Marel hf

ICEX:MAREL

Earnings Call Transcript

[Tinna Molphy, executive]

Good morning and welcome to our second quarter investor meeting where CEO, Arni Oddur Thordarson; and CFO, Stacey Katz will go over the financial results and some key business highlights. My name is Tinna Molphy, Investor Relations, and I'll be your moderator in today's session and we'll cover the presentations and then conclude with Q&A. Hopefully, we will conclude within the full hour. [Operator Instructions]With that, I'd like to hand over to Arni Oddur Thordarson.

[Arni Thordarson, executive]

Thank you, Tinna, and welcome to our meeting as well in the middle of the summer here in Iceland. Let's move on into the market and market performance and order intake and starting with a -- it's okay. Let's go on the right slides.So welcome again. Let's go into the dynamics in the market. It has been interesting periods of softness in recent quarters. And now we are counting 4 quarters on a relatively low level. That is the longest softness in our market that we have seen since, to recap, 2009. We saw softness in 4 quarters in a row in order intake. Then we witnessed a high 21% increase in order intake in the following 12 months.We saw similar pattern to the '13, '14 when we had 3 quarters in softness. We saw a 25% increase for the following 2 years combined after that. [ Underlying ] we are in a growth business with 4% to 6% growth in the market per year and we have a track record of growing at 6%.It is nice to see though that we are taking off from the low level EUR 407 million in order intake this quarter. Activities are clearly improving and market outlook is becoming more positive. And we expect higher order intake in second half of the year. We as well expect higher order intake in the second half of the year than second half of last year, meaning as well that the book-to-bill ratio will move above 1 compared to very close to 1 in this quarter. Behind the numbers are a lot of things. Geographically, we saw softness in now last 3 quarters across the board globally.Now we are seeing very interesting movement geographically as well. For instance, events in Latin America by [ the low neck ] in the beef where it's very interesting, we are going from primary to secondary throughout the full line. Here we are leveraging our local team in Brazil Sulmaq and as well, our high-tech solution from the Netherlands. Cost competitive out there [indiscernible] full line offering in Latin America.We are moving forward and I will touch on that in China in a very interesting strategic partnership in Muyuan that I will -- it belongs to the third quarter. So I will do it after the financial number in second quarter. Then as well, we are moving forward now in this cluster in U.S. with a more sustainable solution that the U.S. market knows in the poultry industry where we are not using air chill instead of water chill, reaping on the benefits from Costco [indiscernible] with higher line speeds and more operational efficiency.Maybe underneath as well. What I'm very proud of is how the chain inside Marel with our customers are working. It's paying off as well the new regional distribution center in U.S. and we are seeing delivery performance in the aftercare market improving as well. So lot of activities happening. It's still such, but it takes time to finalize from pipeline into orders, financial securities or prepayment. Orders came in extremely late in second quarter and some shifted into third quarter, even though we had them fully accrete and we -- our business model is we never book order unless it's financial secure and prepaid.All in all, market conditions improving, cautiously optimistic, but we are seeing as well a pickup and we expect as well as in the past catch-up effect here in our order intake. [Indiscernible], we are working on many axis to make our cost base permanently leaner. We have been investing in our infrastructure, making it more efficient. Additionally, we are ramping up and down, getting industries ramping down, for instance, in primary meat, increasing the focus in the sales in secondary meat. To recap, in first quarter, we saw the dynamic shift of the consumers moving -- trading down [ cost tree ] over to meat or to mince meat, prepared meat and so on.Here, we are wrapping up and down. We are taking on the cost and you will see the benefits of our action in second quarter going into third quarter. Our EBIT is only 8% in the quarter. If we start with the gross profits, they are at 35% level compared to 36% in first quarter. Underlying this is improving, this is solely volume in second quarter compared to first quarter. Very important as well, looking ahead, we believe that revenues will be at similar level in third quarter or second quarter, and then start to ramp up in fourth quarter.And if we go first into the '24, we could be seeing revenue levels at [ EUR 45500 ], in [indiscernible] and you have to bear in mind, we are here take a balancing act on the cost, making the company sustained, leaner and then being able to wrap up when we see the revenues ticking up again. So 8% EBIT expecting next quarter at similar revenue levels at lower cost base and then ramping up in next quarter in the revenues and seeing then operational improvements going forward.We will touch on our targets and how we lay them down. Give you first insight into how we are doing those themes and investments in a transformative matters here, changing completely our aftercare and service business, while the food industry has been in a total transformation in last 3 years. The market is moving from global to regional, both in the global supply chain and in the food industry, people are shifting dynamically between meat and poultry and into consumer happy.Our customer wants us daily with them, and we have been investing high-scale in end-to-end spare parts like the regional distribution center in U.S. and our global distribution sector in Eindhoven that will be operational now in beginning of next year.Capital expenditure on average 4% in first half of the year. That will go down to on average 2.5% in the second half. Very important as well to pause a little bit in those high investments because then we have more time with our customers. We take down as well business relative cost and we improve the free cash flow. 2.5% is above the industry standards. So give you an insight, you can read it here yourself. The warehouse in Boxmeer improving the flow in poultry, operational beginning in second quarter, full efficiency, we are coming to see in third and fourth quarter. But why are we doing this? In service, you can see that we are starting to reap the benefits. We have seen 12% growth per year in the service business.You see as well, it accounts for 47% in this quarter. I see it a little bit differently because project revenues are going to increase in the coming quarters. We are well above 40% in underlying spare parts service and software businesses here in Marel, in line with our strategy of taking it from 10% towards the 5% to 50% '26. Here, we are increasing the intrinsic value of Marel immensely. We are increasing the customer satisfaction immensely. And we are increasing the customer stickiness as well. Daily touch with the customer and we have never been closer to our customers going day by day through the opportunities and challenges that will increase the sales of standard equipment and the next projects that are down the line.Again, delivery performance on a good level toward our customers. Now we will get productivity going forward. But EUR 800 million on an annual basis, EUR 200 million times 4, trailing 12 months, EUR 767 million.So over to you, Stacey.

