Marel hf

ICEX:MAREL

Earnings Call Transcript

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

Okay. Ladies and gentlemen, a warm welcome to those of you who are attending this second quarter results meeting here in our headquarters in Iceland. I also want to extend a warm welcome to those of you who are watching online and to those of you who have joined us via the audio call. And we're going to have a very usual set-up today where we have CEO Árni Oddur and CFO Linda Jonsdottir go over the quarter results and some business highlights. And my name is Tinna Molphy, and I head the Investor Relations activities here at Marel, and I'll be your moderator today. And as you may notice, I'll be going on and return to leave soon, and I encourage you all to be in contact with [ Vicky and Martin Jacobson ] from the IR team while I'm away. And after the presentations, we are going to have a Q&A session where we are going to start off taking questions from the audio call and then move over to the audience here in Iceland. Okay. So the floor is all yours, Árni Oddur.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. Thanks, Tinna. Welcome to this second quarter result meeting. It is a very eventful quarter, second quarter. Looking back now on the quarter, you cannot believe it was one quarter. So many things happened. Of course, the limelight was on the listing, covering the whole Europe and USA and investor education and then the successful listing and offering in Euronext Amsterdam.However, listing without solid operation would not be a good thing as well. So solid operation. Revenues increasing by 10% between years and EBITDA by 15%. Our margin is at good level, 15.2% compared to 14.6% second quarter last year and for the whole year last year.So I want to, before I go into more details, to thank all the shareholders that have been with us in this journey. Some of them have been with Marel team, in the journey since '92.Furthermore, the trust we got in the listing processes. It is, of course, nice when we are coming from this country here in Iceland, pretty small country in population, going to the global markets.We have been a global leader in our field for a long time and now finally getting the recognition in the markets by cornerstone investor, by institutional investors and retail, out in Netherlands, Iceland and all over Europe and with a high demand from UK, USA and so on.Switching to order intake. It is very, very interesting to see the dynamic shift in the last greenfield quarters. We went thoroughly through it since mid-last year, but we believe that the market was normalizing. We were looking at the situation in USA, Europe. It was slowing down due to geopolitical uncertainties, trade constraints, trade wars even, in some cases, et cetera.However, the need for the proteins and balanced diet all over the world is there. People will find solution. We [ say ] as well in recent 2 quarters. Our main task now is to have region by region, to increase supply to meet the existing demand. Furthermore, traceability, safety, sustainability and affordability has never been so much on the [ agenda ].Order intake, EUR 311 million in the quarter and it is at solid level. It is the 3rd highest quarter in the history of Marel. And of course, I cannot say always record compared to history of Marel because we are a growth company. We need to grow. But taking into account the situation in the market, [ what we say, ] if we manage to get greenfields in Asia, China and the rest of the world to compensate for the weak greenfields in Europe, softer greenfields in Europe and the USA, then we would keep the momentum out there.And dynamic shift like we say into those new markets, proportion increasing compared to Europe, USA, although revenue mix is still 35% Europe, USA because we are booking up extensive greenfield sales into USA in this quarter that we are safe to [ account ] for installment.Very interesting to see as well all the greenfield sales in recent years. And with our focused efforts and the importance for all customers that we keep the operation -- the light on all the time.The modernization and maintenance revenues are picking quite faster in Europe, USA, and later on with the new greenfield sales in the new markets like Asia.So modern recurring revenue stream, 35% in the quarter and it's quite significant due to the increase in the revenue booking of greenfield. So underlying service revenues growing very high and that's very nice.EBIT margin, 52%. Like I said, order received, EUR 311 million; revenue, EUR 327 million; 15.2%, the margin. Free cash flow is low in this quarter.There is no fundamental change in the business. Of course, a 0.95 book-to-bills counts in the quarter. What is still counting more in this quarter is timing of delivery of orders. It's just on the brink of the quarterly changes that we are seeing shipping extensive greenfields that are paid when shipped.So our business model is our customer pay upfront and lateral credit financial guarantees the greenfields and then as it goes down the way, as well as some standard equipment and et cetera.The timing there and the timing in the cash