Marel hf

ICEX:MAREL

Earnings Call Transcript

[Tinna Jónsdóttir Molphy, Director of Investor Relations]

Good morning to you all, and welcome to Marel's first quarter results meeting, broadcast to you live from our headquarters in Iceland. And yes, in case you were wondering, we are only 45 minutes away from the small yet magnificently beautiful and tourist-friendly volcanic eruption in Fagradalsfjall. Yes, it's a tongue twister. And that would loosely translate as the mountain of beautiful valleys. But moving on to a different mountain, the amount of information we would like to share with you today, let me first introduce the team. My name is Tinna Molphy, Investor Relations. And I will be acting as your moderator here today in a session that should last no longer than an hour, including Q&A. I'm, of course, joined by CEO, Árni Oddur Thórdarson; and CFO, Linda Jónsdóttir, who will go over the first quarter financial results and some key business highlights. We will then conclude with Q&A. If you would like to ask a question, please do so via the conference call. The dial-in details can be found on our website as well as on our stock exchange announcement. If you experience any problems dialing in, you can, of course, e-mail your question to [e-mail]. And we will then realize your name, your company and the question. So with that, for today, I would like to hand over to Árni Oddur Thórdarson.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. Good morning, and thank you for the introduction, Tinna. I actually went with my family on Sunday evening to see this beautiful small volcano. It's -- even though it's 45 minutes away in driving, it's 1.5 hour to walk up there and great to go there with the family and especially in the twilight zone in the evening. So enough about that. We are now focusing on first quarter 2021 in Marel. And I have to say it's a reflection for me as well to look back after the pandemic started, February, March last year. Because this quarter is like a mirror of the last one. We started last year with a blast in January, poultry and et cetera, and then we took off in March. This year, we go gradually. The pipeline is building up as well quite significantly in this quarter. Many people are asking, what is the difference between pipeline and order intake. Pipeline, we measure very strict, and we take it through gates, 20% like loop, 40% like loop, 60%, 80%, and then we turn into orders. When we have prepaid and financially secured, usually, we later created the remaining parts. In U.S., we do it a little bit different with higher prepayment and the PEO agreement. Anyhow, 369 in order intake in the quarter compared to a record last year of 352. So it's a good quarter, and we are standing a little bit different at this point in time, looking at what is ahead of us in second quarter, third quarter this year. Although we finished on a good note fourth quarter last year. So the dynamics are different. We are seeing QSR, quick service restaurants, coming in as well gradually. Home deliveries are still on a high scale all over the world, U.S., China, particular dynamic in that segment and so on. So it's -- you have to be really focused. The speed is increasing, especially in standard equipment space, where people are adapting to the ever-changing need. Gross profit and maybe starting with EBIT, 11% EBIT in this quarter. We see colored by logistical and mobility challenges and 37% gross. It's the same gross profit as we saw in recent quarters. However, now the mix is pretty good. The volume is going up. And based on that, we should easily go above 39% gross profit. The logistical and mobility challenge in moving cross borders within the countries were on greater magnitude in January and February than we have seen. We were under stringent lockdowns in many of our key locations in Northern Europe this time. Transportation cost between China and Europe both is higher than 1 year ago and et cetera, et cetera. The most important is, though, we are different than many others. We were delivering. We were delivering maybe not in January and February but in -- fully -- but with a very good cooperation with our customers, then we were moving that into March, et cetera. So it's a partnership to go throughout that we manage to deliver. To give you a little bit insight into what we are dealing with, we are having key differentiator factors, our local teams and our digital solutions. We are maybe installing with a team of 6 to 8 people. We have sometimes then 2 client layout if we need the extra specialists. In this quarter, for a job of 4 to 7 days, there was sometimes lockdown -- guarantee for 5 days plus 5 days. We are not going to charge our customers for 20 days for 7 days work. This is to give you insight on why we believe some of those cost terms are temporary, and we are not constating it in the price. Sales and marketing cost is as well high compared to the past, but we are here going ahead of the growth, anticipated growth curve that we are foreseeing. We believe we are going on a new level in order intake. We are strengthening the consumer-ready product sales, the digital solutions sales and geographically, with a high focus, for instance, on China, where we are doubling our sales and service units. That cost is higher then when the dynamic as such are so much, we are very occupied in advising our customers. However, we are as well helping from experience from other, and we are having advisers as well here in Marel, that we don't adjust for that cost where we are focusing on getting more agility, more speed and especially spare parts deliveries. This is analysis cost in this quarter that will change later on into investments. Having mentioned all of this, then the cash flow is robust and excellent level and the cash conversion and the net profit is as well on a fine level, at least increasing earnings per share between years. Order intake here, much better to see it on a picture compared to the past. We believe we will see this line stepping further up. This quarter place orders, standard equipment, spare part packages when you're reopening some sites or shifting SKUs for your customers. I'm talking about our customers. And they are shifting cash SKUs out in the dining places or retail and et cetera. They need different standard equipment, and we have been launching Magna, Accuro. And then we have TREIF on board, et cetera, et cetera. So we have a very good position to deal with this demand at the moment. Then the primary processing is kicking in. And pipeline building going up, like I said, the conversion in this quarter was low in poultry and fish while it was at record level in meat. Interesting to see how much the investment confidence is going to go up, and how encouraged our -- some of our customers are in moving forward. Frimesa in Brazil, it will be outstanding. And one of the largest, if not largest, one in Latin America for processing plant and then move on in China where we are replicating 9 different lines between multiple sites, where the customer is, like many of our customers in Europe moving from the feed mill into the animal growing into the processing. Here main focus on the primary, that hopefully, we will see, we will move on forward and more consumer-ready and so on, so on. But this is a long-term partnerships we are talking here about. Frimesa has been with us a long time. And Muyuan is new into processing as such in recent years, but hopefully, we will enjoy a fruitful and long-term partnership. Operational ratio, poultry 16%. And of course, we are targeting this quarter to get greenfields into it. Volume is sensitive in poultry just to highlight that as in all other industries. However, we are on average 40% maintenance business and higher in poultry, lower is fish. So that is, of course, recurring theme. The standard equipment are increasing. Then we have been low in the large orders in fourth quarter and first quarter, but we believe that we will see a great quarter, second and third quarter, timing difficult.Meat, we are seeing around 8% EBIT. It's below our targets. That's pretty clear, and we are focusing on the project execution, aligning better how we do it in the poultry, we are seeing though with replication of lines standardization and modularization, we will see some improvements. The team is getting stronger, I would say, as well, much more aligned in the way forward, how we should tackle it and so on and so on. This is an industry under transformation. And it has not been easy. African swine flu in the past, volume fluctuation and now the industry is catching up from the past, plus having the pandemic acceleration as the rest of the industry. But I'm having confidence in that with replication of lines, we will see improved deliveries and improved deliveries in the bottom line. Fish, no new stories there, 5 percentage the volume. The gross profit is great in fish. However, of course, there are news that we are teaming up with Stranda, buying 40%. We are increasing our share in Curio. And the pipeline is good for Curio, where we are having outstanding primary processing solutions. And then in poultry, of course, that market was strengthened. I will talk on this better after Linda dives into the numbers. So over to you, Linda.