[Stacey Katz, executive]

Thank you, Arni, and thank you for joining us today virtually as we go through our results for Q2. I am going to start with an overview of the quarter. I am going to focus on the quarter rather than the half year, as I believe that's where you would like to have some more information in terms of the most recent financial highlights.Revenues, EUR 422 million compared to EUR 447 million last quarter, lower project revenues due to lower projects order intake in the last quarters, mitigated, as Arni mentioned, by another increase in aftermarket and spare parts revenues to EUR 198 million. Good and continuing progress on our investments in our end-to-end spare parts journey. Orders received at EUR 407 million in the quarter, picking up from last quarter's EUR 363 million with a book-to-bill of 0.96 closer to the parity level, though we would like to see this continue to increase in the next quarters.Pipeline is strong and outlook is improving in the coming quarters, though we are experiencing uncertainty in terms of timing of conversion of pipeline into orders. As a result, order book at EUR 575 million or 32% of trailing 12-month revenues. Gross profit, still not where we would like it to be, impacted in the quarter mostly by volume, as Arni mentioned. Good actions ongoing to see positive developments in this line item that I will cover in a bit. In the quarter, we did start to see prices easing when it comes to raw materials, stainless steel, et cetera, though it does take time for that to price through. For example, if you look at Marel design parts, we first take negotiations with suppliers, then it goes through inventory and then to sales.Wage inflation remains at a high level. I am very happy to see that in both sales and marketing and in general and administrative costs, they are trending downwards on an absolute basis, EUR 7 million lower quarter-over-quarter, though the percentage is the same due to the lower volume. Good actions ongoing on streamlining that I will cover in a bit.EBIT of 8% in the quarter or EUR 34 million, softer quarter as we had commented on last quarter due to the lower projects revenue and cost coverage. Free cash flow of minus EUR 6 million, impacted by the elevated investments and higher tax payments in the quarter, working capital, strong collections in the quarter, though unfavorable movements on the payable side with some larger payments.Free cash flow as well impacted by the book-to-bill ratio of 0.96 regarding down payments coming in. Leverage stable at 3.5x. While we would like to see this number go down and we are working on continuing to get back to our targeted capital structure of 2x to 3x net debt to EBITDA, we did pay for EUR 8 million for the E+V acquisition and EUR 11.7 million for the dividend in the quarter as well as those high investments. Currency had minimal impact on borrowings in the quarter. Good development on the financing front that I will cover a bit later. We are committed to our targets of sustainable 14% to 16% EBIT, made up of 38% to 40% gross profit and 24% operating expenses.Throughout the last quarters, we have been asked about the changes in the environment that have happened since we set the targets in 2017. It is clear that it has not been an easy ride with a pandemic, supply chain challenges, geopolitics, inflation and higher interest rates. So it's a very reasonable question. We believe that these are the right targets for the future for operational resilience. As well, the challenges that have come up in the last years have led to new opportunities in the food value chain. We have been working to achieve our targets despite the headwinds in the environment. There is quite a lot ongoing in the background by our team to get there, which I will go through.Gross profit, as Arni mentioned, at 35.1% in the quarter, various initiatives being executed to improve gross profit where, of course, you have orders received and volume. But beyond that, we have been strengthening our price/cost discipline. We are working actively on positively impacting the mix in relation to standard equipment, the growing aftermarket revenues related to our installed base and our targeted investments that Arni mentioned earlier.In the quarter, we were diligent on balancing load based on our order book and removing the flexible layers in both the supply chain and engineering as well as using natural turnover when people are leaving to not replace the head count. We are focused on improving our portfolio and product life cycle management and working on footprint optimization.The reason that I mentioned that in gross profit is because it's related to our manufacturing locations. On OpEx, 27.1% in the quarter. We have been reviewing our internal improvement projects to ensure we have clear prioritization and focus. We are focusing on reaping the benefits of investments that we have made in digitalization and we have put in place stronger cost management when it comes to travel, consultancy and marketing activities.We have reduced head count and are focusing on a sustainable lower cost base. Part of the result of the actions mentioned is EUR 3.9 million of restructuring costs in the quarter, which was related to severance. Even though it is not easy, we were prepared and able to take swift action to lower our cost base.We adjusted for this figure to provide transparency into the underlying profitability. Further actions that we're currently working on include streamlining of Marel's locations in terms of the back end, our legal entities and our warehouses as well as procurement negotiation with savings kicking in.With all of the above, our latest management forecast for Q4 shows an EBIT of 12% to 14% compared to our 14% to 16% target. We are committed to a sustainable EBIT of 14% to 16%. It will take us a bit longer to get there in the course of 2024, given the levels of orders received when they came in during the quarter, in the back end and due to some shifting between Q2 and Q3.What do we mean by in the course of 2024? What we mean is that we do not yet know the timing of exactly when we will hit our targets. We are committed to achieving it both via top line growth and lower sustainable cost base. By sustainable EBIT, we mean that once we achieve the 14% to 16% EBIT, we expect to maintain that targeted level of EBIT going forward, though there can be variability between quarters.There's not too much in addition to mention on this one, though good to point out, similar to Arni that the 47% of aftermarket in the quarter is more a reflection of the lower project revenues and strong aftermarket than necessarily a structural move upwards towards that level. Aftermarket revenues continue to grow, which is what we want to see, though we as well want to see the growth in project volume as well.Let's now walk through the segments. Solid quarter for poultry with 15.5% EBIT and 48% of total revenues. Orders received improved quarter-over-quarter, though not yet where we would like to see them, still being impacted by the environment at poultry processors with some order shifting between quarters. We do see signs of easing as well as a strong pipeline and