flow as well is such that it's no change in taxes below the operational cash flow. There is no changes in tax per share. The payment in the quarter is thrice as high as a normal quarter.Leverage, 0.6. It's clearly below our financial targets of 2 to 3x leverage. So 2x leverage on track to 3x times when we go for acquisition.It is the equity offering with net proceeds of EUR 352 million, thereof EUR 361 million in this quarter. We pay the remaining of the transaction cost in next quarter.0.6x, it will be fair question either in this meeting or down the road, can't management deploy the capital for further acquisition? And the second question, that is the other side of the coin, will management keep the discipline in acquisition when we deploy the capital, when we have so much firepower out there in the market.Personally, I believe that the turbulence in the market, seeing the market shifting so much, Europe, USA, Asia, China, yet to come Latin America, clearly, where we have very strong foothold. We are seeing our customers there are improving the operation. Yet to come, Latin America. Pipeline looking promising, activity changing and so on.I would not to be surprised to see some of our peers seeing order intake seriously down. Those that are focusing on Europe, USA and don't have the same global reach as we. Just theoretical, outside-in. This means that consolidation would accelerate when such dynamic shifts is taking place in the market. So maybe [ integrate ] for some customer later on.Balance in revenues, still 25% outside Europe, USA. Order intake still above 40% in those markets, like it was in first quarter. So we expect to see changes here are more balancing the geographical mix in our revenue recognition.In the quarter as well, greenfield revenue recognition is pretty high. Taking that into account, I believe the 15.2% EBIT is a pretty, pretty solid operational result.So moving into the industries, maybe starting on the weak spot in the quarter, the fish industry. 2.3% EBIT. Of course, that is not satisfactory. 11% of our revenues.If you look, though, at Fish, there is nothing broken. Furthermore, it is in a good shape. Gross margin are good in Fish. It is the volume coverage towards the OpEx that is not good enough due to order intake in second half of last year.Third quarter was very weak in order intake there. As such as well, there was consolidation in the Nordics that would delay order intake, and now we are seeing pipeline in Nordics and USA and Latin America in salmon build bigger.As such as well, I would say the team has been doing excellent job in selling standard equipment into existing greenfields and operations by our customers. And there is a shift in the product mix and there is delay in revenue and profit recognition there.Move then from the smallest to the biggest. Once again, Poultry delivering growth, delivering 20% EBIT in the quarter.Whereas on the contrary, high volume coverage in the OpEx. So maybe it's a bit higher than our normalized level in Poultry, 20% EBIT there, but there's the other side of the coin and the story of what I was telling in the Fish segment.Good greenfield sales in Vietnam, Asia, Korea active, China active and so on. Yet to come, Latin America. USA, we have got a question on why do you say lots of greenfields in USA, and USA and Europe softer.USA is the biggest exporter of agricultural products. Of course, we are still having large projects in USA, even though it's a bit softer than in previous years.Meat, maybe to mention, we will get a question, is Sulmaq and MAJA integration on track? Yes, it is on track. We are over-resourcing, I would say, compared to the size of MAJA and Sulmaq, but this is a showcase how we do acquisition, how we cross-sell and upsell standard equipment into the primary processing country, et cetera. So it's fully on track.Order intake in Meat is exceptionally strong in the recent 2 quarters and the order book as well. There is a huge need for optimization even in Europe. So Meat is the only unit that is having strong order intake in greenfields in Europe. Russia is as well taking in very fast.Pipeline building up in China. And in China, we are focusing more here on meat, small and medium-sized plants, but fully advanced with traceability, food security and et cetera. The swine fever is having an effect in the market. Of course, the total supply is down, increasing the import by poultry and then increasing demand for advanced plants in the pork industry.Overall, such is fluctuation, and not all peers are in the game [ out of this ]. And we need to deal with this and fix this situation in the market.Earnings per share, here we are talking about trailing 12 months average. Nice development, up 9% now, trailing average when absolute earnings per share are up 18% quarter-on-quarter and 20% compared to previous year.We prefer to have trailing average. And everybody can see we are into challenge to improve earnings per share. Next 2 quarters, when we have more outstanding shares, and that's the same question. Will management deploy the capital and will management have the discipline when deploying the capital.Over to you, Linda.

