Marel hf

ICEX:MAREL

Earnings Call Transcript 2018-Q1

[Tinna Molphy]

Okay. So welcome, everyone, to Marel's headquarters here in Iceland and also welcome to all of you who are watching online. Today, we are going to have CEO, Arni Oddur Thordarson and CFO, Linda Jonsdottir go over -- give you an overview of the first quarter financial results and some business highlights. We're also going to do a quick video call with Sigurdur Olason, the Executive Vice President of Marel Fish. Then we're going to have the standard Q&A session and I'd like to ask you to state your name, your company and then your question into the mics that will be going around. Okay, then over to you, Arni.

[Arni Oddur Thordarson, Chief Executive Officer]

So just to recap, we will have the call with Siggi because we are having a Brussels show. So there is no major announcement going to be later on here. So just hold your horses. So but we live in very, very good world now. We and other end consumers are demanding healthy, convenient and affordable food. Moreover, sustainability, traceability is a core theme throughout the value chain. We have been innovating systematically to match those needs and market conditions are good, commercial position of Marel is strong. Revenues are up 14%, EBIT is up 16%, all-time order intake poultry, meat, fish delivering.So, look at the industries. Poultry, once again, honoring fully our strategy, tailor-made full line, standard building block, maintenance partner in the field and overarching software, 19% EBIT. Meat improving again, we are seeing 12% EBIT, organizational changes to stimulate innovation, full line offering, integration of Sulmaq will go in full place second half of the year. Great team. We are going to penetrate the South America market. Fish, 9% EBIT, improved operation, still below our targets. However, Siggi will go through what we are doing there. We are going out of the onboard systems. We are innovating salmon wild whitefish and farmed whitefish solutions. You will see it in person.Order book at a very, very good level. Still only 0.5% of our revenue [ stats ] in line with best-in-class enablers to organize our production . Our team is ramping up. We are now adding 70, 80 people per month. Usually, when companies do that, results are hampered. I would say, learning and development is quick. Our team that is existing very, I would say very well trained 15 years on average is taking those new on board, focusing on the customers . We have been investing well in the business. We are synchronizing the IT platforms. That disturbs business. Usually, companies are then reporting one-off cost. We swallow it down the road.However, this is essential to be able to streamline the operation, deliver more and more throughout the system with more efficiency. Order intake, commercial engagement, very high and you can see the foundation for this year is very good with very likely, very strong back end of the year just as we finished the last year. Even though we started this year on a very good note. To recap, we are enlarging existing factories or customer. We are having new greenfields that are the [ live stream ] out there and we are maintenance partner in the field. Software is as well becoming bigger and bigger part of our operation. Maintainer business is what our customers are asking for more and more. It is comes in for us in good times and bad time 40% of our revenues, but it's [indiscernible] at time. We will do it through remote control. We will do it out in the field for the next years and the decades to come. It will [ switch ] a bit to remote preventive maintenance, but it will be close to the customer as well. It is essential that we are maintainer partners, we are innovation partners and we do it together.So, Linda, go through the numbers. We will recap again, but remember our vision to transform the way food is processed in partnership with customers. That's how we can serve together. Together our customers and us, the processor, the end customer need. It's all about the end customer need and the sustainability of the globe.So, Linda.

[Linda Jonsdottir, Chief Financial Officer]

