Munters Group AB (publ)

Welcome to the presentation of our half-year report for this year. I'm Ann-Sofie Jönsson, Head of Investor Relations. With me here today, I have our CEO, Claes Forsström, and our CFO, Annette Kumlin. We will run through a presentation, and after that, we'll take a Q&A session. For those of you who are listening in on the web, do feel free to place your questions throughout the presentation and we'll pick them up afterwards. And we will of course open up for the conference call for questions afterwards as well. So with that, I would like to hand over to Claes to start the presentation.

Thank you, Ann-Sofie. And very, very much welcome to this quarter two report from Munters. Before I start the presentation, let me summarize the quarter in a few sentences. First of all, once again, I'm so confident that we are very well positioned towards transformative growing segments. Batteries, data centers and service drives growth moving forward. We have had mixed market wins in food tech, headwinds in China and Europe, and tailwinds in North America. Continued supply challenges, some operational challenges, but a gradual improved drop through of price across the board. All new projects taken are at a substantially higher price level. I'm very pleased that we can form a new business area, data center, a business area that is set to deliver on or above our midterm EBITDA targets for 2023 and beyond. With that, let me go in to the presentation as such. Strong growth in a quarter marked by continued challenges. Order intake increased by 51%, very much driven by data center technology in Americas, battery and service and air tech. All in all, an organic growth of some 33%. We have increased focus on managing lead times. The net sales grow 25% organically, also here driven by data center technologies and battery in Americas, as well as service. We were offset by a weaker market in China for food tech, and all in all, as I said, we landed on 25% organic growth. The backlog, a solid backlog with good order intake increased to 149%. The price increases compensates for inflation. We came in at 10.4 EBITDA margin. Our prices increased compensated, as I said, for inflation. It was offset by increased work to secure component shortages and increased cost as such. We had a change business mix in data center that Annette will talk briefly more about later on. We had lower volumes, as I said, in APAC and EMEA for food tech, and some operational challenges in the same unit in North America as earlier talked about, and also one of the units in food tech in EMEA. We have increased our strategic investments to capture market opportunities moving forward. A little bit more granular. It is Americas that is the main driver of growth. Americas grow 104% and represents 58% of the total order intake. All segments in air tech show good growth. Data center technology, very strong underlying growth, but also food tech, both digital solutions and the equipment-driven generated good growth. EMEA, 17% growth, some 24% of the total order intake. Good growth in battery and clean technologies. DCT, hyperscaler and colos did grow in the quarter. And here, food tech, then, an underlying market situation that weakened as a consequence of the war in Ukraine. And then APAC, that has been the growth driver over the last couple of years. This time, we're growing some 5%. Airtech's strong growth in battery and clean technologies, and foodtech, then, continued weak swine market in China. I think it's fair, as everyone knows, there have been intensified global challenges. And I don't have to dig deep into this to mention the war in Ukraine, the lingering COVID outbreaks in different parts of the world, especially in China, and overcapacity in the Chinese wine market. But also the inflationary pressure, rising input costs, a weakening market, in particular in food tech in EMEA, and the on and off lockdowns in China. Supply chain, yes, it has been impacted. But I have to say then, all in all, I mean, this we are used to handle. We have fantastic people then handing this day out and day in. And without them, the consequences could have been much more worsen. I think it's reasonable to be cautiously optimistic when it comes to some of the material costs moving forward. We see the lowering material costs in some of our base metals like copper and steel. On the other side, I think it's wise to be cautiously pessimistic when it comes to semiconductors and general freight situation. But all in all, I think we handle this very well. But moving over then to our underlying markets, air tech, a very, very strong demand in the battery segment then. I foresee a continued strong growth in the battery segments, and I'm so pleased to see how we now have started to push prices up to never seen levels before on taking orders. Also the good work in setting up a more easy to produce and a more easy to sell setup of battery components. But what is so impressive in Airtek then, in the underlying market, that is, it is green all over the place. The only area, and that is not the focus area for us, that is commercial, that is flat. So when it comes to Airtek, I'm very confident in how the market will develop moving forward. Especially when it comes to battery, it will be America's NMEA that will drive it moving forward. that it will most probably be a dampening battery market in Asia Pacific, the normal ways it goes up and then it starts to hoover down after a couple of years. I also want to mention, perhaps not the largest projects that we have won during the quarter, but a project that shows what we stand for. A couple of years ago, we sold equipment towards an airport in Belgium. Now we have upgraded that equipment with new fans and new methodologies. And we deliver lower energy consumption and only those upgrades reduces the CO2 emissions with 20 tons per year. This is just one setup. It gives and shows the opportunities that we have in many, many other places like this. Data-centered technologies, a new business area moving forward. Solid growth driven by innovation, driven by investing in the future. Yes, it was not the best of profitability levels this quarter, but I'm very confident, as I said, quarter by quarter, it will continue to improve thanks to the investments that we are doing and optimistic for the future when it comes to 2023. And why am I so optimistic? This is one of the reasons. We build new facilities, new ways of working, new ways of designing and driving innovation across the full value chain. The new production setup in North America that is geared up to become more optimized, that is geared up to really produce our cycle components for the future. Jumping over to a more depressed market, a market that is in transformation. As you know, climate solution, that is the equipment side that we have, and digital solution, that is the future focus for us. And it's a mixed picture here. Digital solution, making progress step by step in a very, very good way. A lot of positive customer feedbacks, a lot of interesting wins. Climate solutions very much affected by a tough end user market. All in all, as I said earlier, it is a positive market in North America, a continued weak market in China, and a contracted market in EMEA. But also here, we do drive new innovation. In this case, a new fan, the next generation, the second step in our new modularized fan platforms towards the industry. It's modular. It is sustainable, it is reliable, and it saves up to 60% of the electricity cost. A very, very important area now, moving forward, when the industry is so affected by the higher increased electricity levels. Climate change is our most important megatrend. As you saw, I show you two small examples of what we deliver to our customers and end users. And that is, of course, important to make them shine even better in this area for customer success and a healthy planet. But also when it comes to sustainability and that work, it is how we work internally. We drive trainings, we create awareness, We invest in our facilities. We update our scorecards when it comes to new products. And we open training facilities. All in all, we're working across the full setup of sustainability. With that, I would like to hand over to Anette and take us through the numbers.