increased sales activity that we expect to convert into orders. Revenues down quarter-over-quarter due to lower project revenues, good growth in aftermarket, which we expect to continue.Meat continues to face a challenging environment that is not moderating yet as we have previously indicated. Meat at 0.6 -- 0.3% EBIT in the quarter with lower volumes. The good news in the environment is that there are a few larger projects that were received in North and Latin America, such as the Loneg order for beef in Mexico that Arni previously mentioned, which is highlighted on marel.com. The timing of conversion of pipeline into orders in meat is harder to predict in this environment, though we have exciting opportunities and projects in there such as Muyuan, which Arni will cover later on.Given the market conditions, meat has been proactive in adjusting the organization to the right size for the output with actions executed in Q2 that we expect to see kicking in during next quarter. In fish, our revenues did pick up quarter-over-quarter on the back of a strong order book, which is good. Orders received in the quarter were softer than the first quarter level, heavier balance of salmon than white fish, while the first quarter was the opposite.We do see ongoing discussions regarding resource taxes that are still impacting conversion of pipeline into orders. The fish team as well has been working to improve the product mix in terms of standard equipment. EBIT-wise, given that it is negative, it is very clear that we target margin expansion within fish. The team has been working on good actions in Q2 related to the organization and its global footprint, which are expected to kick in, in the coming quarters.Fish is impacted by finalizing projects from recent acquisitions, which we are working diligently to wrap up soon. While EBIT is negative, which we do not want to see, we are confident that the fish team has taken the right actions, and we look forward to fish trending positive. Plant, pet and feed at 10.6% EBIT in the quarter and 13% of revenues. Strong orders received in the second quarter, driven by a large order in textured vegetable proteins within plant-based in the U.S. Pipeline is solid and outlook remains good for plant, pet and feed with pet being the strongest segment of the 3. Expectation remains the Wenger delivers in line with historical performance of 14% to 15% EBIT for the full year.I already covered the majority of the income statements during the highlights. For the non-IFRS adjustments, we are introducing an appendix to both the press release and presentation that explains and provides the breakdown for adjustments. This is meant to increase transparency for our readers, so please take a look. Within the adjustments for the quarter, we have the purchase price allocation, of which the inventory uplift for Wenger has now been fully amortized, minor acquisition-related costs and the EUR 3.9 million of restructuring costs, which are severance due to workforce reduction mentioned earlier. No other adjustments have been made. To make it clear, the purchase price allocation going forward is expected to be EUR 7.1 million per quarter compared to the EUR 12.1 million in Q2.Finance costs are elevated, as previously mentioned. Order book at EUR 575 million or 32% of trailing 12-month revenues, book-to-bill in the quarter of 0.96 for the first half of the year, 0.88. We do expect a stronger conversion of pipeline into orders in the coming quarters.Operating cash flow of EUR 27 million in the quarter. Working capital-wise, good movements on inventory and receivables, unfavorable timing of payables in the quarter impacting cash, book-to-bill as well influences being below 1. In the quarter, we used cash to pay the dividend of EUR 11.7 million as well as EUR 8 million for the acquisition of E+V, along with elevated investments that you can see here in the bridge and taxes, which were at a higher level of payments, but were previously accounted for.We have been investing quite heavily in CapEx in the last quarters. And while we will continue to invest in our end-to-end spare parts journey, we have decided to ensure focus on customer centricity to take the CapEx down to more normalized levels in the second half of the year, focusing on reaping the benefits of our investments, such as the manufacturing parts warehouse in Boxmeer, which will be ramping up in efficiency.Free cash flow at minus EUR 6 million in the quarter affected by higher investments and taxes paid. We do expect this will continue in the coming quarters with first of all, down payments coming in from orders received, improved working capital and then lower capital expenditure to move forward towards our targeted capital structure.We recently announced a 2-year extension to our EUR 700 million revolving credit facility using the extension options that were part of the facility. As well, we signed a new EUR 150 million term loan in order to create headroom for the upcoming Schuldschein maturity in December. This loan is expected to be drawn just before the maturity of the Schuldschein, so will not expect the leverage ratio or net debt. Very happy with the cooperation with our longstanding banking partners on this. We thank them for the support and trust in our business model and growth ambition.Here on the slide, we show the maturity profile at the end of June as well as the new maturity profile with the extension, reducing financing risk as well as the currency that the borrowings are in and the fixed floating profile of interest rates, which is about 62% variable, 38% fixed. Due to our current debt position, finance costs are elevated around EUR 12 million cash out, although with the recent announcements last night and let's see to come, it could be between EUR 12 million and EUR 13 million.On the asset side, increase in property, plant and equipment due to the investments, as previously mentioned. Inventories are trending downwards, which is a very good sign. The inventory uplift for Wenger has been fully amortized, but we are as well seeing a reduction of our inventories in our efforts to rebalance our working capital and we will continue to work on that.Good movement on trade receivables in the quarter with collections. Borrowings, we already covered. Contract liabilities related to down payments coming in. Trade payables don't look like a big difference. If you look at under the year, though they have gone down, if you look at end of last quarter as there were numerous items parked in the payables and the not yet due bucket, which were then paid in Q2. Leverage at 3.5x, as mentioned, the same as the end of Q1.Already covered free cash flow and leverage. So we'll just look at earnings per share. Trailing 12 months earnings per share is impacted at the moment by higher financing costs, higher purchase price allocation, the write-off of the Stranda investment last year and higher costs associated with investments. We do expect to see this improving with lower purchase price allocation, some of those one-offs that will be dropping out of the trailing 12 months and lower costs associated with investments in the back end of the year.Back over to you, Arni.