[Linda Jonsdottir]

Thank you, Oddur, and good morning, everyone. Thanks for calling in. I'm going to take you through the highlights of Q1 2021. If I like in very short terms, summarize the quarter, it is a quarter with strong order intake. And even though we are comparing it to a record quarter of Q1 2020, what we do see is that, like we see logistical and mobility challenges at a higher level than before. That is impacting the gross profit in the quarter. And at the same time, we do see the improvements in mix from last quarter. So that is balancing a bit on the gross profit line. In addition, OpEx is at a higher level than in the recent quarters. And the reason for that is that we are stepping up in line with the growth that we are expecting, looking at our pipeline. And we do like see a very strong pipeline. So outlook is good. Cash flow is robust in the quarter and the leverage at a low level. A few more highlights I want to mention before we dive into the slides. We have now Curio on board from beginning of this quarter. We also acquired PMJ and 40% stake in Stranda in the quarter. Stranda is accounted for as investment in associates. On the order intake, which is at strong level, we do see the standard equipment and services are at good levels, while the project business in fish and poultry at a low level while meat is strong. So a bit of a mixed signals there, but like -- but pipeline is good. If I look at the revenues, they are at the level of EUR 334 million in the quarter, a 10.7% increase from the same quarter last year. And we do see like both organic and acquired growth there, aftermarket, 39%, still impacted by challenges like logistical challenges of our people getting to customer site. So spare parts business is driving the growth, which is 5% compared to the same quarter last year, also including growth from acquired companies. If I look at the gross profit, as I mentioned, like we do see a higher cost than before. We are also like stepping up on the OpEx front, like, when we are, like, investing in the front, like, we are innovating more in digital. We are accelerating our improvement projects to reach our midterm targets for 2023, and EBIT in the quarter at a level of 11.4%. We do, at the same time, see very strong cash flow, both operational cash flow at the level of EUR 60 million. We see free cash flow at the level of EUR 45 million. So that is very much underpinning the future and like we'll, of course, facilitate further investments and the future growth. Leverage at the level of 0.8%, which again underpins our ability to continue on our strategic journey. But let's jump into the slides. If I start with the quality of earnings, good quality of earnings. I mean the mix here is very important for us, whether it's the industry mix, the geographical mix or business mix. If I dive a bit into the industries, like here, you see that meat is growing from 34% same quarter last year to 38% this year, while poultry is coming down from a level of 50% to a level of 48%. So a slight change in mix there. Revenues by geographies. Here, you can see that here, you can see that Americas is growing from 32% to 34%. And Asia and Oceania from 12% to 15%. I mean we have been highlighting like that is a very important area for us, where we also do expect to see growth, and we are investing in that area. And we also see like some very good orders coming in there in this quarter like on the meat side. So that should then lead to a further growth on the revenue side a bit later on. While you see Europe, Middle East and Africa going down from a level of 56% to 51%. Aftermarket, last year, 41%, now 39%. Moving a bit into operational performance, starting on the gross profit level. where we highlighted like the impact from mobility and logistical challenges like while the mix is improving. OpEx, we are stepping up in a number of areas like where we are preparing and continue to prepare for the future. And like the growth ahead of us, you can see that SG&A is now at the level of 19.7%. That is higher than our midterm target. That's also in line with what we have been indicating that like we will first go up before we reached 18%. We need to prepare our business better to take on the growth that we are expecting. R&D now at a level of 6.2% very much in line with our midterm targets of 6%. And here, we are also stepping up. And you can see that we are stepping up in absolute terms on the R&D front. Like, where we see a lot of opportunities to continue, like, investing for the future, like in digital solutions, like preparing our customers also for changes and environment, et cetera. Just to underpin then like the EBIT at the level of 11.4% in the quarter, And also to underpin as well, that's like we are not adjusting our results for anything else than PPA and acquisition-related costs. Order book at a healthy level now at the level of EUR 455 million at the end of the quarter, including now the order book of Curio and PMJ compared to EUR 416 million at the end where we had included also the order book of TREIF. Book-to-bill at good levels, 1.11 in Q1. And you can see that like as before, we underpin that the order book is combined of financially secured orders. Earnings per share, just to underpin here like on the cash flow, like very strong cash flow in the quarter, operational and free cash flow, we continue to be disciplined in our capital allocation. We are paying dividends now in Q2 for operational