Munters Group AB (publ)

Welcome to the presentation of our first quarter result for this year. I'm Ann-Sofie Janssen and I'm head of investor relations. And I want to welcome for those of you who are listening in on the conference call and also for you who are on the webcast. Please note that for you on the webcast, you can place your questions throughout the whole presentation, and then we take it at the end of the presentation. And then we also open up for questions on the conference call. And with me here today, I have our CEO, Claes Fossström, and our CFO, Annette Kumlin. And with that, I hand over to you, Claes.

Thank you Ann-Sofie and welcome to this quarter report presentation. Before I start, I just want to summarize the quarter. It was a quarter that delivered strong profitable growth in targeted market segments. a solid cash flow and that while we were handling a challenging supply situation in a very good way. I'm pleased with the result that we have delivered and all the efforts our employees have done during the quarter. With that, over to the presentation. And the agenda will be like this. First, highlights in the quarter by me. And then after that, implementation, our strategies, some status updates there. And then I will hand over to Annette for the quarter financial highlights, summarize it, then open up for questions. So the first quarter, there was growth driven by business area air tech. If I pick two sentences or two highlights, it was a strong growth, improved market conditions. The order intake increased some 20%. It was driven by continued strong development in industrial segment of air tech. An increased backlog of orders and a net sales increase of 14%. Also here, air tech, strong increase in the industrial segment, but also good development of food tech in China. The adjusted EBITDA improved to close to 200 million with a margin of 12.3%. A stable leverage. The improved market conditions were there, especially in the industrial segments. We had effects from the COVID-19 with shortages in the supply chain and we expect those challenges remain for the coming month. We handled it well during the first quarter and we expect to continue to be diligent in this area. The execution of our strategy continued with an optimization of our footprint in the supply chain. Here, in particular, a production site for data center operations. Also important, we have now a strategy defined for business area food tech. Going forward, we aim to accelerate implementation both in the equipment area and the digital area of the business. If I take a little bit closer look into the order intake quarter one, growth in China and US are the main headlines. Take a look upon the well-balanced share now when it comes to the three different market regions. APAC leading the pack with 66% growth of FX adjusted, but also solid growth in EMEA and Americas. Annette will come back to the details here, but if I summarize it, it is very much the industrials. It is battery, it is pharma, but it's also a bounce back of data centers, strong growth in services, and a solid development when it comes to China and its wine segment. A little bit more granular when it comes to recent market trends. The large chunk of industrials represents 37% here, battery and pharma pulling ahead. When it comes to food processing, a slight decline, very much due to the COVID pandemic, but all in all then a good growth within the industrials. Data centers, a solid growth also there, driven by digitalization. Components also driven by data center and lithium batteries. And when it comes to misdelimination, as earlier said, it is now leveling out and we see some large orders coming back, but it's still weak in marine. Services, good to see that it continues to grow. When it comes to food tech then, the largest segment, broiler, the US market is temporarily low. In swine, we continue to grow in China, but moving forward, as said already last quarter, I expect that we will level out during the year. Layer, pretty flat. And greenhouse, even if it's not large in our sales right now, 5%, it is a growth driven by increased demand. If I talk about the strategy, and you've heard me say that many times, we have our purpose for customer success and a healthy planet. It is about customers, be close to them, go market models and pricing strategies. Innovation, that is the future of a company. Continue to invest in R&D and prune out products that is not needed for the future. Markets, focus on the markets that we see profitable growth in. Excellence in everything we do. Continue to drive its step-by-step improvements in lean, but then also work with operational excellence and the footprint optimization. And people. That is very much about how we organize and how we drive our culture forward. In each and every one of those areas, I feel that we have taken good steps forward. To highlight some, very good that the markets that we have focused on, batteries, data center, service and then recently pharma as well, are really showing growth. Innovation, as I said many times, that is a driving force for increased customer value. We will continue to invest in innovation moving forward. And our solutions are so important in many, many for the customer critical processes. Very often, climate control solutions are also energy consuming and our products are reducing that consumption. When it comes to priorities, continue to work with modernization, take out the products that is not needed. When we develop product, focus them on increased energy efficiency towards the customers. And last but not least, develop connected equipment, both in air tech and in food tech. Some highlights. We have inaugurated a new R&D center in Skista. And there are efforts when it comes to sortment reduction continuing according to plan. Innovation is not only products, it is also how you go to market. This is an example of a greenhouse solution being sold in Italy. What is very pleasing with this is that it balances the sun and the cold climate during the year. So the farmers can have a balanced climate and delivering improved productivity. It is the first order, but it's very much a reference order. I hear a lot of good feedback when it comes to this type of solutions in the marketplace. Sustainability. one of our most important road maps going forward. We focus on three areas. It is about resource efficiency, responsible business, and people and society. And each of those areas during the year, last year then, we record this once a year, we made strong progress. Moving forward then, it is about integrating this 100% into our strategy. It is about setting clear goals. It is about strengthening the management, being better in analyzing and delivering on set targets. With that short update on the implementation of the strategy, I hand it over to you, Anette.

