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

Welcome to Munters' Q2 Report. [Operator Instructions] Today, [indiscernible] CEO Klas Forsström; CFO, Annette Kumlien. Speakers, please begin.

Good morning, and once again, welcome to today's presentation of our quarter 2 report. As already stated, with me here today, I also have Annette Kumlien, our CFO. Before I start the presentation, let me just say, I'm very satisfied with our capabilities to handle the current COVID-19 situation. It has been guided by safety first and customer focus, delivering a robust performance, including adjusted EBITA, cash flow and at the same time, driven forward-looking change. Step by step, I feel we will continue to develop even in current quite unpredictable market situation. And our people have more than stood up to the challenge. Please move slide. Today's agenda is the highlight for the second quarter, implementation of the strategy. Those 2 will be presented by myself. I will hand over to Annette for the second quarter result more in detail, and I will come back for a summary, and then we will open up for Q&As. So let us move to the highlights of the quarter. In summary, robust performance, active mitigation of COVID-19 effects and strategy implementation building for the future. From top to bottom on the robust performance, we had an order intake of plus 1% organically, a decline in organic -- in net sales organically by 6% and resulting in the adjusted EBITA of a healthy 14.7%. FoodTech generated a strong performance with increasing order intake and net sales and adjusted EBITA margin. AirTech had a declining order intake and net sales but delivered a stable adjusted EBITA margin. Pleasing was a solid cash flow, delivering a leverage that was lowered in the quarter to 2.7x. Safety first has guided us in the active mitigation of COVID-19. We saw some customer delays in investments and some delays in deliveries. But also clear pockets of increased demand, for example, in the pharma and the data center segments. We had a stable delivery across our solid management -- managing our supply chain. And we saw minor disturbances in our operation. A continuous mitigation and actions for the cost base has also been implemented. When it comes to building for the future, the strategy implementation, it is all about sharpening our customer offering and footprint optimization to ensure execution of the strategy. And 2 examples that we will drill in a little bit more later on that is the exit part of the Commercial business in U.S., and the expanded Data Centers US manufacturing into Texas. And then we also consolidate our operations in Netherlands. Let's move to next slide. Our purpose is customer success and a healthy planet. And here, I think we have 2 brilliant examples of this. The lithium battery factory has started to increase in demand. And 2 examples here. We took an order from a gigafactory of battery production in Northern Sweden. It was about SEK 60 million. It was built on our correct climate and humidity control into 11 dry rooms. And it is our technical knowledge and the value that we create to increase efficiency and reduce energy consumption that has won the order. And then also a smaller order that is very important, the Tesla factory in China. We continue to have a good and strong relationship with Tesla. And I think those 2 shows that we are well equipped to work with to the main battery players and they trust us. The battery segment, moving forward, in the medium to long term is a segment that I expect to continue to develop stable growth. Another pleasing area is the strong order intake in China. The trend continues, as we talked about at the end of quarter 1. Over the years, Munters has built up a strong market presence and a strong trust inter-market. We have strong application knowledge, and now, when the African swine fever has decreased its impact, we see that the demand is bouncing back in China. We also took an important SaaS order in U.S. related to Tyson Foods. Tyson Foods has, for many years, been a valuable customer throughout AirTech, and now, we have also moved in there with FoodTech. At current, we have FoodTech products and services in the 20 largest meat producers in U.S. This is the beginning of the journey. And this journey will continue to deliver, step by step, over many