U.S. markets closed

Edited Transcript of MTRS.ST earnings conference call or presentation 23-Apr-20 7:00am GMT

Q1 2020 Munters Group AB Earnings Call

Jun 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Munters Group AB earnings conference call or presentation Thursday, April 23, 2020 at 7:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Annette Kumlien

Munters Group AB (publ) - Group VP & CFO

* Klas Forsström

Munters Group AB (publ) - President & CEO

================================================================================

Conference Call Participants

================================================================================

* Anders Roslund

Pareto Securities, Research Division - Analyst

* Carl Ragnerstam

Nordea Markets, Research Division - Analyst

* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

* William Turner

Goldman Sachs Group Inc., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Munters Q1 report. (Operator Instructions) Today, I'm pleased to present CEO, Klas Forsström; CFO, Annette Kumlien. Please begin the meeting.

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [2]

--------------------------------------------------------------------------------

Good morning, and welcome, everyone, to this quarter 1 report. And as already stated, you are listening to me, Klas; and our CFO, Annette. And at the end of the call, you will also -- we will also open up for questions.

And before I start with the formal report, let me just give a few words in general about the last quarter. I am very pleased with the dedicated work done by our employees where we have focused on safety first for us, our partners and customers as well as supporting system critical industries such as food production and food processing, pharma industry as well as communication industry for them to operate. It is also, I see, very encouraging that our strong efforts with maintaining our supply chain, customer focus and deliveries without larger and major disturbances in these challenging times have generated success. So I think this really shows the strong spirit of Munters and our people.

And with that, over to next slide and the highlights -- the agenda and the highlights later on. So the agenda will be: highlights for the quarter that has started, it will be me going through that; and then quarter 1 results presented by Annette more in depth; myself coming back to strategy and sustainability reporting and our strategy moving forward and then myself summing up and open up for questions. So with that, then moving over to the next slide as well.

And the highlights for the quarter. And the impact -- Munters was impacted by the COVID-19 outbreak. With that said, order intake and net sales had the impact, but all our production units, except 2 minor ones, operated without any major disturbances during the quarter. We saw a robust demand in January and February, except in China when it comes to February. In March, it was negatively impacted by the outbreak in Europe and Americas, where we saw a recovering demand coming up in China, mainly driven by FoodTech. And as I said earlier, very pleasing that other industries have been regarded as system critical in most markets.

We have a continuous focus on improvements. The order intake, all in all, declined with 8%, with a still healthy order backlog. Net sales declined with 7% organically, and we saw a slightly increased EBITDA margin mainly due to our continued streamlining of indirect costs and mitigations of the COVID-19 effect. Our clear focus now and moving forward is on cash and continuous improvements in the operation.

I'm also very pleased that we are setting up and continuing to setting up a winning team, here represented by Pia Brantgärde Linder, who has been appointed President of FoodTech. Pia is joining in later in mid-August and will bring with her a strong and very well appreciated leadership style. With that, changing over to next slide.

As I said, demand was impacted by COVID-19. With that, we see still both long- and short-term activities in the market and in the end user segment. And moving over to the different regions: in Americas, we saw an increase compared to last year; EMEA, decrease; and in APAC, a slight decrease, as commented earlier. And drilling in a little bit deeper then. In AirTech, we saw a strong development in the subsegment supermarkets, commercials in the U.S. We also saw a strong development of components sales to OEMs and services for AirTech in the U.S. FoodTech had a good development in Americas, primarily driven by good development in Mexico and for software solutions in the U.S. market.

EMEA. At present, AirTech weak development in primarily the Industrial segments. Service in AirTech had weak development, very much a consequence of the COVID and closing down on key and larger markets. FoodTech had a weak development, driven by a decline in Scandinavia and Italy. And here, we can also talk about the COVID impact.

And at the end, then AirTech -- at the end, Asia. AirTech had a weak development in Industrial segments. FoodTech had strong development and a rebound to some extent in the Swine segment, but also good progress in Layer and Broiler segments.