[Arni Thordarson, executive]

Thank you, Stacey. Let's move on and give first insight into our wins in the market. It has been very nice to see the activities getting up again, for instance, in China that I will touch on now. Moving on slide. Before we go into [ gen ], it's healthy to recap our successes around the globe, how we have been growing alongside our customers by that, giving our people as well opportunity to grow alongside ourselves. [ Mr. Roadcutter ] is producing today equal to 40% of the German consumption in poultry.Growing alongside, [ Haldi ], [ Leetul ] and so on into Italy and Spain. We started towards the 2 -- towards the 3 in that partnership, Marel and Mr. Roadcutter. He was moving from the feed mills into growing poultry and into full line offering at higher operational efficiency than the industry at a more sustainability and so on, so on.15,000 chicken per hour in 5 lines, just to give you that go into move to push differences in consumer-ready products that is demand-driven and on the right time, right place. Muyuan in China. To give you an insight into that company, it is a remarkable startup 2 decades ago. This company is then listed on Shenzhen 2014 and has been growing 6x since then. All of the company thinking is to take care of the animals throughout based and take care of the grower and sustainability based on data and intelligence. There are 150,000 people. There are 1,000 people in innovation, focusing on innovation products, and they are highly automated in the feeding, treating and then the partner with Marel.In primary processing, we built 11 plants with them in the years 2019, 2021 and into first quarter '22. And remember African swine fever, where the livestock went down by half in China, we started to export from Europe, we -- the value chain and so on into China, but now it's building up again. And now we are back on track with much more extensive strategic and innovation partnership on how we will assist Muyuan in going first to downstream. Today, Muyuan with our 11 projects -- process and primary processing 1/3 of what they breed. The rest go into the wholesale market. The strategy of Muyuan is to produce the vast majority.Furthermore, starting in the breeding going back to the feeding and then going into the primary processing, now we are planning together to go together and we supporting them, but through innovation partnership like we do Visir and [indiscernible] here in Iceland with Roadcutter in Germany to make our customer centers around, for instance, Beijing, Shanghai and across China to make a retail-ready primary cards that are delivered on the right time on the right place to the customers.The buying patterns are changing a lot in China. 50% of the world consumption of pork is there. And people are dining at restaurants, ordering online and et cetera, although 50% is still in the open market, that's more the elderly generation, my age there.However, people 35 and younger very seldom cook at home, the pork rather than the poultry and the move to restaurants and dad, mom. And now we have to make it consumer-ready products and move closer to the value chain. This is a long-term agreement. We are talking here about [indiscernible] towards the 30, towards 35. It's not this high scale, big and extensive agreement is not in the order intake as such, but it will come step by step by step towards '24, '25, '26 and onwards. This has been my dream and many other dreams is to go into closer partnership with our customers like we do in U.S., like we do in Germany, like we do in Iceland and Norway and lay out the plan of how we transform the value chain.It's exciting times ahead, and there is still around the globe preference number one, preference is locally produced. And that's the same in China. People have a price premium for locally produced. And here, we are dealing with a leading company in this space, 5% of the total pork in the world and the leading global provider of solution services and software.So [ KT ], [ Kwin Muan ] and team and as well thanks, Denver and team in China, our regional team, we are building a global regional teams, approximately with the customers. And Sofie and team in meat, it was a very nice days in China together and very good insight I got into as well the digital capabilities in the breeding and feeding and how we can then interlink the whole value chain and get closer with digital traceability to consumers.The dynamics in the value chain have been very high in recent 3 years of volatility. You have heard me saying for Marel and for our customers, the only way forward is to be a specialist needs or vertically integrate, continue to invest in the infrastructure