years to come. Next, let me talk a little bit about the different regions and later on, Annette will drill in a little bit deeper. Americas had a year-on-year change of 8% (sic) [ minus 8% ]; EMEA close to flat, minus 1%; then APAC, a strong uptick of 28%. In Americas, AirTech had a good development of the data center and the service was also making progress. FoodTech had a quite weak development primarily driven by the overcapacity in the swine market in U.S. And here, I can say it's no change to what we said during the first quarter. The swine market is still good. AirTech had a weak development driven primarily by Marine market, partly offset by a good development in industrials and service. And FoodTech has a weaker development in quite a few countries, very much due to the COVID-19 outbreak. But it was offset by a good development in Germany. In Asia then, AirTech declined mainly due to weak development in Mist Elimination related in this case then to India. FoodTech, as already mentioned, showed a strong development in the Swine segment. Then if I summarize this, I can say also that the last month in the quarter, we saw a small uptick in the demand primarily coming from that markets in Europe started to open up. I also have to say that I'm very pleased about the progression done by FoodTech in China. At the same time, I also have to underline that quarter 2 is, as a seasonal effect, always our strongest quarter. But I think that, you're all aware of. Next. Moving over to implementation of our strategy, and we can shift slide once again. For customer success and a healthier planet. You have heard me say quite a few times that we make the difference. We are present in many different critical processes and applications for end markets and our customers. We deliver energy savings, improving air quality, securing customers' operation, improving animal health and less waste. And that is what we see surrounding this globe and this pinwheel. And the ingredients in our strategic priorities is customers, continuous focus on customer delivery and customer value, very much built on our application strengths. Innovation, target innovation to where it makes sense and where it delivers. And you've heard me say, as late as on the Capital Markets Update, the aim to reduce our standard assortment [ with ] 40%. Later on during the year, I will give you more granular updates on where we are there, but I'm pleased in what I see. And modernization will continue step by step. Market share. I mean we will grow in prioritized market and we will leave markets where we don't see that we can generate what we are searching for. It's a strategic fit that will guide us, our capability to reach the medal podium -- we are among the top 3 players in a tough market -- and of course, our capabilities to deliver on our financial targets. And when it comes to people and organization, of course, that is the essence, the core on what to do. It's about accountability, ownership and development and agility and every day, we will drive excellence in everything we do, and sometimes, we will take larger steps, and sometimes, it will be step-by-step approach. Next slide. And coming then into the next step in our strategy implementation. As published in the report, we have decided to exit our noncore part of the Commercial business in the U.S. And if I simplify it, you can say to exit everything except the Walmart business. There, we have a strong presence and we can see it deliver a strong aftermarket service support. It is not a strategic fit. We are not able to reach the medal podium in the areas we need, and it is a lower profitability and it's not contributing to where we would like to be. We are expanding our Texas operation due to data center orders. I'm very pleased to see -- in seeing what the data center -- how it has been developed in U.S. and I'm also pleased to see that we are now turning the Texas facility into a more predefined standard-driven type of operation when it comes to still delivering custom-made product, but based upon pre-engineered ingredients. In Netherlands, we consolidate the operations into 1 main hub and then we continue to take different measurements and activities when it comes to deliver on our strategy moving forward. With that, I would like to hand over to Annette for a deep dive into our quarter.