Thank you very much, Claes. Then let's dive into the financial performance so far. So when we look at it, again, very good sales growth. It's 25% in the second quarter. And if you look at full year, around 20%. If you look at adjusted EBITDA margin, yeah. It is lower than last year, but again, what we are looking into very positively is actually that we're seeing a net price mitigation, whereas then obviously the issues that we have in some of the operational activities and business mix causes a downward trend. And if we look at the capital structure, the leverage, yes, it has increased. Part of it is obviously due to that we have done acquisitions, and part of it is actually due to the growth that we are facing at the moment. So, if we look then at our order intake, extremely strong. Again, we're talking about a 30% increase, more or less, where we're looking into batteries and also looking into the data centre side in America, particularly. We also have continuous strong service in air tech, which is very good to see. Order backlog, as you have seen now, has increased quite a bit, so we're up at 7.5 billion Swedish crowns. And if we look at the net sales, It trades obviously behind the order intake, so continued good sales increases, driven then again predominantly by the data center business and by the air tech business. Actually, when you look at services today, it's 14% of the group's turnover. And if you look at the past three years, it's actually increased one percentage point almost per year. If we look at the price increases, we have actually been able to then move our price increases, as Claes was talking about earlier on. So if you look at it today, about 9% of the... We have a price increase which is 9%, which you can see in the organic growth side. In adjusted EBITDA, yes, price increases have been made, and they are compensating now for the inflationary pressures that we have seen. However, when we look at certain activities like cost due to component shortages, which has continued, and also looking at the lower volumes that we see food tech in EMEA and APEC, and also the business mix that we have seen in data center, that have had a negative impact on our margin. If we look at what we're doing to make Mantra scalable, well, obviously, as we have spoken about over the past three years, is also that we want to invest to make sure that we can become a much bigger company. So we're investing in innovation, we're investing in the digital side, we're investing in the process side to make sure that we can scale up. And that's ongoing at the moment. If we look then at our margin, what has really impacted the margin and made it then be around 10.5% versus 14% last year? Obviously, volume has had a good impact on our margins. And that is driven basically, as we said, by the data center side and the air tech side. If we look at the net pricing, it's actually so that we can see now that our net pricing is balanced, which is good, because that means that the prices we have done is coming true. If we look at the issues that have impacted our sites negatively, then we have seen that the business mix has been negative. We can see that particularly in data center. It's caused both by the flow of the project business, where there were much more high margin business last year, And if you look at the mix this year, it's a bit lower. And also driven by actually that with the component shortages in D.C., we have had some delays in the high margin products, which then have had a downward weighing effect on the margin. Then also we have continued negative impact from food techs in EMEA and APAC. For APAC, it's China that's driving it, which has been continuously sluggish development. And for EMEA, it's actually part of it is impacted by the Russian war, actually. If we look at the supply chain, then again, the war in Ukraine has caused this, but it's also so that we can see that the energy and the freight costs are continuing to increase, and the component shortages also have a negative impact. So at the end of the day, when you look at it, we still have a negative impact from the macroeconomic or the geopolitical situation around us, but price increases are coming through, which is important. Investments is also something I talked about, the scalability. That's what we're working on. And then we also, as we have spoken about earlier on, we have some operational challenges still in one of our centres in the US, in Airtek. And then also with the changes that has happened in Europe, we also have one in Foodtech, which is causing a bit of a downturn pressure on the margin. So all in all, we're at 10.5 versus 14, but the positive news is that the price increases are coming true. Looking then at air tech, air tech obviously sees good growth in battery, but it's not only the battery side. It's also the food, the components, clean technology and services, as we talked about earlier on. And if we look at today from a net sales perspective, with the growth that we have seen there and what's coming true, we're talking about 40% organic growth. It's also so that services today... about 20% of the air tech business, which again, it's an increase year on year with the focus that we have had. For air tech then, when we talk about price increases, it's about 6% that we can see has come true during the second quarter this year. And again, when we look at the marginal impact then volume growth has a very positive effect we also get then the customer pricing now compensating for inflation or price pressure however when we look at securing components and manage lead times that do has a downturn effect on the margin as well as the operational activities in one of our us centers our new business area data center then As you have seen, we got a very big order in the first quarter, but the order intake has continued in the second quarter as well. So we're still talking about plus 300% organic growth. So