and continue to invest in Norway. We have seen many out there that are extensively just in 1 piece of the value chain, not weathering out after 2, 3 quarters.However, the power curve in the value chain moves between primary process, secondary process in the prepared foods as well into farming or to the customers. To recap, the consumer inflation has been very high in the food industry until -- and every consumers were looking for just availability. In beginning of third and fourth quarter consumers started to trade down on a speed and requesting lower prices.Finally, farmers got a little bit high a bit. And now in the processing sector, we are -- the material inflation is, though, overall moving down or stabilizing. However, the wage inflation has never been higher on a global scale. I know Icelandic people don't fully get that because the global world is now on Icelandic wage inflation, around 6% a year. So there is more pressure than ever to automate in this industry and we are foreseeing therefore, the catch-up effect going forward. Wage inflation is as well as such that Marel needed and needs to go at speed in automization and digitalization of our own operation and we need to do more with less. It's a balancing act, how we do it.And like we say, we believe that the orders are starting to tick up. Disclaimer, hard to predict quarter by quarter. We will be seeing next year, though, some levels of EUR 450 million to EUR 500 million. And bear in mind, we are steering our cost levels as well in line with that because we won't want to wrap up with sustained lower cost base. Having said that, it's unfortunate that our management forecast is now standing at 12% to 14% in fourth quarter compared to targets of 40% to 60%. Nothing has changed in the total picture. The growth drivers are unchanged. We are not going to cut into the bone to get short-term financial results in fourth quarter.We are focused on the sustainable 40% to 60% EBIT trends that we believe we are going into and sustainability and stableness will come with 40%, up to 50% service revenues, all at the above 40%. We have been investing in it, taking one-off costs. Now it's time for harvesting, getting higher productivity. I'm balancing very well between industries. And first time we have seen all industry in softness in all geographies, but our model is playing out and you saw Mexico, China were heating up again the poultry industry in U.S.So Q&A.

[Tinna Molphy, executive]

Absolutely. Thank you, Arni and Stacey. Just as a reminder, who'd like to ask a question, please use the raise-your-hand feature in Zoom or you can e-mail [e-mail]. Moving to the first question is from Klas Bergelind of Citibank.

[Klas Bergelind, analyst]

I hope you can hear me. Hi, Arni and Stacey. So first on the gross margin, it's getting impacted, obviously, by lower project sales. But I'm keen to understand how price/cost is improving through the backlog as we go through the year. If you could please help us with how much pricing from earlier orders now sits in the P&L and what the order pricing is on a rolling basis so we can understand that pricing might improve in the P&L into the second half as these higher-priced orders gets delivered? I'll start there.

[Arni Thordarson, executive]

Just to recap what we have said, Klas, that we said that you remember we do no quarterly price increases. We have a shorter outstanding record. We corrected the prices in middle of last year. The service revenue is taking only 1 quarter to filter through. Standard equipment 6 months to filter through and price/cost more than 12 months filtering through, meaning we have always stated you will start to see that in second half of the year. We are not willing to quantify that. And as well, of course, the softness in the order intake in last fourth quarter is, of course, the factor that is then taking down with the volume the gross profits.However, new orders are at those new cost levels. And PPI, the purchasing price index, you've seen it easing off and going a little bit down in recent 3 months, while it's a total 25% the last 3 years. In the western world, notably in China, Asia, we are seeing about 10% compared to the 25% here and even seeing a deflation there. So -- but all in all, price/cost improving. As we said, the inflection point would be mid this year.

[Klas Bergelind, analyst]

Okay. That's encouraging. So then moving on to Slide 8 and you reiterate that you're saying that you target a higher share of standard equipment. But what you do when you have a customer that offering you a project? Will you say no to that? Or do you think that the industry is moving in this direction in terms of standard equipment?