Then moving over to next slide. And customer first and supplying and supporting growing segments. Here, we have an example of a data center order taken in quarter 1. It is we're a Digital Crossroad data center in U.S. It is a so-called colocation site, which is that segment continuing to grow. Our solution, very pleasing, deliver energy efficiency and is using water from the Lake Michigan. And here, I can say, I'm very pleased with the continued progression of data center in North America. If you talk about stability, continuous improvement, focus on the right customers, moving into growth in innovation. It was a good decision to maintain that and continue to improve data center Americas.

And with that then, customer first and a little bit outlook in the market, I hand over to you, Annette, to dig into the details.

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [3]

--------------------------------------------------------------------------------

Thank you very much. If we turn to Page 7, if we look at our performance this quarter compared to last quarter last year and also the mid-term target, yes, we have been impacted by COVID-19, and the net sales is down 7% this quarter, mainly due to the Industrial segment within AirTech. If we look at the EBITDA margin, we were at 8.3% compared to last year's 8.1%. And this is a consequence of the continued work with driving costs down and optimization, also the COVID-19 activities that we have been working on. That being said, when you normally look at Munters' performance during the year, the Q1 is normally a bit slower and a little bit lower and then it starts to increase quarter-by-quarter. Hence why when you look at comparison to the midterm target, Q1 is usually a bit lower than that.

When it comes to leverage, we have been able to drive down leverage quite a bit compared to Q1 last year, coming down from 4.3x to 3.1x. And this is really the ability to turn profit into cash and also making sure that the capital situation is being driven in a good way. The work is continuing with that. That being said though when we compare to December 2019, we have a slight increase, but that increase is mainly due to the FX impact with the U.S. dollar impact in the debt package that we have.

If we turn to the next page, at the end of the day, yes, demand has been impacted by COVID-19, and we have an order intake, which is about 8% lower than last year, mainly driven again by the Industrial segment.

If we look at AirTech, it's about 11% lower. And generally, you see most of the geography has been down. If you look at FoodTech, there has been good development, particularly in Americas, but also in China that picks up after the COVID-19 situation.

Net sales down 7%, again, mainly driven by AirTech's Industrial segment. Lower sales in geographies within AirTech. And when it comes to FoodTech, again, APAC weak, obviously, because coming out of COVID-19 takes a bit of time from a net sales perspective. U.S. is weaker in all segments within FoodTech, whereas Europe is flat. If we look at services in total during Q1, it was about 15% of net sales.

If we turn to next page and look into AirTech, yes, we have a weak demand in the Industrial segment, which basically impacted AirTech coming down to negative development of order intake by 11%. On the other hand, when you look at it, U.S. has strong development when it comes to the commercial segment, services and also sales of components to OEM, which has shown good progress. If you look at data centers in the U.S., it declined a bit and also Mist Elimination.

Net sales were down 7% for AirTech. Again, Industrial segment is driving this. Whereas if you look at net sales commercial segment in the U.S., it's performing very well. If -- and when you look at data centers, very good development during Q1, whereas Mist Elimination has declined, basically in the Marine segment and also the Power segment in India has been a bit weaker.

If we turn to the next page, FoodTech. FoodTech has had good demand in spite of the COVID-19 outbreak, and China has picked up quite nicely in March. Basically, we had a flat order intake, where we had strong development in the Americas, from the Mexico and also from the software solutions in the U.S., whereas Asia has been growing, particularly when it comes to China, where we have seen some nice developments in swine, particularly picking up after the African swine fever that impacted us heavily since the end of 2018. We also have strong growth in the Layer and the Boiler segment. EMEA, we have seen a bit softer demand.

Net sales, down 7%. All regions down except for EMEA, where the development was flat. Again, APAC had a weaker development due to the COVID-19 outbreak in China, which mainly hit China in February. And Americas, again, experienced weaker net sales in all segments. And there, we have seen the overcapacity in the swine segment, which has not been working us for the past year or so.

When it comes to our EBITDA, if we turn that into next page, we had a slight improvement in EBITDA, and this is the continued work from last year when we resized the organization plus also that we have been working on litigation activities when it comes to the COVID-19 outbreak. And when you look at AirTech, slight weaker margin, basically because a lower gross margin where we had negative product mix, which partly was offset by lower indirect costs. FoodTech, on the other hand, seen a slight improvement. So we're up to 11.8%, basically driven by a slight improvement in the gross margin and also lower indirect costs.