[Linda Jonsdottir, Chief Financial Officer]

Thank you, Arni. Good morning. Good to see you all here today and thanks to you that are calling in.I'm going to go through the highlights of Q2 2019. It was a strong quarter for Marel. Looking at the main numbers, order intake at a level of EUR 311 million. That's a 7% increase from the same quarter last year. Revenues, EUR 327 million. That's 10% increase from the same quarter last year. Also, pretty much in line with the last 2 quarters on revenue level. Spares and service are around 35%.If we look at EBIT, we have 15.2% in the quarter, which is a margin improvement in absolute terms of 14.8% compared to the same quarter in 2018.Cash flow was unusually low in the quarter, operational cash flow and free cash flow, as Arni touched on before. It has to do with increase in work-in-progress and inventories and the timing of tax payments, but it's a timing matter by maturity. Leverage at a level of 0.6x, coming down from a level of 2.2x at the end of last quarter and, of course, influenced by the equity issue and the listing.So overall, it is a very solid quarter from Marel. The order book is at a level of EUR 459 million, which is roughly 36% of last 12 month's revenues, which is slightly under our targets, but still around 60% of equipment revenues.But overall, if you look at the revenue growth and EBIT improvement, very strong quarter.So I'm going to try to explain it in a bit more details on the next few slides. Strong top line growth and solid orders received. And as mentioned, orders received EUR 311 million, going up by 7% compared to the same quarter last year. Revenues, 10% up.We have a healthy mix of revenues coming from greenfield modernization and spares and service. The book-to-bill ratio is slightly lower than last quarter. It's 0.95. And order book, 36% of trailing 12 months revenues.There is clearly a dynamic shift in greenfield orders, specifically within Asia and particularly in China. So you can see that Europe and North America are slightly softer and we see that influencing our numbers.But overall, both on revenue level and order intake, good results in the quarter. Revenue substantially higher than order intake, which leads to a decrease in the order book. Robust operational performance, 15.2% in the quarter, 10% up from last year. Here you can see the development from 2014. This is before our refocusing exercise where we were at the level of 6% in EBIT. We fundamentally changed the cost base of the company, both on gross profit level and OpEx level and we have been delivering around 15% EBIT for more than -- or around 3 1/2 year.Results of the quarter, in line with that 15.2%. Gross profit margin, close to 40% in the quarter, which is strong.Looking at the OpEx items. You can see that R&D is at a level of 6.2%. That's slightly above our strategic level. We are investing well both in Fish to close application gaps and also in our software.S&M, 12.2%, also slightly above our long-term targets. But we are strengthening our regions through our localization efforts. So we are investing also in the front line.G&A, 6.3% in the quarter, lower than last year. Slightly impacted by the listing -- maturity of the listing cost we do take through equity, in line with IFRS, but there are internal costs and also the listing itself in the stock exchange that you don't take through equity that affect G&A in the quarter. But still going down from last year.EBIT, increasing by 14.8% compared to last year. And it's been stable around 15%. Of course, you can, in a company like Marel, expect to see some fluctuations between quarters because of timing of big projects and product mix.So net orders received and revenues close to record. Order book now 36% of trailing 12 months revenues. We don't book anything in the order book unless it's financially secured and vast majority of the order book are greenfield projects and larger projects. Spares and standard equipment run faster through the order book.Looking at the profiling, there is very low customer concentration with no customer with more than 5% of revenues. And in general, the order book is quite well diversified in terms of delivery time, size, et cetera.But book-to-bill, 0.95. 36% is slightly below our targets, but still gives us a good foundation for the rest of the year.Income statement, highlights, revenues growing from last year, 10%; gross profit, 39%, improving 13% compared to the same quarter last year.I already touched on the OpEx item, but they are in line with plans in the quarter, giving us 15.2% in EBIT, which is close to 15% improvement from 2018.Net finance cost, EUR 2.5 million in the quarter compared to EUR 3.1 million, mainly affect -- the decrease is mainly because of FX impact, positive impact from FX, and that result is EUR 34.3 million compared to EUR 29.5 million same quarter last year, which is 16% improvement.If we look slightly at the balance sheet, there are a few things to mention here. On the working capital, we saw a change in the quarter of close to EUR 34 million due to increase in contract assets and in inventories.Contract assets is timing because that's where we are with the larger projects where we have not sent out the invoice to the customers. Inventories is as both connected to volume, but it's also a strategic decision to increase the level of parts that we use regularly in our operations to make sure we speed up delivery times, both of spare parts and standard equipment. And so -- [ but there was ] influence from this in the quarter, affecting the working capital, but this overall maturity of this is purely timing.Cash balance increasing in the quarter substantially because of the equity issue and we did use part of that to repay our revolving facilities.Leverage, 0.6x. The main