Marel hf

ICEX:MAREL

Earnings Call Transcript

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

So a warm welcome to you all present here today and to those of you watching online as well. Today, we're going to have -- or we will have Árni Oddur Thordarson, the CEO of Marel; and Linda Jónsdóttir, the CFO of Marel, go over the first quarter results and some business highlights during the quarter. And as per usual, we'll have a Q&A session at the end of the presentations and ask you to state your name, your company and then your question into the mic handed to you. You'll also be available to have questions -- ask questions online, and then you press the little bubble icon in the top right-hand corner of the window. So without further ado, over to you, Árni Oddur.

[Arni Oddur Thordarson, Chief Executive Officer]

Thank you, Tinna, and welcome, everybody. We are very pleased to report this quarter. It's a solid start to the year. Highlights, I would say the order intake. It is -- we have been talking about trade constraints in the market, geopolitical uncertainties and et cetera. We have global reach, we have innovative portfolio and we highlighted in recent quarters that order intake could go down or at least be not forecastable. However, if we would manage to help processes in Asia, China and other markets to match supply to existing demand, then we would see continuous good order intake. So order intake is close to record that was 1 year ago and is increasing compared to recent quarters. Is this working? Let's go through the numbers. So these revenues are increasing by 13% compared to last quarter -- first quarter last year. We report solid 14.6% EBIT, same EBIT as was the average throughout last year. It's a good EBIT margin with a good cash conversion. Free cash flow is high. Operational cash flow is a bit lower than in -- you fix it when I just stand here. Operational cash flow is a bit lower than in recent quarters, and that's due to the order intake mix is a little bit lower from U.S.A. as a proportion and other markets where we are dealing with letter of credit, fully secured orders instead of PO agreements and a little bit higher proportion prepayments in U.S.A. However, investments are as well going gradually down now compared to the past. We still are investing heavily in innovation. We are still investing very much in our IT infrastructure. For instance, we implemented SAP in Denmark on top of implementation of SAP, for instance, in U.S.A. and U.K., and the past product life cycle management system, Salesforce and so on. So we are there. However, as you see when you walk around our facilities, we cannot do much more. We have been rebuilding here in Iceland, Holland, U.S.A, U.K. and et cetera. So extension in Slovakia in recent years as well where we can take much more capacity out. So in general, we are very well fitted with our facilities, continuous investment in IT and et cetera. So free cash flow is high, with a little bit lower investment. Leverage maintains at 2.2x EBITDA, a little bit higher than 2x in the beginning of the quarter, but we have to bear in mind that we paid out EUR 70 million in form of dividend and share buyback. Very important, we have not attempted into any share buyback since our AGM. We are planning for a pre-summer offering and listing in Euronext Amsterdam. The market is stabilizing now itself. And -- but in the past, due to disciplined capital allocation and strict target on 2x EBITDA leverage that can go up to 3x when we go to acquisition, then we have been buying back shares in order to be able without too much dilution to reissue shares and list in Euronext Amsterdam pre-summer. That's our target, not actual, but our firm target after taking a very good cooperation with the stock exchange here in Iceland and in Amsterdam and, of course, the past and potential investors. And we believe we have a very, very good story to tell where we are transforming the way food is processed and sustainability is a good business. The highlights here is, maybe surprise for many people, is that proportion of market outside of Europe and North America are a little bit less than in the past. The reason is the