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

Hello, and welcome to this webinar focusing on the data center cooling market. My name is Line Dovärn, and I am Director of Investor Relations here at Munters. Investor Relations will be hosting a series of webinars like this going forward, where we will focus on different prioritized areas for Munters. [Operator Instructions] With that, I would like to introduce our first speaker, CEO of Munters and acting President of Business Area, AirTech, Klas Forsstrom.

Thank you, Line. And once again, very much welcome to this webinar about data center and the cooling market attached to that. The webinar today will concentrate on strategy and operations and the market as such; as a second bullet point, talk through our acquisition and new family member of EDPAC; and then at the end, deep-drill into Munters offering and what we provide to our customers. Increasing digitalization fuels the need for data center. And data center is a prioritized market for Munters. But please note, this is a growing market. And we foresee that the market that we concentrate on will grow with double digit over the coming years. But we also have to remember that this is a market that is built up by projects. Some quarters are up, some quarters are down. It is both when it comes to projects, it is when it comes to the customer demand. And in current situation, it's also due to supply challenges out in the marketplace at current. But with that said, what is the driving force behind that? What is the mega trend? It is increased use of Internet. It is widening of the target groups. As you can see on this slide, it is about elder people getting access to this and younger people getting access to it as well. But it's also about machine-to-machine that is becoming more and more that drive -- will drive the demand for data traffic across the world. But also the development of telecommunication as such and the buildup of 5G systems around the globe will drive the growth of data center. And we within Munters is a very -- we are very well positioned for this growth. If I take and go back what we reported in quarter 1, the rolling 12 months at that time then, then data center represented some 12% on the net sales within Munters and some 25% of order intake. What is also important to say that is that we operate data center as a business area -- within a business area, i.e., we have dedicated production facilities, dedicated R&D and dedicated sales functions connected to this type of products and customers. In general, a data center order is over a period of 9 to 15 months considering, depending on size. Very seldom a specific order has a value over SEK 200 million to one site. But sometimes, we take larger orders that is then delivered to many different sites and customers over a period of time then. And as I said, Munters is very well positioned now both in North America and with the acquirement of EDPAC also in Europe. If I take a little bit of a look on the market then, we have many different small players, more local players and as well as several medium players that could cross over into not only one market or one region. And then we have larger players, Munters being one of the larger players, very often, either global or one or two regions. And then we have a couple of very large players. And that is players that is not only providing cooling solutions to the customers, also larger installments as electricity, et cetera, et cetera. A typical example of a small player, that is EDPAC. And we have joined forces, as you know, and you will hear more about that later on then. I should also say that when it comes to us, Munters, we have now over a couple of quarters invested substantially into both R&D, even more so into production capacity as well as also application knowledge into the marketplace. Who are the customers that we serve in this market? You can divide customers in many different ways. One way of dividing and segmentize the market is to talk about hyperscalers, colos or colocation data centers and then smaller telco and enterprises built and owned and operated by companies very, very close to their operations. Our sweet spot is very much in the colo area. But we do serve all of the different customer categories here in order to balance the input and the, call it, workload in our factories. And what I can say that is the focus and the growth that has taken place in order intake towards the colo area, we have always checked up and make sure that we are not taking any production orders that we cannot fit into our setup as such. We have a balanced market approach. And those of you that have followed us over a long time may remember that we decided to back out of the European market a couple of years ago. And let me now state, what makes long-term industrial success? You need to have a solid product assortment with good performance. You need to have a stable and well-covered production capacity and quality. You need to have strong customer connections and a wide customer base. We realized a couple of years ago that all those steps were not there for Europe. Therefore, we went back. We refocused in North America and reestablished us at step one, i.e., establishing those type of ingredients, market position, product assortment, stable manufacturing base and a wide spread of customers. We said over then, when ready, we will continue the growth journey into Europe again. And with the acquisition of EDPAC, as you will hear more about later on, we do feel that we have that step, i.e., a strong production capability, a good customer base and as well a very wide product assortment. And moving ahead further on, we will go into step three and perhaps even step four after that. Then that is expanding, of course, into Europe but also expanding perhaps into the other regions as we move on. It is about organic and nonorganic growth, organic, very much driven by our sales competence and our product offer and our investments in innovation. So let me summarize what we have. It is all about having experienced sales and application engineering teams in the market. It is about having a broad technology portfolio that is fit for the market you intend to serve. It is about developing strong customer relationship that is covering customers that can balance your in and output. And then of course, it is about establishing a flexible manufacturing capability that fits for the business. We invest now, as I said, in enlargement of manufacturing. And just to give you one number, that is when the new Virginia site is up and running, we have doubled the capacity there to serve the North American market. It's the combination of standardization where possible but also always adjust to individual customer needs. So with that short overview of where we are, what we do and what the markets consists of, let us take a look upon a video. [Presentation]