year 2020. And you can see that earnings per share, like if I look at the comparison with last year. Q1 is EUR 2.82 and compared to EUR 1.76 last year. And our target to grow earnings per share faster than revenues remains unchanged. Looking at the income statement. Here, the revenues, as I highlighted, 11% growth approximately also coming from acquired growth, gross profit improving from Q1 2020, but we are comparing to a quarter that was very strong on order intake, but like was impacted by the pandemics. So gross profit in Q1 2021, 37.2%. Selling and marketing cost is going up from the last few quarters, even though not so much from Q1 2020. Here, we are stepping up in frontline in line with our plans. We are improving our account coverage out there. And so we will continue on that journey. You can see that G&A cost is also increasing at especially high level in the quarter, 7.7%. Here, we are running a number of improvement projects. I can mention one, for example, in meat, where we are having consultants, helping us accelerating the journey we are on, improving the profitability to reach our medium-term targets. And then the end-to-end spare parts journey. So there's a number of initiatives ongoing at the moment. R&D going up between years now at the level of 6.2%. You can see that adjusted results of EUR 38 million in the quarter compared to EUR 25 million same quarter last year. Non-IFRS adjustments are higher. Part of it in the quarter is EUR 1.1 million related to acquisition-related cost and the rest is connected to the PPA, which is higher than last year because of the acquisition of TREIF. Net results at the level of EUR 21 million in the quarter compared to EUR 13 million last year. Midterm targets, nothing changed there. We are heading for a 40% gross profit and all our staffs are -- with that in mind and in that direction. SG&A at the level of 19.7% there. We need to go down as a percentage of revenues as we continue growing the company and R&D at the medium-term targets level at the moment already 6%. Looking at the balance sheet, not so many things to like really highlight here, but like There are a number of line items that is impacted by the acquisition of PMJ and Curio. You can see more details on that in the business combination and not for in the financial statement. So I'm not going to go into the details there. Like on the inventory side, like we have been using our financial capabilities to step up on inventories during the pandemic. We did that as well now in the beginning of the year. But what we did then see in the end of the quarter was quite some good orders coming in. So that turned around quite quickly, but like we will continue on doing this, like using our financial strengths to be ahead of the game on this front. Cash position, especially high at the end of the quarter, and that's related to our dividend payment that is -- was made in the beginning of April, so and beginning of Q2. On the liability -- equity and liability side like here and depending the leverage at the level of 0.8, well below our targeted capital structure, and this underpins our capacity. We have committed liquidity at the end of the quarter at the level of EUR 668 million. We have senior funding until 2025. So we are in a good position to take the next steps. We had favorable development in working capital, especially connected to improvement in accounts payables. And as highlighted, like we are paying the EUR 40 million dividend in the beginning of Q1. So that's impacting our trade and other payables at the end of Q1. Robust cash flow, EUR 60 million from operating activities and EUR 45 million from free cash flow. We are paying taxes of EUR 4.7 million. We continue investing in our business. We also pay like in the quarter investments for the PMJ and Curio. And Stranda, sorry, at the level of EUR 21.7 million. And you can see that here combined in the picture. And very strong cash conversion. Like if you look at the operating cash flow compared to adjusted EBIT of EUR 38 million, it's clear that we have a very strong cash conversion. Again, here are the key performance metrics as we continue focusing on growing EPS faster than revenues, delivering robust cash flow as we have been doing. And depending again here the net debt EBITDA showing our financial strengths. Okay. I think I've highlighted all the main points about the financials. So I'll give the word back to Árni.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. Thank you, Linda, for the explicit overview, as always. As said gross profit temporarily hampered due to logistical and mobility challenges. And then our operating cost, we are going a little bit ahead of the growth and the dynamic changes the transformation that we are seeing. So operating costs high compared to revenues in first quarter. They are okay compared to order intake. So of course, this is forecast target and, et cetera, for the growth. But all in all, we believe that the industry is growing 4% to 6% rate. Last 20 years, next 20 years, driven by modernization of shopping following the strong secular trends of urbanization now accelerated by the pandemic as well. So the need for automatization, digital, seamless flow of safety. And in recent weeks, I've never ever seen as much requirement from customers to help them on their sustainability journey. We have together the data points throughout the processing steps. We are connecting, digitizing and remember, the