From Annual Report 2009:
Focusing on profitability in a challenging market
We are global leaders in energy-efficient air treatment and damage restoration. Our products and services are well positioned related to the long-term trends in the market. During the past year, Munters – like many other companies – consolidated and focused on profitability and cash flow. The continuing programs to adjust the organization and processes are creating new conditions for profitable growth in the longer term.
The deep recession in the global economy dominated the entire year. In some of Munters’ business segments, the downturn continued into early 2010, while other segments are showing signs of stabilization and higher order intake. Market trends further ahead remain difficult to assess.
We decided early to take forceful measures to strengthen cash flow and profitability. Restructuring actions were taken in both the first and second quarter, at the same time as we increased our focus on the Group’s purchasing activities. These actions had a clear impact during the second half of the year. The trend of pressure on the margin was reversed, despite invoiced sales falling 11 percent for the full year. We also prepared additional measures for implementation whenever required; and since the market remained weak, additional adjustments were initiated in the fourth quarter. Active measures to reduce working capital were also implemented, resulting in robust cash flow in all divisions, which totaled SEK 461 M.
In tough times, one of the key leadership challenges is to promptly adjust corporate costs, while simultaneously focusing on improving the company’s long-term capacity for profitable growth.
Positive effects were noted from the restructuring programs conducted in 2008 within the framework of the second phase of the Munters Efficiency Program, MEP2. The research and development program launched in 2008 continued through 2009 despite turbulent market conditions. We allocated resources and improved procedures for the development of executive management and key personnel. We adapted the organizational structure in the divisions, improved processes and raised productivity. These initiatives will continue in 2010 and – in addition to their short-term results – we also see definite potential for favorable profitability from future growth.
Dehumidification division: Late cyclical, with a strong cash flow and favorable gross margin
In the Dehumidification product division, we are seeing an ever-increasing response to the new generation’s product lines, with their superior energy efficiency. Our application expertise makes us an attractive partner for large-scale projects involving advanced facilities in such areas as the pharmaceuticals industry, office complexes and shopping malls. Moreover, Munters’ leadership strengthened in demanding applications for moisture control – such as in the rapidly growing lithium battery industry.
The division’s market generally follows a late cyclical pattern. During 2009, order intake declined steadily, with distinct geographic differences. In the first six months, the European market came under pressure, while the downturn in the US became most distinct during the second six months. The Asian market remained relatively stable throughout the year.
Extensive cost reductions were conducted in the division’s production units during the year. Purchasing activities curtailed the cost of input goods, while the division defended its prices. The investments completed in 2008 within the framework of the MEP2 program also had the planned positive effects on profitability. Integration of the acquired company Toussaint Nyssenne was completed on schedule, laying the foundation for future growth in the commercial segment in Europe.
Our product development process is leading to improvements in product quality, performance and energyefficiency, with the parallelled continuous rationalization of production. The conditions are favorable for further strengthening our status as the market leader when the market recovers.
HumiCool division: Adaptation to the market downturn
The HumiCool product division consists of three business areas: AgHort, HVAC and Mist Elimination. The AgHort business area supplies a broad portfolio of products to the livestock breeding and plant cultivation segment. The longterm market trend is driven by population growth, industrialization of livestock breeding and plant cultivation, and more rigorous demands in terms of controlled environments to ensure quality and animal welfare. The HVAC business area mainly supplies products for temporary cooling and heating requirements, as well as components and systems for energyefficient cooling via evaporation.
For AgHort and HVAC, the financial crisis and resulting recession slowed the pace of investment among end customers, and the liquidity crisis in early 2009 resulted in highly turbulent market conditions. A number of actions were launched in these business areas to adjust operational costs to match the reduced volumes. Demand remained sluggish during the year, although first signs of a recovery were noted during the final quarter.
The Mist Elimination business area is a world leader in applications involving emissions treatment in the power industry. The core technology in this area is mist elimination and it is also used in the process industry and in large air intakes in marine applications. Munters has a strong market position, but the pace of investment has been very low over the past two years. Although the business area defended its profitability relatively well in 2009, low volumes contributed to an overall decline in earnings.
HumiCool has a solid market position in Asia, where the trend was stable despite market conditions. To meet demand in China, the division established a new production unit in Southern China at year-end.
A number of projects are in progress to streamline production and the production structure in a bid to prepare the division for future growth.
MCS division: Efficiency improvements and restructuring to enhance market position
MCS, our service division, supplies services for damage restoration and temporary humidity control. With nationwide operations in a large number of countries, the division has a competitive edge when tendering for major contracts. In the largest segment, damage restoration, the slight decline in sales was due to the non-occurrence of major weather events, in contrast to 2008 when hurricanes Ike and Gustav resulted in substantial invoicing. The segment for temporary humidity control has a large share of sales in the construction sector, an industry that suffered from an adverse trend during the year. A number of MCS units performed very well in 2009, but in individual problem markets, specific actions were taken to reverse the negative trend.
MCS’s operations were built up by a series of acquisitions over an extended period. Historically, the companies have operated locally with limited interaction. However, since 2007, a program has been in progress to capitalize on the leverage from MCS’s global market presence. Several improvement programs were implemented during the year. A coordinated, more efficient approach to organizing operations permitted the closure of 41 depots in 2009. Markets have been merged or phased out. Operations in Italy were divested. The new mobile IT system, Field.Link, has now been launched on ten markets, including five during 2009. Centralized administration and resource planning, combined with harmonized processes, permit additional rationalization, while maintaining superior customer service and availability.
The operational model that is steadily being introduced into the division does not only provide improvements in dayto- day operations but also offers the conditions for being a leading player in the long-term consolidation of the industry.
Continuing favorable development potential
As we see it, the turbulent market situation during 2009 primarily entailed a general decline in volume. We have only seen individual cases of consolidation of suppliers or customers in our markets. Thus, the long-term market conditions have not changed markedly. We are, of course, monitoring developments in an effort to defend and develop our market position and we see long-term potential for organic growth and strategic acquisitions.
We have endured a year of deep recession, with profitability and healthy cash flow. A number of improvement initiatives in the company have been accelerated and employees have worked hard and determinedly during challenging times. The year ahead will include continuing improvement programs and cost restraints. Overall, the prospects for profitable growth will be very favorable when market conditions improve.
Kista, March 2010
President and CEO