Thank you very much, Klaas. So if we look from our performance point of view and look at our mid-term targets, we had a growth of 14% excluding FX. We had a margin of 12.3% and we had our leverage remaining on 1.9% compared to end of last year. When you look at the performance of Munters, bear in mind from a growth perspective, obviously that China closed down in the first quarter last year and opened up towards the end of it. We do have, as we said also in last year, Q2 and Q4, those quarters were mostly impacted by actually a customer pushing out their investments. And then if you look at it from this year, then obviously the issues when it comes to freight, both from a capacity point of view, but also from a pricing point of view, impacts us. So if we go into the growth side, we had a growth of 20% when it comes to order intake, FX adjusted, mainly driven by Airtex when you're looking at the battery segment, looking at the pharma segment and also data center. Remember now, as we are always saying, is that data center is a project business, which means that from time to time it's up, from time to time it's down compared to the same period last year. The one business that is remaining with a bit of a struggle is obviously mist elimination. And that's particularly linked to the marine side. Food tech continued with good growth in the swine segment in China. And also, which was quite nice to see, was actually that the swine segment in the U.S. is picking up. From an Netflix point of view, FX suggested we had a growth of 14%. So you can see it's trailing on from the order intake side. Services is now approximately 14% of the group's total sale. And as you can see also, order backlog remains healthy with a healthy growth of 11%. Diving in then to Etik, as we said, the growth was really good. It was 23%. Part of it is actually, as I said, we did have last year in Q4 a bit of a hesitance from a customer side placing orders. And we can see that picking up into the quarter this year. Battery is remaining good and had a very nice growth, obviously. And then we also see... DC coming back on trail. And if you look at services as a percent of air tech, obviously it remains a bit higher. It's about 18%. If you look at net sales, healthy growth, 17%. Again, driven by the services side, also driven by data centers. We also have the battery in pharma, obviously with a very nice turnout to the customers. And again, one thing to remember when you look at the order intake side, impacted by customers coming with orders this year that probably were delayed from last year. If we move into food tech, continued good growth in China. We also had a very nice growth, as I said, when we looked into the swine segment in the Americas and the dairy segment in the layer. The one thing that remains a little bit sluggish is the broiler market, and that is backtrailing from the high timber prices. Obviously, building new houses when timber prices are high is something that is being setting on the backlog. Also, what is nice to see is actually that EMEA is picking up from a greenhouse segment point of view. So when you look at it, growth in food tech from an order intake perspective, 12 percent. And also the backlog, very healthy growth of around 15 percent. If you look at net sales, however, this is where, as I said, you know, we need to remember looking at how COVID-19 are impacting us. And food tech was more impacted by actually the delivery situation than air tech was because of the transportation issues, as we can see in the supply chain. If you look at America's good growth in the equipment side, again, it's the swine layer and dairy business that are driving it, whereas the broiler remains a bit sluggish. It may have a bit weaker development, but that's basically because of the weaker side on the broiler side in the US market where we have controller sales not picking up that much. If we look at EBITDA, as Claes said, we do have a solid improvement. If we compare to last year, we have a margin of 12.3% compared to 8.3%. FX impacted, yes. So basically, if we didn't have the FX impact, we probably would have been almost 1% higher. Airtek is the one that are leading the or driving the change. And it's basically because of the good growth, but also because of the strategy implementation that has been going on since last year and continued, obviously, cost control. If we look at food tech. margin dropped a bit but here again to remember we did have an fx impact and food tech the gap between this quarter compared to last year probably is half of it fx and then as we talked about also transportation costs coming out and we did have a mix of impact also from the controller sale with the sluggish development on the broiler side in the us moving then into delivering on our strategy journey as you remember we did implement a program mid last year aiming to sharpen the customer offering and footprint optimization it is running according to plan in total we're expecting cost of almost 180 million swedish crowns with an annual saving once realized of about 70 million we're basically halfway through so a bit more than a half of the half of the savings impact has has been put into effect although annualization comes next year obviously Given that development of the good profit, but also continued focus on cash flow, we had a good cash flow development. Again, remembering now that COVID-19 is impacting us from a supply chain point of view, which means that part of the increase that we see in our cash flow is then being offset by increased inventory to make sure that we can manage the supply situation towards our customer in the best way possible. That means that when you look at cash conversion, that remains on a high level. Again, when we looked at end of last year, we had a very good December month that took us to the peak. But in general, if you look at turning in almost 90 percent in cash conversion, that's very good from a company that has taken one and a half year to clear things up, which means that we're down now to 1.9. We have been able to remain on 1.9 since end of last year. even if we have been hit by effects in the wrong way, and even if we also have to manage an increased inventory because of the COVID-19 situation. So the financial stability of Monters has picked up over the past one and a half years, and we are very pleased with the development from the company side. So all in all, if you look back at it, good growth in the quarter. Good impact from the strategy deployment, meaning margins are moving up. And again, meaning also that at the end of the day, leverage is coming down. With that, I would like to hand over back to you, Klaus, to wrap up.