[Arni Thordarson, executive]

Yes. So standard equipment sales are both when we sell a full line offering based on standard building blocks. Then we go into engineering phase of designing for our customers, but based on standard building block. What we are saying here, we should get as well more standard equipment and standard lines as well in the secondary process. We have been analyzing very well how can we make it easier to do business with Marel? How can we make it effortless? So instead of our customer taking 3 building blocks to make a hamburger line, for instance, we have been making those lines out there.The market has been on a low level. We are in very close contact with our customers and as well with our peers out there and the market has been on a low level, and we have very good wins like in the Accuro system, where we are blending the fat lean and so on. We are -- have installed it with GPS in Australia, and it's going very well.We have as well customers like Cargill and -- in U.S. and Cranswick in U.K. And now we have to reap the benefit. Remember, it's only now 9 to 12 months, but we have been able to take some of -- all the customers into the reference parts because post-COVID, it was undoable.And therefore, we are getting as well wins in U.S. now because our reference plants of -- for instance, Costco has been opened for -- the peers of Costco in processing because Costco doesn't want to make all the chicken and sell and so on. So we are doing many, many things in go-to-market and we are seeing as well focused portfolio and so on. I know it's a long answer, but it's a high ambitious now and a lot of passion that we get the cake of the revenues correct that our projects are around 40% service 40% and moving up and the standard standalone lines will move from 10% to 20%.

[Klas Bergelind, analyst]

My third and final one is when you say a sustainable 14% to 16% level, can you talk through what you mean with that range? Let's say that sales reaches the current level of EUR 422 million again in the future, i.e., EUR 1.7 billion annualized. Are you saying that you should be able to do the lower end of the 14% to 16% if you go to EUR 1.7 billion again, just to understand better what you mean by sustainable level?

[Stacey Katz, executive]

I would say yes, that is what we're saying. So we are mentioning, of course, there may be variability quarter-over-quarter. But what we're doing now is really to focus on a lower sustained cost base to be able to also make sure we can adapt towards what the environment is.

[Arni Thordarson, executive]

At the same time, to -- let me make it absolutely clear. If we would believe that Marel would be a flat liner at EUR 400 million to EUR 450 million, then we would not be investing in the growth. We have a track record of 6% organic growth. You see our wins in the aftercare. You see our wins out in the market. The food value chain is moving. There is a high fluctuation between products in the market. We made the fabulous acquisition in Wenger last year. Plant-based and et cetera, we had like Stacey mentioned, a very, very interesting quarter in the tax deals. So soybeans that are the ingredients there, higher nutrition, lower -- more sustainability. So we are in a growth sector and we are going to win in the growth. We are balancing the growth, but sustained, yes, meaning less fluctuation and the 40%, 50% recurring revenues count a lot.

[Klas Bergelind, analyst]

I guess, just to clarify quickly, finally, is -- what I mean is, of course, you shouldn't -- I really don't think you would flat line and stop growing because then, I mean, the equity story would be slightly different here. What I mean is if you would go back in a quarter to this level, because I think the challenge for investors right now is to try and understand the earnings volatility between quarters, I guess, that is my question really.

[Arni Thordarson, executive]

I can understand that. And when we are having PPA as well up to 4% of revenues, it is -- I can understand that it's not easy to crack the code when you're analyzing the numbers as well when we are on capital expenditure 4.3% to 4.7%. Now we are going into lower PPA in the coming quarters. Lower capital expenditure as well. And to answer the question, '26, if we would fluctuate from EUR 550 million down to EUR 500 million, yes, we are meaning that we have more stability in the revenue base and our cost base because our actions are not only to breath in, breath out now, but we are making automization investment to make more agility in our operation.Having said that, it was clear what Stacey said. There could be quarter that -- or quarters, but you fluctuate a little bit down. But we are playing on that bandwidth. And remember, we are still looking at our 16% EBIT target. We don't want to take away the volatility 2% and have the bandwidth. So the new targets are 40% to 60%, and we are working after that. Yes, we are talking about more agility in the cost base, but...

[Stacey Katz, executive]

Yes. Perhaps I would also mention. So once we would achieve that EBIT target, it is correct there can be some variability that we can't predict quarter-over-quarter, but we would then be looking at it more on an annual basis, let's say, going forward. So I mean, that is what we mean by having sustainable EBIT. And I do just want to answer, Klas, your question from before. We will always try to upsell a project from standard equipment to a project.So when we talk about improving the mix and improving standard equipment, that's not in conflict with the projects per se, we do have different sales channels that approach the market in different ways. And there are opportunities and venues for sales of standard equipment or 2 machines together, et cetera. So that's more what we mean by that.

[Tinna Molphy, executive]

Okay. Great. So next up, we have Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

I have a couple as well. My first question was on revenue progression. You mentioned [Technical Difficulty]. Sorry, can you hear me?

[Tinna Molphy, executive]

Sorry, that was -- yes. sorry, the sign dropped off for 2 seconds, if you could please start over. Thank you.

[Akash Gupta, analyst]

So my first question is on revenue progression. You mentioned stable sales in Q3 ramping up in Q4, and then you talked about EUR 450 million to EUR 500 million for 2024. Just to come back on this EUR 450 million to EUR 500 million, is this the run rate you are targeting for 2024, which would imply annual sales in range of EUR 1.8 billion to EUR 2 billion? And correspondingly, that probably we should also think about 14% to 16% margin?

