Although the coming period is characterized by considerable uncertainty, I am convinced that the organization will emerge strengthened  from the prevailing recession. From this perspective, I view Munters’ future with optimism 
                                                                                              - Lars Engström, CEO

Positive effects from strategic initiatives when markets recover
Munters’ development during 2008 was characterized by a relatively strong first half of the year, which was followed by a significantly tougher business climate as a result of the general economic recession and the current financial crisis. The MEP2 action program to increase efficiency in all divisions had already been announced at the beginning of the year. During the second half of the year, we took additional actions to adapt the organization to the prevailing market conditions.

Our three divisions were affected to varying degrees by the recession and difficulties within several customer segments in obtaining financing. Historically, Munters’ business has not been strongly linked to general economic cycles. However, the financial crisis has resulted in several businesses that are not normally sensitive to economic cycles experiencing weaker sales due to difficulties among customers in obtaining financing. The products that we sell through distributors were particularly affected by cautiousness on the part of distributors in investing in inventories.  

Development in the divisions

The Dehumidification division experienced stable growth during the preceding year and only noted some weakening in the European market for industrial systems toward the end of the year. In the US, sales in the Commercial segment developed very favorably as a result of the new, more energy-efficient products deriving from the 2007 acquisition of Des Champs Technologies. Within the Industrial segment, demand was favorable during most of the year, with strong sales to the two most important customer groups, the pharmaceuticals and the food industries. A contract was signed during the year with a large, global pharmaceutical company, which gave us the assignment to review all installations of dehumidification systems in the company’s global production structure and to upgrade them with the latest technology to save energy.

The HumiCool division was most severely affected by the business climate. The largest business area, AgHort, which sells climate systems to breeding houses and greenhouses, experienced an unexpectedly sharp decline during the fourth quarter as a result of insufficient financing options among end-customers. Also within HVAC, where a large proportion of sales comprise mobile heaters, the decline as a result of the financial crisis was substantial. Demand from many small customers collapsed, and distributors became very cautious in inventory management. Not least within mist elimination, order bookings from coal-fired power plants were weak throughout the year. In the important US market, this was primarily a result of opportunities for trading in sulfur emission rights across state lines being eliminated. The investment calculations for coal-fired power plants wanting to invest in better cleaning technology were thus weakened.

MCS, our service division, experienced favorable growth during the year. Assignments related to the hurricanes Ike and Gustav contributed to a strong year for the division in the US. The trend for insurance companies to sign more framework agreements with the major restoration companies continued. This has proven very favorable for MCS, and the division won several new contracts during the year. In addition to investments linked to the MEP2 efficiency program, MCS incurred substantial non-recurring costs related to structural changes. These costs included preparations for phasing out certain operations.

MEP2 strengthens our efficiency and profitability
At the beginning of 2008, an efficiency improvement program designated MEP2 was launched. The program was intended to increase the efficiency of the production structure in our manufacturing divisions through more rational production. Part of the program consisted of transferring a larger share of refinement processes to low-cost countries. During the year, HumiCool transferred production of smaller mobile heaters from Italy to China and corrugation machines from Sweden to Mexico. The substantial volume decline within HumiCool resulted in the division reducing personnel by slightly more than 220 persons during the last three quarters of the year. This corresponded to about 19 percent of the total number of employees in the division. Within MCS, there was a strong focus on the launch of our mobile IT system Field.Link in our five most important markets. Field.Link demonstrated its improvement potential in the UK and is now being rolled out globally. This will result in a significant improvement in field work, while allowing administration to be centralized, thus increasing quality and lowering costs. This prepares MCS to increase return on capital employed through increased efficiency, a more favorable cost structure and more efficient processes for handling accounts receivable. The system also allows work to be documented in a better manner while making relevant information more accessible for the insurance companies. Considerable work was also devoted to processes for handling accounts receivable, which have been a recurrent problem for MCS is some markets. Costs associated with this work were to considerable sums. However, we have now implemented sharply improved global routines that will prevent a reoccurrence of the corresponding costs. The MEP2 program was concluded according to plan at the end of 2008.   

Munters leads development in energy-efficient air treatment
Des Champs Technologies, which was acquired in 2007, is now fully integrated in the Munters organization. We have also strengthened and enhanced our expertise in research and development. As a result of this combination, we introduced a new generation of products at the beginning of 2008 under the name DryCool. These products, which combine Des Champs’ expertise in heat-exchange technology with Munters’ expertise in energy-efficient cooling and dehumidification, significantly strengthened Munters’ position as the leading player in energyefficient air treatment. The patented DryCool products were very well received in the US market and resulted in rapid sales growth in the commercial sector, primarily to completely new customers. As the next step in our strategy, we acquired Toussaint Nyssenne in Belgium during the fourth quarter. Toussaint Nyssenne, now called Munters Belgium, will be our base for manufacturing and introducing DryCool, as well as our successful DesiCool products, in Europe.  

The prevailing market conditions mean that our divisions are continuing to adapt their respective resources to current business volumes through efficiency-enhancing measures and personnel reductions. During the first quarter, we took measures to improve the production structure, to increase administrative efficiency and to reduce costs at all levels. Furthermore, we will phase out certain operations within MCS in which our new business model will not result in the improvements required to achieve sustainable and favorable profitability. These measures include personnel reductions of about 250 persons for the Group and are estimated to cost between SEK 30 and 45 million. After full implementation, the result will be cost reductions of about SEK 75 million per year, excluding discontinued operations. Within MCS, Field.Link was launched in the first five markets during the fourth quarter of 2008. Field.Link will be introduced in an additional five markets during the current year. The system will result in more efficient operations with growing benefits as implementation continues. Work to utilize capital employed within MCS in an optimal manner will continue to receive high priority. Within the Dehumidification division, the launch of commercial products in Europe will be given focus through the newly acquired Toussaint Nyssenne. In the US, our goal is to capture additional market shares, primarily within the commercial segment. We expect to achieve this by continuing to develop new products with low energy consumption. Continued growth in Asia is also high on the agenda. Within the HumiCool division, we will continue to adapt the workforce to lower demand levels and work to improve the production structure. This work will result in a concentration of manufacturing to fewer plants and an increased share in low-cost countries.  

Munters has a unique ability to link technical expertise with application knowledge. Our products and services are well-positioned in relation to the long-term trends driving our market. There is an increasingly greater awareness regarding energy savings and environmental conservation. At the same time, knowledge of the importance of the indoor climate for both health and production processes is increasing. These trends favor Munters, and on the whole, I expect Munters to show continued high organic growth over the long term. Our strategy to broaden our product portfolio by being able to offer the customer an even more comprehensive product and service program is retained. This strategy includes complimentary acquisitions. In recent years, we have focused strongly on profit-enhancing measures. This should become evident, especially in our gross margin, when the financial crisis is over and the economy recovers again. Although the coming period is characterized by considerable uncertainty, I am convinced that the organization will emerge strengthened from the prevailing recession. From this perspective, I view Munters’ future with optimism.

Kista March 2009

Lars Engström
President and CEO