high sales in past quarters and years to U.S.A, and now we have upcoming delivery of high-scale greenfields in U.S.A. Even though we don't report order intake split and I have to highlight and color it, it's a different story in order intake this quarter than the revenues. The proportion of order intake outside Europe and U.S.A. and all that, Europe is including Eastern and Central Europe here. We might change the split here to give better view on our conventional market and new markets. However, new market, especially Asia and China, are higher proportion, so the revenue mix will change a bit in back end of the year and next year. Poultry, meat and fish, same proportion of revenues as in the past, maybe Other a little bit higher where we had -- are showing a little bit more sales into vegetables and et cetera. No major changes though. Revenue mix is still very, very well balanced. We are seeing recurring revenues of 35% in the quarter like we did in spares and services, like we did in the past. Modernization projects continue, standard equipment sales and then highlight 3 new greenfields in Asia and China. Poultry, meat and fish. We have been now talking to existing shareholders, potential shareholders around the listing. And there is a high focus on meat and fish. Can you -- or starting with poultry, can you sustain the profitability in poultry? Is it getting saturated, the poultry market? First of all, I can tell you that the market of poultry is not getting saturated. There are 62 billion poultries consumed every year commercially in the world. There is as well nearly equal amount of poultry that is outside of the commercial world and meat and fish as well. So we are seeing a huge shift from the backyard farming into the commercial world, both in poultry, meat and fish. And there is a need to match that demand for more greenfields, more services and more advanced solution. Poultry, 17.6% EBIT, a little bit lower than the average last year, very good profitability though and continuous on high scale. Meat, a little bit improvement between years on back of a very good order book in beginning of the year. Just to highlight as well, MAJA that we acquired in August last year was delivering some revenues into last year, but that was an EBIT margin neutral that year. It's delivering nicely to EBIT margin expansion this year as well already. A high-quality company that we acquired with a very, very good standard equipment. And now when we will synchronize better and better our sales and service network, we will see the benefit of that acquisition further. In general, the meat market has been in some turbulence in this quarter. We have the swine flu all over -- of course, geographical terms but widespread. That has turned -- is increasing the demand for safety and traceability. It is changing as well the pricing in the market, primary processed pork. And to the farmers, it's increasing the price and so on. The demand for poultry is as well increasing and so on, so it's an interesting dynamic in the market and, all in all, probably increasing the demand for our solution with traceability and more capacity out there in poultry and meat and so on. Fish delivering 7.6% EBIT. It's clear that we are having full focus on closing the application gaps to become full-line provider in fish. Our customers are asking for it. In meat, we are standardizing and upselling and cross-selling more. All in all, very good conditions in all of those markets, improving in fish again, but we need to have a fully aligned approach in the fish. I believe we all love this picture. And we are seeing on a trailing basis, the earnings per share increasing once again quarter-by-quarter, 26% this time. Absolute -- if you look at that absolute number, the fourth quarter -- our first quarter compared to first quarter last year, it's 18% increase when net profit are increasing by 13%. That is what we are talking about acquiring shares, disciplined capital allocation and trailing earnings per share increasing. That's -- the name of the game is twofold: serve our customer, transform the way food is processed; and deliver to our shareholders at the same time. Over to you, Linda.