influence here on the balance sheet is on the borrowing side, which is the repayment of revolving facilities.Cash flow, this is the walk from EBIT and also shows a decrease in net debt. As mentioned, influenced by changes in working capital. Cash generated from operating activities, EUR 22.3 million. We paid taxes in the quarter of EUR 16 million. Just to put it in some perspective, the payment in Q2 2018 was EUR 9 million. Taxes we pay in a year are roughly EUR 30 million, so EUR 16 million in a quarter is a high amount. So that's a timing impact.Investing activities, EUR 8 million. Plus our investment in the Canadian company, Worximity. And on the investing activities, we continue investing in innovation and IT, but we have been scaling a bit down on our investments in housing because they have been at a very high level over the last few years.Net new shares issued, 361 million here. This is the EUR 370 million minus the transaction cost paid in the quarter. Then next quarter we will pay the rest. So you will see in the cash flow negative impact from transaction costs in Q3. More details in the notes to the financial statements.Just to summarize like the key metrics that we are focusing highly on is earnings per year. Now the trailing 12 months is at a level of EUR 0.195 compared to EUR 0.165 in Q2 2018. We are very focused on with focus on margin improvements to grow earnings per share faster than revenues.On the free cash flow front, that's also an area we highly focus on. The cash flow generation of the company is excellent. Because of timing, it's slightly lower in Q2 than we normally see. But as explained, that's a timing matter.Net debt/EBITDA now at a level of 0.6x net debt/EBITDA, which is below our targeted capital structure and underpins that we are financially ready in terms of strategic growth opportunities.So give the word back to Arni.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes, thanks. So,maybe before I go into the slide -- so Linda is CFO of the company as well IT. We have been implemented very heavily new -- modernizing all our systems. And this quarter, we continue implementing systems and et cetera.How did you take the administration cost down in the quarter and we were in [ listing ] as well, but it's just a question. But we said that 1 or 2 quarters ago. We are focused on this. We have been investing very, very well in the company and we can streamline this cost level down to what we see in best-in-class when we are getting much, much more [ fit ] for advancing out there. But we needed to invest very well in those systems.We continue to develop housing facilities. We can [ have ] investments more and we have a very, very good as well fit for the future manufacturing platform.R&D at the right level, like Linda said. And gross profit at 40%. So pretty good to operation in general. That's why we were confident when we were traveling around introducing the Marel case as well. We are in a fabulous industry that is growing. Underlying need for balanced diet, proteins is there.We need to do it in a sustainable way and we went all over Europe, New York, London to educate the market. It was not only to do the offering and the listing. The shareholder journey afterwards matter a lot.It's a partnership like with the customers. When you invest in a company and your management in a company, it's a partnership. How can we together, through Board of Directors, through the AGM, improve the operation?So it's very important, the investor roadshow by the management and by the analyst and the special management because investors are -- [ to serve the ] company and we are as well, of course, targeting someone for a real partnership on real challenges because, in the end, the company is owned by shareholders and we are here to serve the shareholders.We announced the listing process AGM last year, 2018. It has been an interesting journey, seeing the re-rating of the shares in that journey. I think it's fair to say that was a goal as well to see the re-rating of the shares. However, it was a goal as well to leave enough on the table for future investors to join the company. It's a balancing act, diluting investors, having room for, first, creation going forward.I think we found out the right level in the equity offering and it was not the company that found it out. It was the investors that found it out. It was based on extensive indications from wide variety of investors where they were willing to come in, but the pricing was set. It reflected in multiple oversubscription. It was not an easy task to allocate the equity issue.However, all in all, a very, very successful transaction. 3% global holding 18 months ago. 30% global holding now. 19% registered in Euronext Amsterdam. You can then see that one class of share, fungibility of the shares is fully working. The price levels are the same in the market, more or less the same in the markets day to day. And net movement of shares from Iceland to Amsterdam has to date from the listing been 4% or 30 million of shares.Behind the scenes is 50 million movement into Amsterdam and [ 20 million ] to Iceland back. That's part of the retail. That's part of the arbitration that is taking place. So there is a huge movement on a daily basis between the markets.This is a key in our preparation. When you do a list, you are dividing the free float. And the sum of the worth of [ spread ] of markets need to be greater than separated.If the fungibility is not there and if it's not one class of shares, very often do a listed company see result and less activity in the market.However, the allocation as such is -- is as well that long-term holdings was the vast majority that we're taking this year in this equity offering, 79%. Then retail, 5%. And the remaining, hedge funds out there, high