Marel hf

ICEX:MAREL

Earnings Call Transcript

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

So good morning. My name is Tinna Molphy, Investor Relations, and I'd like to welcome you all to our first quarter results meeting. We are, of course, hosting this event under the COVID-19 setting. So we're ensuring there's 2 meters apart from everyone, and there's no audience here in the room.These are indeed strange times and all the more, we appreciate your time and effort in joining us here today. We will start with Árni Oddur giving some opening remarks, followed by the overview of the first quarter results by CFO, Linda Jónsdóttir. Árni Oddur will then go with some business highlights, and we will then dive into a Q&A session. Having said all that, I'd like to hand over to Árni Oddur.

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes. Thank you, Tinna. Good morning. This is clearly a quarter where we have been putting the safety of our people, the well-being of our people and their families first. Moreover, working with our customers, our suppliers, our partners, even back-to-back with supplier or suppliers focusing on business continuity of ourselves and our customers. With passion and dedication, our team has been able to keep the most -- one of the most valuable value chain running, the food value chain. It's very important that people all around the globe have access to safe and affordable food that is produced in a sustainable way.Looking at the highlights, I would say, record order intake in the quarter. EUR 352 million compared to previous record of EUR 329 million 2 years ago in first quarter as well and EUR 323 million in last year first quarter. The order intake is very well balanced between greenfields, large projects, standard equipment and spares. Although service revenues, our field service engineers were not having same possibilities in visiting the customers in this quarter. Then overall, though, aftercare market revenues were 41%, resellers completely were in 41% and double-digit growth in spares.We highlighted in the beginning of the quarter our financial strengths. We went for equity issue last year with a listing in Amsterdam. Then I would say, very good timing of our long-term financing end of January back in February, we have been utilizing our financial strengths and our cash flow in building our manufacturing parts, building our spare parts, testing the system back to back because the most important is to remove bottlenecks throughout the system, deliver right quality on the right time to our customers. And right time is now requested shorter delivery time than ever because the agility is what matters. Our customers that have been the most forward-thinking and have the process know-how and the market channel know-how to deal both with groceries and the restaurants market have been able to shift in a dynamic and fast way to the new needs in the market.Let's go through our numbers. Order received, EUR 352 million. When I said it was most important to remove all bottlenecks, that's not without a cost. Our revenue recognition is lower than we originally planned in beginning of the year, EUR 302 million. However, just to recap, we were not planning to have a quarter -- first quarter, in line with our previous profitability of close to 15% EBIT and revenue of EUR 330 million, EUR 340 million. We said we needed a V recovery from fourth quarter. The reason was low order book in poultry. We were entering this year and fourth quarter with low order book in poultry and then we need to improve the mix in meat. However, the nice thing in first quarter is to see how exceptionally strong poultry is in the order intake, there is some momentum. There is always a momentum after a slow order intake for a while. There is a huge growth in our industry. And when there is a slow, there is a catch-up. Additionally, maybe in current environment, it seems like when people are cooking at home, they prefer very much the convenience and affordability of poultry.So all in all, strong quarter intake, profitability only 8.4% in the quarter EBIT. However, we have to take in mind that around 1 percentage as well, additional on top of that, so underlying 9% plus in profits is our streamlining activities.We decided to stay the course. Take on -- and we say that after all the investment in IT infrastructure and et cetera, we had the opportunity to consolidate, streamline the patent in Europe and ramp up market coverage, both to sell more standard equipment and to have more market coverage in sales and service in China, Asia, as we have in Latam, U.S.A. and Europe. I would say it's bearing the fruits. We saw short-cycle high gross margin standard equipment picking up in beginning of this quarter. Free cash flow is strong despite that we are investing in inventories. The main inventory buildup will be see though in April, May, due to lead times when we order. However, as we are seeing double digit growth in spares as well, it runs very fast through the books. Leverage getting close to 0. Although we have a lowering EBITDA, due to the high cash flow, we still at 0.4x EBITDA. And we are convinced that this temporary pressure in EBIT and EBITDA is temporary. And in reality, it's less important in this quarter and next quarter where it is, as long as the cash flow is positive and we are grabbing market share.Let's move on. I'm getting used to the new realities like we are doing throughout this quarter. Many things are first in this quarter. We managed to -- in-store with remote assistance from a specialist in Netherlands and local team in China, we managed to sell through Microsoft Teams our first solutions without having social interactivity with customers. Of course, we -- I'm a social guy, I prefer the social thing. But it's amazing to see how connected we can be. Marel Live was introduced as well and our AGM was virtually conducted. Here you see the 1.17 book-to-bill ratio last quarter. Very nice to see that equation, partly due to the low revenues, but mainly due to the record order intake. Now we are 39% of the trailing revenues in order book, very, very healthy level. We said previously 40% to 60% is a nice ratio. However, then our aftercare business was 35%. Now it's 40%, 41%. So in short, we are at a very, very good level with the order book. Industries, 12% EBIT in poultry compared to 40% the last quarter. We said we recovery, low order book. We are used to 18%, 20%, now the basis of the order book. Although we are cautious in predicting order intake in this quarter or next quarter, the pipeline is good. Then 12%, 40% EBIT, more or less the same. Some pandemic effect on poultry. The main pandemic effect is on meat. To recap, we are used to 12% EBIT there. Went down to 8% last quarter due to mix and now to 4% due to pandemic, as we had low utilization and less people in China, Brazil and Germany. So our main pandemic effect is on meat. Fish is more or less the same as we saw in fourth quarter. We are building the ship while sailing and fishing. And I'm convinced that we will see 2021, a bit different operation on profits in fish and then gradual -- we made a very important acquisition last year. We have been changing the management team and we are streamlining our -- the cost in Nordics and U.S.A. in fish so we can better coverage the OpEx with our gross profits.But over to you, Linda.

