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

Welcome to today's webinar hosted by Investor Relations. My name is Line Dovarn, and I'm Director of Investor Relations. Today, we're focusing on an area called Digital Solutions within our business area, FoodTech. You can ask questions throughout the presentation by using the chat function below, and we will address all questions at the end. Our first speaker, President and CEO of Munters, Klas Forsstrom.

Thank you, Line. And once again, very, very much welcome to this webinar, yet another one in our series of many different webinars. Today, as Line said, it's all about FoodTech and our strategy. And if I take you a couple of years back, it is 2021. We kicked off the new strategy within FoodTech. It was about accelerating our digital solutions, i.e. our software and our controllers and solidify and strengthen our equipment business, our fans and so on. Digital Solution is a very, very important part of Munters, not only in FoodTech, but across the company. A quarter and a half ago, we launched a new strategic review of FoodTech. It comes from two different assumptions. The first assumption is that we see a fantastic progress in the marketplace where customers are looking for even more digital solutions from our side. The second part that is that we see a weaker and weaker link in between the equipment side and our software side. We are going to conclude this during the first half of next year. With that said, we will continue to keep our investments high into the software arena. And I can foresee a couple of years ahead that we step-by-step are moving up our sales within Software as a Service to reach on and about 5% of our total turnover in the group. We will do it in a very simple way. First, we will double what we have today. And after that, we will double it again. I'm super excited about this, and I'm also very eager to listen in to what we will hear later on. So with that, over to you, Line.

Thank you, Klas. And our next speaker is President of FoodTech, Pia Brantgärde. Welcome.

Hi, Line. Thank you very much. Hello, everyone. I'm really happy to be here. I'm going to give you more information about our Digital Solutions side. As Klas mentioned, we launched our new strategy in 2021. And already at that time, we decided to actually invest a lot into a digital solution. Today, in this webinar, we will take you through a bit about our growth journey. We will speak about our unique position that we have with our customers and within the industry. And we will also talk about how we contribute to a global impact, helping our customers to address different food challenges. But before we move into the digital offering that we have, I will start with a picture about our industry. So the food industry is among the world's largest industry. And the annual production value is roughly SEK 45 trillion. The animal protein side stands for SEK 18 trillion. And then also a substantial part of the plant side is actually used for feed to the animal protein. So it is a very large and important market. The whole food industry is going through a transformation. There is a lot of challenges that we are facing in the world. One of the largest one is actually how to feed the world in a more responsible way. There is already and still more than 800 million people that are still going to bed hungry every night. And we also know that a large part of the food produced is actually wasted or lost. And according to the World Bank, 65% of the waste and loss is within the producers' supply chain. And this is exactly the area that we are working with, where we are helping our customers to improve the supply chain. Many of our customers are large food producers. They are multinational. They have a big supply chain, complex supply chain with many different production facilities. They have a lot of transportation and logistics that goes in between the different facilities. And their main task is really to transform living animals or livestock into finished quality products. But -- there is also a lot of demands on our customers. We see demands from a lot of market trends. They need to handle population growth, changing demographics, resource scarcity. And there is also a high expectation from the consumers. For example, food safety and traceability. We, as consumers, we all want to know how the food has been produced and where it has been produced. Another area with high expectation is in predictability and standardization. We want to have access to food every day of the year, and we want to have the food looking the same and tasting the same every day of the year. Also animal welfare is high expectation, and sustainability, how to reduce the carbon emission in the supply chain. So as you can see, there is actually a lot of demands on our customer. And really, the only way to manage these challenges and to manage these complexities through digitalization. So how do we help our customers, we do that by capturing data from all areas in the supply chain. We analyze that data. We give insight recommendation and decision support to our customers. And that is leading to improved KPIs, improved logistics and improve operation. And by doing that, we can actually help our customer to improve resource efficiency through the supply chain, profitability, animal welfare and also reduction of carbon emissions. And how do we do that? What is really our offering? So our offering is based on scalable platforms. Our main software offering is the Amino. It is really designed to capture all data from the complete supply chain. And it's also seen as one of the most or as the most powerful software in the industry. We are capturing data through our platforms, the Trio controller that is also a scalable controller, and we capture data through our IoT and sensors. But it's not only in the farm. We also captured at many of the other areas in the supply chain. Amino is built on a cloud solution and it's built by people that has very unique application knowledge about the industry. These people exist within our software company, MTech. Amino is handling all areas in the supply chain. We have modules on planning, transportation, logistics, purchasing, financial costing and also analytics, so that we can help our customer to predict what they need to do to improve their operation. Our software business is really a true Software as a Service business. We are measuring since a year back, we launched a KPI we call annual recurring revenue. It's really how do we measure stable revenue over time. And we have done a great growth year since then. As you can see in this slide, we have been growing the first quarters with 30%, and then we are moving up to 50%. And in the last quarter, we were above 50% in growth. We have decided several years back when we launched the new strategy to invest in this area, and we are now committed to continue to invest in this area for the future. For the rest of this presentation, we will actually talk about our software offering, and we will talk about MTech System, which is really our software company. MTech joined Munters in 2017. It is a high-tech software company, very innovative with cutting-edge technology, using a lot of artificial intelligence and also machine learning to improve the complete supply chain through their software platform. But they are not only that. This is actually also a software company that was born in the live protein industry. We have a lot of people with a lot of unique application knowledge. We understand our customer challenges and their needs. And our people in MTech are also very passionate to help our customer to solve those challenges. So I am really happy now to introduce Simon Cohen, who is one of the founders of the company and also our Vice President, Marketing and Sales in MTech. Simon will take you through a bit about the company history. He will also talk about the product portfolio and our customers. I leave over for you now, Simon.