Thank you, Annette. So before we move into Q&As, let me summarize. A solid first quarter with improved market conditions. There is a mixed impact from COVID-19. The main major impact is, as Annette talked about earlier, in the supply chain. We expect those challenges to remain for the coming month, but we have handled it very well so far. We have shown strong growth in prioritized market areas, delivering improved profitability and good cash generation. We continue to manage our long-term strategy. We invest in R&D, we optimize our footprint, and also important, now we have defined our food tech strategy and we will start to implement it both in the equipment and the digital area of the business. You will hear more about that in our upcoming capital market update in mid-May. We are really well positioned in long-term growing markets, driven by an increased need for sustainability, energy efficiency and digitalization. With that, I open up for Q&As.

Thank you. Ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. So that is 01 to register for a question. We have a question from the line of Carl Ragnarstam from Nordea. Please go ahead. Your line is open.

Good morning. So I had actually a really, really bad line, so I maybe missed a few things. So first of all, of course, really strong growth in air tech. Could you first of all help us understand how much of that growth is driven by vaccine or the farm, as you said?

If you go into that at current, then the pharma segment represents on order intake approximately a little bit short of 10% of the order intake. So it's not a large part of it, but 10%.

But according to your question also, I would say that the main growth was really driven by battery, although supported by pharma. And then also remember, as I said, DC is a project business, and DC had a good order book building in the quarter, which was very nice to see. And then also we have services that are coming in. But the main driver was really the battery segment, if you isolate into one segment. Yeah.

Okay, I think my line is quite bad. I couldn't hear the answer, but I will try a final one from my side. Also, is it fair to assume that a substantial part of the margin uplift in air tech is driven by the strong pharma growth rather than service? Because service is, as I can see, down as a percent of sales year-over-year.

And Carl, you may have missed when it comes to the pharma. Pharma represents roughly 10% of water intake. So saying that that would be the majority of the improvement, that is not right. It is many different areas that has driven improvements across air tech.

Okay, perfect. Yeah. I couldn't hear that one either. Okay, thank you very much.

Okay, so now I step in here and we do have some problems on the conference call line and I'm really sorry for that. So for those of you who are calling in on the conference call line, do please also send me your questions or the questions in the webcast and I will try to make sure that we catch them in the webcast. We do have some more questions from Carl actually that I would like to put to you. Your order intake is also looking quite strong. Could you comment on whether any large order is included in it for the first quarter?

In this quarter, it is not any substantial large order as data centers orders or battery orders, but it's many mid-sized orders. Especially you can see battery has really increased in Asia, but it also has grown in other markets.

Very good. And we continue to see an upwards trending steel prices. Could you comment if you have during Q1 implemented any price increases and also what you plan to do in Q2? And I guess that Q2 will be the quarter where it might be impacting you, given that it takes some time for you to work through your inventories and get it out to customers, etc.

It's correct that steel prices have influenced us, both when it comes to pricing, but also when it comes to some of the deliveries. Already last year, we started to implement general price increases. Those price increases have carried on during this quarter, and during the year, we will... Step by step, continue to improve it. But as I said already, quarter four, we have a backlog and the backlog is to some extent very difficult to catch up. But I'm pleased with the activities we are driving here.

Thank you. And the U.S. swine market has been a bit slow. Could you comment on the development that you now see in Q1 and whether you expect a similar bounce back there as we have seen in the swine market in China in recent quarters?