Thank you very much, Klas. If we turn to Page 11 and if we look at our midterm target and our performance versus that, in Q2, we had a net sales growth of minus 6%, impacted by the COVID-19 situation. Adjusted margin reached 14.7% and actually about almost 1 percentage higher than the same period last year. And if we look at year-to-date, our margin is 11.7%, also the same relationship with accumulated versus last year, almost 1 percentage point higher. And if we look at our capital structure, the continued work with improving our working capital situation has helped us reach a new leverage of 2.7x, and we also have a slight currency improvement for us now in Q2, which made us come down again after having a bit higher after Q1. So we go into Slide 12. First of all, when you look at Munters, one needs to remember that we are late cyclical business. And also when you look at the cyclicality within the year, usually AirTech has a better performance quarter-by-quarter or as the year progresses. Whereas FoodTech normally has a good quarter 2 and then followed by quarter 3 and usually also Q1, Q4 following the construction trends by not having -- by having a lower cyclicality -- by having a lower level due to the winter season. So all in all, when we look at the order intake for the group, we had a growth versus last year in Q2 of 1%. And you've seen that was basically driven then by good performance in Data Centers in the U.S. and also the battery segment, where we received the order, as Klas earlier talked about. Also, Services have grown slightly in AirTech, despite the negative impact from the COVID-19 outbreak. FoodTech also had a very good growth, mainly driven by China and the Swine segment there in the wake of the African swine flu and also then the pickup after the -- their outbreak of COVID-19 in the first quarter. In FoodTech, EMEA was a bit softer, and the U.S. are still sluggish when it comes to the Swine segment, which has been going on for some time. A positive thing also when we look at the order intake is obviously that the backlog is quite healthy and has increased both compared to last year same quarter, but also compared to end of last year. So healthy, up to SEK 2.6 billion, basically. So turnover, as I already said, declined by 6% both when it comes to the quarter per se, but also year-to-date, FX-adjusted. And again, as Klas said earlier, AirTech has mainly been driven by a weak development in Mist Elimination and also in the Industrial segment. Positives was obviously the data center performance. Also pharma and Services had good outcome. When it comes to FoodTech, the increase is very much related to the swine pickup in China. And again, as the same with their order take policy and the lower development in EMEA and America. Services now represents about 14% of total net sales. If we then go to the next page and talk a bit about AirTech, as we have said, strong growth when it comes to Data Centers in the U.S., which has basically led them to a nice quarter coming in, although quite the decline due to the Mist Elimination due to the global low demand when it comes to Marine segment, and also when you look at the Indian performance, so that come to have been in shutdown. Data Centers, again, very positive performance, and Services have actually grown slightly even in the midst of the COVID-19 situation. Basically then a big impact actually coming from, then, other onshore service package that we introduced earlier. When it comes to net sales, down about 10% if we look at it FX-adjusted, again, driven by Mist Elimination and then also the Power segment in India. Data Centers and pharma segment, again, performing very well. And Services also grew quite a bit. When we look at FoodTech, if we turn to the next slide, Slide Page 14. Very good growth in China, which impacted the total quarter for FoodTech. So we had a growth of 13%, and this actually compensated more than well, as you can see, from the sluggish development that we have seen in the U.S. or in the Americas. When it comes to net sales, plus 2%, obviously will lag a little bit as the order intake will have to funnel its way through the company, again impacted by China, and again, also the U.S. is on the weaker side of the development for us. If we move on to Page 15 and talk about adjusted EBITA. Good margin in the quarter, reaching almost 15%, as I said earlier, almost 1 percentage higher than we had in last year. And we also see that when it comes to the year-to-date figures, again, improvement coming in from our strategy implementation. FoodTech performing well during the quarter, increased almost 2 percentages, whereas AirTech remained stable in the period. Coming back then to -- on to Page 16 and talk about execution of the strategy. As Klas earlier talked about, we have continued with our strategy implementation, where we have 4 major activities ongoing, which is exit then the Commercial business in the U.S., excluding for Walmart; the relocation or actual expansion of the US manufacturing into Texas; so we have consolidation in Netherlands into 1 unit; and we have also other activities supporting then the continued implementation of our strategy. All in all, when you look at the IACs, we're talking about SEK 138 million in the quarter in -- what we have taken, where basically SEK 125 million is related to AirTech and then minor activities related to FoodTech and the rest of the group. If we move on to Page 17. What do we expect coming out of it? Well, we expect, basically, when it comes to the strategic implementation, a payback time of 2.5 years, leaving then run rate savings of approximately SEK 70 million. Out of the total package of SEK 188 million, we expect around SEK 160 million to cash flow impacted. The rest is the depreciation and amortization. If we continue then to Page 18. So what has happened then with our cash flow? We have continued to focus on driving our internal performance and operational excellence within the company, working through how we drive business with our customers, with our suppliers and also our internal sales and operations planning processes. So we have continued very well, and the working capital is coming down to -- operating working capital is down to just below 15%. And this is really what drives then the performance for cash flow development. And then if we continue to next page, our cash conversion, where we have actually from -- if we compare to summertime last year where we had a cash conversion of around 50%, we're now up to the level of 70%, all in, meaning then that our leverage accounting now is strong to 2.7x. What we have done now also in the quarter is that we have had discussions with our banks. So we have actually created more headroom for us to continue with our strategic journey. So for a period of time, we have actually increased our leverage ratio with the bank from 4.5x to 5.5x. And that higher level will continue until Q1 2021. We have also established a new revolving facility as a backup or as a precautionary measure should things continue to work sideways when it comes to COVID-19. So we are well armed for the future. With that, I would like to hand over to Klas.

