Munters Group AB (publ)

Good morning and once again welcome to today's presentation of our quarter two report. As already stated with me here today I also have Annette Kumli in our CFO. Before I start the presentation let me 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 EBITDA, cash flow, and at the same time, driven forward with the 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 the slide. Today's agenda is highlights for the second quarter, implementation of the strategy. Those two will be presented by myself. I will hand over to Annette for the second quarter results 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 net sales organically by 6%, and resulting in the adjusted EBITDA of a healthy 14.7%. Foodtech generated a strong performance with increasing order intake and net sales and adjusted EBITDA margin. Airtek had a declining order intake and net sales, but delivered a stable adjusted EBITDA margin. Cleasing was a solid cash flow, delivering a leverage that was lowered in the quarter to 2.7. Safety First has guided us in the active mitigation of COVID-19 at 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. Very stable delivery caused our solid managing of our supply chain, and we saw minor disturbances in our operation. Continuous mitigation and actions or 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 two examples, and we will drill in a little bit more later on, that is the exit part of the commercial business in the U.S., and we expand the data centers U.S. manufacturing into Texas. And then we want to consolidate our operations in the Netherlands. Let's move to the next slide. Our purpose is customer success in a healthy planet. And here I think there are two brilliant examples of this. The lithium battery factory has started to increase in demand. And two examples here. We took an order from a giga factory of battery production in northern Sweden. It was about 60 million. It was built on our correct climate and energy 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 water. And then also smaller water, that is very important. the Tesla factory in China. We continue to have a good and strong relationship with Tesla. And I think those two shows that we are well equipped to work with the main battery players and they trust us. The battery segments moving forward in the medium to long term is a segment that I expect to continue to be very stable and grow. Another pleasing area is the strong order intake in China. The trend continued that we talked about at the end of 41. Over the years, Mantris has built up a strong market presence and a strong trust into the market. They 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 the U.S. related to Tyson Food. Tyson Food has for many years been a valuable customer in 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 the 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, I'll let you drill in a little bit deeper. America had a year-on-year change of 8%. close to flat, minus one, and APEC at a strong uptick of 28%. In America, APEC had a good development of the data center, and the service was also making progress. Food ag had a quite weak development, primarily driven by the overcapacity in the swine market in the US. And here I can say it's no change to what we said during the first quarter. The swine market is still weak. Air tech had a weak development, driven primarily by the weak marine market, by a good development in industrial service. And food tech had a weak 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, air tech declined, mainly due to weak development in misdemeanournation, related in this case to India. Food tech, as already mentioned, showed a strong development in the wine segment. And 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 food tech in China. At the same time, I also have to underline that quarter two 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 slides 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 in 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 spin wheel and the ingredients is 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 later on the capital market update we aim to reduce our standard assortment to 40 percent 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. Markets here. I mean, we will grow in prioritized markets 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, be among the top three players in a certain 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 is 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 and then into the next step in our implementation. As published in the in the report, we have decided to exit our non or part of the commercial business in the US. And if I simplify it, you can say the exit everything except the Walmart business. There we have a strong presence and we can deliver a strong aftermarket service support it is not a strategic fit we are not able to reach the metal podium in the area 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 with seeing what the data center, how it has been developed in US. 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 products, but based upon pre-engineered ingredients. In the Netherlands, we consolidate the operations into one main hub, and then we continue to take different measurements and activities when it comes to deliver on our steps to the moving forward. With that, I would like to hand over to Annette for a deep dive into our quarters.