I mean, when it comes to the market, we are not giving exact outlooks. But as I said, and myself and Annette said already at the end of quarter four last year, that is that if it follows the normal pattern when it comes to the swine market in North America, I mean, then during this year and especially during the end of the year, it will have a pickup in that market. And now we see some first evidence on that.

And the interesting thing also when we see the pickup is that it's larger constructions as well, which is good if you look from our point of view. So it's nice that it leveled out in Q4 and started to pick up this.

But it's too early to say that it's a clear trend.

Yeah, yeah, yeah. Okay, so... I don't have any other questions for the moment. I don't know if we can, maybe we can try to open up the conference call. If there are any ones that still want to place a question on the call. It seems that we have some problems with the conference call line today. Now we have a question from Lucas Ferrani at Jefferies. Can you provide more details on the key areas where you're seeing supply chain constraints and also what products that you mainly see that it is affecting?

I can start, and Annette, please pitch in. I mean, first of all, it's a general supply squeeze, I think, that goes across all different industries. So I'll start with that. When it comes to food tech, it is more container-related in transportation, back and forth to... to Asia. When it comes to mountains in general, it is some of our metal plates and steel deliveries that we have a squeeze. We are not exposed to semiconductors in the same way as other industries. Yes, we use semiconductors, but it's a different type. And here we feel very, very, let's say, safe on that side. But it's more a general one. But please, Annette, if you have any more.

And I think it's also important to say that what we have worked with is obviously our supplier strategy and broadening the supplies. And that together with intense work to make sure that we move the goods in the back chain of it has made it possible to stay the way we are. But obviously we're working very hard to make sure that we contain the issues.

Great. Lucas also has a question about cash conversion. And cash conversion, can it be maintained around 100%, around the 100% mark going forward?

I would say that a good company stays probably above 70%. We have made really good inroads to move things when it comes to cash. As you know, we're also moving things to improve our margins. So I would say that any company that delivers above 70% is good. And then once you remember, also in December, we had one actually order where we managed to both invoice and collect within basically 20 days. And that's probably not so common, I would say.

Very good. Thank you. We have a question from Filbert Veissier. I'm sorry if I pronounced your name incorrectly, but it's regarding the 61 million Swedish crown as insurance compensation that we got in the first quarter, if it is included in our adjusted EBITDA in Airtek.

It's not included in the adjusted EBITDA. As you know, we're very particular about making sure that adjusted EBITDA shows the trend of where the company is moving. So no, it's not.

Good. Thank you. And then we have another question from Francesco Cavaglio. Can you please provide some comments on the expected development of the service business as a percentage of sales going forward? What is your mid-term target in this metric?

You have heard us talking about that we would like to move up services and our target is to move it up to 30 percent over a longer period of time. But as you know, also, we don't give guidance in the shorter time period. But this is what we're trailing towards.

And a good company, I've said it a couple of times, if we can, we aim to increase it roughly with one to one and a half percent units per year. And then on top of that, if we can acquire service companies that are part of our strategy, I mean, that is on top of that. And if you go back a couple of years, that is what we have delivered.

Thank you. We have another question from Manat Chopra, who is congratulating on the great results. Is the margin growth you have seen sustainable? Your 14% margin target feels very much in sight. Or do you expect weakness throughout the year as raw material inflation is felt?

Thank you for the question. I mean, we have a firm look on our mid-term target, and that is 40%. And in order to become a very, very good company, not only quarter by quarter, but in the long run, we will continue to invest in R&D, we will continue to invest in service organizations, we will continue to invest in digitalization. So the correct answer is yes, I'm very confident that we will reach the 40% mid-term target during that period. That is really how I look at it.

Yeah, and I would say also, as you have heard us talking about, we are on a journey to improve munters. And obviously there are different activities. You take the low-hanging fruits and then you work with the longer activities. But our main goal is to move it upwards. But you could have periods of where you're actually hit a bit. You can look at food tech this quarter, for instance, when the freight costs are impacting us. We also have a certain activity, as we said, when it comes to making sure that we invest in the future, looking into R&D and digitization, which temporarily could also delay it a bit. But again, we're on a journey. I think that's what we all need to understand when we look at mentors.

And just one additional. If you take a look upon AirTech during this one and a half year, I think it is showing that we are progressing very well. So I'm very confident moving forward.

Very good. Does Q1 have a special catch-up effect or is the growth trend we're seeing reflecting a general increased customer's appetite?