Thank you, Arni. Good to see you all, here today. Thanks for coming. So I will take you through the highlights of Q1 2018. Business is very solid. We are seeing very high order intake in the quarter, EUR 329 million. We are delivering revenues of EUR 288 million. At the same time profitability is 15.2%. Order book is strong, now around 50% of last 12 months revenues.Cash flow continues to be strong from operating activities, it's EUR 56 million. We are paying dividend in the quarter of around EUR 30 million. We are also investing in treasury shares in the quarter of around EUR 30 million. Leverage goes slightly up from a level of 1.9x to a level of 2x. And then what I think is also interesting is to see [ not ] all industries are performing very well.So if we go through the numbers. What is interesting here is like in Q4 2017, we managed to ramp-up production and deliver solid revenues and EBIT. We see that again now in Q1 2018, revenues of EUR 288 million and EBIT of 15.2%. It's also interesting to look back to the beginning of 2016. Since then we have been delivering very stable results around 15%. Like we have highlighted in the past, you can see fluctuations in results between quarters. But for the last 9 quarters, it has been very, very stable.At the same time, we are investing in the business and we'll continue to do that.If I look at income statement for Q1, revenues EUR 288 million. You see, compared to Q1 2017, we had EUR 252 million. So it's 14% increase in revenues. Most of it is organic growth. Looking at gross profit, we are now at a level of 38.7% compared to 39.4%. The main explanation for the difference here is the implementation of IFRS, which I will summarize a bit later in the presentation. Looking at OpEx items, SG&A was at a level of 19% same quarter last year. It's now around 17.4%. And you can see that net finance cost is going slightly up. The underlying interest cost is going down because our leverage is going down. But we see some effects from exchange rate around EUR 2 million, which is affecting this number.But net result now EUR 28.3 million compared to EUR 21.3 million the same quarter in 2017.Looking at the order book. At the end of 2017, we had order book of EUR 472 million, because of delay in revenue recognition, we had adjustment in the beginning of the year of around EUR 16 million. So the opening order book is EUR 488 million and this is something that we did explain in the end of last year. Order intake then in Q1 is EUR 329 million. We book off revenues of EUR 288 million and end up with an order book of EUR 529 million, which is around 50% of last 12 months revenues. There was slight impact on revenues, because of IFRS in the quarter. So without that impact, revenues booked off would have been slightly higher by around EUR 4 million.Looking at the balance sheet. Property, plant and equipment is slightly increasing. Like we have explained, we are investing in the platform, and we will continue to do that. You're seeing new item here in the balance sheet, right of use assets and that's the impact of the leases being added to the balance sheet because of IFRS 16. Working capital items, like inventories and trade receivables are going up, because of volume. Overall, working capital is still going down from the beginning of this year, because of down payments from our customers.Borrowings, if you look at that, it's slightly increasing. The reason is that we did pay out dividend, we did purchase treasury shares, so borrowings are going up. Leverage remains at similar levels from -- goes up from 1.9x to 2x net debt/EBITDA. And here again, you see, lease liability as a new item on the balance sheet both under current and non-current liabilities. The main difference is in contract liabilities which is production contracts and this represents the down payment we get from our customers into projects.On IFRS, I think, like we did go quite thoroughly through this at the end of last year. So I'm just going to touch upon the highlights. IFRS 16, which is the standard or leases. There we are adding around 2.3% of our total assets to the balance sheet, assets and liabilities. This has non-material impact on EBIT. It has impact on EBITDA. For the full-year, it will be roughly around EUR 8 million and then you add loans to the balance sheet that are interest bearing. This slightly affects the leverage, but quite minimal. But overall, this has now been implemented and the effects are in line with what we communicated at the end of 2017.On IFRS 9, the maturity here is about that like we did amendment on our loans facilities in 2017. We had to recognize profit from that in the opening balance sheet in the beginning of the year, and then we need to amortize that profit throughout the lifetime of the loan. So you see slight increase in finance cost because of IFRS 9. But this is again in line with what we communicated in, end of 2017.On IFRS 15, which is the revenue recognition. Then we did explain last quarter that we would see some [ attention ] timing of revenue recognition. The effects on the opening balance sheet was around EUR 9 million. You also see the impact on the order book, the EUR 16 million, I showed before. And now in Q1, we see impact on revenues and EBIT. Impact on revenues around EUR 3.8 million and the impact on EBIT of around EUR 3.3 million. This is timing impact and it's slightly higher than we estimated at the end of 2017. But overall, I would say, like -- the implementation of the standards are having relatively minor impact on the results this quarter.Cash flow, I explained, it's strong EUR 56 million. We are paying taxes of [ EUR 9.5 million ]. We continue investing both in tangible and intangible, roughly the split is 50/50. And free cash flow is EUR 35 million. We pay the finance cost, we did purchase treasury shares for around EUR 30 million. We pay dividend, part of it we pay now and the taxes we pay, next quarter. And there was an increase in net debt of EUR 21 million.Earnings per share, now at a level of [ 14.83 ], 8% increase from last quarter. Like I explained, we did pay dividend in line with what was decided in the AGM. We did get authorization for purchase of EUR 20 million of treasury shares. We have already executed EUR 10 million now in Q1.Looking at the key figures, I think it's fair to say that it's all going into a very good direction, whether you look at revenues, order received, order book, EBIT or the cash flow. So very solid development here on all angles.I'm not going to go into this in details, but just to highlight like the financial targets we have, we say, we are revenue growth on average around 12%. It will be on average. So it's going to be variating between years like [ '16 ] was 20%, last year, 6% and now we see 14% in Q1. We continue to invest in innovation around 6%. Leverages within the capital structure, and we paid dividend within our dividend policy, which is between 20% to 40% of net profit.So I think, this is all from my end. So I'll give the word back to Arni.