Thank you, Pia. Super excited to be here with you guys today and to share the journey and the history of MTech Systems. The journey starts in the early '90s. When we -- like any startup company, we started in a small kitchen. And our passion from the beginning was to build a company that focused on helping our customers to be more efficient, to be more productive and to have better returns. In the early 2000s, we started building relationships with medium-sized companies and started building a full enterprise solution, an ERP, the first and only ERP that was tailored specifically to the industry. And we started working with multinational companies. Right from the beginning, our goal was to build relationships across the world. Rather than focus on one region, we understood that we had to build a platform that could cover the world. From 2017 to 2022, became a very important part of the journey, very pivotal and it's when Munters acquired MTech in 2017. Munters was critical to help MTech scale to become the global leader company in the industry. During that time, we worked very hard building the data science team as well. And what it did is accelerated our growth to become really the largest company in the industry. Today, it's all about cloud-based systems, delivering artificial intelligence algorithms to play much more accurately the supply chain -- we deliver the Software as a Service, and we are the reference company in the industry today. So we are one global team with unique application knowledge. So over 230 employees are part of the MTech family, over 75 software developers and data scientists within the team. We have 3 offices. The United States office, which is where I am, the headquarter office, and then we have the Mexico office. We built that office 10-years ago, focusing on controlling the code and not outsourcing development. Until today, we remain committed while developing everything in-house, providing high-quality products. Our third office is in Brazil. Brazil is one of the powerhouses of protein production in the world. Brazil is one of the largest exporters of meat in the world. For us, was super strategic to have local presence in Brazil, close to our partners. Today, we remain focused to the Brazilian market as one of the key regions. So we support 65 countries, 7 languages, 6 continents. Let me share some of our people, our DNA, our family. Barry Schulz is our CTO, and he actually works very closely with cutting-edge technology, helping develop what you're going to see today, which is Amino. Padmini is a PhD on environmental sustainability. Super excited to have her. She leads our carbon footprint calculator, one of our latest modules, helping customers calculate the carbon footprint and work through a sustainable environment. This is one of the leading products that we have today. Evan is a data scientist manager. So he leads the team that builds the algorithms to help plan the supply chain much, much more efficient, and it's a super important department within the company. Dalton Greco is not just a sales manager in Lat Am, Latin America, but he's a veterinarian. So he's working every day with our customers and very passionate about taking care of the animals and the animal welfare of the business. Last is Hayley. Hayley is a team lead. She dedicates her time implementing the software across the world, helping customers all over the world implement the software and take advantage of it. One of her passions is definitely the costing side of the business, so she helps customers calculate the cost to be much more efficient. So we are creating our market, and we lead it. We're leading the way. 98% of the United States broiler and turkey industry are running MTech. 7 out of the 10 largest protein companies are customers of MTech. And that's not enough for us. We keep on improving the platform, delivering better technology and helping our customers. 55% of Latin America is running MTech as well. In 2 out of the 2 largest genetic companies in their broiler space are partnering with MTech. So how do we do this? We do it through partnerships with customers. Every software we've developed, every part of the system has been with a partnership hand-in-hand with customers. That's the secret of MTech. With that, we're able to develop very good systems to help customers with all the challenges and of course, improve their supply chain. So we are global. We are in every corner of the world, in every continent of the world. We have customers everywhere, makes us very powerful. We cover multi-species. When the company was born in the '90s, we focused on the poultry industry. But soon enough, we started working with the pork industry, which today we deliver a full platform. And for the future, we're working for the aquaculture industry and the beef industry. So now I'm super excited to share with you, Amino. Amino is the most comprehensive supply chain management platform in the industry, 30-years in the making, very intuitive, easy to run and now I'm super excited to share a brief video that I hope you're going to enjoy. [Presentation]