[Linda Jonsdottir, Chief Financial Officer]

Thank you, Árni. Good morning. Good to see you all here today. I'm going to take you through the financials of Q1 2019. It was again a good quarter for Marel. We are seeing order intake at the level of EUR 323 million; revenues, EUR 325 million, with sales slightly below Q4 2018 but 12.6% higher than the same quarter last year. EBIT, 14.6% compared to 15.2% Q1 2018. In absolute term, we see improvements of around 8%. Cash flow is strong. From operations, around EUR 60 million. Free cash flow, EUR 44 million. We continue investing in the business and in the infrastructure, as Árni mentioned. At the same time, we are returning capital to shareholders. So we paid dividend and share buybacks of EUR 70 million in the quarter, which is slightly affecting the leverage, which is now at the level of 2.2x net debt to EBITDA compared to 2x at the end of 2018. Order book, still strong, EUR 475 million or 38% of last 12 months' revenues. So overall, a very strong quarter, and I'm going to take you through the details of the financials. Top line growth, supported by high order intake. We also see that the mix of revenues coming from greenfields, modernization and standard equipment is good. 35% of revenues are coming from our maintenance business. And if you look at the orders received, that's EUR 323 million, which is 9.2% higher than last quarter but 1.8% lower than the record quarter of Q1 2018. 38.5% of the order book is now like of trailing 12 months revenues, and we can see that vast majority is in greenfield projects and larger projects because the standard equipment flows and spare part flows quicker through the order book. Revenues, EUR 325 million, 12.6% higher than the same period last year. We did manage to ramp up capacity in Q4 2018. We are running at similar levels now, slightly lower. But with good execution, we managed to deliver similar revenues as in Q4 2018. Orders booked of -- are pretty much in line with order intake, so book-to-bill ratio is 0.99 in the quarter. If you then look at the operational performance, we have been delivering steady operational performance, EBIT of 14.6% and solid revenue growth. EBIT in the quarter was 14.6%, which is the same as we saw for the full year of 2018, but compared to Q1 2018, it's slightly lower where we had 15.2%. And if you look at this picture -- and I think it's always good to reflect on where we are coming from. In 2014, we were at the level of 6% EBIT. Now we have, after the refocusing period, we have managed to improve both margins and lowering the cost base. So we have been on steady EBIT level, close to 15% now for a period of more than 3 years. During this period, we have also been investing heavily in the business, and we are very happy to use part of our strong cash flow to invest in the future. And after the refocusing in 2014 and 2015, we are only adjusting for purchase price allocation. No other adjustments done on the results. A robust order book. We are now at the level of EUR 475 million, similar levels as end of last year. You can see that order intake, EUR 323 million. We booked off orders of EUR 325 million, so we ended the quarter at the level of EUR 475 million, which is 38.5% of last 12 months' revenues. And order book-to-bill ratio of 0.99. We don't account for anything in the order book unless it's financially secured with down payments and through letter of credits. And you can see, it's also interesting to see that we have very low customer concentration. So if you look at -- there is no customer accounting for more than 5% of revenues. Looking at the income statement. Q1 2019 revenues, EUR 325 million compared to EUR 288 million Q1 2018, improvement of 12.6%. Gross profit at similar percentage as Q1 2018 of 38.6% but improving in absolute terms by 12.5%. Selling and marketing expense, 11.5% compared to 11.3% the last year. R&D, 6.3% compared to 6.1% last year. And G&A, 6.2% compared to 6.1%. So costs are increasing slightly as a percentage of revenues, but you can also see that in absolute terms, they are increasing with the revenue level. And for example, in R&D, we have been stepping up in our innovation efforts, and we are investing there in the future. Adjustments for PPA now EUR 2.6 million, and that is the only adjustment that we make, as mentioned before. Net finance cost, EUR 3.8 million compared to EUR 6 million. There was some negative currency effect in Q1 that we don't have in Q1 2019. And then that results at the level of EUR 32.2 million compared to EUR 28.3 million in Q1 2018, so improvement of close to 14%. In the financial statements themselves, we are slightly changing how we present the income statements with relation to PPA-related costs, aligning factor with the IFRS guidance and ESMA guidance. So we explained that also in Note 6 here in the presentation and in the press release. We will continue to show it like this because this best reflects how the business is doing. On the balance sheet. There are not many things to mention here. Like I stated before, we continue investing in the business. Working capital increased in the quarter by close to EUR 20 million, mainly because of inventories and trade receivables. You -- we have -- we took measures on inventories because we wanted to make sure we have fast moving parts at all times, so we can ensure good deliveries of our equipment to our customers. On the liability side, the only thing really to mention here is on the leverage because it goes slightly up. As I mentioned, we have been paying dividend and doing share buyback in the quarter. So leverage ends at the level of 2.2x net debt to EBITDA. And no share buyback after the AGM in 2019. Key performance metrics, these are the metrics we are focusing very heavily on. It's the earnings per share, which, as you can see here, has been developing very positively over an extended period of time. With focus on margin expansion, we are going to deliver higher growth in earnings per share than in revenues. That is our aim. On the free cash flow, there we have very good business model. We have negative working capital. So our cash flow is very strong. We are committed to invest part of the strong cash flow, which was EUR 60 million in the quarter, into the future. So free cash flow is around EUR 44 million, which is after investment and taxes. And you can see, slight difference there because we have been investing heavily in the facilities. So there is -- we are now more heavy on innovation and IT, slightly less on facilities than before. And we are just like we believe this is a very important point to create a platform to be able to grow the company further in the future. Net debt/EBITDA now at the level of 2.2x. It looks very stable. There has been fluctuations up and down. For example, when we acquired MPS, we went up to a level 2.9x net debt/EBITDA, but we have been very close to 2x net debt to EBITDA. I would say, like, good to highlight as well that during this period, we have been acquiring companies. We have been paying dividend. We have been buying shares. So it's -- with a very strong cash flow, we have been able to do that and, at the same time, maintain leverage within our targeted capital structure. And to highlight again and put it together, like, on the capital allocation, we have high focus on disciplined capital allocation. And in the quarter, we are paying dividend and buying shares back, and we have been doing that over the last 3 years, very much in line with our dividend policy, which is 20% to 40% of net profit. And the excess capital, we want to use to stimulate further growth of the company. So I will give the word back to you, Árni.