[Linda Jónsdóttir]

Thank you, Árni, and good morning, everyone. Thanks for taking the time to call into the meeting. I'm going to take you through the highlights of Q1 2020. Order intake in Q1 is 9% higher than the same quarter last year and 16% higher than Q4 2019. So record order intake of EUR 352 million, which is excellent results. Revenues were at the level of EUR 302 million, which is lower than we hoped for and a decrease of 7% from the same quarter last year, which is impacted by the order book in poultry in the second half of last year, but also impacted by the logistical challenges we saw now in Q1. Maintenance revenues at a level of 41%. That is 10% higher than for the same quarter last year. So positive developments there. Gross profit close to 36%. It is impacted by volume, by product mix and also the higher cost related to the pandemics we are seeing at the moment. EBIT, 8.4%, impacted by nonrecurring streamlining cost of EUR 3 million, which we do not adjust for, specifically. Cash flow, both operational and free cash flow are strong, EUR 61.5 million operational and free cash flow of EUR 38.6 million. Leverage, 0.4x net debt-to-EBITDA underpins our financial strengths and our capacity after the equity issue we did in last June. Order book, EUR 465 million, which is around 37% of trailing 12 months revenues, growing now because of the high order intake in the quarter. So overall, we are delivering a very solid quarter in terms of order intake at record level and strong cash flow. But revenues and costs are impacted by the pandemics and by streamlining cost, leading to an EBIT of 8.4%.So if we start on the quality of earnings, I mean Marel has very good quality of earnings, which is, of course, like very important in market dynamics as we are seeing now. And if we look at the revenues by industries, poultry now at the level of 50%, meat 34% and fish close to 13%. And we are, both in Q4 and Q1, impacted by the lower portion of revenues coming from poultry, moving from 54% to 50%.If we look at the revenues by geography, you can see the trend there like Americas moving from a level of 39% last year to a level of 32% now. We should see this trend up again now with large orders coming in from the U.S., like the Bell & Evans. If you look at Asia and Oceania, like while we are well invested in Latin America and EMEA, we are -- we need to strengthen the frontline both in Asia and China, and that's something we are working on now. And at the same time, we want to streamline the back end there. So high focus on strengthening our geography, strengthening the regions and localizing the company.Looking at the mix of revenues with respect to equipment and aftermarket, we have now 41% coming from aftermarket, growing 10% from the same quarter last year. And on the equipment side, standard equipment last year, we saw a slowdown also because of escalation levels on -- and on trade constraints throughout the year. But in the back end of 2019 and now in Q1, we see them coming back on a strong level.Looking a bit more closely at the EBIT, EBIT margin now 8.4%. As I said before, like impacted by nonrecurring cost of EUR 3 million that is not adjusted for, that will return EUR 6 million cost -- lowering the cost base on an annual basis. So from -- in year 2021, that will have impact of EUR 6 million, starting to impact already now, of course. We are expecting profitability to gradually increase throughout the 2020, and now we're at a level of 8.4%. Gross profit, 35.6% for Q1 compared to 38.6% last year, impacted by volume, by product mix and by the cost related to the pandemics. Level of OpEx in Q1 was around 27% compared to 24% for the same quarter last year, also impacted by volume and streamlining cost. S&M is at a level of 13.4%. And we continue investing in the frontline. We will continue investing in the frontline. S&M is also impacted now with less cost around exhibitions because the world is changing within -- in respect to exhibitions. Hopefully, that will go back soon.G&A is on a high end in the quarter, 7.9%, impacted by streamlining costs and R&D at a level of 5.8%, which is in line with our strategic levels. Order book at a healthy level. Order intake, EUR 352 million, revenues EUR 302 million. So the order book is growing in the quarter from a level of EUR 414 million at the end of 2019. To underpin, orders are not accounted for in the order book, unless they have been signed and financially secured with down payment under a letter of credit. And the vast majority of the order book are greenfield projects, while spare parts and standard