Shifting over to the next page, when we look at cash flow and how that has been going. We can see when we look at the cash conversion, which is basically in the adjusted EBITDA above the cash flow from operations that we have increased the level from a sort of like 35% during end of last year to a level of around 55% during the last month -- this month in the Q1 situation. And again, when it looks like -- when we're looking at cash flow from operating activities, they have been slightly impacted by inventory buildup under the COVID-19 outbreak in order for us to make sure that we handle our outsourcing flow correctly. And when we look at the net cash flow from the period, yes, we have an impact basically but also FX impact in the U.S. dollar.

If we turn to the next page, as again said, the work that we have been doing in turning the property into cash and also making sure that we work with the working capital has made us come down to a level around 3. The increase during the last quarter, again, was related to the -- basically to the U.S. dollar impact. When it comes to our available cash, we remain strong at the SEK 1.7 billion cash of the company.

Over to you, Klas, to talk about strategy.

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [4]

--------------------------------------------------------------------------------

Thank you, Annette, and flipping over to strategy and sustainability reporting and changing slide immediately then. Implementation of a refined strategic direction. In today's situation, it's all about acting in today's market, at the same time driving improvements for the future. And Munters is very well positioned in a long-term growing market driven by climate change, energy efficiency and digitalization. And as said earlier and proven during this period, we support and act in industries with system critical functions and/or indices with solid growth drivers behind that. So despite the great attention on managing the current situation, we are also moving forward with respect to cash. And here, we will put even larger attention on how to align future product assortment and pruning out products that we don't need and optimizing our manufacturing footprint. So it's all about acting today and setting us up for the future.

And moving into that then for customer success in a healthier climate, that's the purpose for us. And it all starts with innovation. It is focusing on the future, on the right products for the future, driving them through modernization, be able to use bits and pieces and puzzle them together, not just inventing a larger assortment. It is about replacing 2 products with 1 new, driving energy savings and supporting growth trends. But it's also about markets. It is to act in the right areas. It could be geographies, segments or it could be subsegments as well. But even more, it is about being customer-centric. And here, I think we really show that, that is at our heart in current environment. It is to work with them in the right way. It is about driving service. It is about value selling. It is about getting their attention for what will make customers more successful into the future. But even more so, it is about excellence in everything we do. It is the everyday improvement in every part of our organization. It is also about sometimes to reduce, on and off to stop or exit. That is very much the mantra. And when you can turn this into spin with innovation, markets and customers supported with excellence in everything we do. In the core then, it is about our people. It is about setting leadership. It is about creating business understanding in the right type of organization with a mandate very, very close to where the business decisions needs to be taken.

It is about the culture and people development. And all this, then, we will continue to drive even during this business environment. A few examples. The launch of a new controller in FoodTech. I think this is something that's proven what I talked about earlier. I see it as the best of 2 worlds. A better and a more user-friendly product that is at the same time reducing the assortment. This product replaces several subproducts from the past. It has started to sell well, and it has been well received with positive feedback. One example of innovation and digitalization.

And if we move over to next slide then, it is about customers and markets. We have accelerated our remote assistance to Merged Reality in order for our service personnel to be able to serve customers either at premise, supported with experts sitting in offices all around the globe or even so moving forward be able to support customers with us -- without us being there in the premises. Also here the best of 2 worlds, driving efficiency and customer support at the same time.

Two more examples. And one is our continuous increase on sustainability. It is for our customers. It is for us. It is actually for the coming generations. And our sustainability framework is divided into 3 parts: resource efficiency, responsible business practice and people & society. And some examples on the KPIs that we have. Green electricity moving from 31% of total consumption to 40% last year. Safety first, total recordable incident rate, moving from 3.4 to 2.7. And then diversity and inclusion, the proportion of female leaders, moving from 20% up to 25%. And here, this is just the beginning of our journey. We have started to build up even more ambitious goals to set at the end then moving forward.

So what we talked, successful improvements in our operation. I think this is a good example to show what we're driving right now. This is from Monterrey in Mexico that mainly produces evaporative cooling pads. In the past, it's struggled very much with both deliveries and quality. What is fascinating to see here, and I think that's the tone for us moving forward that is it includes leadership changes, teamwork, a constant focus on Lean resulting in stability and efficiency, both the higher output and improved quality and lower energy consumption, a good examples on the path that we have put ahead.