[Arni Oddur Thordarson, Chief Executive Officer]

Thanks, Linda. I heard clearly EBIT margin expansion both from meat and fish. And it's clear that in -- there is no structural difference from those industries vis-à-vis poultry in the industries itself. These structural difference inside Marel. We need to change the structure, standardization, modernization, cross-sell and upsell in meat, and we need a full-line offering in fish. It's all about comparable advantages in the field what the EBIT margin is by industries. And we know that we can. If we look at from the other angle, the gross profits is 38.6%. We see some marginal improvement potentials there. Sales and marketing costs, 11.5% there, maybe it stays at 11%, 11.5%, but proportion of front-end sales will increase vis-à-vis back-end. We can synergize the back-end across the company, and we can do much more there and increase coverage to stimulate sale with a similar percentage in sales and marketing costs. Innovation, you have heard it again and again. We are committed to continue, continue to leapfrog the industry, innovate. So we should expect innovation cost to be in this area of 6%. However, G&A, we are seeing improvement compared to fourth quarter. We are still and not a benefit of to any adjustment except PPA. We are still doing -- moving our organization, moving very fast in Latin America and then Asia and China. Our staff think with external advisers and et cetera, we absorb that all. However, we are as well cost-conscious, and we are seeing improvement. Less traveling cost and et cetera in this quarter compared to previous quarter. And it is important. It is our vision, sustainability. CO2, fuel footprint around traveling and, et cetera. That motivates our people, and we are focusing on lowering the G&A cost as a proportion of sales. So from 2 angles, meat and fish can improve, gross profit can improve and G&A can improve. At the same time, we are working on listing our shares. And globally, the needs are global seen. That's pretty, pretty clear. I used to be in the financial market, stockbroker, analyst, all over and a lot of that industry. I was a little bit shocked coming back to this project, how little has developed in the back end overall in the financial market. At the same time, I have to highlight the good cooperation with Euroclear, Euronext and the Icelandic counterparts here in finding out how are we going to interlink those markets. It's called the [ Diplomique ]. In the back end of the market, we have done that. We have as well been focusing on the front end, taking early look presentation with potential investors. We have the Capital Markets Day after 2 days in the Netherlands in Boxmeer, and so on, so on. We believe that we have a story to tell, an interesting story to tell. And market conditions are good at the moment in the market, and we are getting prepared. So we are targeting pre-summer listing in Amsterdam. And so just to -- it will be listed on both markets, and we cannot go more exact in how we do this. However, you know what we have excerpted on the Annual General Meeting, and we are working more or less in that direction. So we should expect this sooner than many other people expect it here. So stay tuned, we will announce it very, very soon where we are targeting and how we will do it.This is the story we have to tell, how a company that is founded in the University of Iceland started us on idea, 1978 -- however, we should not forget, it started not only as a theory in University of Iceland. It started in partnership with the fish industry here in Iceland to find solution, innovate solution that could help the industry. It was started -- we have been data-driven from day 1., collecting data, distributing data, et cetera. Organic growth has been driven by innovation in partnership with customers all the time. Market penetration and innovation is the driving force in the growth, and we complement the growth with acquisitions. This is the essence of what we are doing with customers all over the world. And they are -- our customers are serving the consumer need. Consumers are looking for more balance in their diet at affordable prices, safe and sustainable, so more balance. Personally, I believe poultry, meat and fish is the building blocks in a balanced diet. Vegetables, souperies and so on, that's balanced diet with some corn and so on. So it's a good market to be in, and the dynamics are there and consumers are now 3 billion, increasing