first machine, standard machine in Marel was the scale that was collecting and electing data. So it's in our DNA. And this is a very important factor. We have made our commitment in TCFD. Our customers, many of them have turned it as well and consumers are getting more and more aware of it. So fascinating discussion and opportunities. But in the end, if you're good in sustainability, then usually your operation improve as well. So it's a very, very strong tools to passionate teams going forward, reduce the waste, increase the yield. And then we will introduce in next quarter as well, exciting new sensors and, et cetera, and digital solution. So stay tuned there, but let's go back to the presentation. This frames it in. Some of you are seeing this picture before, but it's a very good picture as a talking point. We are investing systematically in the infrastructure. We are flagging as well then from fourth quarter, first quarter, we will see maybe 100, 150 basis points higher investments. We are going to take our spare part delivery on a totally different way. Everybody are now digital savvy. Even grandma, grandpa, people want to have it online, see the delivery times and know immediately when it will be delivered. It's a growing business. Many of our customers are as well focusing on making their best products and relying on Marel to be a one-stop shop. So just to give you insight where we are investing and probably, we will take it up by 100, 150 basis points for a period of 3 years, but then automatically requesting higher growth. I said the growth 4% to 6% underlying. The growth has been in recent 5 years, 2% to 4%, and Marel may be on the top of the curve. That means next 5 years, properly 6% to 8% growth in the industry and we, on the top line of that growth curve. It doesn't mean that I believe that the overall growth for the next 20 years will necessarily be higher. But if it's front end-loaded, it's so important that you take the market share, you stay with the customer at the forefront, you transform because then you gradually take a bigger piece of the pie, grow the pie instead of splitting it together and be in partnership. M&A and strategy partnerships, strategic partnerships starts there. The TOMRA partnership is going great. And it has been wonderful to see the teams of 2 companies working together in the pandemic situation moving forward, encouraging each other and taking it to the next level. So we are already testing out in the market, some of our fascinating vision technology. So as I said, stay tuned there. M&A, some of you would say, those are better than M&A that we were taking this quarter. However, in the market for instance in China, even though it's small now because it was main -- 70% of the market there is because main consumption of duck was in the open market buying a whole bird. The dynamics are changing. If you look at top 10 fast food in China and home delivery going to be or is twice the U.S. market. Then the top 3 are Western ones that we have been focusing on serving indirectly through our customers. You know those names, Kentucky, McDonald's, Burger King. However, in the next in line, 7 are local cuisines. So there, you will see the duck, the poultry, the meat and maybe the fish and sushi and so on and so on. So it's a very important step to get the third pillar in the poultry alongside the turkey and chicken. And then I'm really, really glad to have Stranda onboard go in front of the processing into the farming as we are doing in poultry and move forward and then Curio is going fine. We will deploy the capital. We are only 0.8x leverage. We are loaded as well with long-term financing And this is -- will be passing the discussions with you going on. Some of you say I'm very glad to see the discipline that when you are so -- having so strong financial that you don't go ahead, stick to the strategy, all they say, when are you going to utilize the balance sheet better and et cetera. We -- the thing I can say, there are outstanding targets out there. There are good discussions going on. And we will be stronger together many of those companies and the differentiators factors are crystalizing. The global reach and the digital solution are a differentiated factor in Marel. The innovation cost at 6.2% in this quarter. It might go a little bit temporarily in absolute numbers, but hopefully, the revenues will eat it then down to the 6% level. But the ideas and our capabilities are such that there are -- there is a need to continue to transform the industry. So I would be very surprised if we are below 6% this year. So I've cut on this poultry meat and fish acquisition taking on in poultry and fish and so on moving forward, driving fourth quarter as well, fantastic FALCON evolution on the high end and then the PUMA machines on the lower ticket and then Marel portioning in between. So now we take comp sales, now we take line sales in the meat segment, and we are seeing a real tipping point in order intake, in standard equipment, in meat that will come into revenues in coming quarters. And one thing is to improve project execution, but the real icing on the cake for our customers is to make better consumer products and for us as well to deliver more standard equipment. Now I take you to video into Progress Point Copenhagen. It's a virtual Progress Point. Here that we are showing exactly the same as we are having in Copenhagen. So welcome to Copenhagen. [Presentation]