Thank you very much, Claes. Let's return to page 11. If we look at our mid-term targets 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 one 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 losses last year, almost one percentage point higher. And if we look at our capital structure, the continued work with improving our working capital situation has helped us to reach a new leverage of 2.7. And we also have a slight currency improvement for us now in Q2, which made us come down again after having a bit higher off to Q1. So if we go into slide 12, first of all, when you look at monitors, one needs to remember that we are late cyclical business. And also when you look at the within the year, usually Airtek has a better performance quarter by quarter or as the year progresses, whereas Sootex normally has a good quarter two and then followed by quarter three and usually also Q1, Q4 following the construction trends by having a lower level due to the winter season. So all in all, when we looked at the order intake for the group, we had an 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 US and also the battery segment where we received the order as Claes earlier talked about. Also services have grown slightly in Airtek despite the negative impact from the COVID-19 outbreak. So Airtek 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 their outbreak of COVID-19 in the first quarter. In food tech, EMEA was a bit softer and the USR is still sluggish when it comes to the swine segment, which has been going on for some time. The positive thing also when we look at the organ intake is obviously that the backlog is quite healthy and has increased both compared to last year. same course, but also compared to end of last year. So, healthy up to 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. And again, as Klaas said earlier, air tech has mainly been driven by a weak development in this elimination and also in this industrial segment. Positives was obviously the data center performance. Also, pharma and services had good outcomes. When it comes to food tech, the increase is very much related to the swine pickup in China. And again, the same with the order take policy and the load development in the Mayan America. Services now represent about 14% of total net sales. If we then go to the next page and talk a bit about Airtek, as I 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 a few declined due to the mis-elimination due to the global low demand when it comes to marine segments, and also when you look at the Indian performance, that has been a 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 our virtual service package that we introduced earlier. When it comes to net sales, down about 10% if we look at the FX adjusted, again, driven by misdelimination, and then also the power segments in India. Data centers in the pharma segment, again, performing very well. And services also grew quite a bit. When we look at food tech, this will turn to the next slide, slide page 14. Very good growth in China, which impacted the total quarter for food tech. So we had a growth of 13%. And it's 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 3% obviously will lag a little bit as order intake will have to funnel its way through the company. Again, impacted by China and again also the US is on the weaker side of the development for us. If we move on to page 15 and talk about adjusted EBITDA, good margin in the quarter, reaching almost 15%. As I said earlier, almost one percentage higher than we had last year. and we also see that when it comes to the year-to-date figures again improvement coming in from our strategy implementation food tech performing well so in the quarter increased almost two percentages whereas 80 uh ethics remain stable uh in the in the period coming back then to on page 16 and talk about execution of the strategy as talked earlier talked about we have continued with our strategy information where we have four major activities ongoing, which is exit and the commercial business in the U.S., excluding for warm-up, relocation or actual expansion of DS manufacturing into Texas. We have consolidation in Netherlands into one unit, and we have also other activities supporting the continued implementation of our strategy. All in all, when you look at the IATs, we're talking about 138 million in the in the quarter that we have taken, where basically 125 is related to assets and then minor activities related to food tech 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 two and a half years, leaving then one rate savings of approximately 70 million Swedish crowns. Out of the total package of 188 million, we expect around 160 to be cash flow impacted. The rest is depreciation and amortization. If we continue on 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 businesses, with our customers, with our suppliers, and also our internal sales and operations planning processes. So we have continued very well, and the operating working capital is down to just below 15%. And this is really what drives the performance for cash flow development. And then if we continue to the next page, our cash conversion, where we have actually from – if we compare it to – Summertime last year, where we had a cash conversion of around 50%, we're now up to the level of 70% or less, meaning then that our leverage has come down strong to 2.7 times. 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 a band from four and a half to five and a half. And that higher level will continue until June 1, 2021. We have also established a new revolving facility as a backup, as a precautionary measure should 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 Claes.

Thank you, Anette. And let me then summarize the quarter and then open up for questions and answers. We can move to the next slide, then. So the quarter can be summarized as a robust performance in a challenging business environment. I'm very pleased with our growth in water intake, our adjusted EBITDA, modern improvements, 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 feel that we have a healthy current water 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 a long-term growing market 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 a's please thank you ladies and gentlemen if you have a question for the speakers please press zero one on your telephone keypad and you will enter a queue after your announce you may proceed with your question I repeat, if you have a question, please press 01 on your telephone keypad and you will enter a queue. Only after you're announced, you may proceed with your question. So, dear presenters, we have a few questions lined up. So, the first question is from Mr. Carl Ratnestrom from Nordea. Please go ahead.

Good morning, it's Karl Einarstam here 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 Airtek. I mean how is the underlying business performing excluding data centers?

Good morning Karl and thank you for the question. As you know we are not pointing out the individual segments by JET. But you can say like this, I mean, the certain areas did show growth, data center being one, the pharma industry being one, certain pockets when it comes to 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 centers. But data centers and pharma as well as service to some extent did stand out.

Okay, perfect. Thank you. And could you perhaps try to give more granularity around the cost savings timeline between the different measures? that you mentioned, the relocation of the manufacturing footprint, the consolidation in the Netherlands and so on, and when we should expect the full run rate from the savings. I might miss that if you mention it.

The total program per se will have an 18-month implementation period. So during that timeline, then you will see savings coming true, but the full relocation doesn't come true 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 will you start off with, if you try to...

If I jump in here, you can see that one clearly highlighted area that we will exit the non-commercial segment in North America, US. And the other one is also when it comes to consolidate into one main office in Netherlands. Those are the two main ones to start with.

Okay, perfect. Have you tried to divest the business or is that not an option? Then I mean the commercial business in the US.

If I give a very broad description of the commercial business in our commercial business in the US, we have had a wide spread of different target groups and different types of customers. 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 sector 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 off the market sales into that. So pretty much it is.

believe a business where we don't see a future and have decided to close it down okay perfect thank you and the final one for me if i may i it might be a little bit of a stupid question but i've seen news around the new 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 slash fever in China. So far, we have not picked up anything else more than the similar news. We have not heard anything from customers as such. And perhaps I also should highlight here that I mean, the trend that you can see in China, if I oversimplify, it goes from the mega farms, I mean, mega farms compared to the Western countries, into smaller farms, but still large farms compared to Western countries, where our technology, i.e. model swine farming technology, is used. And from that perspective, we are very much well equipped for handling this. And at least I see, and partly as part of perhaps bias, 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. And we have been there for more than five 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.