it's quite high. And as you have seen also, some of them are very long orders that are coming in. And again, when we look at the margin side, we are positive when it comes to 2023 and beyond. Again, when you look at sales, obviously it's EMEA and Americas that are driving it. And we can see then that the price increase here is about 2% that are coming into the into the quarter. But again, this is more project business where we are managing prices in a different way than with the flow business. If we look at the margin, again, volume is positive. Here, we can really see the intensified activities to make sure that we have the components that are coming in. And that has cost a longer lease time. It's also cost a a higher cost to manage the situation. However, again, when we look at all the effort that's been done by the people in our organization, it is really making a difference to make sure that we come out on top at the end of the day. And then obviously, as I talked about, the change business mix, which is both a component of the component shortage per se, but also then just the flow business of being a project site. Coming into food tech, very much the same situation as you have seen earlier on, although a bit more amplified when it comes to the Russian war, where our EMEA business has been affected by it. When we look at the order intake, we are looking at the sluggish market, both for APAC and EMEA, whereas America has continued to grow, which is nice to see. and when we talk about net sales it's trailing the same way more or less as the order intake we have very good situation when it comes to americas with the broiler and layer segments whereas apac is declining and we can see also now in may and having a flat development price increases you can see that it's really making a difference we're approximate around 10 percent that are coming through through into the second quarter result If we look then at adjusted EBITDA, again, what we're talking about is that food tech is in the transformation towards a more digital environment. So when we look at that, it's very positive to see that the sales in the digital solutions in America is continuing to grow because that is kind of like the foundation for the future. If we look at investments, that is obviously something that's weighing down on the margins. And this is, again, in a transformatory stage that needs to happen. It's particularly directed towards the digital solution side. And then obviously, again, what we talked about, the war in Ukraine, it actually has impacted us negatively here in the EMEA and also caused some issues in one of our production facilities in EMEA. So with that, Moving then into what does it look like then from a pure cash situation? Well, when it comes to the cash flow, obviously, we've had a negative development, mainly because of actually that we are growing the business. So we need to prepare, obviously, for the orders to come. But obviously, that has always been amplified by that we're in a situation where it takes longer time to get the components coming in. So we need to make sure that we have the right safety stocks. That's basically the reason behind it. If we look at leverage, yes, it has increased since year end and also in the quarter, but it's mainly impacted actually by the acquisition we did earlier this year. And then also, obviously, the working capital causes an impact. And we also have FX, which has impacted us quite a bit in the quarter. So if we look at what are we doing then when it comes to our strategic development and actually our traction on our strategic journey? Well, part of us, as we said when we actually joined the Class of May, is that we're going to invest in digitalization. We're going to invest in innovation. We're also looking at lean, looking into manufacturing excellence and also making sure that we have the right people on board and develop our people. So you will see that and are seeing that actually impact in our margins. Short term, a bit negative, but this is going to build the company for the future. And one of the things that are coming in this year is obviously a new human resource system so that we can work a bit more efficiently on that side. On top of that, we're doing more efforts into innovation and also into the digitalization side. Our two strategic work streams that we implemented, the first one, which was more or less related to air tech back in 2020, is working according to plan. Yes, it was delayed initially in certain areas because of COVID, but we're moving on. And when it comes to the food tech, which was implemented then, or which was announced then in the spring of last year, that is also moving on as planned. And delivery when it comes to profit improvements is expected according to plan, but a bit later. So those are the two work streams where we're looking into resources and when we're looking into really changing the basics of the foundation of how we're working. The third stream that we're working on also is the inorganic strategies. And as we've spoken about earlier on is that when we look at the M&A agenda for the group, we basically have four buckets that we're working on. One looking into the core. And here's where particularly the Edpack acquisition really fitted in. And if you look at then technology and digital, which was the second one, actually what we are doing is that we are looking into making targeted and minor financial investments in areas where we can see that we can jump the curve. So, so far this year, we have done two of them. Also, what we're doing in this area is looking into acquisitions of intellectual property, also with the course of actually driving our innovation and jumping the curve a bit. The third one is services, string of pearls, and then also obviously looking into new growth areas. So I'm sure there will be more to come later on. And with that, Claes, I would like to hand over to you.