So as you saw the video, hopefully, you had a brief view and a little bit of the Amino platform. So now let me take you through the product offering. Amino is a multilayer platform that the more you use, the more you gain. So it's a journey that our customers go through growing through the platform. As you can see on the screen right now, from the bottom section, that's the base of Amino. So we cover the entire supply chain from feed mills, to breeding or genetics, the hatcheries and the grow outs. And we do the same thing for the pork industry, cover the entire supply chain and the key to Amino is the [indiscernible]. The customer can grow in the software and taking different components, building more value to the platform. So let me take you through the offerings. Machine learning, the first one. That's the power of AI. So we have built algorithms in an add-on module that can predict the supply chain extremely accurate. This becomes so important to our customers because they're more efficient with less waste. Then comes Sonar, Sonar is the IoT hub. It is Sonar that connects the Amino platform to all the offerings of Munters in terms of controllers, sensors that we manufacture, that we acquire, and we can connect any type of sensor from [indiscernible] into the Amino platform.

We are very sorry about that. We had a power outage here, but we will now continue with Simon's presentation. Over to you, Simon.

Thank you. So as you saw the video, hopefully, you got a brief of Amino and look at the screens and the product. Now let me take you through the offering. How is Amino delivered to the customers. So Amino is a multilayer platform. The more the customer uses, the more value they get out of the system. If you look at this slide from the bottom, we take the entire supply chain. So we work with feed mills. We work with genetic companies, breeding companies, the hatcheries and they grow out. We cover the whole supply chain. We do the same thing for the pork industry. But what the power of Amino delivers and their value is on the [indiscernible]. And we start with machine learning. This is the artificial intelligence component. Its this part that we use algorithms to predict in a very accurate way, the entire supply chain, enabling machine learning and artificial intelligence throughout the whole supply chain. The second offering is Sonar. It's our IoT hub. Sonar is how we connect to the hardware, to the controllers, to the sensors in their houses, in the farms, in the different parts of the facilities of the company so that we can bring real-time data into the Amino platform, delivering insights they have never been seen in the industry. This is a strong connection to the Munters strategy. Then comes Proline. Proline is one of our most advanced products, again using our artificial intelligence. What Proline does is takes the livestock and takes it into a finished product from a planning standpoint. So we help our customers match supply versus demand and the key to Proline is our customers can guarantee delivery of finished products to other customers. Income sustainability. This is the module that helps calculate the carbon footprint. And not only we calculate the carbon footprint, but we're helping customers improve, get to the Zero -- Net Zero goals that they have for the upcoming years. The ERP component is the costing and financials. It's been the ERP that we can calculate the entire cost of production end-to-end, helping customers drive efficiency. Digitalization is critical to the MTech offering. That's Amino mobile. Amino mobile, it's a set of applications that can run on iOS, on Android tablets, the key to Amino mobile is that we can capture data in remote locations bringing real-time data into the platform and reducing duplicate work. We capture the data from the source all the way to the system. Last but not least is Axis. This is the business intelligence. This is the component that delivers dashboards, reporting, analytics, insights to our customers so they can really find the problems and drive value through the supply chain. This is Amino, that's the full offering. Now I want to share with you our customers. So we work around the world. We have projects everywhere in the world. We have customers of different areas in different parts of the world. So I thought I'll bring a couple of highlights, so you understand our product and how we work with our customers. One of them is Tyson Foods. American company, they're considered #2 broiler producer in the world with about $53.6 billion of revenue. They operate in over 16 countries and currently over 142,000 employees. Tyson Food is a company of high-quality products with a lot of customers. They deliver products to customers