So with that then, let me shortly summarize and open up for Q&As. We -- on the market moving ahead, we see a continued challenging business environment in the coming quarters. At this time, it is difficult to see the visibility of the factory output and it's limited. With that said, we have a healthy order backlog but of course, it's depending on the length and the severity of the outbreak that is currently ongoing. And it could be, as earlier stated, risk for increased project delays. At the same time, we are well positioned in the long-term growing market and our strategic journey continues. And I see clear evidence that the strategy is also delivering in time of crisis because it's the same triggers that we need to work with.

So with that, moving over to Q&As and open up for you on the other side. So have we received any questions?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Unidentified Company Representative, [1]

--------------------------------------------------------------------------------

We have one question from the web from Max Fryden and he is asking, could you please remind us what your bank covenants are and also the maturity on your bank loan? So I think that's the question to you, Annette.

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [2]

--------------------------------------------------------------------------------

The maturity of the bank loans are May 2022. And when it comes to covenants, as we have listed in the prospectus from 2017, we're talking about a leverage covenant of 4.5x, but it's a calculation made on a certain adjustment.

--------------------------------------------------------------------------------

Unidentified Company Representative, [3]

--------------------------------------------------------------------------------

Thank you. I think we can open up for questions on the conference call.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Carl Ragnerstam from Nordea.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [5]

--------------------------------------------------------------------------------

It's Carl Ragnerstam from Nordea. First of all, margins are seemingly holding up fairly well in Q1. Could you please give some flavor on what measures you have implemented in Q1, but also maybe if you can share some light on April as well? And have you, in your numbers in Q1, seen any positive impact from the government support program?

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [6]

--------------------------------------------------------------------------------

I would say that in general, when you look at the mitigations in activities we have taken, first of all, we are continuing with the long-term work to drive margins up. So it's a continuous from last year's program. But then obviously, also, we're doing a lot of things that most companies are doing looking into, can we push out costs? Can we push out new hires? How do we work with our shipments? How do we work with our material costs? So there's a lot of those things that we are looking into. But it's not only -- we're not only working on, let say, mitigation of cost activities, we're also looking into activities from a top line perspective, what type of opportunities does arise in the market that we actually could case from.

When it comes to forward-looking, as you know, we are not giving any outlooks for the year, and particularly not in situation like this because, as everybody understands, COVID-19 could take off in any turn, which is very hard to predict. But again, I mean, if we look at it, we have been hit now in the first quarter, but as you can see, we -- not to a major extent. And most likely, also, as everybody knows, as COVID-19 is traveling around the globe, moving from China into Europe and into U.S., then Q2 will be a higher hit than what we have seen probably during Q1.

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [7]

--------------------------------------------------------------------------------

And the only additional comment there that is the last week in March, we could see a weaker development in Europe and Americas, but also a stronger development in China.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [8]

--------------------------------------------------------------------------------

Okay. Perfect.

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [9]

--------------------------------------------------------------------------------

Yes. Sorry, and there was another question also on the governmental subsidies. One can say like this, we -- as you heard, we have had all of our factories basically open, it's 2 minor ones which have been subject to closure and/or partial closure. So for us, it has not been about looking into furloughs during this period of time as the factories are open.

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [10]

--------------------------------------------------------------------------------

But if necessary, I mean, preparations are made for that depending on deceleration in each and every market.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Okay. Perfect. And secondly, I mean looking at your order book or order intake, it looks quite decent for Q1 given the turmoil. And could you perhaps give any comments on the order intake development during April, which is probably more relevant?

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [12]

--------------------------------------------------------------------------------

No. As you know, and I think in particular in a situation like this then, I mean, we don't give any outlooks. What we can see, I mean, comparing quarter-to-quarter, I mean, then you can see that we have increased the backlog in a good manner. With that said, I mean, some of the increases also then related to subscriptions on implemented software as a service. So that will pin out over a longer period. But all in all, I am -- we are very pleased with a healthy order backlog.