quality hedge funds that are as well very, very important for the setting the fair pricing and trading day in, day out.So we met all our targets in this. Yet to come, though, index inclusion. That is not yet there. But all other targets are met and it was not the target to have Index inclusion at this time.Access to investors, global investors, global currency. Many of the companies we are discussing with are family-run companies for 3 generations out there. When we are entertaining discussion, people are talking about -- it's the global reach. It's globalization. It's digitalization that are paying an interest for us. It's cross-selling, upselling serving our customers better.Very often, those owners don't want to exit this industry. To be honest, I've not met anyone yet that has been very or super excited to get Icelandic shares in Icelandic krona. So this changed the landscape to have a euro listing in Euronext Amsterdam in the [ way they come for us ]. Acquisition, currency, improved liquidity, analyst coverage, flash reports out yesterday, 6 analyst reports already on a global scale out there, in addition with, I would say, the very sound and good analysis that we have had here in Iceland, but not with the same distribution and not as well-known as those house names out there that are now covering our stock.So higher team cooperation with the banks and as well our STJ, our independent adviser, legal team and et cetera, excellent job. I very, very often say to the banks, if there is some discussion, some disagreements between the banking group, then I would like to think, going through the journey. I said it again and again. We never saw it as management. We saw it just as a one team working with us.And you can imagine, we could count that 300 people to 500 people were actively working on this equity issue, directly participating through the extensive network of banks. This is important. Of course, the fees are high in view of many investors. However, this is not a listing exercise. This is a starting point for a new shareholder journey out in the global markets. So successful listing, clearly.Back to operation. We said listing, the highlights is that we are showing solid operational result, revenue growth. Our targets are clear. We continue to increase our competitiveness with a global reach, 6%, innovation, investments.Market will continue to grow on average by 4% to 6%, probably lower at the moment but higher in few years. So it's a [ peer request ] to grow faster than the market when we are investing higher than the market in R&D [ and ] more extensive global reach.Acquisition growth, 5% to 7% on average, nonlinear. We could see it in stats throughout here. And not opportunistic, closing application gaps, strengthening our offering is the main focus.Operation today, we need innovation to continue to sustain the growth, to sustain the profitability, sustain serving our customers better.Last time, we went thoroughly through Fish. We showed you as well video from the [ IFFA ] show. Next, we probably then deep dive into Poultry, but a little bit snapshot here in Meat.Just to explain, we cut -- we are getting -- volumetric portioning, we are getting from MAJA, even though we say we are full line offering in Meat. Then here we get a more agility in the width of the meat that we are slicing. We are getting to thinner slices.Why is that important? It's all the schnitzel market in Germany. It is the Latin speaking world. It's Spain, Italy, Latin America. It's not barbecuing every night. Moreover, it's more often schnitzel on a pan, thinly sliced meat, [ then heat it ] and have that solution when we have the extensive network.So we have that. And if we have that, then, of course, we need to have coating for the schnitzel and why not then use the coating from the chicken nuggets for the schnitzel. And that's how we built by the LEGO bricks the full lines. It needs to be LEGO bricks. It needs to be synergized with other industries and that's our competitive edge.As well, this nice PremiumFormer making the excellent burgers. At least I love those burgers. We are as well here in real sustainability game. We are utilizing the fat better that is attractive as the value for our customer versus the lean muscle. We are making excellent product out of it, either a burger or meatballs [indiscernible].However, this needs to be bone-free. This needs to be exactly the fat that we promised it to be. And therefore, in the beginning of the line, you have SensorX Magna. SensorX coming originally form fish, moving into blockbuster in chicken, detecting the bones, removing the bones, getting out of line. By pushing it into the line, again, to utilize the [ market ] best, SensorX Magna is the next generation. Not only detecting the bone, we are detecting the CLA level. So we are measuring and monitoring the fat level versus the lean muscle level.Now here is the real winner. And you never retain quality in the flow. You can just keep the quality. So taking the quality in beginning of the hamburger line after our primary processing, after our secondary processing, always keeping the quality throughout the process, then mixing the fat and taking out the bones and then you get the matter for the real hamburger. [indiscernible] here.Why are we showing this [ cross-product ] selling since acquisition of MPS? It's on the target. While primary processing is well ahead of targets, we have never introduced as many solution to the meat industry and secondary, [ on, first, the process just ] this year.And we are focusing on taking the customer through the value chain because that's value catering for customers and ourselves.Now it's time for Q&A and ask Linda to join me here. Let's see. Financial targets fully in line with what could be expected.