like McDonald's, Burger King, Walmart, Tesco, et cetera. They're multi-species, they're working across all the supply chain and for MTech is a long-term partnership. So we are helping Tyson run an entire platform on Amino and on our latest version protein, so they can actually manage the entire supply chain. So then I wanted to share 1 more customer, Bell & Evans. Bell & Evans is a United States broiler company who's been running MTech for over 20 years. They are one of the customers who took now the Amino platform and have finished the upgrade a few months ago. Chevele Crawford is one of the key leads of the project and she helped us deploy the entire system through the company. They're very excited of running the software. Bell & Evans is one of the most innovative companies in the industry, and they deliver very high-quality products. For them, Amino delivers full visibility of the entire costing, which was very important for them. Their senior leadership is using the dashboards of Amino to truly manage much closer their business. The entire company from top leadership to live operations management are using Amino and the data. So how do we bring value to our customers? How do our customers return the investment? One of the best examples is feed. So 70% of the cost of growing protein, life protein is the feed. So in the industry, we work on a KPI called feed conversion ratio. We use the word FCR. FCR is total feed consumption divided by the total meat produced. So think about it basically how many kilograms of feed do I need to produce 1 kilogram of meat, that's FCR. So how do we drive value? Well, we collect the data right from the source, from the entire supply chain, everywhere we've run that data into Amino. We analyze that data and we rapidly deliver insights to the customers. So we help them make decisions, support the decision and act on it. So you understand the power of this KPI within the industry. One point of feed conversion improvement can represent SEK 200 million in 1 year for our customers in the industry. And this is how we drive Amino. This is how we deliver high-quality value through the supply chain, returning the investment rapidly. Pia, back to you.

Thanks a lot, Simon. Thank you for the presentation. I think that you have seen how passionate we actually are about our business and our customers. So as a summary then, I hope you got a bit more insight about our digital business. It is really a high pace growth journey that we have made, clearly above the Munters' growth targets. And I hope also that you see that we are very much committed to invest in this area going forward. We have explained a bit about our unique position with our customers and also our unique position within the industry, and how we actually are contributing to the global impact where sustainability is a very important part for our customers. We are excited about the future, I'm really proud what we have achieved so far.

We are now ready for the Q&A session, and you can still post questions by using the chat function and we will address them. Pia, it sounds like MTech has penetrated the market, especially in the U.S., given what you have talked about here. What is the future potential in the U.S. Is it to drive a higher share of wallet? Or how do you view it? Can you elaborate, please?

I think we mentioned in one of the slides that we actually have a high penetration with many of the large customers in U.S., in the poultry industry. With that said, it is only part of our offering that is with these customers. There is a lot more to do in increasing the share of wallet. But we also can go into other customers, new customers, other regions, we can also go into other segment. So there is a lot of opportunity to grow this business.

Thank you. Klas, the farmer sentiment in EMEA and Asia has been weak. What can you do to drive the growth within Digital Solutions?

Very good question. And as you know, I mean, the farmer sentiment is weak due to the war in Ukraine and due to depressed situation in China. But here, we are not talking about the farmers. We are talking about the food process owners, the integrators and that is how we drive digitalization and software. So farmers, yes, but even more so, we will drive it through integrators.

Perfect. Pia, you have a large penetration in some segments in the U.S. poultry market. Is the poultry market mature? Or do you see further upside and adding new features to the offering?

What is so exciting about the software business is that it's coming out new modules and new offering. So there are definitely more potential in working together with our to customers to see what can we do more to improve the supply chain and take it to the next level.