[Arni Oddur Thordarson, Chief Executive Officer]

So I hope you like this. This was Copenhagen. And we are, of course, we like even more when we have physical trade shows in Copenhagen. It was a very brave investment 10 years ago where we moved forward with Copenhagen and Progress Point. It has played through and especially now in the pandemic when we took it on a virtual reality platform. We had a great Salmon show to mention one meat show and the last week Innova showhow where we are exchanging idea how we can take the industry forward. Virtual reality is more and more used to design the customer factories and our installation group is sometimes taken down by half the installation time because they have in the factories before. You know yourself when you're ordering IKEA that you don't use the booklet. You use the YouTube, but virtual reality is next level after YouTube. We have told you that we are investing in mixed reality showrooms as well in Brazil and China. We are just now opening up in Brazil. And later on this year, we will open up in Shanghai. So now I want to say it's a short video, but welcome to Campinas, Brazil. [Presentation]

[Arni Oddur Thordarson, Chief Executive Officer]

Thank you. I think you understand now a little bit a bit higher sales and marketing costs. We are increasing the people. We are having the economics and the look and feel and all the working conditions, the same. Brazil, Copenhagen, China, this is a huge change from our Piracicaba location that we are moving now to Campinas closer to the airport for spare part delivery and getting more intimacy with our customers. So here, we are investing, but let's move over to China. We will show you at least when we publish our first quarter results next year, our facilities in China. We just took a decision on that in addition with Beijing opening up in Shanghai to recap traveling time Beijing, Shanghai the same as Euronext Amsterdam. Very important to cover this dynamic market. We have 100% local team. It's not error where we say glocal structure we see instead of be, we are playing where the world works. You have to think global and act local and vice versa. So to use the economic scale, we have industry specialists, mainly in Europe that are supporting the local teams. Now we can support with remote and move forward and exchange back and forth and divide the forces, but the most important is to have people on the ground, rethink in and out with the customers to understand the local needs, local cuisines and how to move forward. After care service, very, very important, and we are targeting to increase that. Muyuan Group moving forward, I touched on that earlier, replicating several lines, very important. The drug market, important, wastewater important, we are here moving forward. I'm giving here your snapshot because order intake in China was strong in the quarter, we foresee it will continue. We are seeing the heat and the parameters going up in U.S. as well at the moment. Usually, U.S. is very quick to rebound when the economic outlook changed to positive. But we promised you Q&As. So let's go over to that. And I confirm, of course, our midterm and long-term targets. If you have any questions regarding that, we can touch on that.

[Tinna Jónsdóttir Molphy, Director of Investor Relations]

Okay. So time for questions. Let's start with the online audience, and I'll hand over to the conference call operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Klas Bergelind of Citi.

[Klas Henrik Bergelind, Director]

Klas Bergelind of Citi. So it's obviously very good to see the order improvement in March and it's driven both by standard equipment and greenfields. And that suggest that the backlog conversion should be a bit quicker at least on the standard side, those orders that you're now particularly taking in March. But how Arni, how much of those will be invoiced this year relative to next year? So that's my first question.

[Arni Oddur Thordarson, Chief Executive Officer]

So it is a little bit blended. So service level agreements are as well picking a bit. That will be invoiced in the long term, but more that the recurring growing pace. Then the standard equipment is picking up, but we even believe it will be more. But what will really start to kick in as well is the poultry and fish large project in second quarter. We have to bear in mind as well, even though the standard equipment turn very quick, they came in, many of them late March. So some of the effects we will see in third quarter rather than second quarter, but it is -- we are not classifying yet fully, what is for the revenues this year compared to the next year, but the dynamics are not very much unlike in the past, 40% is recurring aftercare revenues. And then standard equipment gradually improving now and especially in mid finally, we are seeing the tipping part.

[Klas Henrik Bergelind, Director]

But just linked to that, I think you said during the presentation that you feel confident that organic sales growth could be above 6% for the year. So did you say that, just, so I confirm.

[Arni Oddur Thordarson, Chief Executive Officer]

No. So sorry guys what I said is that I believe the growth in the market for the next 5 years will be on the range of 6% to 8%. Partly to compensate for the 2% to 4% in recent 5 years and then accelerated now by the pandemic. Maybe I'm too low compared to the data I'm seeing at the moment, the excitement for new solutions. And I said, we will, on average, stay on top of that because we are investing more in innovation. We are investing more in global reach. We -- our competitive position is great. So we are targeting higher organic growth on average for the next 5 years. And we don't fully want to time now how the revenue recognition will be in second, vis-a-vis third quarter and et cetera. So we are not giving guidance for this year.

[Klas Henrik Bergelind, Director]

Okay. Now fine. I thought you said also that you made a comment for the year. But just looking at the trajectory, you're starting off at EUR 334 million in the first quarter, reflecting easier comparatives and orders you're taking now. I mean high single-digit organic seems quite closable. But I guess you don't want to guide on the year.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. We are feeling quite optimistic. What do you say, Linda?

[Linda Jonsdottir]

Yes. I mean I think like we underpin quite clearly, like also in the press release that like we are positive on the pipeline. I mean, it is very strong. So we are positive on the outlook. But it is just a early to be very explicit on this point. But like I would say, we are quite upbeat in the medium term for sure.

[Klas Henrik Bergelind, Director]

Okay. Fantastic. My second one is on S&M and G&A costs in the quarter. I totally get that these are good investments as they intend to capture the growth opportunities. How should we think about this for the year as well? Should they, Linda should it stay over 19% combined, i.e., S&M and G&A, I guess, G&A will drop off, it's to stay over 19%, it will require quite a big gross margin step up to meet current in the market. So I totally get that you should look at this versus orders because that's real demand. But when we model the year, if you could comment in numbers is revenues, at least for this year.

[Linda Jonsdottir]

Yes, exactly. So on the S&M front, there, I would say like we will stay around this level and even go a bit higher because we are continuing to invest in the front line. Of course, then we want that to become a last part of revenues. But like I would say, it will be around this level now in the coming period. On G&A, it's like more nonrecurring related even though like we are, though compared to last year, we are increasing also on adding people because we have a number of improvement projects ongoing. But there are like nonrecurring costs there that like we are not adjusting for. That should not come back. So I would say this is a especially high quarter on the G&A front. But like we are though very much focused on like continuing, improving the company and even though it means a slightly higher OpEx in the short term. So that should fade out a bit throughout the year. But no major changes on the G&A front until we have actually finalized our improvement project, and we start reaping benefits from a number of initiatives that are also connected to streamlining the back end, et cetera.

