Record earnings despite unsatisfactory profitability
within the MCS division

Now that the 2007 fiscal year has ended, we can note that Munters reported its best-ever earnings. One positive note during the year was that recent acquisitions developed very favorably. Another was that our expanded production facility in China was opened at the end of the year, which will be of great importance for our growth ambitions in the Asian market.

Profitability within MCS, however, was not satisfactory. Over the coming period, we will devote considerable effort to strengthening profitability in the Group. An extensiv e efficiency and margin improvement program will provide the foundation for this work.

The Group’s development during 2007 was characterized by stable growth and strong order intake. However, profitability within our largest division, MCS, was not satisfactory. During the first half of the year, MCS was negatively affected by very dry weather in Europe, the US and Australia. In addition, some costs of a temporary nature arose that were not foreseen at the beginning of the year.

To reverse the weak margin trend, a costreduction program was initiated within MCS during the summer. The MCS division’s sales and operating margin improved during the second half of the year, primarily as a result of weather in northern Europe that was more favorable for Munters, but also as a result of a marked improvement in German operations. During February 2008, an extensive action program was initiated that creates potential for significant margin improvements within MCS, as well as in the other two divisions.

The Dehumidification division performed well during the year. The market for industrial dehumidifiers was strong throughout the year. The division’s investments in Asia resulted in major orders in that region toward the end of the year. The HumiCool division also noted stable order intake and a favorable earnings trend during the year, despite weak market demand during the first half of the year in the largest business area, AgHort.  

Demand for Munters’ products favored by global trends

The general factors driving Munters’ growth are that customers need to increase productivity while also seeking to improve the quality of both their products and manufacturing processes. At the same time, increasingly higher demands are being placed on indoor climate in both commercial and industrial facilities. Rising energy prices and increasingly strict emission regulations also increased demand for energy-efficient and environmentally friendly products and production processes. Munters’ energyefficient solutions for controlling indoor climate often satisfy these requirements. Broad economic growth in large parts of Asia has had the result that a greater proportion of the population is able to adopt Western consumption patterns, which in turn increases demand for Munters’ products.

Another trend driving the market is consolidation in many of our customer segments. Within the insurance industry, the players are becoming fewer and larger and are increasingly electing to partner with national and to a certain extent international damage-restoration companies. Today, Munters is one of the few companies in this area with a global organization. In addition, rapid con solidation and regulation is taking place in the agricultural and food industries. Consumption of meat in developing countries is increasing in pace with regional economic growth. This in turn results in higher prices and a need for more effective production methods, thus driving the consolidation trend. Munters’ systems for controlling the indoor climate for animal breeding increase productivity and can also reduce the risk of disease.

Strategic initiatives for profitable growth

Munters’ long-term strategic plan for increasing profitability, while positioning Munters to leverage these global trends in the best possible manner, can be summarized in the following strategic initiatives:

Leverage on global market trends – As mentioned above, Munters is well-positioned with respect to a number of global trends. Most of Munters’ strategic initiatives are intended to further exploit these trends. One example is that we are currently already well-positioned to secure a major breakthrough order for energy-efficient industrial air conditioning for a plant in the Philippines being constructed by a global electronics company. 
   
Strong presence in Asia – During 2007, significant effort was devoted to increasing the Group’s presence in Asia. At the end of the year, expansion of the plant in Beijing was completed, which in practice meant that Munters’ production capacity in China was doubled. At the same time, the sales force was strengthened by the addition of well-trained personnel. The plant, which is shared by Dehumidification and HumiCool, will be one of our most versatile production facilities when production is transferred from Europe and North America. It will be the global producer of small heaters from Sial and also constitute the hub in purchasing for several parts of the organization. During the year, Munters opened its first sales office in India, which is a market with substantial potential. Much of this work will show tangible results starting in 2008. 