As I said when we presented this, that part of it, there is a catch-up effect, particularly when you look into the Arctic side. If you remember when we talked about Q4, we said that basically when you look at 2020, Q2 and Q4 was actually the one where we're most impacted by customers actually pushing out their investments a bit. And part of that actually ended up now in Q1. But we have underlying, we had good growth. I mean, we're riding on the megatrends of digitalization. We're riding on the megatrend of e-battery vehicles. We're running on the trend of, if you look in the pharma industry, obviously when COVID-19 with the test sticks and so forth. So there are underlying trends that are moving us upwards. But from time to time, we could be impacted like this quarter.

Very good. Then we have another question from Philbert, and that is if you can comment on the competitive environment in the battery segment in our three different regions or geographies.

A very good question. What differentiates Mantis from all competition? If I listen to what customers are saying, that is our application knowledge, our capability to add on value at the site. That is what all our customers are saying. At current, you may have heard me talk about that in China. A couple of years ago, battery was moving up and then it was a consolidation. Now it's moving up again. China and Asia, they are in the lead when it comes to the battery transformation. Then we have Europe that is coming more and more and also U.S. We foresee that the battery segment will continue to be a strong segment moving forward for many years.

Thank you. He also has a question about data center and if data center had any sales in Europe in the first quarter.

We have concentrated our business on North America. We are maintaining contact and we are to some extent resupplying to existing customers in Europe. So it's a small part of the sales, close to nothing really. We now have invested in a business development manager in Europe to start to reactivate Europe when we feel ready. But all in all, I mean, the large majority is from North America.

Thank you. And he's also wondering if we, when we talk about M&A and acquisitions, if we're looking for acquisitions in the greenhouse segment in particular of food tech.

We have a broad M&A agenda. It is three buckets. One bucket is technology driven. Another bucket is very much service driven, the string of pearls. And then we have complementary business. And in that bucket, of course, greenhouse is also fitting in. But please, Anette, do you have an additional comment?

Just to say that obviously we have our focus areas where we believe that we can enhance munters and those are the areas also where we're looking out for the M&A activities.

Thank you. And then now we also have another question regarding seasonality of the business. And generally, Q1 is not such a good quarter for the profitability in air tech from a seasonality, historical perspective. Could you elaborate a little bit on this?

I mean, the largest seasonality effect that we have in the month is that it's really connected to food tech. And here it's always the fourth and historically always the fourth and the first quarter that are the weakest quarter. When it comes to air tech, I mean, the seasonality pattern has actually varied in between different years. But I agree. This is a very, very strong start of the year in air tech. But please, Annette.

And it's again coming back to obviously that we had good growth and that obviously turns out to scalability also from a profit point of view. Then we have a strategy deployment that is kind of like underlining and moving things up. And then one thing to remember also in the strategy deployment, we actually took the decision last year to close down the non-Walmart commercial business in the U.S., which was not performing that well. That is also a third layer that actually moves the margins up. But again, if you have a 20 plus increase, then it starts to come true also.

Perhaps I should add something to data centers. I remember last quarter, it was to some extent the worry about that we didn't have a strong order intake. I think the most important thing when you manage data center, that is from my perspective, it is not really ups and downs in order. It is how well you are then loading the factories. And here I think we have made strong, strong progress over the years. So we have a constant load in the factories and that drives both predictability and the mix as such.

Thank you, Claes. For the moment, we don't have any more questions. And I think the telephone conference line unfortunately was not very solid today. So with that, I would like to thank those of you who were on the webcast and on the conference call. And now I actually got another question uh okay i'll i'll we'll take it this last question then could you could you please it's from manat could you please split out the margin improvement between operational leverage and self-help so operational leverage from growth and actually efficiency improvements in the business if you could

I would say, I mean, if you look at a growth of 14%, obviously gives a lot of loading to the factory. I mean, that's the nature of running a factory, basically. So I would say a lot of it is pertaining to that. But again, Mantras is on a journey. We're here to improve the margins. And I think we have made inroads. And that actually ampers it up, obviously. But a big part, if you have 14% growth in Airtek, you load your factories with 14% more products coming out of the doors.

Then you should have a good leverage and that we have.

Yeah, then you should have a good leverage.

Thank you very much. So with that, I say thank you for those of you who have listened in to the webcast and also for those of you who were on the conference call line. We will have a capital markets update on the 11th of May. And I hope you will listen in then. It will be webcasted live. And well, thank you. So with that, closing words from you, Claes.

Thank you very much. And as I said earlier, we leave a strong quarter behind us. And I would also like to take the opportunity to say a big thank you to our employees that have been able to balance both. the current market situation with the implementation of a long term strategy. So with that, look forward to meet you all in May. Thank you very much.

Thank you.