equipment run much faster through. Order book now trailing 37% of trailing 12 months revenues.Earnings per share, as we have stated, one of our targets is to increase earnings per share faster than revenues. Looking back, that is definitely the case. But in Q4 '19 and Q1 '20, earnings per share is at a lower level now at a level of EUR 0.1232. Our target of growing earnings per share faster than revenue sales is unchanged. Cash flow, strong in the quarter, where we continue investing in the fundamentals, innovation, infrastructure and the global REITS.The AGM approved dividend of 40% of net results that has been paid out now in Q2 on April 8 to shareholders, so it falls into Q2 numbers. On March 10, the Board initiated a new share buyback program for up to 25 million shares, and we have, at the end of Q1, bought 4.4 million shares of that authorization.Income statement, revenues at the level of EUR 302 million. We're going down, like I stated, from the same quarter last year. Gross profit, 35.6%, going down from 2019 levels because of the order book and poultry and because of the logistic challenges we are having. S&M, 13.4%, where we have been investing in the frontline. G&A, 7.9%, impacted by recurring cost. Adjusted results ending at 8.4%. Net finance cost, EUR 5 million, slightly higher than the same period last year. Interest on borrowings is going down. At the same time, FX rate losses and also the valuation of the interest rate derivatives that are going through the P&L are impacting the finance cost in the quarter. So net results, EUR 13.4 million for Q1 2020.Yes. So last quarter, we also underpinned our mid-term targets, which we are going to reach before the end of 2023, and that's to bring gross profit to a level of 40%. It's to bring SG&A to a level of 18%. Today, SG&A is at the level of 21%. So it's clear that we need to continue focusing on, becoming more efficient and improving the cost base and R&D to continue to have that at a level of 6%.Looking at the balance sheet, total operating working capital is improving, mainly because of decrease in trade receivables. In the other direction, we are increasing inventories. We are building up inventories and we will continue to do that also in Q2. Cash balance is extraordinary high in the quarter. As you can see here, we did secure financing in the beginning of the year of EUR 700 million on very good rates. We did, also in the quarter draw, EUR 600 million to increase our flexibility and that is now sitting as cash on the balance sheet.Leverage at a level of 0.4, very good level, underpins our financial flexibility. And you can see here also on the contract liabilities, to mention there, like that's reflecting the down payments we're getting in because the order book is growing. Other payables is also increasing in the quarter, trade and other payables, and that is connected to the dividend, which is not paid until in Q2.Balance sheet resilience, like Marel has a very strong balance sheet. In February, we've signed EUR 700 million -- a new facility with our bank consortium that we have been working with for many years. Opening margin, 80 basis points, tenor of 5 years with 2 extension options. And we did this early this year, and we drew on it already in the quarter as well, EUR 600 million. On the right-hand side, you can see our profile equity ratio, 40%; net debt, 0.4; and we are well within our targeted capital structure, secured financing until 2025. So balance sheet-wise and financing-wise, we are in an extremely good position.Strong cash flow generation, you can see here both operational cash flow EUR 61.5 million. We paid taxes in the quarter, EUR 13.4 million. We paid that actually -- it's a prepayment. So it's a bulky payment in the quarter because we get some discounts when we pay it early. Investing activities, close to EUR 10 million, where 40% is connected to property, plant and equipment and 60% to intangible assets. Free cash flow, EUR 38.6 million. We paid finance cost, EUR 4.1 million. It's impacted also by the upfront fee with respect to our new facility. Loan to associates is a loan to Curio, then we purchased treasury shares in the quarter, EUR 14.5 million. So overall, like very strong cash flow generation.Key performance metrics is -- this is the area that we are constantly focused on. Earnings per share, growing that faster than revenues; free cash flow, which continues to be strong; and the net debt-to-EBITDA, which is at a very low level, 0.4 and underpins our ability to continue and support further growth of the company.So I am going to hand it back over to Árni.

