing structure from our side and value selling and value delivery towards our customers. And it's about improving our go-to-market models. It's about focusing on the aftermarket and the service. A few years ahead, I will be displeased if we are not moving from today's 13% of the total sales related to service to well about 20%. Markets and segments. The rationale is here to be unsentimental in our approach, to allocate resources to the markets where we see they generate returns for us and for our customers. But it's also to build on the future when it comes to possible future M&As, create a funnel, generate opportunities moving forward. And last but not least, it is about excellence in everything we do. Turning the company into this passion for improvement day-by-day, quarter-by-quarter, to make that become a natural part of working, the DNA of a very, very successful industrial company. Highlighting lean activities, continued improvements in net working capital, strict performance management and work with quality every day, and to support this with our organization and people. So with that, over to questions and answers.

[Operator Instructions] And we first go to Anders Roslund at Pareto Securities.

Yes. I had a question regarding the margin squeeze in AirTech. You explained that it's caused by product mix and also temporarily, higher costs. Could you elaborate a little bit on those 2 issues? For 2020, how should we look upon those mix issues and also the temporarily higher cost?

If you look at fourth quarter 2019 versus fourth quarter 2018 for assets. The first things to remember is that 2018 was very strong. And so having said that, then obviously, the Q4 then have a margin which is a bit lower, but at the same time, it's well in line with the performance during the year. When you look then also at AirTech in 2019 and you look particularly into what has happened with some of our project business, is that it's some of our factories had to use temporary people in order to get the products out. And that obviously, increases the cost and squeezes the margin down. If you look at 2020, we don't give any guidance towards the margin or towards anything when it comes to the financial statement for the group, so I will leave that aside. And also, when it comes to the product mix, I mean it's a combination of, obviously, how the project -- how the product -- how the project business is moving versus, obviously, the -- versus the regular business or the kind of base business. And some of our product business has very good margins compared to the base business.

It was very much about balancing the system in regards to growth in areas that we didn't see growth coming before the quarter and balancing the outcome of that.

Okay. But those temporarily is very exact, meaning that something is temporarily, so that is related to certain project business. Is that how we should look upon it?

I think you should look upon it like, I mean when you gear up in certain areas in the beginning of gearing up, it drives cost up. And then when you reach a more, call it, balanced setting, I mean, then you have a balanced set of cost than an income as such. But in the gearing up, I mean then you drive more cost.

Yes. And also in combination in other certain areas, there is scarcity of production resource -- people in production.

Okay. I mean we could look upon it in a positive way that it's -- sales is growing in 2020, you should sort of absorb those higher costs.

I think that is one way of looking on it, and I'm not being sort of stubborn here. We have -- we are not giving any guidance for the future. But at the end, I mean we have been gearing up that part of the system.

How could you explain the scrap dividend?

For the proposed dividend. Sorry.

I think Anders, it's fairly easy to explain what has been proposed by the Board. I mean the year that has passed has been full of reshaping, refocusing, stabilizing. And that is now being brought into 2020 when it comes to, I mean, gearing up for continuous improvement and growth. And all in all, I mean all the measurements we took during 2019 was about setting the base for the future. And I think when the Board is looking on to Munters, it's unwise to start to bring out dividends too quick and let that come step-by-step moving forward.

We now go to the line of Carl Ragnerstam at Nordea.

It's Carl here from Nordea. First of all, can you elaborate a little bit more about the rationale why you're keeping Mist and Data Centers in the group, given the sort of quite small technical synergies? You also -- on that note, you also mentioned that you expect strong growth for both of them. I mean can you sort of break down where you see the growth coming from in terms of end markets, geographies or so?

If I start to take them one-by-one, so to speak, I mean the Data Center, as such, everyone has seen that, that is a market that will continue to grow. The challenge that we have in the future, that is that they expanded into market too quickly and we were not successful in Europe. And now we have, during the year, we gathered our forces, we have shown good progress in how we operate, we have widened our customer base and been driving efficiency and ways of working in Data Center U.S. and North America. So the focus going forward here, that is to concentrate on Data Centers Americas, and then start to build the base there to move forward. When it comes to Mist Elimination, we have been even more convinced about the market is there for years to come. It is not just about adjusting and setting in new products on scrubbers and so on. But it's also about the statements moving forward in the years to come. So we are much more, let's say, positive to the market outlook. And in the same way, when it comes to our performance, we have proven substantially that we can handle a project business like that in a much, much more balanced way. So all in all, we see great opportunities for continued value creation.