Thank you, Klas. Our second speaker today joining us from the U.S., Frank Pellegrino, Vice President, Data Center Technologies. Good morning, Frank.

Good afternoon, Line. Thanks for having me. And really excited to share the story of our acquisition of EDPAC and how the integration has gone within Munters here. When -- in 2020, we knew that expanding into Europe was a good opportunity for us. And so we performed a study about the European market and how our American offering could be used in that market. And what we learned was that the same market that we've been successful with in the United States existed in Europe. And that it was actually underserved by the manufacturers in that region. We looked at our business model. And we confirmed that the value we create with that model could be used in North America and that there were global customers that we serve currently that we could apply that to in Europe. And so when we looked at this, we knew that the preferred route to go in terms of expanding into Europe would be through an acquisition. And so we had been working with EDPAC on a couple of very small projects in Europe with our existing customer base and knew that they fit a lot of the criteria that we were looking at. They had a good product portfolio and they had existing manufacturing in key areas within Europe. And so when we looked at EDPAC, we knew that it was a good target for us. And we began discussions with them. And what -- we looked at a couple of core issues that we wanted to make sure we would address with an expansion into Europe. The first one was that they had -- any company we acquired had a strong offering, a product offering. EDPAC had a diverse product offering that had existing synergies with the products that Munters sold and also other products that we could add into our portfolio, in particular, their precision cooling. So in addition to the free cooling products that they were making either for us or for themselves, they also had a new range of products they could bring into us. From a customer base, they were serving some of the same customers that we were serving in North America. And we knew that they had a good kind of attractive end user customer base that we could bring our products from North America over into Europe with. The second thing, we wanted a very strong foundation to build from. And within two very important criterias of this were the people. They had a very strong team of technical -- with a lot of technical know-how, strong engineering workforce and a very good applications knowledge that gave us a really good base to bring our products over with. And then from a manufacturing point of view, they had two facilities in Ireland that were well located within the data center market to manufacture from. So that was a strong foundation to build off of, where we could successfully bring our business over to Europe with. It's much easier to start out with a strong foundation when you're bringing a new business over. And so those similarities and the good overlap between the two businesses really made us knew that we could bring our products and our business model over to Europe in EDPAC. And so we've -- they've been part of Munters for over 100 days now. The integration is going well. The company is very excited to be part of Munters. And we know that we've brought in a really strong and a well-functioning team to bring our growth journey with into Europe. So that's the EDPAC story. And now I'll send it back to Line.

Thank you, Frank. And we'll stay in the U.S. for our third speaker, Keith Dunnavant, Vice President, Sales, Americas, Data Center Technologies. Good morning, Keith.