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes. Thank you, Linda. It seems like we are on good time and I'm getting excited for questions. So -- but to recap it, it is that we have been constantly investing in the business. And as we grow, we have been increasing the quality of the earnings. Marel started as a company focusing on secondary processing and fish. We have vertically and horizontally grown. Now we are post farm to dispatch in poultry, meat and fish. And we have the global reach, and we have constantly been investing in digitalization.Especially in recent years, when we have been leveraging that, it would be unthinkable how to go through this pandemic situation without having teams on the ground in every single continent that speaks the language, understand the customer, understand the customer needs, although they are remotely connected. It's not same to be connected China to China and connected Europe to China. So we are having the global reach and digital product investments and ourselves have been digitalizing ourselves. And I have to admit, I have never seen the speed as in, in recent 2 months. So we can easily say that not all the extra cost in second quarter is a bad cost. It's actually a good cost and can change us for good and how we do business.So let's go through the slides and this is the theme from our annual report: everything counts. We should not forget, even though there is pandemic now, and we talk a lot about safety and affordability. Then sustainability of our produce matter a lot as well and everything counts. We need to use less water, less energy. We need to vertically integrate our value chain. We need to constantly continue to invest in those areas. There is too much pressure on the world. And we can do it together, meaning consumers, customers of Marel, Marel and suppliers. So every person counts and we are now having global reach, although we are different position.Of course, in Europe, U.S.A., we are extremely strong. However, in Latam, we have been systematically building up there. We have some 700 people in Latam at -- currently. 200 people in sales and service, 500 in manufacturing. We are ramping up in Asia and Oceana, and I'm very pleased with the structure we have put in place in Latin America, including Mexico, China, Asia, Oceana, and so on. Very strong regional leadership, local people with experience of global operation. This is what is making it happen -- to, for instance, install this remote assistance from Europe to China in last quarter. However, going forward, we have stated constantly we are ramping up our sales and service coverage, and we believe we are already starting to reap the benefit from that. We are as well consolidating and streamlining our global back end that is mainly located in Europe. It's not only to save money, it is as well in line with our vision sustainability. Why fly in, fly out? Why service someone out in the field, when you can build it up locally? Local language, understanding the customer needs and, et cetera. This is all part of the maturity level of the company. Of course, you need economic of scale, but this is one of the things that differentiate Marel at the moment.Every role counts. It's no cooperation within the enterprise or within the value chain is stronger than the weakest link. We have seen it in this pandemic situation, the bottlenecks can pop up. We have to work back to path. We are not only working with our suppliers, we are working with suppliers of suppliers or insisting that our suppliers do that, and we want to see through the whole value chain. Same applies when we are working with our customers and innovating long term. So every role counts in the system. Just to recap, Marel Live is a new and very good for customers to utilize it and our own, getting more interconnection. We can be very close to each other and actually I met more in last quarter than ever, remotely. Software KnowHow was remotely as well, was planned to be physically in Copenhagen. We have been throughout the COVID situation having global crisis team, local crisis team. On 3rd of March, we decided to unwind all physical shows and change them as we could into digital shows, utilizing the technology and who, if not Innova, should do that.Every part counts, that has been visible very, very much now. I strongly believe that we are taking market share from third-party providers. I as well here, many, many of our customers, how pleased we are with delivery times now. Although everybody understand that you can have some hiccups. We have ramped up and we are using a lot. It's costing in P&L to ramp up