[Klas Henrik Bergelind, Director]

Yes. But the gross margin will obviously go higher as you -- as volumes are accelerating. And as logistics costs level off?

[Linda Jonsdottir]

Absolutely. And I mean we are like, of course, very focused on that part, like getting that to a level of close to 40% as soon as possible. But like -- but It takes some time to get there, but like that's our priority at the moment.

[Arni Oddur Thordarson, Chief Executive Officer]

But very important sales and market cost is not only capital goods. It is service, digital solution and et cetera. We are seeing quite short payback on those initiatives. many are surprised in-house when we start to engage even better with our customers that the lying demand is even greater, and we can meet that.

[Klas Henrik Bergelind, Director]

Yes. Very quick final one on underlying demand versus preordering in March linked to supply chain issue. Do you send only that the strong orders in March reflected underlying strength? Or did you see any preordering. It seems like underlying momentum, but just the comment from you would be very helpful.

[Arni Oddur Thordarson, Chief Executive Officer]

So the biggest part is underlying strength, but maybe 3 buckets. It is the underlying strengths changed in that our customers focus on what they do are doing best and we are one-stop shop, et cetera. And we have the greatest installed base that has been growing and so on. That is the main pillar out there. You know that some customers are as well focusing as we just in safe stock. So that is a part of it. Maybe that is permanent as well. in the supply chain. So maybe it moves partly over to those customers and et cetera, et cetera. So -- and then rebounding of quick service restaurants, is as well then you need more spare parts in data in. It was earlier the retail and all those fluctuations. Then the SKUs are changing. You have seen the reports from some of those that are serving the commercial kitchens and et cetera. But it is changing, and that means that the process steps are changing. So overall underlying team, but there are many, many factors and we need to serve the customer needs. So -- but there is a pent-up demand in service, manpower service. We have been too much now in the remote in this. When we engage at the plant with the customer, we see things even better together where we should advance and modernize more.

[Operator]

Our next question comes from the line of Akash Gupta at JPMorgan.

[Akash Gupta, Research Analyst]

My first question is on raw material and commodity prices. Maybe if you can tell us what are the key commodities that you are exposed to. Do you buy these metals directly or the exposure is through intermediate products where your suppliers could be buying commodities like steel? And what are the mechanism to pass it on these raw material price increases to you? And final one on that front is on your ability to pass this raw material inflation to customers, like how -- what is the success rate historically to pass this limited increase to customers? And has that been an issue for margin expansion in the past? So that's question number one.

[Linda Jonsdottir]

I start just like briefly on the raw material and the perhaps you comment on the pricing. Like I mean like we have, for example, with one of our key raw materials, steel, I mean, there we are and have been fixing the price like a better head of time. So like into the future, like fixing the price with our suppliers. And of course, that period then ends, and we can see that the prices are increasing. So that could impact and start impacting us more than it has done in the past. And our team and supply chain and procurement is doing an excellent job like they're looking at this holistically trying to balance out like against those other savings to try to keep it as as possible. But like if trends continue as they are now, that could start impacting us more. And perhaps on the pricing, Arni?

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. So thanks for the question. But all in all, I think this plan is having a great cooperation from suppliers into our customers, and we are following this very closely. We have not been affected and the cooperation with the suppliers is great, and our team here is great. We can inflate it into the prices later on if this goes with over. The component is, of course, bigger than the raw material prices. But until now, we have not seen it coming in, in higher prices. So If it comes cross over, then, of course, we, with a good pricing power need to inflate it. However, we are more worried about do we get the part. So we are still focusing on just in safe And then the transportation cost 4x higher than China, Europe than last year. That is because the rebound is quicker than people expected ramping down the supply last year, and then there is a faster rebound. So all in all, quite many of those things are temporarily, and we see and less of improvement potential here. So we are a little bit reluctant to put it out in the price yet, but we follow it very closely.

[Akash Gupta, Research Analyst]

So maybe if I summarize my understanding of what you said is that the likelihood of margin impact from raw material side is low, but I think you may have some other costs linked to like items like transportation and then finding whether you can get components or not. Is that fair?

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. That is having a real long-term effect those efforts are much more brief. All the other pricing effects, it would be a very temporarily 1 or 2 quarters in the end, that doesn't change the intrinsic value of Marel. So the big forces where we can really, really get forward and get the real savings, we are seeing quite significant buckets there. And then lowering the risk, remember as well, we can make or stand that come always in 2 sites now, et cetera. We are on same platforms and, et cetera. So it's a blended just in time just to say that we are playing on, but you should not be actually content about the raw material price.

[Linda Jonsdottir]

To add a bit on this one. Like I mean, I would say like there are a number of examples like through the last few quarters where we have been just very focused on delivering the equipment at the right quality at the right time, like not thinking about the exact cost behind it and like how much the transportation cost, like we follow it carefully, but like our focus during the pandemic has been very customer focused, like making sure we deliver. So -- and of course, that has impacted our margins as we have been highlighting.