Expansion from selected niches – Munters has a historically strong position in a number of niches based on the company’s core technologies. Based on these positions, Munters is expanding the company’s offering to enable us to satisfy a greater proportion of customer needs. One example is the AgHort business area, where we for along period have had a high market share in evaporative cooling media. In recent years, we have also built a strong position in ventilation products for the agricultural industry and are now introduc ing new products in heating and control systems. Another example is mist elimination, where we have traditionally held a dominant market position in cleaning of emissions from coal-fired power plants. This technology has now been enhanced for applications in the chemical processing industry, a segment in which Munters has noted rapid growth. 

Complementary acquisitions – In April, Des Champs Technologies was acquired, which significantly strengthened Dehumidification’s position as a leading supplier of energyefficient systems for climate control for commercial buildings and provides opportunities for greatly improved market coverage with respect to both climate zones and customer applications. The acquisition of Turbovent during the summer strengthened HumiCool’s position as a leading supplier of climate control equipment and air and odor purification systems within the AgHort segment, while supplementing Munters’ product range with products for colder climates. We are currently analyzing several companies and intend to make additional acquisitions during 2008. 

More efficient product development – Munters has always placed great emphasis on product development. Our starting point in developing new or enhancing existing technology is that the new models must be more energy-efficient than the old ones. Our investments in research and development increased by 35 percent during 2007. To ensure future growth, product development operations will be further strengthened during 2008. A number of well-received products were introduced in the market during 2007. One example is Oasis, developed within Des Champs, which is a system that combines indirect evaporative cooling in the first step with traditional air conditioning in the second step. The result is that the air is cooled without adding moisture, which reduces energy consumption by half, compared with using air conditioning only. Another example is ESAC, an evaporative cooling product for industrial applications. During 2008, we will launch a number of very interesting products. One example is DryCool ERV, a dehumidification system that combines dehumidification and reclaiming of energy. The system is based on the third generation of Munters’ patented HCU platform for cooling and dehumidification in combination with the energy-recovery technology from the newly acquired Des Champs. 

Focus on gross margin – During the year, we continued the effort to increase efficiency and reduce costs to ensure high productivity and profitability within Munters over the long term. In February 2008, an extensive efficiency and margin-improvement program was launched under the name Munters Efficiency Program Phase 2 or MEP2. The new program is an enhancement of the original MEP program introduced in 2004, which was based on the principles of resource-efficient manufacturing, short lead times and high employee involvement. Within the framework of the MEP2 program, the mobile IT platform Field.Link will be rolled out to most service technicians. Field.Link is intended to industrialize the management of business processes, which will improve productivity both in the field and within support functions. In conjunction with this project, a capital-efficiency project is also being conducted that is intended to reduce tiedup capital in accounts receivable. In addition to the measures within MCS, MEP2 involves increased efforts to improve production efficiency within HumiCool and Dehumidification. 

Prospects for 2008

Looking ahead to 2008, there are several factors that are important to bear in mind. We estimate that 25-30 percent of our sales volumes normally follow economic cycles. This means that most of Munters’ sales are more affected by the long-term trends mentioned above than short-term economic fluctuations. During 2008, Munters will take additional decisive steps to strengthen profitability, and we are confident that investments in new markets and new products will result in increased sales volumes.

The unsatisfactory profitability in MCS is being addressed during the year with the introduction of a more efficient business model based on the implementation of Field.Link. In this context, I would like to welcome Morten Andreasen to Munters. Morten assumed his position as manager of our largest division MCS at the beginning of March and is now a member of Group management. Morten has broad international experience and in-depth knowledge of service operations, and I am convinced that he is the right person to further strengthen MCS’ position as a leading service company in a market undergoing consolidation. In closing, I would also like to thank Munters’ employees for outstanding individual performance that contributed to a successful 2007. A focus on goals and unrelenting work by the entire organization have laid the foundation for continued success in 2008.

Kista, March 11, 2008

Lars Engström
President and CEO