manufacturing parts and spare parts, but it would be awful for our customers if the downtime goes down. It would as well be bad for them, for the end consumer. So let's turn it into good that we keep the value chain running. It's the key essential in safe and affordable food now that every part counts, every link in the value chain counts.We are having, just to cast a light on it, what we have been working on with consolidating the manufacturing footprint in Europe 5 years ago, 6 years ago, as we are now doing with the back end. And in service and sales, we consolidated from 19 to 13 manufacturing sites, mainly in Europe and U.S.A., and then we are building our growth platforms in Nitra, Beijing, Brazil. However, maybe more important, higher and higher proportion of our standard equipment has 2 places where it can be produced in the model site and in the co-location site. It's very much -- very important for the risk metrics, very much important as well to balance the load even in a normal situation. But you can imagine now how much we reduce the risk. I would love to have it more than 50% of our products, but anyhow, it's 25% of our standard equipment, our highest runners, most critical sensor portioning, et cetera, that we can either make in for Iceland, Garðabær or in Nitra in Slovakia, same applies to product invented in Denmark and the Netherlands. Building up step by step by step, you're never perfect but better than perfect moving forward.Recapping, safety of the people, main, main, main focus. To give you maybe an indication in how we are dealing with this, although we are essential, identified -- that's infrastructure company. Then we apply social distances as we can. We are now sitting here in Garðabær. This factory used to be 1 factory. Throughout recent 2 months, we have been running it as 6 factories. That's not as efficient as running 1 factory. However, when you classify in different groups, no interaction throughout the day, separate doors in and out, separate canteen, separate restaurants and et cetera, then you lower the risk. And it's not only lowering the risk. Let's do everything to let our people feel equally safe at work as at home. Although most of the office people are working from home, manufacturing people are showing up to work. Field service engineers, warehouse people, and let's make it as safe as possible, even as safe as home. That's our goal throughout and as well the well-being of our people. I will not go in the details here. This is the essential. We are keeping the value chain running, but safety of the people is very, very important. And of course, it costs some money, but you cannot measure it against that. Temporarily, the profit is down in first and probably second quarter, if not third quarter, but we are on the right track. And 2023, 2026 affirm target, 16% EBIT; 2023 and 2026, 4% to 6% growth underneath in the industry. Although I believe personally and many others that recent geographical constraints, African swine flu and now the pandemic will accelerate the growth. We need to see modernization of the value chain in many markets and we need to see the more automization, more agility and less waste in the total value chain. So I would not be surprised that the growth next 20 years will be the same as we predicted, but a little bit more up front loaded, meaning next 5 years. Although we need to be cautious for the next quarters. We cannot be pessimistic when we look at our pipeline and it's a balancing act now. We can see fluctuation in order intake between quarters, but we are definitely on the right track.To recap, we changed as well the executive team in the quarter. It has been eventful quarter. It's very important to stay the course no matter what is happening. Stay the course, continue to evolve. We are now 9 instead of 12. We said that we are going to streamline our back end. You have to walk the talk, start at the top and then go step by step. We are very well diversified, balanced, 4 nations. As well you see by the pictures, more diversity here and very much welcome Gudbjorg and Anna Kristin, valuable team members. Although it's maybe when I smile -- not met them already after they became executive team members, although we are in the same house. But we have talked a lot through Microsoft Teams, and we have had a very, very good virtual meetings. I'm not feeling alone in my office because I've been more connected than ever. And thank you, and welcome on board. And I have to say, the teamwork in executive team, peers and triangles excellent. And moreover, I have seen unity and excellence all over in team Marel. So let's go to Q&A.