by 100 million per year. The middle class and so on are demanding more poultry, meat and fish. We invest 6% in R&D as we are always telling. We expect our market due to the need for optimization, safety and, et cetera, will increase by 4% to 6% a year, just to recap. The commercialized poultry, meat and fish is increasing by 3% a year while total consumption is increasing by 1.5%. But the shift from the backyard farming into commercialized world is strong. And then the need for optimization, safety, traceability and so on. So our target is lower than the past of the growth. We have been growing 20% a year on average. Our target is to grow 12% a year, approximately 50-50 organic and by acquisitions. Innovation is the cornerstone in the growth. And just to take some highlights here, for instance, if we look at meat, we have to start by handling the live animal in a friendly way. Animal well-being is essential for us, then it goes to primary processing, where we are using more and more robots. It's a harsh environment, difficult environment. Our robots are getting very, very precise in the primary processing. DEBOFLEX takes over in pork and in beef, where we are starting to cutting and deboning and slicing and so on. Sensor Magna is one of our new introduction, very, very interesting. Now we are taking the sensor that started in fish moved over to poultry to find bones to analyze and monitor and manage the fat ingredients to make the great premium burgers with the HELIX DRUM in further processing. Just to give you snapshot, premium burgers, meatballs and et cetera. So this is the flow, and this is our risk adjustment as well. We are in poultry, meat and fish, primary processing, secondary processing and further processing. Geographical spread. Tinna, how do I put this on? Just click. We are having 2 trade shows in front of us. And I'm very glad even though I love you, analysts and investors, I have been in the early look presentation and we are going for a road show. Then of course, we are here for our customers, changing the game, transforming the way food is processed. We are on trade shows next week, IFFA in Frankfurt, that is a meat show. Same time -- it's strange though, the biggest seafood show. So we will capture that on both places next week in Brussels. So to give you a highlight into a little bit the meat, and I hope I went through the transformations as well in innovation.[Presentation]Pretty good. I have not seen it before, so it was interesting for me as well. In Brussels, we are as well having our Seafood Show. And maybe I'll tell you a story here. We are introducing, for instance, the RoboBatcher. We are transforming and cross-utilizing across poultry, meat and fish more and more innovation. We are doing it faster and faster. We have a lot of engineers, and one of our core value is excellence, being better today than yesterday. We are always dealing with perfectionism and excellence. It's very, very nice to discuss that. RoboBatcher here that was installed in Vísir, Grindavík just after the FleXicut. People inside Marel thought maybe we need 6 months more to adapt it from poultry to fish. However, our overarching INNOVA software is more and more standardized across. And what happened when we installed the RoboBatcher in Vísir? It was working. We are getting more and more standardized motorized blocks behind, inside Marel. Working fine, we are introducing that. We are introducing more infeed, outfeeds of the FleXicut Compact Grader and et cetera, et cetera. I cannot take all of the highlights out from the show because there needs to be excitement as well and some introduction. But this is giving you insight in how we work. We are out in the field. We are in innovation partnership with our customers. Sales and marketing costs are a little bit front-end loaded in our cost lines because trade shows are taking part, majority of them taking part in front end of the year. Target, clear leverage, capital allocation, everybody can see. If we are successful in the offering and listing, then we are literally having 0 debts in beginning of next year. However, we have a clear, clear growth plan. Acquisition, going forward. And I believe the consolidation is on an ultra-speed going forward now. There is a need for a full process approach in the market, and our customers are getting larger. And they are requesting more and more one-stop shop. So Linda maybe join me for Q&A.Marinó, are you going to control Q&A? Thanks.