Okay, perfect. Thank you very much. All for me.

Thank you. So we have the next question from Mr. Max Fryden from Danske Bank. Please go ahead.

Perfect. Hi, everybody. Can you hear me? Absolutely. Perfect. Just on the divestment of... or the phase-out of certain products in the commercial and markets in the US. If I'm not mistaken, you say that was related to Walmart. And a few years ago, you had sales of roughly 25 million US to Walmart. So should we see this as this is going to impact revenues, this sort of forecasting? That's my first question.

You may have misunderstood where 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 install 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 clear. It's opposite to my question. And that business has not generated profits for years.

Yeah. 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 conservation in the Netherlands, could you just tell me again what that is relating to?

The broader thing is that 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 one 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 the spray dryers and and what we're 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 okay all right um

I'm just trying to get back to 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 to Tesla, etc. Was this an exceptional quarter for lithium for you?

I mean, we highlighted the order of 60 million, and of course, that is a large order. At the same time, I cannot say that it was an exception. I think it is, if I summarize it, I think 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, a year and a half, we had a tremendous order intake in China related to battery manufacturers. And then over the end of last year and continues this year, it has been a consolidation into it as it always is in China. You can say they open up a lot of layers and then they consolidate. so in summary you can say no it is just a sign on that that the industry will continue to grow for the years to come um okay very clear thank you so much thank you thank you thank you very much so we have another question from mr kenneth stone and he's from carnegie please

Take the floor, Mr. Kennan. You can ask a question now.

Yeah, thank you. So I was a little bit surprised to see this cost out program that you start today, considering that there was a very large restructuring program done only two years ago. I mean, when you describe the actions you are taking, they seem very, very logical, as you point out. I mean, it should probably 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 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 is when the business is stabilized, then I mean measurements like this should actually be taken step by step. 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 in data centers, and we've talked about the strategic whiteness 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 commercials in the US, 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. Thanks. okay i'll make some i mean there's a difference in sort of pruning your business and then taking those bigger steps uh that you're doing right now um then another question um the you i mean your net debt to ebta and net debt are moving in a very good direction uh but you're still um You're still expanding the finance agreements you have and hiring 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 in order to make sure that we can continue to realize the strategy. That's the reason why we have done it.

Okay, great. That's all for me. Thank you.

Thank you. We have a next question from Mr. Carl Borsvidt from ABG Sundar Kholia. Please go ahead, sir.

Yes, thank you. Good morning. So just to follow up on Max's question when it comes to the commercial segment, I think as a part of the group commercial is six percent of sales and class i think you mentioned that it was a very little impact on sales so should just if when one could get a little bit more clarity here the six percent related to commercial is that mostly walmart or how should one think about this i mean first of all uh

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 existing 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 4 million in Q2. Does this mean that you have in total received 4 million in 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 EBTA, this is obviously not included there because we have actually taken them out.

Yeah, of course.

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 when it comes to making sure that we don't get COVID-19 into our factories. The figure is single digit, but just below 10 million that we have received.

Understood. Thank you. And good that you included it in the items effect comparability. So thank you for that. Then just a sort of risk assessment here. You have highlighted that the data center business in the US is different than how it looked in Europe. With your aim now to expand the business, are there any risks that we will see any form of similar events as to what happened in Europe? Or 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. When we took the strategic decision to keep the 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 had had in the past, what the quality levels were, etc. And we came to the conclusion that for many, many years, I mean, North America has performed well. And the The challenge was that it was not copied and pasted into Europe. So coming back to that, 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 seen 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. They're their desires to team up with us. That's the reason why they 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 asked 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 i i can start on a general level and then also annette to pitch in here because she has a more thorough understanding and knowledge about this but if i just sort of summarize that you can say first of all i mean i'm sorry to be uh this one we are not giving any outlooks for uh the quarters to come uh and many different reasons for that but i can say what did we see then during the quarter that passed we we did see as presented that it was a mixed mixed type of demand a strong demand were in china in food tech thanks to we taking market share at the same time please remember that that is the normally highest quarter is quarter too and when it comes to underlying demand the original the old monsters industrial has always been late cyclical and not to speculate too much i think that is also what what you would see in the industrials on the other side we also have another exposure at current and towards more fast-moving growing areas like like data centers like food, like pharma, etc. And when it comes to cost, I mean, certain costs will obviously return. At current, we are not traveling, because we are not now.

But I think at the end of the day, we don't give any out, that we 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 made cyclical, but we're also driving in other businesses, driving in other businesses, which means that there is another drive for months as well. And then when it comes to the performance we have, well, I mean, again, we're into driving strategic change, which actually impacts them also, our performance going forward. So that's what we're working with, but we don't give any answers.

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

No, I would say that normal could be the word. Normal up and down.

All right, perfect. Thank you very much.

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.