Okay. Perfect. And one follow-up on that. You also mentioned that if they live up to your performance expectations and I mean the obvious question is, what is your performance expectations for both the Data Centers U.S. and Mist?

I think like this, Carl, that you should look upon it -- that comment was not directly linked to Data Centers and Mist Elimination. That was just to reestablish that we are a very much performance-driven industrial companies and all different areas as it should be. You measure performance, we judge where the market is and see if you can create value as such. And the plans that we have set in all different areas within Munters, I mean it's up to each and everyone, in our now more business area-driven setup to concentrate and execute on those. So it was more an understatement that perhaps reflects my view on, to some extent, as Munters have been handled in the past. They have not been that performance management-driven.

Okay. Perfect. And the final one for me is regarding the aftermarket growth expectations for 2020. I mean what can we expect there and portion of sales or so? And what measures are you implementing in order to strengthen that business area?

As you know, we are not giving any predictions about the year to come. But if I elaborate more on how high and we look upon aftermarket and the services, it consists of different parts. Within the more industrial-driven area of AirTech, it is about attacking and covering the already-installed base. It is, of course, also about leaning out and seeing what can we then convert from competitor base. If I go into FoodTech, I have high hopes for the years to come that we are moving even more forward in our world-class leading product line of Software as a Service. And that over the years to come, will we see good examples of subscription in those areas. So those are a couple of examples how we look upon it. Then as I said earlier, I mean, we issued gradually, step-by-step, moved from 13% up to somewhere that is well about 20%. But this will not come in a quarter, it will take some time.

Okay. We now go to Kenneth Toll at Carnegie.

So both the nonrecurring costs and the losses in the discontinued operations were higher than I had expected. And during the whole of 2019 and a bit before as well, there was a lot of nonrecurring costs and so on. But now you have finalized the closure of the European Data Center operations. So should we expect no nonrecurring costs going forward? Or do you think they will continue on a certain level?

Again, I mean the FPP growth program were concentrated on making the changes that was necessary for the group, highly concentrating on taking up DC Europe. With that, I mean we normally don't give any guidance to the financials. But obviously, when you make a big change like this, you will have cost. Once that cost is over -- once those changes are over, you should not see those type of -- those level of nonrecurring costs.

And those changes are over now?

This change related to DC Europe is predominantly over. And obviously, we have -- I mean there's still a phasing out of DC Europe and considering you don't just close, from one day to another, the operations. But there has been in the 2019 financials, taking cost -- expected costs that we would foresee for closing out during 2020.

But we should expect some costs still in discontinued operations in 2020 and maybe '21 as well.

No. What I said is that we have taken costs related to closing down or unwinding the operations already in the 2019 books.

Okay. So -- okay. So discontinued operations disappears from Q1 then basically.

Yes. I mean we have taken an expected -- what we expected it would take to close it down, those costs we have taken in 2019. So as long as we don't see anything more coming in, and obviously, the cost has already hit the books.

Great. And then on the other nonrecurring parts, you have just revised your strategy or refined your strategy, so there should be quite little nonrecurring costs from strategic changes and so on going forward as well, I presume.

Yes.

Yes.

Great. Then you talked about higher investments for growth. From a financial point of view, I mean you alluded -- you discussed what you wanted to do more practically, so to say. But from a financial point of view, do you see that, that will hurt margins or that it will bring the CapEx levels up in 2020, '21?

I mean once again, coming into margins, et cetera, as you know, I mean, Munters, if you start to talk about margin, Munters is a company that is also has some seasonality effect that if this take -- go away from that, so to speak, yes, we will invest in future growth and cash-generating businesses. It is in one bucket, it is about R&D, and that is, of course, dedicate resources but, at the same time, drive efficiency in R&D. I'm not talking about, let's say, substantial cost, but it's a gradual cost expansions step-by-step. In the same way that you do continuous improvements in your operations, you drive continuous improvements and adding capabilities both into core of Munters, i.e., the humidification and that type of area, but then also into digitalization and software as a service, as an example. But it's is not a giant leap, but it's a step-by-step approach, but it will generate higher investments and higher cost related to R&D assets and so on.

Before going to the next question, which is Björn Enarson of Danske Bank. [Operator Instructions]

I have one similar question on the cash generation and your target or your gearing target. I would assume that you are still -- that you are seeing a little bit of high CapEx and still looking for a few more steps towards your gearing target in 2020. Is that correct?