[Akash Gupta, Research Analyst]

And my follow-up question is on organic growth. So if you can help us provide some numbers on exchange rate and acquisition impact on both orders and sales in the first quarter, so we can see what was the underlying organic revenue and order growth was in Q1.

[Linda Jonsdottir]

Yes. I mean we don't state it like clearly. But like I can give you some flavor behind it, like we have PMG and Curio now on board. Their contribution to revenues in the quarter was around EUR 3 million. Of course, we have thrived then from Q4 and impacting the quarter. Like what we've said about thrive is like there full year revenues were around EUR 80 million. We had a seasonally strong Q4 2020. We have a seasonally weak Q1 2021. So you can think a bit about the flavor there. So -- and we don't show it explicitly organic versus acquired growth, but I think this a lot into the question. On the currency impact, like we are seeing impact on revenues by around 4% and like -- and in the end, like also impacting our EBIT in the quarter?

[Operator]

Our next question comes from Tijs Hollestelle of ING Bank.

[Tijs Hollestelle, Research Analyst]

The first one is, why are you not providing the detailed split between organic growth and M&A growth for the divisions?

[Arni Oddur Thordarson, Chief Executive Officer]

So I can answer that. That is just how we have done it in the past. We have so much focused on giving explicit how the companies look when we buy them. Then as we have discussed, we don't calculate as the 2 companies. We start metal planting in the sales teams out there and all the cost and the financials and, et cetera. We really, really look at our portfolio, net debt today and future cash flow. I know you can't get maybe underlying organic growth out of it, but we don't either take the headwind, tailwinds this quarter. We had quite massive headwind compared to last year, maybe it's a tailwind to next year. But we really, really focus on being naturally hedged and solve it. So this is our I strongly believe this is one of the reason why we have a good track record and value creation in M&A that we immensely blended together as one and stop calculating separately. That's the core reason.

[Tijs Hollestelle, Research Analyst]

Okay. Yes. Yes, then my initial...

[Arni Oddur Thordarson, Chief Executive Officer]

I fully understand the question. As analysts, I fully understand the question. But it's important not internally to be a one team. It's very, very important.

[Tijs Hollestelle, Research Analyst]

Yes, okay. Yes, the first question is about the credit position. I guess it's for Linda, it seems to be unusually high at EUR 285 million. So it's a EUR 60 million move higher versus the end of the year. But it does not really show up in the cash flow statement. And I know it includes also the contract liabilities, but there's not much volatility in there. So can you help me understanding what's going on there?

[Linda Jonsdottir]

Yes. So If I'm understanding your question correctly, like we do have the dividend as well, like EUR 40 million impacting that number in the quarter. So -- and then like then some working capital movements like connected to also a rising order intake, et cetera. But like the dividend is -- has impact, and it's paid in the beginning of April. And then on other payables, you see that's also increasing between quarters, and that's related to our obligation with respect to the Curio shares. The rest of the Curio shares.

[Tijs Hollestelle, Research Analyst]

The remaining 50% of Curio?

[Linda Jonsdottir]

We didn't hear. Did you say anything now?

[Tijs Hollestelle, Research Analyst]

Yes, there's nothing structurally going on with creditors being paid later. So it's just other items included in that balance sheet position.

[Linda Jonsdottir]

Yes, no, there like -- there's nothing like that. I mean, of course, there's also some -- always some timing impact like where it lands between quarters, but there's no delay in paying creditors. I mean, our financial position is very strong. So we are not in that business.

[Tijs Hollestelle, Research Analyst]

Yes. Okay. That's good to hear. Then the second question, yes, about the record high order intake in the first quarter. In my view, that is primarily coming from strong order intake in the meat division and then in the other to division also by standard equipment. But have you, in the past ever experienced, let's say, previously record-high order intake basically based on one animal protein business.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes, we have done that. When very often -- when poultry has been showing a blast, and we have had turbulence in meat and fish. But usually, it comes wider. The pipeline is building up as well in all the industry in first quarter, but the meat is strong in this quarter. That is clear. And now we need to see our friends in the fish industry. The good thing is we are finally seeing the pipe building up in the fish industry additionally. There is a need for consumer products in the fish industry on new scale. We have shown we can't do this in prime, for instance, was and then salmon factories. And we are moving forward with a pretty high innovation cost in the fish industry. The poultry industry is unusual to see 2 quarters so low in large greenfields, and we will see the tight turning. So...

[Tijs Hollestelle, Research Analyst]

Yes. Okay. That's much appreciated. If I recall well, you already gave us a kind of soft guidance in the beginning of the year on the, let's say, big greenfield projects in China and Brazil, so that turned out now. So you do have that visibility, so that's including here. Yes. Then maybe one final question. It may be a bit of nitty-gritty, but if I read the comments in the slide on the industry performance on the EBIT margin pressure, you say in the poultry division, it's due to lower volume of large projects. So to me, that seems like it's anticipated by you. But in the meat division, the common says EBIT was impact by lower-than-expected margins. Is there anything company specific? Or does that relate to the, let's say, COVID-19 related to additional cost? So any color here would be much appreciated.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. So in this quarter, maybe the COVID-related cost is higher in it, but we should be cautious in saying that we just see when we compare the way of working in in project execution in meat versus poultry that we can do better in the mix. Therefore, we talk about the mix. So the margins out of the project. The volume effect we talk about in poultry, the reason is that we will garner for a bit higher volume in the rented matters a lot when you have the same fixed cost. We were not spending this slide on talking about everything we talked about in the previous slides about the logistical and mobility challenges because that's cross over all the industries. So that's the reason for -- the flavor differences, project execution can improve in meat, and we have assigned advisers there. And volume needs to pick up in poultry. That's why we give this flavor difference.