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [13]

--------------------------------------------------------------------------------

I mean, we see also some -- we can also see and have been faced with kind of like some of orders being pushed out and so forth. And that's why the question is about what we believe in Q2 and going forward, it's impossible to answer actually. But we are working on making sure that we drive this and steer this during this outbreak as good as possible.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [14]

--------------------------------------------------------------------------------

Okay. Perfect. And the final one for me. I mean, as you mentioned, the leverage came up to 3.1x EBITDA. Could you perhaps shed some light on what cash-generative measures you are implementing in order to secure a healthy balance sheet throughout, yes, the market uncertainties?

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [15]

--------------------------------------------------------------------------------

Again, I mean, first of all, it's making sure then that we drive our margins, so we turn actually our business into profit. And this has been ongoing for quite some -- I mean, since last year. And also since last year and which you saw also the drive we did is really to look into not -- making sure that we don't stick our cash into working capital. So I mean, obviously, we're keeping a close eye on our customers. We're keeping a close eye on our sales to order processes to make sure that we don't put too much into the inventory and streamline everything to make sure that we turn it into a cash situation. That being said, obviously, it's very important in this type of situation to understand that when it comes to logistics and shipping products between the different geographical areas, that is to then very carefully and we need to make sure that we don't fly up from behind, which means that during this period of time, we're also making sure that all our critical components are being safeguarded and that to a certain extent could increase inventory. But again, it's basic working capital management that we're talking about and operational excellence to make sure that we drive to profit.

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [16]

--------------------------------------------------------------------------------

And beside that, it is -- the normal routine in the downturn, i.e., is travel at current. I mean, we don't even have to pull the trigger on travel because we cannot travel. It is exhibitions. It's spending. It is consultants. And then, of course, I mean, always keep an eye on what businesses to invest and what is just good to have. So the normal and healthy industrial cash routine, so to speak.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [17]

--------------------------------------------------------------------------------

Okay. Perfect. And the final very quick one for me. Could you comment on the service development during Q1, if you could get the number on that?

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [18]

--------------------------------------------------------------------------------

As I think you've heard me state several times, I mean, service is one of our main focus areas moving forward and a strong service-driven industrial company should have a service level that is above a 30% level. At current, we are around 15% that I would like to say is a flat development compared to the past quarters. Service was down due to COVID-19 in Europe, and it was the same or slightly increasing in Americas.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from the line of Kenneth Toll from Carnegie.

--------------------------------------------------------------------------------

Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [20]

--------------------------------------------------------------------------------

Yes. So I just -- I'm still curious about April and what you're seeing now and I hear that you are not willing to comment. But have you seen any dramatic changes like complete closedown of business in -- when the U.S. introduced their lockdown measures or -- yes, so the U.S. is an important market for you, yes, or is it running slowly?

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [21]

--------------------------------------------------------------------------------

Kenneth, you have to bear with us here and then here I'm persistent, it's not the only one -- 15 months that I've always been like this. And I mean, we don't give outlooks. But with that said, then coming back to the last quarter, that could serve as perhaps for you as an indication then. We saw a drop in Europe and in Americas the last few weeks in March. And we saw a return in China, especially when it comes to FoodTech. That was, to some extent, predicted, but I have to say it also surprised us positively that it was such a strong one in China. With that said, we're able to keep all our operations, all our factories up and running. And I can tell you, we would not have them up and running if we didn't see that we could fill them up with plenty of orders. But all this, of course, is coming back to the first quarter, but that's to give you an indication.

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [22]

--------------------------------------------------------------------------------

Then Kenneth also, I would say, when it comes to these lockdown measures, one should remember that we are in a lot of those business streams which are considered as critical to society. I mean we also hold agricultural segment with FoodTech, obviously, where there's food -- we have food processing in AirTech. We have defense in AirTech. We have pharma and so forth. So that's also why even when -- I mean, in the U.S., when each of the states took their measures, we were actually allowed to keep open. And as we said, it's really only India, which we actually had to close down because that was a complete lockdown with no exception.

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [23]

--------------------------------------------------------------------------------

And then -- sorry, Kenneth, just add to that. As we said, I mean, we are not giving any outlooks for the quarter and we anticipate that the business environment will continue to be tough, if not tougher moving into this quarter.