Thank you very much, Annette. And before we move into Q&As, let me make a brief summary of the quarter then. Once again, we are well positioned, or I have to say very well positioned, and continue to take advantages of the strong megatrends in digitalization, electrification, and the increased demand for sustainable solutions. I'm so excited when I take a look upon the funnel of future coming projects, both in air tech, battery, but then also in data centers. And here I find myself very comfortable. Price increases, yes, we have a lead time, but we are moving it ahead and we continue to adjust prices. I start to see a real effect. And as I said earlier, the new projects are taken to a price level never seen before. and we increase investments to capture market growth opportunities. That's the reason why I believe we have a great future ahead. So with that, I would like to open up for Q&As.

Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the star keys. If at any time your questions have been answered or addressed, and you would like to withdraw your question, please press Start in 2. At this time, we will pause momentarily to assemble our roster. We have a first question from the lineup, Gustav Bernerblatt with Nordia. Please go ahead.

Good morning, Gustav here from Nordea. Just to start off here regarding the margin drop of 10 percentage points in data centers, just to get a bit more flavor here. And did you see a positive delta on the component shortage by the end of the quarter as we are headed into Q3 or how should we think here?

But it's a very good question, Dan. Let me phrase it like this. I mean, during first quarter and even more during the second quarter, we have basically redesigned most of our application areas in order to make sure that we can open up for different type of components. So with that, I'm very much more comfortable in when it comes to, I mean, multiple supply, et cetera, et cetera. And

we never do predictions but i'm confident we step by step moving forward or moving in the right direction all right and on the order intake in data center it looks to be very very strong in the quarter is there a single project that drives this or

This time, as you know, we announced the very, very big projects earlier. And then it is a multitude of several, call it mid-size project, a typical mid-size project that is 50 to 150, maximum 200 million Swedish kronor. So here it's a basket of different projects done. But what I have to say, what makes me really, really happy, that is the keen interest from many customers in our new innovation cycle. I mean, you have heard me talk about, I mean, innovation is the future for a company. And here I can see moving forward the coming years, that will be a main driver from an innovation point of view, but also from a sales point of view.

Okay. And then if we move to food tech here, it looks to me as order intake volumes are down very much in the quarter, given that you have a negative organic growth of 22%, including 13% price increases. Since you have had a close dialogue with the customers within food tech, are you seeing any subsidies kicking in or other positive news in that area?

I can start to take that, and then I will hand over to Annette as well, Danberg. As we have seen in a couple of quarters now, I mean, it is a depressed market in China due to very many different ingredients. My belief is that at a certain time, the Chinese market will come back and it will drive incentives, etc. But at current, I think that you can say the Chinese market is depressed. When it comes to Europe, it is very much so that here we see the effects of the Ukrainian war, the increased energy costs, etc., and also feed prices. So far, no indications that it will be subsidiaries kicking in. But really, it is a big debate going on, not only in Sweden, but across Europe, how to compensate farmers. But Annette, any more flavor on this?

Yeah, and you can also add, obviously, when we're looking at price increases, we have applied also price increases to some of these, to our products. And obviously, it took a little bit of time before the customers got adjusted to actually that there was an increase in the energy prices and the feed prices and so forth and accepting and accepting actually the prices that were coming through. So we could see also that in one of the areas that we had in Europe, we could see that the orders were coming through towards the end of June, whereas there was a bit of a time lag in between announcing price increases and getting the order. And that is part of the impact you see also. But obviously, if you look at the comparison between the second quarter and the first quarter this year, China has continued in kind of the same downturn trail as earlier. The addition is really the Russian war on Ukraine that has impacted us.

Okay, and the last one here. If we compared African swine fever in Q3 last year compared to now, would you say it's much worse or pretty much the same?

I think the euro is still out there. I mean, China, To be honest, perhaps not the most politically correct statement, but you never know really what is the real truth in China. But the way we see it, it has not increased. It is at the same level. So I would like to say, if I summarize it, flattish them.

And I think to add also... All right, thank you very much. To add also, when you look into China, it's obviously that the feed prices has gone up. So for the farmer that are building farms, obviously there is a negative impact in between the pork price and the feed price.

Yeah, fair enough. Thank you very much.

Thank you. We have next question from the lineup, Lucas Furrani with Jefferies. Please go ahead.

Good morning. My first question is on... the margin. Obviously, you showed the bridge at Q1 and now also at Q2. I'm just trying to think, kind of looking at 2023, is kind of supply chain and operational challenges really the two main items that will help you kind of lift margins going forward, given the volume situation seems to be healthy. Pricing is already kind of covering cost inflation. And so those two are really what is left for you to handle. And do you have a view on when you should see component shortages and those operational challenges start to improve?

if i start with the last question when it comes to component shortages i think this is something that we will continue to have to be used to but what makes me feel much much more comfortable that is that as i said earlier we have really started to design in different type of options i am more multi-sourced setup with a main supplier and then a couple of backups so to speak That has costed us efforts and R&D costs during the quarters, but that puts us in a better position. Then when it comes to our operational challenges, I'm very confident that we have taken the right measures. I see gradual improvements and I expect that we will continue to deliver on gradual improvements during the year. Then I have to highlight Innovation is driving future growth and future profitability. And here I need to highlight data center technologies again. I mean, here we have designed a completely new type of product, designed in an easy to manufacture setup, easy to scale type of setup. And that makes me comfortable that we are taking the operational right decisions moving forward.