[Linda Jonsdottir]

So are there any more calls? Any questions from the conference call?

[Operator]

[Operator Instructions] The next question comes from Andre Mulder of Kepler Cheuvreux.

[Andre F. M. Mulder, Analyst]

A question on the development of the backlog. You said it started so low and accelerated in March. Can you give us any indication of the momentum there? And one related question on the pipeline. Can you give any indication of how large that pipeline is? Is it 2x the backlog or 3x? Just a bit more input.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. So just to recap about the pipeline first, that I said. We measure pipeline from a lead where the customer shows very much interest. And then we start to mass sue it when it goes through the first 2 gates in 40% likelihood, 60% likelihood and so on. The magnitude of the pipeline is great than what you were asking about 2x. I'm not going to classify that more. But that is always that way, but now it says escalating a bit higher than that. So the opportunities are out there, and we need as well more teams out there to create even more leads and turned faster into the order book. So I hope I answered that. The large greenfields we are closing here in the March, they were in the pipeline last year coming in, in the middle of last year to be clear about that. But deal is not a deal until you close it, and we are closing that in March. Then the baseline or the spare part packages and standard equipment came on much faster rate in March than in January and February. You can imagine as well that when the operation was seeing the same logistical challenges in January and February. The pandemic is not over. We are dealing with, of course, in Brazil in the and so on, but the magnitude in Northern Europe was at the highest scale in January and February. So all in all, January, February full focus and engaging with the customer and orders coming in, in March. I hope it covers.

[Operator]

Our next question comes from the line of Eric Wilmer of ABN AMRO.

[Eric Wilmer, Analyst]

Question on the deal, you closed with Muyuan Group in China. With your presentation specifically mentioned that it concerns primary process and equipment I think, only. I was wondering, is it because this is just the first part of the project? Or is this because equipment for underlying is supplied by other manufacturers? That's my first question.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes, it's a good question. I have to be careful. We have agreed on what we are classifying here. But it's natural when you're going from the feed mill into breeding into processing that you -- when you grow in this direction, that you start in a primary processing. Hopefully, we will see this as a very fruitful, long-lasting partnership where we then add into the equation or consumer at products. At least discussion now about how do we stop power spare part deliveries in China. How do we build up that now at a speed And how can we be a real, real maintenance partner as we are seeing cost in U.S. and Europe. So to give you a flavor, this is our business model and the business model of Muyuan and many other customers are to increase the value cuttings.

[Eric Wilmer, Analyst]

Okay. Understood. Very clear. And secondly, your Q1 EBIT was impacted by a boost in your sales and services coverage, notably in Brazil and in China. I was wondering what are your concrete plans in terms of further growing your global presence, let's say, in the quarters ahead? By how much are you targeting to grow your FTE base?

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. So in general, we are focusing more on prepared food and consumer at and that across the globe than we are focusing more on aftercare services in sales and then delivering the sales, digital solutions as well. Geographically, we have a number of people on a quite good level in Latin America, U.S., Europe, except from those specific areas that we are focusing on. And then there is a buildup in coverage in APAC, where the fastest buildup is in China at the moment going from 60 to 120 people to give you plans into that.

[Operator]

I believe we've run out of time for questions on the phone. So I'll hand back to speak because I believe there was one question from e-mail.

[Tinna Jónsdóttir Molphy, Director of Investor Relations]

Correct. many interesting questions raised here today. Our final one is from Tom Casper, Fabory Capital and it reads. Can you please provide an update on your Innova software offering? Can you provide some color with regard to the revenue and EBIT contribution of these offerings and the anticipated growth of Marel Inner Solutions.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. So it's a nice question. Most of it will be better transferred in the second quarter because we have decided to have a focus on digital solution at that point in time. But to give you plans that we are having the process control, the digital platform and are now on a speed connecting those out there and the customers feeling connected. The first digital protests on top where we are commercializing the digital products will see the fruits in this quarter really coming in. So we have said today calculates self-standing revenues as low single ticket. And we will then really see that nil move from 2024 and onwards. But you can follow us closely, and we will start to give you more insights into our digital journey. From second quarter results, however, I challenge you all to go to Insoo, that was last week, where Haste, the VP of Inno will explain this much better. So thanks for the meeting today, but it was a virtual show how you should go there in. And if you as well contact Marel people and you go into the progress point, then you can click on and go deep into our machines and see what they are all about. So we have this all on the web. And if you want to contact us well, our people, those people with deeper in it. But due to the time, I will not go deeper into this, but it's already on the anti the second quarter, and I promise I will be taking upfront. So thanks for the meeting today.

[Linda Jonsdottir]

Thank you.

[Tinna Jónsdóttir Molphy, Director of Investor Relations]

Right. Like Arni said, marel.com is an ocean of information, and the IR team is, of course, available you need us. I sincerely thank you all for your time, attention and continued support from Marel. Stay safe, and I hope to see you back here in a couple of months for our second quarter results. Thank you, and goodbye.