Thank you, Annette, and let me then summarize the quarter and then open up for question and answers. You can move to next slide, Annette. Second quarter can be summarized as a robust performance in a challenging business environment. I'm very pleased with our growth in order intake, our adjusted EBITA margin improvement as well as our lower leverage driven by a healthy good cash flow. And then in parallel with that, having capabilities to drive forward-looking change. I see that we have a healthy current order backlog. With that said, the visibility of the effects of COVID-19 outbreak is still limited. I feel that we are more than well positioned in the long-term growing markets driven by climate change, energy efficiency and digitalization, and I have touched upon a few, pharma, Data Centers and so on. Moving forward, safety first for our people, customer focus will continue to drive us into the future. So with that, I would like to open up for Q&As. Please.

[Operator Instructions] So dear presenters, we have few questions lined up. So the first question is from Mr. Carl Ragnerstam from Nordea.

It's Carl Ragnerstam from Nordea. I have a few questions, if I may. First of all, if you could perhaps try to quantify if you adjust for Data Centers in AirTech. I mean how is the underlying business performing, excluding Data Centers?

Carl, thank you for the question. As you know, we are not pointing out the individual segment quite yet. But you can say like this. I mean the -- certain areas did show growth, data center being one, the pharma industry being one, the certain pockets when it comes to a very promising service even in this type of climate. It was not any major large projects that were standing out as such. So I think if I summarize it, I can say it was a fairly normal quarter when it comes to how the spread in between the different countries, but Data Centers and pharma as well as service, to some extent, did better.

Okay. Perfect. And could you perhaps try to give more granularity around the cost savings time line between the different measures that you mentioned, the relocation of the manufacturing footprint, consolidation in Netherlands and so on? And then when we should expect the full run rate from the savings, I might've missed that if you mentioned it.

The total program per se will have an 18-month implementation period. So during that time line, then you will see savings coming through, but the full realization of this doesn't come through until after 18 months.

And should we see it as front-end or back-end loaded? Or how should we look at that?

I would say that it comes quite evenly spread.

And what would you start off with, if you try to...

But if I jump in here, you can see that 1 clearly highlighted area that is that we will exit the non-Commercial, the non-Commercial segment in North America, U.S., and the other one is also when it comes to consolidate into 1 main office in Netherlands. Those are the 2 main ones to start with.

Okay. Perfect. And I mean if -- have you tried to divest the business? Or is that not an option? Or -- and I mean the Commercial business in the U.S.

I mean if I give a better, broader description of the Commercial business in our Commercial business in the U.S., we have had a wide spread of different target groups and different type of customers. And I mean the business that we're exiting, that is the type of business that is low price levels, high price pressure, you need to have large volumes and you need to be a dedicated player towards that. So our conclusion is that the best way to handle this, that is actually to exit that business. And thereby improving our profitability and our focus moving forward and maintaining the business where we feel that we can be on the medal podium, where we see continued growth and supportive profitability levels for our strategy and outlook, so to speak. And when it comes to Walmart, it is also so. We have a strong installed base, and I foresee that we will continue to drive service and aftermarket sales into that. So pretty much it is we leave a business where we don't see a future, and we have decided to close it down.

Okay. Perfect. And the final one for me, if I may. It might be a little bit of a stupid question, but I've seen news around the new -- the swine flu in China. Have you read anything about this? Has it impacted your customers or the confidence of your customers yet? Or...

I mean it was a note about a different type of swine flu/fever in China. So far, we have not picked up anything else more than that -- the similar news. We have not heard anything from customers as such. And perhaps I also should highlight here that the -- I mean the trend that you can see in China, if I oversimplify, it goes from the megafarms, I mean megafarms compared to the Western countries, into smaller farms but still large farms compared to Western countries, where our technology, i.e., modern swine-farming technology is used. And from that perspective, we are very much well equipped for handling this. And at least I see and I'm partly is what's called perhaps biased, I see that it's a strong appreciation from the Chinese farmers of that future. And then, of course, I mean, we have to take it step by step, then we have been there for more than 5 years, but I think it's starting to pay off. And I can say like this. I'm convinced that we take market share in China at current.

So we have the next question from Mr. Max Fryden from Danske Bank.

Just on the divestment of or the phase-out of certain products in the Commercial end market in the U.S. If I'm not mistaken, you say that was related to Walmart. And a few years ago, you had sales of roughly USD 25 million to Walmart. That's like -- so should we see this as this is going to impact revenues? Just sort of for forecasting. That's my first question.

You may have misunderstood or I was not clear enough. I mean we will maintain our business with Walmart. That is what we will continue to focus on, that's the core. And we have a strong installed base in Walmart, and we see both continued strong development and alignment with them aside then, of course, working with aftermarket and service and upgrades. So just to underline, we exit everything else, except.