But I would also add, obviously, when you look at the margin impact, it's also the business mix that impacts us. But as Claes is saying, that over time will be corrected. And if you look at DEC, it's a combination of how the projects are flowing in and flowing out also.

Thank you. And the second question was on your exposure to gas prices in Germany. Obviously, there's increasingly worries about potential gas rationing in Germany. It seems to be 6% to 7% of your sales. So I just wanted to touch upon, do you see any risk there? Is it a situation you're following closely? And also in terms of opportunities, you're providing solutions that are helping clients consume less energy. So are you already having these type of discussions with clients?

I bet it's a very good question. And I cannot say that we are sort of exposed in a heavy way towards the gas prices. Some of our end users, of course, depending on the situation, if you're in Germany, they are more exposed in general terms towards gas prices. But what is important to see here, Lukas, that is we deliver gas. solutions that lower the energy consumption. Sometimes we deliver solutions that use gas. They often use, I call it, normal electricity. But let me just give the example I talked about earlier about the Belgium airport. Strong reductions in energy consumption, but also when it comes to clean technologies and air tech, windmills will increase moving forwards. And in each and every windmill, at the bottom of the pylon and at the top at the rotor, it is a Manters installation or a similar installation. So I think we are very well set. And I hate to say that we will benefit from increased quality pressure on the electricity market, but I think that we will balance it off very much with our solutions.

Thank you. And the last question was just on the data center business. It's obviously now a larger business within mentors. I think you're getting to kind of a more mature offering there. Mid-term, do you still see this as kind of very volatile? Obviously, there's big moves in the margins. It was the case prior when you used to report it, and also now this year there's a big move in the margins. Is it something that you can manage, let's say, more efficiently in the future to stay at margins levels that are, let's say, high or... not seeing that big of an impact, or it's still something that will remain very volatile within Montes?

Also a very good question. I mean, we are setting up our businesses to be more sustainable, to be more predictable. And I'm so, so happy that we now have separated out data center technology. It will generate more transparency to the market. It will enable us to show the strong progress we are going to make moving forward when it comes to how we operate and what we deliver. And coming back to what I mentioned earlier, Lukas, the innovation, the new ways of manufacturing, the way of working with projects. I'm very confident that data center will contribute accretive to our midterm EBITDA targets.

Great. Thank you.

Thank you. We have next question from the line of Anders Roslund with Pareto Securities. Please go ahead.

Yes. Good morning. I have a question about your capacity increases now. You're building new factories in the US for data centers and also new capacity in your lithium batteries. How will that impact? Are there any risks that you run into more production problems or Or are you well in line with that now? How is your planning?

Good morning, Anders. It's a very good question. I think the easiest way to answer it is that we have targeted our strategy towards megatrends and transformative segments where it will grow. We have started to build those factories quarters ago, i.e. we are setting us up for future success. Yes, we have some operational challenges in one of our older factories in Americas that we are driving lean work, et cetera, et cetera. And then as always, perhaps the first quarter, we will have some balancing effects in the new factories. But I mean, it's a completely new type of manufacturing. It's a completely new setup. I mean, I would be so happy to invite you to see what we have started to create there. So from that perspective, It may be some bumps up and down, but if we go a year ahead, I would like to say that we have manufacturing facilities at the never seen level within Montes.

Okay. Thanks. That's all questions from me.

Thank you. We have next question from the lineup. Gustav Osterberg with Carnegie Investment Bank. Please go ahead.

Thank you, operator, and good morning, Karlsman. A couple of questions from my side. Firstly, on business mix impacting modding negatively, could you comment sort of on what's driving that outside of D.C.? ?

Part of it is obviously our negative development in food tech when it comes to China in particular, and also when you're looking into some of the impacts now that are coming from Europe triggering. I think those are the main things outside of DC. Because obviously when you look into data center technology, there has been a, compared to last year, there's been a shift towards more low margin. And this is again, it depends on the project flow, how we are moving it. And also with certain type of commissioning work that has been done, which were a little bit on the low and the margin side. But again, also when you looked at the margin shift in DC, remember again that part of it is also due to then this component shortage that actually triggers both the cost side of it, as we talked about qualifying new components for the products, but also then making certain type of products being delivered a little bit later.

Got it. And just to sort of get the feeling for how many quarters now has the mix in food tech or the negative mix impact from food tech been present? Because obviously that market has been soft for quite some time now.

If you look at it, I would say that that has been present over the past four quarters or something like that. It's again, if you look at how China was moving from sluggish in 2019, only 2020, then we had a real strong growth during end of 20 and also during up to mid 21. And then it started to turn down. So it has been a long development on it. Combination of African swine fever, you have also a little bit when it comes to the COVID and so forth. So that has gone on for quite some while, yes.

And then to balance it often, it started in China and now we have a dampening in EMEA. But I have to highlight also this strong progression that food tech is making in US and North America.

On the software side you mean?