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [24]

--------------------------------------------------------------------------------

And then also, that being said, when you look at them, as I said earlier, logistics and transporting goods in this type of situation where you maybe have the containerships on the wrong side of the globe, and they might be also in quarantine because of trying to avoid COVID-19, that also slows down a bit. So that's why it's important to keep our eyes on the board, absolutely.

--------------------------------------------------------------------------------

Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [25]

--------------------------------------------------------------------------------

Yes. Also, when -- you seem more relaxed about the situation than I have feared, so to speak. How do you balance -- I mean, you talk a lot about strategic initiatives and so on, but you feel that you still have sort of management capacity to also drive strategic agendas like product assortment and such things. And it's not 100% focused on mitigating the coronavirus effects on demand and health and so on?

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [26]

--------------------------------------------------------------------------------

A short comment on that. I think all industries and no exception with us, when the corona started to hit and we started to implement actions already beginning of February, starting in China then. And I think due to that strong actions, safety first, good measurements and communication also with the governments and regulatory as we were able to maintain operations then. Of course, I mean, a lot of our focus has been on COVID-19 during the quarter and especially in the beginning. And I can tell you, even if you may feel that I'm looking relaxed, I am as unrelaxed as we should be. But I've learned over the years that if you -- if I send stress out in the organization, people will not be able to focus on what we should focus on. I'm very, very confident that our business leaders and our strong committed people can both work with the current mitigations, and I should not go away from -- we are taking a lot of mitigation activities. But it's a fascinating thing, and I think this is the key here. To drive cash, you need to work through your inventory. To drive future success, you need to drive your product assortment that affects inventories. So a lot of the things that are in line with our strategy, it also delivers that needs to happen now. And some of them we have accelerated and some of them we have put a little bit of break on.

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [27]

--------------------------------------------------------------------------------

So I mean, in summary, it's not contradictory short-term activities with long-term activities because you still have to have a certain models of run when you drive a business. And at the end of the day, the growth in profit is cash. So that's why we're relaxed, but it's about being focused and being able to drive these 2 parameters at the same time. And then, as we said, the work that we did last year when we started to turn the situation around, helps us now when the COVID-19 situation comes in. So we had some wind in the back, particularly when you look at leverage situation, which we took down quite a bit because of looking at margins and because of looking at the working capital, so we can continue on that.

--------------------------------------------------------------------------------

Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [28]

--------------------------------------------------------------------------------

Excellent. And also, I had one more. Yes. In the last conference call, after the Q4 report, I think you mentioned that you were targeting a product assortment that could be up to 30%, maybe 40% lower and you talked about this now as well that you can sort of come up with launch 1 new product that could replace 2 older products and so on. So when do you think -- how far are you in this process? When do you think we can start to see benefits in terms of costs and so on?

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [29]

--------------------------------------------------------------------------------

I -- we are still very much committed to that. And when I talked about the 30% to 40% lower product assortment, there's stock standard assortment. I talked about that from a midterm perspective, i.e. during the -- at that time coming 2 to 3 years. I'm very pleased to see the development taking place initially in FoodTech. That they have already started to act, started to deliver towards those targets. And then with that time perspective, I would be disappointed if that would not be delivered during that time perspective. And as you know, Peter Gisel-Ekdahl that did a lot of good work in FoodTech. He's also the Chief implementing now in AirTech, and I expect that to start to move as well. But as always, when it comes to change, first, you need to commit, and then you need to put all plans in place, and then you can start to deliver. In FoodTech, delivery is on its way. And AirTech delivery will start to come. But I'm confident that we will reach those targets over the coming years.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

The next question comes from the line of William Turner from Goldman Sachs.

--------------------------------------------------------------------------------

William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

Just going back to some comments that you made on your services business. Can you give a better or a greater breakdown on what your services entails? So what is the split of spares and parts? And what proportion of it is actually start -- go into the facilities of your customers and provide labels to them? And then are you experiencing some difficulties with the latter?

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [32]

--------------------------------------------------------------------------------

Let me start to lay that more generically, and then we need to come back to the details and split it up in a good way, but that is something that we are constantly working on when it comes to, I mean, be more transparent in those parts. But I mean, services, if I generalize it, you can say services is the person-to-person type of services. That is the base of our service. Then spare parts connected to that either spare parts that have been implemented in a service contract in the beginning of the business when you do the OEM installment. Our focus here is always have such programs being put in place when do the original equipment. That has not been that in the past.