[Arni Oddur Thordarson, Chief Executive Officer]

Thank you, Linda. It's -- results can fluctuate between quarters and we have been seeing 9 quarters in a row with 15% EBIT. That's pretty comfortable and moreover, we are always strengthening the team. The outlook is pretty good. I heard investors talking together here before the meeting. Can we expect a lot of CapEx to deal with this high growth? To sum it up, we have been investing very, very much in recent 2.5 year and we continue to invest at that scale in next 2.5 year. It is a little bit visible the housing investments and here in Iceland, it is clear that we are now 640 people out of the team member 5,500. It is around 12% of our workforce focusing on software, focusing on fair share. In Holland, we are 1,800 people focusing on meat and poultry and so on. We are already 600 people in Latin America, where we are going to grab the market opportunities. It is only here in Iceland, where we are pretty squeezed in the office space because to recap, we have been investing in a great facility in Aarhus, where we acquired a company [ 2006 ]. We foster the companies we acquire and we are investing in them. In Boxmeer, we were opening [ fast in ], I think innovation center and offices and so on. In manufacturing, we were enlarging in Slovakia in beginning of this year. We were more than doubling the existing plant. We started [ towards the 5 ] in Slovakia [ towards the 8th ], our own house, extending this year.However, all those investments are minor compared to the intangible investment, 6% a year in innovation. But as well the IT platforms. We are investing EUR 50 million, EUR 60 million in IT. That goes in investments. But much, much deeper investments is that our business people are aligning the processes and implementing those IT systems and that's a pretty high number that goes straight through P&L every quarter.So the investments are high, they need to be high to capture this high growth that we are seeing double-digit organic growth this year. We will see as well some external growth. But why are we doing this? We want to serve the customer needs as best as we want. As close to the customers as possible. Out in the fields, out in the regions, some of the things in this business, we always need to do centrally. Centrally means in hubs that can be in Europe, U.S., Slovakia, in our case China and Brazil. So now, we have upgraded Nitra, Slovakia. Next in line is, of course, Brazil and then China.So all-in-all, we can expect similar CapEx as we have been seeing now for 2, 3 years. Then we believe as well that Internet of Things continue at faster speed than we have ever, ever seen. It is in the DNA of Marel to be interconnected. It was in the business plans, 1979. I'm amazed to read the old business plan, 1979. It's just, Industrialization 4.0. The only thing was the Internet was not there. The connectivity is and will always be in our DNA and I think, we are in pretty, pretty good shape to grab the opportunities but later on Siggi go through it. We are having a good mix of revenues and geographical mix, just to recap our old installed base, our big installed base is Europe, U.S. and therefore service and spare revenues are very high there. New orders are getting more and more outside Europe and U.S. We are truly a global company.Let's go to Brazil and then after Siggi, we will recap a little bit where we are standing in the listing alternatives but let's focus on fish and we are investing systematically in fish. I think we are getting closer and closer to full line approach, we have to. We have standardized, we have interconnected our solutions but we are investing above the 6% in fish in innovation. In other industries, we have been able to acquire, to accelerate growth. But as you know, the needs to [indiscernible] in M&A. Here we are going the innovation path in fish unless things change and we are going for a full line on a high speed.We will take now an interview with Siggi, it is live. To be honest, it's semi-live. It is taken just before the meeting started, here. So over to you, Siggi. What do you say?