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

Yes. So it's time for questions. And we're going to start off with the online audience. So I'm going to hand over to the conference call operator.

[Operator]

[Operator Instructions]. Our first question comes from Akash Gupta from JPMorgan.

[Akash Gupta, Research Analyst]

My first question is on rolling 12-month book-to-bill, which is at 0.95 for the Group. Can you talk about how does it look like for the various segments, particularly high margin Poultry business, given that it will be important driver for margins for the second half?And my second question is on -- can you give us some general idea about how long it takes to negotiate these large orders by regions? Because it looks like it may take a little bit longer in Asia, in China in particular, than what you have in Europe, North America. But maybe if you can elaborate a little bit more in detail, then it would be very helpful.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes, thanks. So the question was the order book and the book-to-bill now 0.95. However, it was 0.99 last year and then 1.10 the year before. Just to explain a little bit. The question is, when do we expect it goes above 1.0 and then how long time it takes outside of Europe, USA where vis-a-vis Europe and USA to lead to a shortage into the order book. And then, probably, I would say how in general the order book translates into revenues. So is that correct?So in general, of course, when we are growing on average organically 6% a year, our book-to-bill is on average 1.06. So that's our target. However, the extensive greenfield sales in recent years and et cetera, booking off revenues at this magnitude because we need to deliver right quality on right time and we have coming our largest order to date, the Costco order and installation, up and running factory in September. So that's why the revenue recognition is higher than order intake, although order intake in the quarter is high.We don't quantify exactly how long a time it takes to take a pipeline. Pipeline is the potential orders [ outside ] into orders by market. But as you can imagine that, when you have very longstanding business relationship, 20, 30 years, it's a high switching cost in our industry. In Europe and USA, everything is in place. It's just like the financial markets, opening accounts in the banks and et cetera, everything is in place. And it's very important because it's prepayment and lateral credit everywhere outside of USA. So it takes shorter time closer to us. But we have to bear in mind, we are getting more and more than advanced out there because China, Korea and et cetera are not new markets.So on average, the big orders, it takes 9 months to change that into revenues. Linda, you can add to it and industry by industry. It's a little bit longer in meat than in poultry and fish. Shortest in fish.Then I'm not avoiding the difficult question, what is the proportion of the order book by the industries. We can color it. We don't announce it. It’s exceptionally strong in meat. When it's exceptional strong in meat, dare we say that, it's a little bit weaker in other industries. It is at low level in fish due to the order intake in last autumn. And due to the high revenue recognition in poultry, it is weaker than we have seen in recent quarters in poultry. However, the pipeline is as well strong. And remember, the proportion of service and spares is higher in poultry than the other industries. So some things nearly don't touch the order book when they translate from orders into revenues.A long answer to one question.

[Operator]

The next question comes from Klas Bergelind from Citi.

[Klas Henrik Bergelind, Director]

It's Klas from Citi. A couple of questions from me. First, on the moving parts again, looking through the P&L. Earnings quality is good with an improvement in the gross margin. You have lower G&A, which is more than offsetting the further push on the front line and higher R&D. So I had a question on this with respect to poultry where you have very strong numbers. Was it better service and perhaps higher margin software driving an improved mix and how sustainable is the improved gross margin here into the second half? It's been trending a bit lower recently. Now it's recovering again. So yes, we get the gross margin right, especially greenfield sales were strong in the quarter, which sometimes is weighing on the margin. It's encouraging to see that the gross margin is trending higher. Just to understand it.

[Arni Oddur Thordarson, Chief Executive Officer]

So thanks, Klas. Maybe I start short and then Linda takes the real question. So order intake in greenfields were softer and the cost around spare part order intake very high in [ cost there, ] but revenue recognition in greenfields was very high. So that's why we said 15.2% was very good in that light. However, spare parts and services with high gross margin are as well running very, very well through the system.So before I gave it to Linda, the gross margin at this level is long term very sustainable, but, of course, under some challenge in the rest of the year. I say very slight challenge for the rest of the year due to the lower order book compared to last year, but, Linda, maybe you go through it step by step.

[Linda Jonsdottir, Chief Financial Officer]

No, exactly. It is higher than we have been seeing over the last few quarters. So the mix is good in the quarter. So I would say it's at the high end, also taking into account -- if you look at pull-through there at very strong levels. So I would say this is what we have stated that our target, to be around 40% on gross profit, which we reached in the quarter. But I would not necessarily assume a flat line there for the rest of the year.

[Arni Oddur Thordarson, Chief Executive Officer]

And maybe to add, the software revenues are not yet delivering to the total EBIT margin, even though they are starting to deliver something to the gross margin. It's a low-single-digit pure-play software revenue still. And we are reinvesting that all in the R&D line. That is, therefore, the R&D is higher than the 6%. So net contribution into EBIT from the software is not yet there, but underlying value creation is there.

[Klas Henrik Bergelind, Director]

Okay, perfect. And my second one was on the Fish margin. I understand the reasons for the lower margin, but I was wondering if you could help us with the likely trajectory from here. How much of the 600 bps lower margin year-over-year was IFRS 15? And the order pipeline, you talk about, Arni, is strong now. If we get stronger orders in Fish in the second half, how quickly can these turn into invoicing and help the margin again here? I get that the long-term opportunity in Fish is really there, but I just want to understand the trajectory in Fish margin maybe over the next 12 months.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. So we have to bear in mind that, long term -- how to answer this? Because, long term, our target is clearly 15% plus in Fish segment. However, if we compare to 8% last year in EBIT in Fish, then maybe it's a 50-50 ballpark delay in revenue recognition. And then the volume effect for last year that we don't reach the same level as last year. Volume going down by 20% between years, then you don't have the operation coverage. However, gross margin, fine, in the Fish, and solution coming out. When we are so convinced that we are on right track and we need to close the application gaps in [ primary fish, ] wild fish and continue new innovation in the secondary. Same in salmon. And then the fabulous growth opportunity in the farmed whitefish like tilapia and et cetera, then we just continue. Of course, we are using the green cash flow from poultry to invest in those areas. And we could take the option to take the OpEx down and then we get the higher temporary Fish result, but we need to gain the leadership there. And especially, when we go to China and new markets, there's no use that we try to sell the secondary processing solution and then our customers start investing in the primary and 3 years later in the secondary. We need to have the full line offering and we are focusing on that. So from 8% to 2%, isn't it 50-50 revenue recognition delay and volume, 20%. Ballpark. We cannot answer it more exactly because we don't classify it.