Both on the software side but also on the equipment side. So I mean the North American market. If I should highlight an up-going market with a strong market, a willingness to accept price increases etc. It's the North American market. And talking about price increases, I mean, it is North America that is accepting the highest price increases. It is, of course, Asia and China that is accepting the lowest type of price increases. And then just to average out, Europe, I think, accepts a healthy price increase. And in some markets, a very, very high price increase. And that goes for both food tech and air tech.

But if you look at it, I mean, the trends when it comes to China and U.S. has been inverse almost. Because if you look three years ago, then U.S. was very sluggish and actually in a declining mode. But part of it was, you could say that China was actually picking up and actually offsetting that. Now, when you look at it, the downturn trend in China is a bit more than what we have the uptrend in America. But America is performing very well. And it's very nice to see that it has come back from earlier sluggish levels. And that has also been going on for some time.

Yeah, thanks. And just the class, you mentioned that the sort of raw material price decreases quarter on quarter, but with some concerns on semiconductors and freight, could you develop a bit more on what you're seeing there that makes you see no sort of sequential improvement in those areas? Because in some cases, it appears like freight rates are going down somewhat. So is there availability that is an issue or is there something else?

A very good question. If I go first of all to the raw material, we see a lower price levels on especially steel and copper. As you know, I mean, it will take some time before that triggers through our order backlog. But let's say like this end of the year, beginning of next year, we will see positive effects on that. When it comes to transportation, I have to divide it into two different things. I mean, first of all, we have been forced due to the situation in Chinese harbors, et cetera, to air freight a lot of our goods. Initially, we were aiming to take it by train through Russia. As you know, impossible right now. So it is both a mix in how we need to send out material, but then also the prices as such. And yes, it is going down when it comes to shipping, etc. And we are pushing more and more through shipping towards Asia. And it's predominantly in between Europe and Asia that is the pressure.

Perfect. Thank you. And then my final question is on the service share in Airtek that is now 23%. And with an upward arrow on the market outlook. Can you give some more flavor on what's driving that?

First of all, it is our dedicated conviction that we should drive service in a better way. So that is how we operate, what we push. I'm also pleased to see how that side, not only in growing in numbers, but also in growing profitability, is developing well. On most of the projects that we sell, we are also selling a part of the service. It could be installation service, it could be prolonged guarantees, etc. So that is driving it. But perhaps even more important thing when it comes to service, that is, at current we invest in technology share into battery. and then we are going to gain the service as it comes moving forward. But to simplify it, a good service offer, very dedicated people and then we see a service market that is growing.

Are you already seeing service contracts from the battery side to a larger extent or is it still low?

In monetary value compared to the installments and the projects, it's a low value. What I see that is both in Europe, earlier in Asia, and definitely now moving forward in Americas, there is a willingness to accept, call it both installation service and prolonged warranty, etc. And then, of course, the interesting part, four to six years ahead, Then it's a replacement business of the rotors, etc. But that we have to wait four to six years to gain the benefits of that. And rotors, as you know, that is one of our most profitable areas.

Perfect. Thank you very much. That's all questions for me.

Thank you. We have next question from the line of Matt Les with Kepler Xerox. Please go ahead.

Yeah, hi, good morning. Can you hear me? Yes, Matt. Hi. Well, coming back to orders, and so I guess you mentioned a lot of mid-size orders there, and what about the quotes going forward? Should we expect a similar flow going forward here in the second half, or could you say something about that?

If I take a look upon the general market, as you can see, I speak about Airtek now. We are not really making market predictions, but we're sort of leaning forward six months ahead. And the majority of the areas there are pointing in the green. I mean, definitely 5% or above. And if I take battery and data centers, then I expect it to be well above 5% moving forward. I'm very pleased with the funnel of orders that we see. I think we are winning the orders that we would like to win. I'm confident that we take market share both in Europe and in North America when it comes to the battery, and definitely in North America when it comes to data center technologies. And the interesting part here, I reiterate that once again, that is, new innovation that will drive our market share. And it's also a product that is delivering customer value. And surprisingly enough, it's easier to manufacture than our previous products. So I'm really pleased in how that product has been designed.

Thank you. And could you say something about the lead tax order

I can start to reiterate, and I know that as Annette highlighted out, I mean, we are working very much on the lead times. It has been the development as in the past. I mean, we had gone from three to six months to nine up to 12 months. And on the larger projects, I mean, the ones that I talked about last quarter in data centers, I mean, there it is a delivery over five quarters. But I just want to highlight that specific project, because that is a very large project. That is not one installment. That is several system sales representing more than 300 systems that is being sold on a rolling basis. And we are getting paid on a rolling basis. And I think this is something that we need to reiterate. It is not always installment projects. It is also larger orders as such. But I'm very pleased when it comes to how I look upon our quality focus in try to shortening up our lead times, etc. But customers are still having no problems in being granted one year lead time. So happy to see the reaction.

And then if you look from Futex side, obviously they don't have those long lead times. They have much shorter normally, but again, they have been stretched a bit given the situation we're in. But that's very much the same situation as we saw last quarter also.