[Arni Thordarson, executive]

So it's a very good question. And don't take it as guidelines for next year because you do that or beginning of the year. However, I'm trying to take here all of us out of the [indiscernible] of trying to look at our cost levels compared to the EUR 420 million level. We will be around EUR 420 million, maybe EUR 410 million, EUR 420 million next quarter, but at a lower cost base and so on. And then we foresee the ramp in the fourth quarter. And how do we measure pipeline? We measure it with, of course, close contact with our customers. We are more closer to them. We measure 40% likelihood, 60% likelihood, 80%, 90% likelihood. We have as well some contracts that are lacking either prepayment or lateral credit and so on.So what I'm saying, we are going 1 tick -- 1 year ago if we go back to the beginning of the year, we were EUR 360 million in order intake. So -- and then we had a record order intake in second quarter last year. And then we have seen, in my view, softness in 4 quarters, softness is under EUR 450 million now because that was the new [indiscernible]. Then we moved forward in a new [indiscernible] in the bracket of EUR 450 million to EUR 500 million and so on. There is a need for our solution and it has never been more meat in the wage inflation and environment through automation and et cetera. So I was rather doing last time on to the guidelines, but it's not a coincidence that I was using those numbers.

[Akash Gupta, analyst]

And just a follow-up on these order figures. So you said you had some old contracts, which has been signed but not booked because you were awaiting letter of credit. Is it possible to quantify the magnitude of these orders? Like, is it low double-digit, mid double-digit, just to get some idea in terms of what would have been the demand in Q2 if you haven't had this delay?

[Arni Thordarson, executive]

So this happened as well in first quarter and, et cetera, and the magnitude are like you always are analyzing that there are around 4 projects that are -- you say to [indiscernible] until second quarter or third quarter and then around 2 of them go. And our projects depends on industries, but in poultry, they are varying from EUR 10 million to EUR 60 million. And so we are talking about the mid and lower end in that 2, 3 projects that are shifting the 2 customers. Then when -- then other projects, such as Loneg came faster than we expected, to be honest as well when the customer was very firm on where he was heading and so on. So the market is a little bit changing to better, and we are seeing signs of that.But correctly, we are having some kiosks in U.S. that are firmly agreement without prepayment. The reason we say as well it belongs to third quarter to be -- to give you a little bit more insight. Investors need to understand our cash flow model. Prepayments come in and the prepayments of that quarter belongs to third quarter. As well, we don't start to engineer until we get the prepayment. And that's why revenue recognition is a little bit delayed in the third and fourth quarter. This is our model and it has proved to be a much less -- more return compared to risk. It proved that 2009, 2013 and we -- it shows a little bit how diligent we are in this, but magnitude, yes, EUR 30 million -- EUR 30 million, EUR 40 million.

[Akash Gupta, analyst]

And my final one is for Stacey. On Slide 8, when I look at your margin bridge, you say that from Q2 to 14% to 15%, you would get support of gross margin improvement of around 300 to 500 basis points. Can you provide a bit more color on this gross margin improvement and driver? How much of that is pricing versus, let's say, how much of that is better utilization of your production facilities so you can get more operating leverage and also may not suffer from underutilization that you may be suffering in part of your businesses?

[Stacey Katz, executive]

Yes, it's a good question, Akash. I mean, I would basically direct you towards like the left-hand column on the gross profit margin improvement. So part of it is definitely, let's say, volume and then better coverage in terms of the manufacturing efficiency, et cetera. In terms of the price, yes, there is still price to filter through, but I would not put an exact number on it, as Arni had mentioned earlier. You also have the continued growth of aftermarket, et cetera. And then what we have done quite well in the quarter is that once we did see that the orders were more coming in on the back end, we did take action in terms of also lowering our flexible cost base in terms of also engineering and supply chain.So it is truly, let's say, a mix of those factors that are mentioned there. That is going to be what we need to do to get there. I think you can perhaps at least assume that the difference between last quarter and this quarter is related to volume. And then if you also remember, in Q1, I had also said the difference between Q4 and Q1 where we had a difference in revenue as well, like about half of that was volume-based as well. So hopefully, that can provide some color.

[Tinna Molphy, executive]

Okay. Next up, we have an e-mailed question from [ Felix Menin ] from [ SFO ] and it reads on the fish division, given another surprising negative adjusted EBITDA performance in Q2, can you please give us some indication on when this will turn back positive? Or will it remain in negative territory in the second half of '23?