Good afternoon, Line. I'm going to give a overview of our solutions portfolio for data center cooling. Data center cooling is referred to as mission-critical cooling because without it, the data center can't function. For every watt of electrical power that goes into a server, there is a watt of heat that is liberated and must be rejected to keep the servers happy. So if you don't keep the chips cool, they don't perform optimally. So data center cooling is really important. And the solutions that you provide must have redundancy because the equipment has to be maintained. And so occasionally, it has to be taken down for servicing. So you have to have redundant units so that when the data center is fully loaded, you can service it properly. So with that in mind, I'm going over the five general solutions that we offer. Starting at the left is our direct evaporative cooling offering. And that's unique out of the five solutions in that it's designed to cool outdoor air. This is a solution that is commonly used by hyperscalers that cool their data centers using outdoor air. And when that outdoor air gets very hot, they need to cool it down a little bit. And that's the function of the direct evap. I'm going to talk a little bit more about each of these in subsequent slides. So this is just a quick overview. So next, we have our Oasis offering, which is a packaged unit. And this cools recirculating air from the data center. So there's no outdoor air component of this. Recirculating hot air is cooled using an air-to-air heat exchanger that we apply a process called indirect evaporative cooling, too, that I'll explain in a minute. This product is unique in that for a recirculating air cooling system, it offers really low peak power and annual energy usage. Next is our PVX product, which is very similar to our Oasis, except it operates dry. So it uses a plate-type air-to-air heat exchanger. There's no water use whatsoever. It has a little bit of higher peak power but very, very good annual energy consumption. The next two products are Modular Chilled Wall product and our SyCool Split, our split systems, okay? Often, it is impossible to duct all of the air externally to air handling systems. So you have to separate what I'll call the heat absorption component, which is absorbing the heat from the data center from the heat rejection component, which is either a chiller plant on the roof or, in the case of SyCool, a condenser that's mounted externally. So Modular Chilled Wall is designed to marry up to anyone's chilled water system. So we're not in that game of chilled water cooling at this point. And so next is our SyCool Split. And that is a thermosyphon-based system that we developed to provide a compelling offering against the chilled water platform. And a thermosyphon works using refrigerant that flows through piping purely from the laws of physics, due to gravity and phase change. And you'll hear about -- a little bit more about this in a minute. But it's very, very efficient. It operates dry and offers extremely low annual power and peak power. This next slide is just to give you a little better clarity of the different solutions. So if I start on the left with the direct evaporative cooling, you see that outdoor air comes in on the left-hand side. And when the outdoor air needs to get cooling, the media is wedded to give it that cooling. And so we offer to the market the evaporative media itself, which we sell to OEM customers. We offer a modular product called FA6 that has the sump and pumps and piping and everything integrated for insertion into an air handler. And then we offer complete packaged systems as well. These diagrams are a little bit overly simplistic. In the real world, there are filters and dampers and things. But this is just to give you an idea of how the system works. Moving over to the right to the indirect air cooling platform, which is the Oasis and the PVX product. You can see now the outdoor air on the left of that element is segregated from the recirculating air by air-to-air heat exchanger, which either operates dry or wet. And finally, as we move to the right, is our split system offering, which we have either our Modular Chilled Wall that we make to any customer and then we also make a proprietary product for Aligned Data Centers that's called Delta Cube. And that -- or that can be our SyCool evaporator that's at the bottom. And so then there's connected piping to a heat rejection component that's externally mounted. Moving to the next slide. If you'll focus on the upper right of this slide, you can see a section of evaporative media. And the way to think about this is it's corrugated media. It can be anywhere from 4 inches in depth to 12 inches in depth or even deeper, depending on the efficiency levels that you're trying to achieve. And so if we apply water to the top through a header system and that water trickles down over the media and when air flows through it, it comes in contact with that wedded media, which allows that hot and dry air to be cooled and humidified through a direct evaporative cooling process. And so we've been making this media for over 50 years now. It's designed to provide very efficient cooling with low pressure drop so that there's minimal fan energy consumed to push the air through that media. For the data center market, we offer media called GX30, which is a fire-rated media in accordance with UL 900. It's also a GREENGUARD Gold-certified, which means it's -- the chemical emissions from the media are extremely low. And then we offer a more robust media called GX40, which allows for more extremes of the pH in the water and it also has a more robust fire rating. It's also GREENGUARD Gold-certified. If you go to the left part of this slide, you'll see what the FA6 section looks like. And so that now is a modular product. You'll see piping. You'll see the pumps in stainless steel casing. And so we manufacture this for OEMs that insert it into their air handlers. We also build it for hyperscale customers that install it into the building directly as part of their architecture. And then we install it into Munters' own air handling systems. This is our Oasis product. And so if you look over to the right, you'll see the two different configurations that we offer. We have a roof-mounted offering and then below that is a perimeter-mounted installation. And we make Oasis systems typically up to about 500 kilowatts. We have done some approaching 600 kilowatts of heat rejection capacity. And these systems operate in three modes. There is a dry mode in the wintertime. And then in transition, the water circulates over the heat exchanger to provide indirect evaporative cooling. And then finally, on the hottest days, there is supplemental refrigeration typically to provide the trim amount of refrigeration cooling needed. And as I said earlier, this offers really, really low peak power and annual energy usage. So here's a graphic showing the indirect evaporative heat exchanger. And we developed this going all the way back to 1997. And it's comprised of polymer tubes that are horizontal. And they're typically about 8 feet in length. And so as the hot air from the data hall comes in, usually around 35 Celsius, it flows through the inside of the tubes. And on the outside of the tubes, we have outdoor air that's being pulled by fans over those tubes, which when we wet those tubes, there's a film of water flowing down. And so the heat from the hot data hall return flows through the thin-walled membrane of the tube into that water film. And that's then ultimately rejected to the atmosphere. So it's a super, super efficient cooling method. We went with polymer tubes because they're corrosion-resistant, they're flexible, so they shed the scale deposits that form through the process of evaporation. The headers are sealed. And it's also got a lot of surface area to allow it to operate dry at ambient temperatures of about 10 degrees Celsius and lower. And here's one of our many indirect evaporative cooling installations. This one is at Sabey Data Centers in Quincy, Washington. To date, we have approximately 400 megawatts of Oasis installed globally. And now you're looking at the PVX product. If you look to the right, you see that we offer that, just like the Oasis, in a roof mount configuration and a perimeter mount installation. So this -- what you're looking at is a photograph of a perimeter mount installation. And as I said earlier, this is still a very efficient packaged system offering low annual energy consumption but dry, no water consumption. So here's a graphic of a typical chilled water plant cooling system. So on the roof, you see an array of chillers that are designed to chill water or reject heat from the warm water loop. And there's a network of piping that you'll see, both chilled water supply and return piping, that goes to what's referred to as a CRAH gallery, which you see on the first and second floors of the data center. And those are -- inside that gallery are air handling systems that are comprised of usually some filters, coils that handle the chilled water and absorb the heat from the data hall and then reject that back into that circulating water loop. And then there's some fans that are part of that. And so as I said, we offer a product called Modular Chilled Wall. And we marry up to anybody's chiller platform. And then we also make, as you see in this photograph, a product that's proprietary to Aligned Data Centers. And this is referred to as the Delta Cube. [Presentation]