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

Okay. I would like to hand over to the conference call operator.

[Operator]

[Operator Instructions] The first question we have is from Klas Bergelind from Citi.

[Klas Henrik Bergelind, Director]

Yes. So the first one is on poultry and the strong orders. Can we talk about how we should think about deliveries for the year? We obviously knew about the solid pipeline, but these are very strong orders. Do you think we can turn that 13% sales drop in the first quarter to maybe flat to down 5% for the year? And linked to that is, of course, whether these poultry orders are sustainable through COVID-19?

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes. It's a good question. Like, is it sustainable? Starting there, through COVID-19, the order intake in poultry. We need to be cautious because let's look at the mix of our orders. 1/3 is greenfield. 1/3 is targeted standard equipment, although it was lower last year. But the good thing is resellers -- recurring revenues are now 40%. So that goes through and we are taking market share in the aftermarket. We are as well bearing the fruit in standard equipment. As those customers that are having the agility to deal both with groceries and foodservice, they maybe now to add modules into their solution to be better equipped to deal with the dynamic shift to groceries. History has taught us that financing can become more difficult in greenfields. One, there is a credit crunch. However, as a former bank rep, if I look at the banking system, I think I would lean toward IT, food and health care to finance something, and we need to keep the system running. So it's hard to predict. We need to be cautious regarding the big greenfields, although they are at a big magnitude in first quarter. However, if the situation continues, social distance, sheltering at home, then it's just fact of life that people go quite a lot to poultry, pork and so on. Main speed for home cooking and et cetera. It's more the steaks at the restaurants, it's more the fish at the restaurants. However, in the end, when you prolong it, you need more balanced diet. So we are working in all of our protein industries and the cost is, of course, less dining home. And a lot of fun now for families to enjoy to stay together, cooking in the evening and so on. We need to continue to live our life. Although we have a greater sympathy with those that are affected. But can we sustain it? Yes, we could. We cannot predict.That's our aim, at least.

[Klas Henrik Bergelind, Director]

My second one is on the cost savings for you, Linda, the EUR 6 million. Is this largely targeting the meat business? Or is this sort of spread across the different divisions?

[Linda Jónsdóttir]

Yes. No, it's not particularly in the meat business. It's mainly in -- affecting like in the P&L, the G&A part in the quarter. And the other part is in gross profit, like high level picture.

[Klas Henrik Bergelind, Director]

Okay. My next one is on the aftermarket. If you could give us a sense of how much of the spare parts business versus contract or service growth -- the mix of growth of the 10%? Given that you had issues on the technician side, like many other cap goods companies, I guess, that spare parts growth must have been quite strong. If you could give us some sense there, that would be really good.

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes. If we look at the aftercare business, then 75% before the pandemic was spares, 25% service. More and more though, 2%, 3% in software that we will see totally different 2026. So 75% were spares. Service revenues, clearly down. The 25% piece, mainly in March, will continue in April and May. So maybe a strong effect there into second quarter and first quarter, the service part. However, we started to see the uptake -- real uptake into the spares after the middle of first quarter. That could continue. That's at least our focus, and that is what we have used our financial muscles into building up the spare parts stocks and the manufacturing part. So we are as well putting some standard equipment to stock that is not in line with our regular strategy. But short lead time is the key thing now, portioning, sensoring, et cetera, change over weekends, how they setup, so our customer can deal better with the groceries. So spare parts could continue. Service will be affected, but maybe the nice thing is we are learning always more and more. We are now offering our customers to come into -- in the night time and fix the factories. We are not traveling around between customers because we quarantine in between. So we are learning and our customers to stay longer at each time and so on. And moreover, field service engineers are getting more acquainted with the rest of the company in the warehouse, in the manufacturing, et cetera. And we are already starting to talk to the people that are usually behind the desk, who are willing to go out in the field, when we see the uptick. Because it's not whether we will see the uptick, it's when we will see it. And then we better be ready because the order intake is good, as you see.

[Klas Henrik Bergelind, Director]

My final one...

[Árni Oddur Thórdarson, Chief Executive Officer]

I -- clearly second quarter.

[Klas Henrik Bergelind, Director]

Just one quick final one on the order book. It's increasing now, but how much of it is meat in the order book? And how should we think about risk of cancellations there on the meat side?