That's very good. Opposite to that, that's [ now ] my question, yes.

And that business has not generated profits for years.

Yes. And just in relation, if my estimate for Walmart sales there is correct, how large part is this in terms of revenues, roughly?

It has a very little impact on sales.

Okay. And then just on the consolidation in the Netherlands, could you just tell me again what that is relating to?

The broader painting is a few -- several years ago, we acquired a business in Netherlands, and we had our own setup in Netherlands as well and I look upon this very much as we now consolidate and we bring it into 1 main hub. And in my book, still being a newcomer, this should have been done several years ago, actually. And then, of course, we will continue to support our customers. We will continue to work with spray dryers and what we are good at. So it has nothing, in that case, to do with what we do and what we deliver to our customers. It's just efficiency measurements.

All right. I'm just trying to get back to the sort of the lumpiness of orders in Data Center and lithium. And I think you already answered the question on Data Center, saying it was more of a normal quarter. Then on lithium, the same question, you mentioned orders to gigafactories in Northern Sweden and in Tesla, et cetera. Was this an exceptional quarter for lithium for you?

I mean we highlighted the order of SEK 60 million. And of course, that is a large order. At the same time, I cannot say that it was an exceptional. I think it is -- if I summarize it, I think it is -- it's an evidence of that this industry is continuously growing, and we have a strong relationship with that industry. If I go back a few years then, you may have heard me refer to a few years ago, 1.5 years, they had a tremendous order intake in China related to battery manufacturers. So then over the end of last year and continues this year, there has been a consolidation increase, as it always is in China. You can say they open up a lot of players and then they consolidate. So in summary, you can say, no, it is just a sign on that the industry will continue to grow for the years to come.

So we have another question from Mr. Kenneth Toll, and he's from Carnegie.

So I was a little bit surprised to see this cost-out program that you star today, considering that there was a very large restructuring program done only 2 years ago. I mean when you described the actions you are taking, they seem very, very logical that as you point out, I mean it should probably be done -- have been done several years ago. But that keeps me wondering also, I mean, when these actions have been taken, are there still a lot of housework to do to clean up in the company where you see sort of a logic improvement that should already have been done, so to say?

I'm a firm believer in not believing in programs. And what I mean with that, that is when the business is stabilized, then I mean measurements like this should actually be taken step by step. It is not -- I'm not the program driver, just to underline that. I believe that now we have lined out what we see right now. I don't feel that they have any skeleton in the wardrobe, so to speak. With that said, I mean, the market is constantly changing, and we need to change with the markets. So I'm not the person that will give, call it, promises that we will not drive restructuring or anything like this moving forward. But in summary, if I go back to the IPO, it was a tremendous growth opportunity in Data Centers. And we talked about the strategic rightness of that and perhaps the mishandling of how it was driven into Europe. We took care of that. Another strong growth driver was also connected to Commercial in U.S. and sadly, that didn't emerge either. And now we take the consequence of that. And as you see, it has not affected our net sales, as we talked about, but it will improve our profitability and our focus in delivering service to a strong, strong customer like Walmart.

Okay. Makes sense. I mean there's a difference in sort of pruning your business and taking those bigger steps that you're doing right now. Then another question. The -- you -- I mean your net debt-to-EBITDA and net debt are moving in a very good direction. But you're still expanding the finance agreements you have and [ highering ] the covenants in those agreements and so on. So are you looking to make acquisitions now in the very near term? Is that the reason why you want more headroom?

As I said earlier, I mean, what we have done is more precautionary measurement from us to make sure then that we can continue to realize the strategy. That's the reason why we have done it.

We have a next question from Mr. Karl Bokvist from ABG Sundal Collier.

So just a follow-up on Max's question when it comes to the Commercial segment. I think as a part of the group, Commercial is 6% of sales. And Klas, I think you mentioned that it was a very little impact on sales. So should -- just if one could get a little bit more clarity here, the 6% related to Commercial, is that mostly Walmart? Or how should one think about this?