[Sigurður Ólason]

Good morning, Arni and everyone. We are here at the Marel stand in Brussels and the booth looks fantastic. It's truly amazing how well the people have done by pulling all this together. And as you can see, we are launching a new theme, which is called smarter processing, which is based on the themes from Industry 4.0 which is Internet of Things and Big Data. And those are the pillars that the company was founded on. That's why we are truly well equipped to utilize the opportunities that are ahead of us. So I would say, that the future is quite bright. Here at the stand, we have salmon equipment and there we are integrating the process of filleting and deheading, so it's automated. And then we are just optimizing the processing steps. On the whitefish side, we have our [ diamond ] which is the FleXicut where we are detecting the pinbones and cutting them out with water jets. And then after that, we have a RoboBatcher which is putting, [ batsying ] into styrofoam boxes. So it's all really compact. And as well, we have a huge portfolio. So that's why we have -- we are utilizing the latest technology with the virtual reality and on the salmon side, we have factories which customers can see in 3D and as well on the whitefish side. So we're bringing the latest and greatest technology to the stand for our customers to explore. And it's going to be truly exciting days the next 3 days and we are really excited about what's going to happen. Over and out. Thank you.

[Arni Oddur Thordarson, Chief Executive Officer]

So in beginning of the year, we have trade shows all over the place. It is poultry, meat and fish, it's a very, very busy season. We have been engaging well and as well in the field. Customers, partnership, new and existing, so the order intake poultry, meat and fish EUR 329 million. It's amazing to see how fast it is going now. Even more important, we deliver right quality on right time. It takes a lot in capital goods business to grow like we were growing 18% fourth quarter, 14% now in first quarter. All the system need to be interlinked. It used to be that it could be in people's head what is the utilization level in the factory. Do we need to add 10 or 20 guys? Now it's an overarching value chain.PMI indexes are skyrocketing in the world. What does that mean? It means that maybe suppliers are reaching top in utilization levels. So we need to go for alternatives suppliers in some cases. Engineering, so we standardized more and more, and we are building for the future. So we need more engineering capabilities, that's why we want to be global, that's why we went for talent acquisition in Sulmaq, going extremely well. That is why we're fostering our people in Europe and U.S. It's -- we been playing on all axis in this but it's a overarching value chain. Just like we are working for our customers in overarching value chain. We are in capital goods, together. We have our customers in the food value chain. More and more important interconnectivity traceability throughout the chain.You're seeing the high growth, solid operation. We believe that alternate delisting could be an option. We have hired STJ as an advisor to advise the management in the work ahead. This is a shareholder matter. Shareholder decision as well. So the Board of Directors is working very closely with the management. To recap from the AGM. There are theoretical because we are focusing on Europe, 3 options. One option that is pretty unlikely, I believe listening to stakeholders is that we remain only listed in Iceland. Second option is that we will cross-list the shares. Have the shares, list it in [ Regex ] and in -- addition in another stock exchange in Europe.The third option is that we will delist the share in Regex and relist it simultaneously in another stock exchange.It's very, very important that in all of those cases, the form and constitution of the shares will not change. The company is the same company. We are very proud of our heritage. It gets easier and easier to operate the headquarter from Iceland. It was only 5, 10 years ago, we had 3 flights a day, 10 years ago, probably. It's [ 40 ] flights a day. More important is the IT revolution. We are interconnected all over. So form and constitution of shares doesn't change. Headquarter is where the decisions are taken. Nobody knows the future in that. Headquarters are where decisions are taken. We are analyzing alternative trading stock exchange. This process takes approximately 12 months from last AGM because we want to make thorough analysis. We could of course list with just overnight. But it's not about listing, it's about fair trading after listing. Some stock exchanges, the journey is a little bit longer. Maximum 12 months though, and others would be 3 months, but to have a fair game in a beauty context, their team, the IPO pacts and their stock exchanges, we say it's 12 months.That's if the world is stagnated, it takes 12 months.So we can say, it's around 12-month journey if the decision is taken by the shareholders and if there is not a major adverse effect in the financial world. So to recap, this is what we said in the AGM. This is our journey. It is going fine. Quite a big portion of the executive team, Marel used to be bankers, so financial people. So I think, it's healthy for us to move into modern world and get advice from people that are in the field today because our mind has been in the industrial world for quite a long time. So it is -- we are doing this thoroughly but next year, we could be seeing a new trading platform. But remember, you can trade dollars for euro and you can trade as well probably then Marel shares, even the shares don't change in another currency than the Iceland krona. It doesn't need to be changed for form or constitution.So we are not going to have it longer. I'm getting very excited to get to Brussels. It is looking into talking to the customers in this arena, it is amazing. I have to be honest, as well talking to our competitors as well, fun. Seeing what they are thinking of. We are in competition. It is tough, we have to be on the forefront. And then, of course, seeing our people that is doing their most, they started preparing yesterday. The first day of the show is today. Tomorrow is a good day and Thursday is usually the slow day. So tomorrow, at the show, seeing the melting pot of what is happening in the seafood. It's fun.So Q&A.