Secondly then, on the same when it comes to upgrades of the installments, we are revisiting our step-by-step the individual installments of us, but also reaching out towards converting competitive business. With that said, I mean, that is the face-to-face service connected to the spare parts. The other part of service, primarily driven in FoodTech, is software as a service. Here, we talk about, I mean, a few -- a very few percentage at current of the total sales, but it's a recurring revenue that is coming on and we are step-by-step signing smaller contracts that will prove our way forward and then hopefully -- and I'm confident that, hopefully, will turn into reality. In the coming years, it will be larger projects when it comes to software as a service in FoodTech. So as you can hear, I have to be fairly generic at current. But all in all, it represents some 15% of where we are, and we are doing day-to-day improvements. But we will come back on that incoming calls and a more granular description.

--------------------------------------------------------------------------------

William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [33]

--------------------------------------------------------------------------------

Okay. Good. And on -- your comment on -- you expect there could be some order deferrals. Obviously, you have some markets, which shouldn't be too affected by the breakdown, like some of the food markets you're exposed to. Is there any particular end market where you see there could be potential of the order deferrals? Or was that just a kind of generic comment towards 2 regions, Europe and Americas?

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [34]

--------------------------------------------------------------------------------

I think you should look upon this as a general comment. And the reason why we look upon this, let's say, it could be already implemented or close to the 1 project that due to, I mean, lockdown in a certain market. It may be a little bit of delay in installation, et cetera, et cetera. So it's not a specific particular segment that worries us. It's more the general, call it, development on governmental issues and how to be able to move in both as an individual, but also when it comes to freight around the globe. So call it more a supply/individual type of interactions, but no specific areas. And as you rightly stated, we are supporting system critical industries that I know that they need to have them up and running.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

We have a question from the line of Anders Roslund from Pareto Securities.

--------------------------------------------------------------------------------

Anders Roslund, Pareto Securities, Research Division - Analyst [36]

--------------------------------------------------------------------------------

I have a question regarding short-term but also medium-term demand for certain sectors like data centers, lithium batteries and also food. How do you see the sort of -- could you expect those sectors to perform better than other sectors, for example, the commercial or industrial? Do you have any opinion about the differences in demand, both short-term and medium-term for those sectors I mentioned?

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [37]

--------------------------------------------------------------------------------

Anders, coming back to this, I mean, this is a delicate question. I mean, what is a long-term, medium-term outlook and what is then a sort of a forecast for the coming quarters. And we are not doing that, as you know. But if I take a few of those, when I talk about medium term, we see and we are very confident that lithium batteries and the electrification of automotive industries, just to give 1 example, is a good, healthy growth area. And we are confident, thanks to our good relations and our already installed base, especially in Asia, but moving into Europe and then also North America that we can generate good growth, medium, long term there. Then when it comes to food, when it comes to pharma, when it comes to those areas, I mean, I think you in your models may know it as good as us. I mean, those are industries that I think will be, to some extent, positively affected by the current situation. But we will take every opportunity to strike and make deals where possible. But those 2 industries are also medium to long-term growth generating.

And then finally, then when it comes to data centers, as you know, we took a deliberate and active decision to exit Europe and very good decision. We also took a deliberate decision to stay in North America and from the strong days that they have start to then improve it and gradually grow it. And what we see, it is peeling out to exactly what we projected. We see a healthy development in that sector. And I foresee that to continue for many years to come.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

And as there appears to be no further questions, I'll return the conference to speakers.

--------------------------------------------------------------------------------

Klas Forsström, Munters Group AB (publ) - President & CEO [39]

--------------------------------------------------------------------------------

Good. Then I would like to send out a thank you and don't hesitate to reach out to us for any more detailed questions one-to-ones later on then. And thank you very much and look forward to talk and see you, hopefully, face-to-face then in the coming quarters. But at current, I think we all need to do our very best to mitigate all the necessary actions related to COVID-19. So thank you very much.

--------------------------------------------------------------------------------

Annette Kumlien, Munters Group AB (publ) - Group VP & CFO [40]

--------------------------------------------------------------------------------

And stay healthy.