[Sveinn Þórarinsson, Equity Analyst]

Just to -- 1 question today. Just reflecting to what you said in the end about the M&A market -- and I'm Sveinn from Landsbankinn. Can you just dive into just the market dynamics now? Maybe not specifically Marel but a little bit more what we can expect in 1 to 2 years in the market in general?

[Arni Oddur Thordarson, Chief Executive Officer]

So the question from Sveinn, Landsbankinn, was the dynamics in the market. First of all, if we look at -- we are in poultry, meat and fish globally. The primary market is pretty much dense where we are having 2, 3 players. It is already quite a lot consolidated. We are having -- we are probably twice as big as the next one, both in poultry and meat, for instance, while you get more diversification in secondary processing and further processing. So secondary processing, we are seeing many, many good players that are having a mixed approach into, for instance, portioning, sensoring and et cetera, into the market having a great solution. It is companies that were maybe founded in 1940, 1950, second, third generation. However, they are dealing with increased globalization. Sales and service networks are needed. You have to have -- be there for the customer to minimize the downtime. We have 35% service revenues and et cetera. And you see that dynamic shift, for instance, in this quarter, where proportionally, Asia, China, goes up et cetera, on the cost of proportion of Europe, U.S. and so on. So you have to be there globally. And the second thing that is driving that some of those great companies are engaging in discussion with Marel is digitalization, connectivity and et cetera. So it's the sales and service. So most of those companies are in the arena of EUR 30 million to EUR 200 million in revenues, if that is the real question you are asking and so on. So there are many, many good players out there. It's not like Marel is dominating the market, far from it. There is competition out there. And there are many, many great middle stance, for instance, out there in the market.

[Stefán Broddi Guðjónsson, Head of Research]

Stefán Broddi Guðjónsson from Arion Bank Research. Two questions, but I believe they are sort of interconnected. The order book is declining year-on-year. What does that signal going forward? Is that a cause for concern? And the second question is service and spare parts are 35% of sales in Q1. Can you refresh our memory? What has that been in the past? And where do you see it going forward?

[Arni Oddur Thordarson, Chief Executive Officer]

So maybe I'll start with the service. Just to recap, the big picture towards the 5, spares and service were 10% of our revenues. So maybe the underlying -- the biggest change in Marel is how global we are and how important for our customers the service is that is 35%. It was 35% last year as well. In order intake, it's a bit higher than 35%. We are putting more focus, even more focus on service. We are professionalizing our service network in Latin America and Asia, making local for local or region for region, less fly in/fly out. So it's as well then the proportion, and then we are taking out cost at this fly in/fly out in that. So to give you inflection out on that. Order book, we have said we want to have the order book at 40% to 60% of annual trailing revenues. It's 38% now. It's not concern. We needed to deliver projects on the right time. It is maybe a little bit paused if surprise how much we manage to take out of our system in fourth quarter and first quarter, where people are working together very efficient on all cylinders and et cetera. And we expect in coming 2 quarters, order intake to be a bit higher than revenue recognition. That's expectation, not fact, but we believe order intake will be higher than revenue recognition in the next quarters. So it's not concern. 38% of trailing revenues. Some of our advisers say, why do you use 38%? And we say because we highlight as well, 35% is service revenues. And why don't you highlight that your order book is 60%, 70% of equipment revenues? So -- but there are also 2 sides around it. So order book is at good level, and with our synchronized systems and IT, we can move it around in our production and so on, more efficient. So any other questions? And then we have Capital Markets Day where we will definitely get a lot of questions. And just to highlight there, it will be Linda and Árni Sigurdsson with me there, our Head of Strategy. They will go thoroughly through the finance and strategy. In addition, we will have [ Rogik Klassen ] with innovation focused in poultry. We will have David Wilson going through the industries, Head of Meat. And then we will have Ulrika Lindberg going through service and how we are looking at service and how we can professionalize service furthermore. We believe there are a lot of opportunities in the aftercare market. So let's conclude this meeting and go back to the field, all our fields, and then see some of you hopefully in Capital Markets Day. And stay tuned for the listing process. Thanks.