Okay, thank you. And then the pricing of these orders, I mean, you have talked about this throughout the call, but are you able to sort of, should we expect you to come back to the EBITDA margin of 14% in the backlog you have, or is it still unclear how costs will develop and affect the final margin.

Mats, I look upon it like this. I'm very comfortable that we will reach our mid-term targets. Yes, we have had a couple of issues, especially in air tech and this quarter in data centers, driven both when it comes to the mix, some operational challenges and the lead times. When we are working ourselves through the lead times and we are getting more and more new orders that has been taking on a never seen price level, I mean, automatically that will drive our EBITDA upwards. But we never do call it forecast when or how, but I can say that I'm comfortable that we step by step will move in the right direction.

Great. And then, well, there was a question earlier about capacity, and I guess you have a large backlog now. Is it sort of a constraint to take on new orders? Is capacity sort of limiting the opportunities there?

What I've seen that is something that I'm pleased with, I mean, I talk about operational challenges and to give you a little bit of flavor on that then, I mean, we didn't have a year ago a good enough sales and operation planning in that facility. We didn't have a good enough management when it comes to production. All that has been changed. So we are generating step by step a very much more balanced setup We are doing the investments as an example then in Virginia for data center, where we ramp up the capacity with 50% from what we had, and we can ramp it up even more by adding shifts, et cetera, et cetera. The same when it comes to our check new built, that is also something that is building up capacity. And beside that then, I just give you this as a flavor. In our rotor factories, we have during the last year, or I should say the last half year, we have been able to increase the capacity with more than 30%, not by heavily new investments, just by lean work, diligent ways of working. And on top of that, we're adding more capacity. I'm comfortable that we can take the orders that we would like to take and that we have enough capacity to grow with the market and about that.

Great, sounds very sure and finally a question about sustainability and the EU taxonomy I guess. In the annual report sort of you write about it and about 30 percent of your offering is sort of eligible with the EU taxonomy. And now during this year, it's more sort of seeing how much it's aligned with the EU taxonomy. Could you say something about how much of your offering will be aligned as well?

I think it's a bit too early to talk about how much it's going to be aligned, but obviously we are working diligently to make sure that we do the proper work around it. There's a lot of activities, working through the life cycle analysis and so forth, that's being ongoing at the moment. But also if you read the report, Mats, actually when you look at what is illegible, there are certain areas where we're also investigating which we didn't include from the beginning, like data center, for instance. That's also ongoing at the moment. So when you look at the offering that we have, Mats, I mean, we're confident that we are actually quite aligned when it comes to what the EU taxonomy is doing in our core business. Our products are really sustainable. But we will come out with more information in the annual report. But work is ongoing and quite a bit of work.

And just to add on that, we have not been, I call it, aggressive when it comes to taking a look on the full sales of monitors. If I take it out of memory, it is software, it is service, and it is battery that we have taken.

And I mean, the big chunk for us to walk through the data center business, obviously, which is ongoing at the moment also. So, Mats, we are on it, definitely.

It includes also industrial.

Okay, great.

Yeah. Thank you very much.

Thank you Mats. Thank you.

Thank you. We have the next question from the line of Carl Bockwist with ABG Sandal Collier. Please go ahead.

Thank you and good morning. I apologize if I managed to ask a question that's already been answered. What do you think about the demand outlook in Airtek outside of batteries, and whether or not you've seen any change here towards the end of the quarter?

A very good question, and I don't think that specific question has been asked, so I'm happy to answer it. I mean battery, without saying. In EMEA and in North America, a solid underlying demand. I'm positive for the future. I would like to say that in Asia and China, the normal trend will most probably come. I described it earlier. It expands and then it starts to retract, etc. So I think Asia will be a little bit in that phase, but that will be overly compensated by the two other areas. And coming into the more general land, I mean, the... we see it's a little bit shadowed by the strong growth in battery but food processing we see a good underlying market it has really started to pick up when it comes to smaller segment for pharma solid not really increasing but solid moving forward When it comes to clean technologies, I think we have to look upon that from two perspectives. Extremely in a big interest when it comes to the more greener side. And then a little bit of speculation here. And more interest also due to the increased gas prices. The discussion should more power plants be up and running again. Let's see for what the future looks like. But here I can speculate and say that will drive a demand there. So in general, we have not seen any slowdown in our main markets as such during the end of the quarter. And then, of course, the underlying market in Europe, there is a question mark as such, but we don't see anything at current.

All right. And then on the business mix in data centers, based on the numbers you've provided, it seems like the margins over the past two years have been double digits at least. But with the current start of this year, when do you expect a kind of return towards the levels you've seen in the prior years?

As we said in the beginning, when we look at data center, it's a project business, so it depends on where you get the customers and how the products are flowing in. And then for this year, it has been weighed down by the component shortages and also by the work to actually make sure that we get new components coming in on top of it. But if we look at in the future, we are confident that from 2023 and beyond, it should start to be in the right direction, which is towards the mid-term target goals.

I can add on that. A gradual improvement. And to be very clear, I would be extremely disappointed on myself and our full drive towards data centers, all the investments, et cetera, if we would not reach the mid-term targets moving forward from 2023 and ongoing.