Great. Simon, can you talk about competition in this segment? What does -- how does your offering -- our offering compare?

Yes. Thank you. So for us, the competition remains very local. We are really the leader in the market. There's nobody really that has a whole global spectrum in the whole full supply chain. We see competition more regional. And also, some customers have kept legacy systems, in-house systems. But of course, these systems have become a bit old, and that's where we become quite strong with the offering, delivering brand-new technology, covering the entire supply chain.

Thank you. Pia, do you see -- you spoke about other segments like the pork segment. Do you see the same types of opportunities here?

Yes. I mean the core of our business has been poultry as Simon explained earlier. We come from that area. But we quite -- some time ago, we actually went into pork and pork is also a segment which is growing and more and more digitalization is coming into that segment. And there are other segments coming in the future as well that are interesting for us.

Good. Klas, how -- you talked about sales development in Digital Solutions. How large a part of Munters' sale does the represent today and what do you see?

As you saw on one of the slides, I mean, in the area here, we have been growing a couple of quarters ago, about 30%. 2 quarters ago, 40%. And last quarter, more than 50%. So if I take it all in summary, it is about 1% of total Munters sales, if you talk about software right now, but rapidly growing. And that's the reason why I'm so excited about the future, and I foresee that with step by step. First, we'll double it and then we will double it again.

Interesting. Pia, can you talk about what the contracts look like in this -- in digital solutions?

We normally have a product implementation side, and then we have a SaaS part of the contract.

Good. Simon, can you talk about technology trends that you see for the coming years within?

So, the protein industry -- I think an industry that pushes quite strong technology and becomes innovative, right? So I see growth on artificial intelligence, of course, they use -- enable algorithms to help through their whole supply chain. So I think that's one big component. And then the other one is the IoT offerings. I see growth in that space. I see the optical part of the IoT also to be important in the future. So I do expect high investments from the industry on both areas.

Interesting. Pia, what about M&A? Is this something that you would consider to grow digital solutions?

I mean we have already done 3 M&As. We did 2 minor investments into 2 high-tech companies. One is called FarmSee that are doing machine vision sensors for how to capture more data from the farm. We also invested into BarnTools, which is an IoT and sensor company, which is also helping us to capture more data. And this summer, we actually acquired a controller company, InoBram in Brazil that became part of our family. And of course, we are interested in looking into more areas when it comes to software, controllers, IoT and sensors, if we see that those companies are contributing to our offering in the digital solution.

Klas, what kind of synergies do you see between digital solutions and the rest of Munters?

I mean in all industrial companies, it's very much about digitalization. And I see synergies when it comes to the knowledge and my learning then from different industries that is you need to have a spearhead. You need to have one area that is going ahead of the rest. And by having that, I mean, then you can spread it across. So that's the reason why I think it is so important that we continue to speed up what we accomplish in MTech.

Good. Pia, your -- the margin development within Digital Solutions, can you elaborate a bit on this? And where you expect it to be in the coming years?

So first of all, we are measuring the margins in each and every business area and not really into each and every part of the business area. But during this year, we have clearly improved our margins. And of course, that is part due to our digital solution offering. And as a normal software company, I can just say this is a high gross margin business. But of course, we are investing in it so that we actually can accelerate the growth even more.

Very good. The last question, I'm sorry, we're running a little bit over time here, but I will ask a last question to you, Simon, about the go-to-market strategy. How do you reach customers?

Yes. So the last 30 years, we've been working hard in developing and implementing the software. So we built a brand, a very strong brand. Today, it's all about long-term relationships. So we look for partnerships. They're more of a journey with our customers. Large projects, very committed, and it's about adding more value to the product. And so today, it's all about the long-term relationships that we have built through the years.

Thank you very much. I think we are out of time there. Thank you, everyone, for listening in. We are again, sorry about the difficulties we had, but thank you for listening. Thank you, Pia, Klas and Simon for presenting today. And this webinar together with all our other webinars are available on our Investor Relations web page. Thank you and Merry Christmas, I guess.

Merry Christmas, everyone. Thank you.

Thank you.