Now I'd like to give you a little history behind the SyCool product evolution. So it's been quite an R&D effort. This is new technology again based around the thermosyphon. So it's unique in that there's no pumps needed to circulate the working fluid that absorbs heat and rejects it to the atmosphere. Initially, we brought to market a 400-kilowatt product that had a computer room air handler referred to as a CRAH. It was optimized for hyperscale data centers. So it was tall and skinny to provide maximum kilowatts of heat rejection per linear foot of wall area. We quickly realized that for the hyperscale market, we needed a lower height version and we also needed to be able to support raised floor air delivery. So that was the next development. And then we had customers asking for smaller capacity units. So we developed a 250-kilowatt machine. And we offered that in four different air handling configurations. And then next, we brought an even larger capacity, the 500-kilowatt machine, which pairs to either a single CRAH unit or, as you see in the diagram to the right, to two 250-kilowatt machines. In the future, we have already validated the application of SyCool to reject heat from liquid cooling platforms. So we are actively looking at a number of ways to apply SyCool to reject the heat from various liquid cooling approaches in the data center. We're also looking at smaller-sized split systems to expand our offering to smaller data centers. And we're looking to make a packaged system that may be appropriate for edge-type data centers. And then not listed on this slide is our development of a pump. So for a thermosyphon to work, the condenser has to be elevated above the evaporator, as you see in this diagram. But in some cases, customers aren't able to do that. The condenser needs to be on the same grade as the evaporator. And so we have already validated the ability to use a refrigerant pump to assist. So that's a liquid return assist to allow that refrigerant to operate optimally even though we don't have that elevation difference between the condenser and the evaporator. So at this point, I'll turn it back over to you, Line.

Thank you very much, Keith. And before we open up for questions, I'll let you summarize this presentation, Klas.

Thank you very much, Line. And then thank you, Frank and Keith. As always, very, very educational, and I hope all viewers have come to the same conclusion. We are in a growing market. Data center and the need for the data center technology will continue to generate growth moving forward. We are building a business for the long run. We're investing in innovation, production capacity and application knowledge. We have established strong flexible manufacturing capabilities, both in North America and in Europe. We have the widest in our segment, the widest product offering there is, and I have to say with a little pride in my voice, the most professional application team there is in the marketplace. So with that, let's go over to Q&As.