[Sveinn Þórarinsson, Equity Analyst]

Sveinn, Landsbankinn. A few questions. I will just ask all in. Regarding the gross profit margin going forward to end of year, can you indicate any level there, due to large greenfield projects, are we looking at sub 40% or even lower. Just an indication going forward. Also any indications of what -- can you expect in Q2 in new orders?Anywhere around the levels in Q1 or more like in 2017 or higher? And the last question, have there been any changes in down payment schemes or conditions for customers. You have indicated how they were 1 year ago, 2 years ago, but have there been any changes or is it just the same?

[Linda Jonsdottir, Chief Financial Officer]

Sveinn, if I start with the gross profit, I would say, it's going to be somewhere around like this area 59%. I mean that's , it's difficult to say exactly. On the down payments from our customers, there has nothing changed there. It's just the same as it has been before. I would say, like we have a good business model there. And on the order intake, Q1 was a very strong quarter. Perhaps, you want to comment more on the outlook.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. But it's a good question as well above the cash flow that has been explained, but this is very important. It's not quarter-on-quarter issue. It's essential that our business model is sound. And there has been no changes in prepayment since 10 years, 20 years. Even [ 2008, 2009 ] it was challenged heavily. We didn't change our model. I think, there is a very good agreement with customers. This is our model. Customer finance the greenfields and we run the spares and standard equipment faster and faster. This is our model, no change. Order received, EUR 329 million. We cannot expect that level throughout the year. It is a very, very good order intake. However, simultaneously, we need to prepare our system to be able to handle if it goes there. So, but we don't expect it.

[Stefán Broddi Guðjónsson, Head of Research]

My name is Stefan Gudjonsson from Arion Bank. On the question of listing outside of Iceland. Can you please elaborate a bit on your expectations or your ambitions regarding trading volume, valuation, international ownership et cetera.

[Arni Oddur Thordarson, Chief Executive Officer]

[ Short answer, there is no ]. No further announcement until later on. So nothing more. Good question, though. So we are, as you see, cautiously optimistic. And we are eager to get out in the field. So thank you for the meeting.

[Linda Jonsdottir, Chief Financial Officer]

Thank you.