[Operator]

The next question comes from Eric Wilmer from ABN AMRO.

[Eric Wilmer, Analyst]

Two questions from my side. You mentioned softer greenfield orders in Europe and North America. At the same time, data shows that June China pork imports rose by 63% year-on-year as a result of African swine fever, mainly from U.S. and Europe. As such, would you expect mature market greenfield projects to catch up during the remainder of the year?And secondly, you also mentioned large orders received from Asia in Q2. Assuming some of these related to greenfield projects, which tends to have lower margins, would you expect the EBIT margin for Poultry to come down in the coming quarters?

[Arni Oddur Thordarson, Chief Executive Officer]

So the second quarter, will it be lower margins in Q2, China, Asia vis-a-vis Europe, USA, historically lower margin. Now we are talking about the EBIT margins. We are operating at similar gross margins in those markets. Historically, we have seen lower EBIT from that due to that we didn't have the same extensive sales and service network as we are having. That's why the S&M cost is so high in the company. That's why we have 700 people on the ground in Latin America. We are clearly under-invested compared to opportunities and compared to current sales in Asia and China. So something of it is fly in, fly out. So it's correct. Sometimes it's higher cost to install that, but that's still [ the gap, ] the market. So no, we don't expect therefore materially lower EBIT, but it is, of course, high volume, like I said at the beginning of the meeting. Higher volume in this quarter, certainly increase in poultry and lower volume in Fish, so it's a reverse effect on the EBIT in that cluster. But the general [ sale ] gross profits, in gross margin in all of the markets. But when you're first [ of the way ] and you want to have the same quality in equipment and installation, then the cost can be higher. Korea is not a new market for Marel. Brazil is not a new market for Marel. China is not a new market for Marel. So it was new markets few years ago, but we are, of course, building up further expansion.Ballpark. Furthermore, 25% of our employees are now in Europe, USA. In 6 to 10 years' time, it will be 50% of our employee base outside, even though we will increase employees by multiple of 2.5 in 10 years' period when we will increase revenue by multiple of 3. So just to give you an insight into what we are thinking. Swine fever and et cetera, Linda.

[Linda Jonsdottir, Chief Financial Officer]

Now just a brief comment on -- because you asked about the Poultry margins. In the quarter, they are definitely at the high level. Higher than, for example, we saw last quarter and close to record for Poultry. So I think that's something to keep in mind when you think about the total year.

[Arni Oddur Thordarson, Chief Executive Officer]

The question was exactly then, would it affect in more order intake in second half of the year in Europe especially, and maybe USA.We cannot say. But definitely, if you look at -- the pipeline is good. But if we look at what happens after just extensive credit constraints as we have had. And you can just imagine, if we start to release it again, that must happen because supply and demand is a mismatch in the world and agriculturally CO2 sustainability is different country by country. We must find a solution to release it. However, it will never be same after we release it as before.The export countries will be much more stricter on traceability and quality than before. The limelight and the focus on this will increase, increase, increase. So after we start more movement of flow [ between ] countries, traceability, bone-free and et cetera, and our customer know that and are preparing, for instance, investment in SensorXs and as well that's why we are stepping up in INNOVA investments. So it will never be as before, fully pre-flow and it will be much more stricter in food safety, food traceability. But we cannot say if it has some effect in order intake in second half. We are looking at what happens in 3 years' time and 10 years' time. But focus on day to day.

[Operator]

[Operator Instructions]

[Arni Oddur Thordarson, Chief Executive Officer]

I'm sorry. This is new for us. I was getting -- when we would get the audience as well to ask some questions. But it is nice. It's not maybe very unusual not to control the show in a meeting room like this for me. So Tinna, [indiscernible]. So, next question. It's exciting. And a lot of those questions -- and this is what was wonderful about the investor road show. We got a lot and lot of deep and good questions. So continue.

[Operator]

The next question is a follow-up question from Klas Bergelind from Citi.

[Klas Henrik Bergelind, Director]

I had a follow-up question just on Meat quickly. When you say in the release that orders are strong, especially on the primary side in Europe and Russia, is that a clear acceleration quarter-on-quarter? Is that what you mean? And then, on pricing on new orders, is pricing better on the new orders versus those that maybe came through this quarter and weighed a bit on the mix there?