[Arni Thordarson, executive]

So I can take this one on the fish because Valka acquisition and the integration is counting here. Valka team had different terms and conditions in contracts than we and et cetera. So we have agreed with our customers that we are finalizing some projects out there. It has cost us a lot. We have been working hand-in-hand with our customers. We are taking now off some of those projects that we are finalizing. So we expect that we don't want to time it fully, but that means that we are out of that territory. Then we need to get the order intake in fish as well that has been in our high-margin business in Norway, has been turbulent due to the taxation, but now there is coming clarity there and then we roll on when we are having a good wins in Chile as well and so on.Having said this, Stacey went very well through that we have ramped down the cost as well, the running cost in fish. So we will be not in 10% to 12% in fourth quarter, but we will be in the fourth or first quarter, close to the historical level of 5% to 6%, and then we will walk us through to get us above 10%. And we don't want to time it. And remember, when we are talking about that, we want to go to 18% to 21% in poultry. First stop in fish is 10%. Remember then another thing is that SensorX, the blockbuster in poultry is invested in fish and vice versa. [ Water catering ] fish moving now into poultry and so on. So remember that in our business model. But unfortunately, we are here and it has cost us more to finalize those projects out in the field.

[Stacey Katz, executive]

Perhaps not to exactly time it, as Arni said, because both we and the fish team are really looking forward to turning that towards positive and they are doing the right things. What I will mention is that when we refer to our management forecast in Q4, which is 12% to 14%, the fishing EBITDA is not planned to be negative. So in terms of exactly when that happens and how it happens, these are our best estimates at the moment, but that is what we are working with.

[Tinna Molphy, executive]

Okay. Second question from Felix reads, it's on the Wenger order intake. Can you comment on order intake growth at Wenger in Q2 and visibility for Q3 and 4? Some companies that are active in the [indiscernible] area comment about a deceleration in demand. What do you see in this end market?

[Arni Thordarson, executive]

So Felix, thanks for -- you are talking about less demand than from the high demand, et cetera. In fact, the market is very much looking the same way as the rest of the market. It is more sustainable production. It's higher nutrition and et cetera, both -- and remember the extrusion technology can work in the pet and in the plant and in the feed segment. So we are seeing by combining the strengths of Marel and Wenger that there is -- the pipeline is on a strong note.We are getting larger order and more remarkable in the plant here in second quarter. And we see that we will land, at least that's the forecast, 14%, 15% EBIT for this year and continuous steady out in the market in the order intake. So this is our best case now that we are looking at and we are very optimistic. We are getting very strong and post the feedback as well from our customers in the poultry and meat on this acquisition because they are moving into those arenas. So overall, we are optimistic about this and our public sector.

[Tinna Molphy, executive]

Okay. Another e-mail question that reads, once again, we're seeing poor performance by Marel's fish division. In the last few years, Marel has acquired 2 companies, Icelandic companies in that segment. How has integration of these 2 companies into the Marel operation been going? And what specific action are you taking to turn around your fish business?

[Stacey Katz, executive]

I will start. And I am happy to be a bit more concrete here because I do know that this has been negative for some time, and you are wondering about it. And as I have mentioned a few times, we really believe that the fish team is doing the right things. If you look at the quarter and things that have been in the planning for some time, but were being executed in the quarter, fish has reduced its workforce across the board, both by using the natural turnover of people, but also by difficult decisions in some cases, based on how to make sure that they can have a lower sustainable cost base as well.The second thing and we've mentioned it before, like they are combining their manufacturing facilities here in Iceland and good movement on that in the second quarter. Of course, when you have a segment at the size of fish, it is not very easy to carry the extra costs, if you would have, for example, 3 manufacturing facilities in Iceland. And the last thing is really on their global footprint in terms of offices and housing. They have been evaluating, I would say, quite diligently and they are taking action to combine some offices and take decisions which will have effect in coming quarters.Now the footprint, of course, that takes a little bit more time to actually kick in. But in terms of the savings in terms of head count and as well in manufacturing, that should already start to kick in, in Q3.

[Arni Thordarson, executive]

Very important to answer this. We have been finalizing the projects in Valka. We have already now taken the manufacturing of Curio [indiscernible]. We cannot have 3 manufacturing here in [indiscernible]. But remember, we are doing a far bullish standard equipment out there, fabulous line, the new filleting machines that is connected out there now. Now that is second to none in yield improvement, waste improvement and et cetera. So we are coming out new innovation and we are taking the fish industry to next level and consumer-rated products.It's easy to talk about only the numbers when it is minus 7%. I fully understand it, not satisfied with it. Harder integration with Valka. This is the first time we acquired a company that is on a path in digital journey and et cetera. We are getting out of the woods there. So I want to underpin what Stacey is saying, very good actions under the leadership only that have been taken to get on a lower sustained cost base, focus more on what we are planning out in innovation, getting as well stabilization in the innovation cost in the company. And if we look forward in general in Marel, then you can see our success in the aftercare market that we are going from 40% to 50%. And it's very likely that we can balance out our innovation cost in 4% to 6% instead of 6% in the total with capping out the same. So here we are working on a diligence way in balancing out our costs and getting a lower cost base. We are focusing on getting our OpEx in total below 24% and our gross margin in 38% to 40%.

[Tinna Molphy, executive]

Okay. Indeed, many interesting questions raised here today. The IR team is, of course, at your disposal if you have any further questions on the results or our growth plan. On behalf of the team, I'd like to thank you all for your time and attention and we hope you enjoy the rest of the summer and we'll see you back here in Q3.