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes. So there has been no cancellation in meat, just to highlight that. There has been request or delays of installation by our customers. We are different than other companies. We never book orders, unless they are prepaid partly and financially secured. So it's a solid order book throughout. We do it, though, in U.S.A., where we have the POS, it's prepaid. So it's a very solid order book, but we have sometimes some change of scope and delays out in the field. Meat order book as such was higher proportion, as you see in the revenue recognition last year than poultry. But now there is a dynamic shift into poultry, as we had a weaker-than-expected order intake in meat in first quarter and even stronger order intake than we expected, although we went into the year with optimism in poultry. And fish is fully on track. They are very, very passionate going forward, finding out because it's a valuable product and unfortunately too many processors and fish, and not in position to deal with the grocery stores because 2/3 of fish in U.S.A., for instance, is consumed at restaurants. So this will lead to ongoing evolution, if not revolution in the fish industry.

[Linda Jónsdóttir]

I'd like to add to this one, like -- so a bigger part of the order book now is poultry. Like, we should also underpin what we stated that we want to improve profitability throughout the year.

[Operator]

The next question we have is from the line of Eric Wilmer from ABN AMRO.

[Eric Wilmer, Analyst]

Three questions from my side. In the earnings release, you specifically referred to Chinese, Brazilian and German temporary customer plant closings. I was wondering to what extent current U.S. plant closings could impact receive orders during Q2. Secondly, with Q1 selling and marketing costs coming in around 14% versus 12% in Q1 in 2019. I was wondering if you could give some more granularity on which part of this increase is related to operational leverage. And which part is driven by COVID-19-related cost inflation? And finally, is actually on M&A. During Q1, one of your bigger European poultry customers acquired a vegetable processing company. I was wondering to what extent such horizontal expansion could be part for Marel's M&A growth strategy.

[Árni Oddur Thórdarson, Chief Executive Officer]

So maybe I start to talk about the parts, then Linda take the operational leverage, and then I touch on the M&A again. So we were talking here about in the text, our own plants, not the customer plants. And maybe we need to look into the wording. But what we were meaning that it was our own plants in China, Brazil and Germany that were affected in the meat industry by the pandemic. We are running all our factories. They are not at 100% level. They are at around 90% level at the moment, our factories, meaning 90% of the people show up to work. We are taking cautious with elderly -- those that are elderly and our underlying ] as well. We have to bear in mind that sometimes 3 generation lives together in new -- in emerging countries and et cetera. So not willing to show up every day, but we are now at 90% overall. To recap, China, we needed to close 1 week extra in cooperation with the authorities. Then we ramped up 60%, 70% and are now in plus 90%. We are currently at 75% level in Germany and Brazil. And we say here in the press release, it's too soon to say when we are at full speed there. So we are -- and it's not due to infections. It's due to social distance measures, and we take it extremely cautiously and how we are doing it. So it's our own operation and therefore, percentage of completion when we deliver is revenue recognition later. So it affects the meat business, and this is all meat-related in China, Brazil and Germany. So that is what I meant -- or we meant.

[Eric Wilmer, Analyst]

Okay. Sorry to interrupt. So do I understand correctly that in the U.S., there are no plant closures?

[Árni Oddur Thórdarson, Chief Executive Officer]

No. Not our own plants. We have been operating at now, 90%, 95% level in our own plants in U.S.A. We have been able there larger production plans to utilize the social distancing in our plants there. So we have been running our U.S. plants all the time through at less output, note of any hand, and there are bottlenecks all over, especially in suppliers, suppliers of suppliers and throughout our system. When I say 90% average, I reported that know-how to calculate average, it means that some division are 60%, and other, 100%. So this creates inefficiency, but that is what we are dealing with every, every, every single day. And that's our job to solve the bottlenecks and prevent them.

[Linda Jónsdóttir]

So if I touch on the operational leverage question, like if I go slightly back to Q4, like there we had the impact from the industry mix, like where poultry was low and meat was high. We also had like the volume part and the product mix influencing the margins, and EBIT went down to a level of 10%. That's where we underpinned that we would start streamlining and improve our cost base. What then happened in Q1 is that we are streamlining, we have one -- nonrecurring costs of around 1%. And in addition, we have pressure coming from the pandemics in the world. Pushing EBIT down to a level of 8.4%. What we are like focusing on at the moment is that like we have our capacity now in the organization. We cannot ramp fully down because we have very high order intake coming in. So there is some additional cost in terms of where we are in terms of balancing our capacity. And that is, of course, also costing us while we are at a lower volume at the moment. The positives is that like now we are seeing positive industry mix because poultry is improving and should be a bigger part of the pie which should then underpin and support the profitability later in the year, in addition to the actions we are taking on the streamlining part.