[Arni Oddur Thordarson, Chief Executive Officer]

Again, excellent question. So pricing in orders have been weak in 3, 4 years in primary meat due to the fact that the 3rd player in the game was under-bidding a lot in the market, under-bidding customized solution toward other solutions. There were 3 players, Marel, Frontmatec second last, then Banss. Banss went into bankruptcy one year ago.So somehow I believe it could be stabilizing. And of course, it's stabilizing as well when order intake is at such high level. Everyone that walks through a meat factory vis-a-vis a poultry factory in Europe see the need for automization. We have a huge value catering as well opportunity in the Meat segment, like I showed in the innovation here with our SensorX Magna hamburger lines, volumetric portioning and so on.So swine fever, high attention, you will not export pork in Europe and USA to China unless you are full traceability. And we will finally start to see some consolidation in the farming side in China, more investment in advanced pork plants in China. We have already seen, in recent 7 years, in Russia, investment in high-tech primary meat factories in Russia. And they are getting net importers into China.So the landscape is changing. We are following very thoroughly. Like I said, we are on to targets in cross-selling and upselling in secondary and fast approaching and introducing new solution there. So situation in the Meat segment, all in all, much better than we have seen.

[Operator]

There are no further audio questions. Please continue with the audience.

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

Okay. Many thanks. I think we'll turn now to the audience here in Iceland. And I see that we have a question from Stefán Broddi from Arion Bank.

[Stefán Broddi Guðjónsson, Head of Research]

Stefán Broddi Guðjónsson from Arion Bank. Yes, I have a couple of questions. The first one is on the increase in inventory. You say that's due to special initiative. Can you elaborate on what you hope to achieve with that? And is that going to result in increasing portion of recurring revenues, service and spare parts as portion of your sales, which has remained rather stable around 35% of sales both in 2018 and so far 2019?My second question has to do with -- well, I'm going to try to have you elaborate a bit on future acquisitions. And so I'm tempted to ask if you will -- if you are approaching or you are focusing on older established companies with strong cash flow as you've done in the past or would you consider investing in new or future technology even though that would affect, for example, your short-term earnings per share.

[Linda Jonsdottir, Chief Financial Officer]

So if I start with the inventory question, you have been seeing inventories growing if you look a bit further back, which partly is just in line with the volume and quite normal. There is like a specific focus now in terms of making sure we have available fast moving parts at all time because we are growing quite a lot as a company and to make sure we have lead times in line with our customer expectations at all time. So that's the comment I made on -- in terms of increasing a bit the fast-moving parts to make sure we are in line with our customers in terms of lead times on our products.Will that grow service revenues? I think service revenues are at a very good level, 35%. I think we still have opportunities there to grow, specifically within some of the industries to move more in line with the industry that has the highest percentage of service revenues. But it's also about servicing our customers properly and making sure we deliver at the right time.

[Arni Oddur Thordarson, Chief Executive Officer]

We clearly can. Even though we are seen as pretty good in service, we can improve. And shorter lead time, answering through the phone when can it be expected or online. Our generation -- I say always our generation. I'm talking about people now in purchasing. Many of them younger than me. When you go to Amazon, et cetera, you expect, not necessarily, to get the spares, the equipment on the spot. You expect answer within 5 seconds. We are not yet there. We need to have the fast-moving parts, the critical parts available and we need to be able to answer immediately when do we deliver. We are not yet there. We are taking on the safety side when we are investing in the IT systems and et cetera to stock a little bit in the fast-moving parts and critical parts. We need to serve our customers. Cost of capital is low here. So we improve net-net both sales, EBIT for our customers and ourselves by being cautious here and stock a little bit up. We have seen that order intake is growing a little bit more than you see because greenfield revenue recognition is higher than 35% revenues.Main focus in acquisition will be on companies that are having excellent products out that like MAJA, easy to upsell, easy to cross-sell, take it through our global reach and digitalize the platform. Taking INNOVA into it and et cetera. In this quarter, we although invested in Canadian Worximity company, we will continue to do some things like that to extend that to our INNOVA platform.We are net-net not delivering through our software initiatives standalone. However, embedded software/hardware is the key differentiative factor of Marel. But in a standalone software, we reinvest all the gross margin generation in R&D. We will continue to do that and we will continue to invest in as well. Interesting technology not on high scale compared to the size of model that will transform firstly the softer piece. Yes. So we are investing in that dilutes the margin and net-net it will increase the margins in next 5, 10 years, so we are investing in the future. Yes, we will.

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

Right. If there are no further questions, I'd like to conclude today's investor meeting. I'd like to sincerely thank you all for your time, your attention and your continued support for Marel. Thank you very much and enjoy your day.