Questions, yes. We have our first question for you, Keith. How do Munters' solutions compare to competitor technologies in the market when it comes to water and energy consumption?

Well, that's a little bit difficult question to answer. But if you first start with the direct evaporative cooling solution, we are, I'll say, a little more efficient in terms of energy. And that's driven by our direct evaporative cooling efficiency in combination with the air pressure drop through the media. And then for customers that want to minimize their water usage, we offer a product that we call MRM, which stands for Mineral Removal Media, which takes the water that's normally sent to drain for the purpose of maintaining the solid concentrations in the sump water. And it puts it over the sacrificial pad, allowing no water to be wasted, so all of the water to be used for good evaporative cooling. So that's in regards to the direct evaporative. And then regarding the indirect approaches, the packaged units, we are best-in-class in terms of our indirect evaporative solution and our PVX products for operating dry as a packaged unit. And then our Modular Chilled Wall matches up to anyone in the industry's performance, these are dry systems. And SyCool has some of the best efficiency and peak power of any metrics in the industry.

Great. Thank you very much. Klas, how do you work with modularization and standardization in data centers?

When you talk about modularization and standardization into an industry like data center, you need to keep two thoughts in your head at the same time. How do you drive the best possible efficiency in our own setup and, at the same time, adjust to the individual customer needs? So it's a standardized setup of different modules. I think, Keith, when you explained it in a SyCool setup, a standard setup. But then of course, when you reach out to individual customers, you must be able to customize and branch out. And that is the way we work, simplest, possible, efficient way of producing but at the same time, when needed, adjust it to customer needs.

Great. Thank you. Frank, a question for you. The new factory being built in Virginia was mentioned. How much will this factory increase your capacity? And will it only serve the North American market or also the European market?

Yes, Line. We have two facilities in the U.S. that produce data center equipment. Our factory in Texas has been producing it for a number of years. And then our Virginia factory is kind of our data center, center of excellence globally. And that factory is being basically replaced with a much newer and efficient facility. The Virginia capacity will in effect be able to double our output from that facility once it's up and running. It's scheduled to open in the second half of this year. Predominantly, the U.S. factories make equipment for the North America market. There is a little bit of equipment that can go to APAC for certain customers. And it will function, at least the start, as the facility that manufactures our EPX heat exchanger for production in Europe with EDPAC. But overall, we are going to be able to double the capacity of our U.S. business with this new factory.

Great. Thank you. And Klas, how much do you focus on developing data center cooling solutions?

Also a very, very good question. And as you saw in the presentation earlier here and as you have heard us talk about earlier during the year, the large cycle order that we received, more than SEK 1 billion over a period of 5 quarters then, that tells the story about how we concentrate and focus on the future. We have put in a lot of attention, a lot of resources of building that functionality. And moving forward, it is in the same way. And when I say -- when I talk about new products, it's not only about the product and solution as such, it is also how we should manufacture it. So it is not about only the monetary value, it is also how we work and how we move on. And then I just would like to put in one more spice in this dish, so to speak. It is not only what we do. It is also if we can find opportunities to collaborate with others outside Munters or even finding possibilities to acquire technology and therefore speed up the IP development as such.

Great. Thank you. Klas, how big is an order typically in data centers?

Also a very good question. And let me start to elaborate on I had -- we have received several questions about the big order of SyCool that we announced then. And first of all, if we talk about an individual order to one site, it is a very, very seldom larger than SEK 200 million in size, so to speak. If we talk about the large SEK 1 billion-plus, that is towards the colocation arena, i.e., it is an order that will go into many different installations over a period of time. And here, I think it is important also to distinguish. Sometimes, when we talk about project orders, that is very much the SEK 200 million type of style. And then when we talk about large order values, some of those order values could be many different installments over a period of time, where we get paid per installments or per shipped-out and received solutions, so to speak.

Great. Thank you very much. And with that, I think we have come an end. And I would like to thank everyone who has been watching and participating. And a special thanks to Klas, Frank and Keith for your presentations today and then hope to see you next time. Bye-bye.

Thank you. Bye.

Thank you.

Thank you.