I mean first of all, I don't have exactly those numbers on top of my head. But if I just take it out to how I look upon it, I mean we have Commercial in North America, and the majority of the Commercial exist in Commercial segments in sales is very much related to Walmart and that we will continue. Then we have certain Commercial activities also outside North America, and that is not affected at all.

All right. And another question here. When it comes to government grants and support programs. I think you mentioned you have COVID-19-related items of positive SEK 4 million in Q2. Does this mean that you have, in total, received SEK 4 million in sort of government support funds? Or if not, how much have you actually received?

First, just to make one thing clear, is that when you look at the adjusted EBITDA, this is obviously not included there because we have actually taken them out -- but the -- so we -- because we wanted to clean out the results. And then as you can see, it's very little support that we have gotten. But it's a bit higher than that because that is net of actually all the cleanup costs that we have had because we're very thorough with -- when it comes to making sure that we don't get COVID-19 into our own factories. This figure is like, yes, it's single digit, but just below SEK 10 million that we have received.

Understood. Yes, and good that you included in the items affecting comparability, and so thank you for that. Then just a sort of risk assessment here, you have highlighted that the Data Center business in the U.S. is different than how it looked in Europe. But with your aim now to expand the business, what sort of -- are there any risks that we will see any form of sort of similar events as to what happened in Europe? And -- or have you -- do you believe that you have learned from what happened there and that you are able to mitigate these potential risks when it comes to expanding your operations?

A very good question. And when we took the strategic decision to keep Data Center in North America and focus there, I mean one thing that we made very clear that is, I mean, we investigated the risks, we investigated what type of claims we have had in the past, what the quality levels were, et cetera. And we came to the conclusion that for many, many years, I mean North America has performed well. And the challenge that was that it was not [ copied -- paid ] into Europe. So coming back to that, I think -- I really feel that we are having a strict good control. I don't foresee any more risks than all the risks that is always in a business and that you have to work with. And I should also say that, I mean, it's the customers that makes us expand. There are their desires to team up with us. That's the reason why we expand now. So it's not a hockey-stick plan that we are building and driving for future. We are just driving what the customer asks us to do, sell more to them.

My final question here, it's a bit broader, but early cyclical, late cyclical or not, I think the general perception among most companies has been that Q2 should mark the trough, so to say. And I'm just curious as to how your view would be on that. And extending that question a bit. If we look at margins, let's say that growth actually comes back or the sales decline is far less severe than what perhaps was initially expected, how much of these lower indirect costs would come back once demand starts to pick up?

I can start on a general level, and then I ask also Annette to pitch in here because she has a more thorough understanding and knowledge about this. But if I just sort of summarize it, you can say, first of all, I mean -- and sorry to be -- this one, we are not giving any outlooks for the quarters to come. Many different reasons for that. But I can say, what did we see then during the quarter that passed? We did see as a percent that it was a mixed type of demand. Strong demand were in China in FoodTech, thanks to retaking market share. At the same time, please remember that the normally highest quarter is quarter 2. When it comes to underlying demand, the original -- the old Munters Industrial has always been late cyclical. And not to speculate too much, I think that is also what we would see in the Industrials. On the other side, we also have another exposure, current and towards more fast-moving growing areas like data centers, like food, like pharma, et cetera. So -- and when it comes to cost, I mean, certain costs will obviously return. At current, we are not traveling because we are not allowed, but please, Annette.

But I think at the end of the day, I mean, as Klas said, we don't leave give any outlook, and that, you have to respect. But when you look at it, we have been impacted by COVID-19, and we see that in the growth. And this is something that has happened to most companies as well. At the same time, as I said, I mean, we're late cyclical, but we're also driving other businesses, driving in other business that we're pursuing, that there is another drive for Munters as well. And then when it comes to the performance we have -- well, we only -- again, we are into driving strategic change, which actually impact then also our performance going forward. So that's what we're working with, but we don't give any outlooks.

Okay. Quick follow-up, just was there any -- you mentioned something about the gross margin, but is there any noticeable impact here from mix, for example, much more sales to -- in the form of controllers and those sorts of things?

No. No, I think I would say that -- it's normal could be the word. Quite normal.

Okay. Your normal ups and downs?

.Normal ups and downs, yes.

Okay. So there is no other further question at this time. So please go ahead, speaker.

Thank you very much. I would like to say thank you and until next time. See you then and talk to you then. Thank you very much.

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