I mean, again, when we look at our gearing target, it's 2.5x and we ended 2019 with 2.9x. So yes, we're working towards that gearing target.

And that could also, well, in that case, include a slightly higher CapEx? Is that what you're highlighting in the results.

Yes.

Yes. And on the same time as you're talking -- as I understand it, you will also invest a little bit in OpEx. And to finance that, is that through efficiency, or is this more cost out in certain projects?

It's very much a combination. But please...

I mean if you look at it, when you look into innovation and investing in those types of things, those are not like a 3-month project, and then you will get suddenly a higher sales or a higher margin on it. Those should take -- it's maybe 2, 3 years before you see the full impact of these type of investment. So -- and again, I mean we don't give -- really given guidance to how the margins are going to -- well, from that point of view, but it is the long-term investments that we need to focus on from an innovation perspective so that we build the -- our U.S. piece towards the platforms.

And in the meantime, you are thinking that efficiency maybe be financing the potentially higher OpEx?

Put it like this. I mean without having -- doing check and balance on each and every side, a successful industrial company, you need to continue to drive efficiency gains, step-by-step improvements. That is the mantra that we bring to the desk and to the factory every day. And that is something that we need to continue to instill into the company. Beside that, I mean, we need to, as an industrial company, aim for future success. And future success, I mean that requires selective investments in certain areas, and one of those areas is R&D. I think I said it after my first quarter-by-quarter that I think we have a lot to gain there. I'm not saying that we have been under-invested, but I think we can speed that area substantially.

Okay. And one last question on Mist Elimination. And as I understood, it's obviously quite great many growth opportunities. Can you shed some light on that if you exclude the scrubbers? And then what's your position now, if you can remind me on the clean coal segment? Is that still highly interesting? Or have you looked upon that?

The way we look upon it, that is, of course, long term, it is a trend moving away from that type of power stations and power plants. But the medium term, when we talk about the coming, let's say, 3 to 5 years, I mean it's a transition taking place here, and we see quite substantial demands, also in that area, in many different regions but perhaps, in particular, in the region of Asia. Yes.

And all the other areas that you're looking at, that you can highlight, that are growing substantially in that, in Mist Elimination?

In Mist Elimination, then it's very much towards the scrubber slash...

Power plants.

Power plants in different ways. And what we have concluded, that is that, that will continue for quite a few years. And it will also -- there is also a need in a few years ahead of a retrofit. And our conclusion is that, that will generate a good value creation within Munters, thanks to the efficiency and the better way of working that we have seen in this project-driven type of a system.

[ Let's go over to ] the line of Mats Liss at Kepler Cheuvreux.

Two questions, please. First, I guess we have talked about the gearing. It improved somewhat and you decide to keep the Mist Elimination and the 8% operations. And I guess the impression is then that you feel that you have the sufficient amount of resources now to implement these growth opportunities and restructuring -- maybe potential restructuring also. I mean gearing is no longer a constraint for you?

As Annette said, I mean we are constantly working towards our mid-term targets, that is in regards to growth, that is in regards to EBITA, and that is also in regards to the gearing as such then, and that we take step-by-step. And yes, coming back to Mist Elimination and Data Centers, the way we look upon it, that is, we will drive growth in combination with efficiency gains, and that step-by-step will reestablish it to where it should be. And we have seen good progress during the year, and I expect good progress over the years to come.

Good. And what about the raw material now? I have been -- here, I mean what will the impact be in 2020 compared to 2019? Could you say -- give some flavor there?

The raw material for us is not a high influence on the cost base as such. As you may know, when it comes to FoodTech, it's quite a substantial part and assembly type of industry. And that is also the reason why we have -- even now, if I put it like that, the authority and the drive of how to produce and how to assembly into the business areas. The AirTech side is a little bit more vertically integrated, but it's not a big influence on, if I call it, raw materials and costs related to that.

Okay. That was the final question for today's session. So can I please pass it back to you for any closing comments at this stage?

That first of all, thank you for participating, and thank you for asking open and good questions. And yes, to close the call off, I mean, Munters is in a journey. The journey has started well, and we will now continue the journey step-by-step by driving efficiency and invest in future cash-generating type of businesses. Thank you very much.

This now concludes today's call, so thank you all very much for attending, and you can now disconnect.