[Árni Oddur Thórdarson, Chief Executive Officer]

And regarding the M&A question, it was that customer are integrating poultry customers. For instance, going into groceries, as I understand the question, will we see the landscape of Marel or business model change? Just to recap, we are having clear vision. We are as well very big fortune in Marel is that we have gradually expanding our operating window instead of trying to eat the elephant in one go. So we started in, in the secondary processing in fish. Now we are post farm to dispatch in poultry, meat and fish. We are seeing quite a lot of our customers as well, poultry customers, going into meat industry and meat industry into poultry. And to recap, we utilize as well our blockbuster in poultry, for instance, the SensorX, detecting the bones' contamination as well is originally invented in the fish. It's not unlikely that we will take at least the software outside of post farm dispatch, at least myself and most of consumers want to know end-to-end traceability of the products. We can do it in strategic partnerships or we can do it with acquisition. I think if we just focus on the next 3 years, it's more likely that we will see acquisition that strengthen our portfolio offering and innovation effort in poultry, meat and fish because we still have a long way to go. That's so exciting about our industry. We still can do so much to reduce the waste, increase the value, and there is different maturity states between industries, even between white fish and salmon, between red meat and pork, for instance, and et cetera, et cetera. So if you ask me, will Marel be in vegetables in 10 years? Yes, probably. Will the main focus be in next 3 years on acquisition to strengthen poultry, meat and fish? Yes, probably. Will you go outside of the window post farm dispatch in software sooner than later? Yes, probably. So I hope we answer what you are thinking.

[Operator]

The next question we have is from Akash Gupta from JPMorgan.

[Akash Gupta, Research Analyst]

I have 3 questions, please. My first one is on pricing environment. And I'm wondering if some of your family-owned businesses are undercutting prices to get down payment to help sustain the prices. So maybe if you can talk about what sort of pricing situation do you see there? And in the same context, how should we think about backlog profitability in current environments? So that's the question number one.

[Linda Jónsdóttir]

Sorry, can you repeat the second one? How should we think about?

[Akash Gupta, Research Analyst]

Profitability of backlog in current environment, where basically some of your competitors who don't have global supply chain in customer space might be struggling and therefore, they may be putting pressure on pricing. So that's the question number one.

[Árni Oddur Thórdarson, Chief Executive Officer]

So I have to admit -- Linda, what was the first question? So when I heard profitability and I thought it was CFO so...

[Linda Jónsdóttir]

So it was -- I understand it is the pricing environment and also on down payments -- like on down payments in general, like, of course, some of our customers are probably seeing the effect from the changing environment. Like what our approach in this is that we are like very strict on our payment terms, like we do not register our orders into the order book unless we have the down payment there and the financial security. So nothing changing from our perspective on that front.

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes, it's a very important tools to mine. We didn't change our payment terms. The customer finance the big orders, we run faster and faster spares and standard equipment, very, very important. We are sticking to that, we are agile. If there is a technical problem in paying on right time, 1 week, 2 weeks and et cetera, we have the financial flexibility to do that. In current environment, people are less price sensitive, that's pretty clear. Their delivery time is the absolute need. Keeping the factories running, spare parts need to be delivered. Although we have not been cascading the extra cost, as you see in our numbers to the customers when we have been ramping up our space, we are thinking of how can we more fair split it. But we have not done it because our main focus was how to deliver. But in general, the focus is on execution, switching time and delivery times in this environment because in the end, the cost of the equipment is only fraction of the value creation or the value protection that you can get in this environment. So delivery time is more important than pricing in the current environment.Going forward, we have some concern about the pricing in current order book in meat, as we have stated again and again, and our job is to change the mix to more standard equipment. Pricing level in both the order book in fish and poultry is just fine, very good levels.

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

Okay. I think we've lost the connection. So I think we're also running out of time. I think this concludes our Q&A session. And again, I'd like to extend our warmest thanks for joining us here today, and have a lovely day.

[Linda Jónsdóttir]

Thank you.

[Árni Oddur Thórdarson, Chief Executive Officer]

Thank you.