Understood. And then my final question is just on the cash flow situation and in terms of timing on how you view the backlog when you think we could see support on the cash flow from releasing receivables or inventories, for example.

I mean, as you know, we have some of the big orders coming through that's going to start to be delivered starting from end of this year. Then obviously you will see some start of outflow, but it depends a little bit on the other orders as well that are coming in. And if you look at it, we are in an up... upside upbeat cycle when it comes to our growth and that in itself will tie down on the inventory build up so it's a little bit hard to predict but if you look at for instance the dc order that will start to flow out fourth quarter this year and until basically i think first quarter 2024.

And most of our battery orders, just to give a flavor on that, when we take a larger battery order on a large battery site, they are in general cash flow neutral through the project. But then it depends where in the project they are.

And then also it depends a little bit. I mean, obviously, as we said, the inventory is building because of the growth, but there's part of it that's also been built because of the situation with moving goods around or components around the world where we have to have some bigger stocks in order to actually handle the situation from a customer perspective.

Understood. Thank you.

Okay. Thank you very much. We do not have...

Yes, ma'am, I'd like to hand it back to the speakers for any further questions from the webcast. There are no questions from the audio participants. Please take over, ma'am. Thank you.

Okay, thank you very much. So we do not have any further questions on the conference call, so I would like to pick up a few questions from the ones that have now been on the webcast. We have a few questions from Philbert Vessiers. And I will start with a question regarding air tech. And here we've had operational issues for a few quarters. And if you could elaborate on how you see this going forward for the second half of this year and 2023.

No, but it's a really good question. It is one factory in North America that in, if I oversimplify it, you can say that that factory was not well balanced. It was not well balanced from workforce. It was not well balanced from the flow of materials, etc. So we have moved in since roughly half a year, new management, setting up new flow systems, etc. And step by step, I see strong, strong improvements. We're also working ourselves through the backlog in a good way, without doing specific predictions, but I think a quarter more, but with improvements, and then we will start to be out of that challenge.

Thank you. And the second quote we ask is regarding data center. If we are, and it's a two question related to that. And one is if we're taking market share in the market. And also if you could comment on the first five months or half year with the Edpac.

I can start, and then, Annette, you are as involved in EdPAC as myself. First of all, I have to say, if I start with data center, then, we have a very good team. And by complementing it with commercial knowledge by Stefan, jointly with domain knowledge in the management team of data center since the past, I think we are really creating a winning team moving forward. So that is the first statement. And when it comes to then In North America, I see that... Could you repeat the question? Because it's twofold.

If you're a winning market share?

And the simple answer is yes. Especially with our new developed products. I mean, whatever we take when it comes to Cycool, that is market share. We have not been in that market. I see a lot of very, very eager customers lining up then and coming back to... We never predict about future... future projects, but I see a lot of hungry customers eager to see what they can do with that type of product. So the simple answer is yes to North America. And coming back then to Edpack, It has progressed well. It is, as I think we were very clear, it is at the profitability level that is below what we expect to have, I mean, already when we bought it, and we are intending to move that up by step by step to reach the targets that were set for data centers that is in line with our midterm financial targets. But Anette, I mean, we have been there, both of us, and any comments on NPAC?

I think that the acquisition has gone very smooth, and it has been a joy to work with our new co-workers. We are now part of the Mantis team. The reason why we bought it, part of it is also, after having stepped out of Europe, coming back to Europe, but also actually making sure that we move in the products that we have had in the pipeline. And also, as Claes was talking about, the new products that are really built in the future. So there is a transformation to be made at S-PAC, but so far it's working out quite well.

Thank you very much. And the last question is related to food tech. And if we look at the market development and the market outlook and also the performance of food tech, would you consider any structural changes or selling part of food tech? Yeah, that is the question.

We have no intent to sell off anything within Foodtech. We are very comfortable with the progression that is taking place. It's predominantly a market situation that we have to work ourselves out when it comes to equipment. What I'm really pleased with, I mean, and what we have invested quite a lot in and will continue to invest, that is the digital side of it, the digital side, where we see good tractions from on the software side, a keen interest. And you remember the large order a couple of quarters ago and smaller, similar type of orders are dropping in over time. But please, Annette.

Yeah, and also if you look at the Americas, also outside of the digital, it's going very well also. But again, we need to remember that transformation and that journey started last year. And I think we're both very positive to see that the digital is moving, which was the way we expected it to do also. And hence also why we are making some smaller investments in these type of niche activities that can make us run even faster. But it's a transformation. And then at the end of the day, when you look at it from a market perspective, I mean, obviously China is in a downturn, and that's sort of what could happen in other businesses as well. That is what you have to work with, the cyclicality.

Thank you very much.

Thank you.

On that note, I would like to thank everyone who was on the webcast and who listened in to the conference call today and welcome you back to the next investor seminar that we will have in September related to service and also to the third quarter results in October, of course. So thank you very much. Thank you, Claes and Annette. Thank you. Have a nice day.