Marel hf

ICEX:MAREL

Earnings Call Transcript

[Tinna Molphy, executive]

Good morning, and a warm welcome to our second quarter results meeting broadcast to you live from our headquarters in Iceland. My name is Tinna Molphy, Director of Investor Relations, and I will be your moderator today. We will start with presentations from CEO, Arni Sigurdsson; and CFO, Sebastiaan Boelen, who will go over the second quarter results and some key business highlights and provide an update on the JBT process. We will then conclude with Q&A. And if you would like to ask a question, please use the raise your hand feature in Zoom or you can also e-mail [email protected]. With that, let's go over to you, Arni Sigurdsson.

[Arni Sigurdsson, executive]

Thank you, Tinna. Good morning to everyone, and thank you for joining us today. There are 3 key points that we want to share with you. First, it is our financial results in the second quarter. Second, it is the outlook for 2024 and key business highlights; and third, an update on the potential combination with JBT.

Starting with the financial results. The second quarter was encouraging from a profitability standpoint with 9.1% EBIT margin and 13% EBITDA margin on EUR 415 million in revenues. We are seeing margin improving both sequentially and year-over-year, reflecting actions that we have been taking to improve our business. We continue, though, to operate in a challenging environment with rising geopolitical tension and elevated short-term uncertainty. This is evidenced by the soft order received in the quarter of EUR 393 million, resulting in a book-to-bill of 0.95.

Orders in the poultry segment were particularly soft in the quarter, mainly due to order shifting later as customers are taking longer to discuss scope and making a final decision. The other segments, especially plant pattern feed compensated for the soft data in poultry, resulting in total orders received at a similar level to the first quarter this year.

Improving market fundamentals in the industry and our healthy pipeline overall give us the confidence that we will see a pickup in orders received in the second half, especially on the poultry side. Growing the order book from the current low level of 32% of revenue is instrumental for us to deliver revenue growth and improved operational performance. And I will provide a more detailed view on the outlook later. with that, I will hand it over to Sebastiaan to go over our financial results in more detail.

[Sebastiaan Antonius Boelen, executive]

Thank you, Arni, and good morning. On orders received. Our orders received were soft at EUR 393 million, down slightly from last year quarter 2, flat compared to quarter 1. There is still short-term uncertainty on the back of geopolitical tension, persistent inflation and high interest rate environment. This was perhaps most felt in the poultry segment, where a number of orders we were expecting in the second quarter are shifting and now expected to come in the second half.

However, the softness in poultry was compensated by the other segments. Orders in PPF improved significantly quarter-on-quarter and meat and fish showed some improvement. Having said that, we do see commercial activity increasing and the feedback we are hearing from our customers is more constructive and positive as the overall external environment continues to show signs of improvement with lower input costs and better pricing for our customers.

The main message here is that there is a healthy pipeline and that we expect stronger orders received in the second half -- our revenues were EUR 415 million, which is flat to quarter 1 and down just under 2% year-on-year due to the soft orders in the past quarters and the low order book. The lower revenues are mainly on the back of lower project or refill orders in the order book. Though the project revenues at 214, we're ticking up 3.5% compared to the prior quarter. They're still below quarter 2 last year. In comparison, our average quarterly project revenues in the past 8 quarters were approximately EUR 240 million per quarter, 11% higher than the second quarter.

Recurring aftermarket revenues remain healthy with trailing 12-month levels staying again above EUR 800 million this quarter. Aftermarket revenues were at 48.5% of total revenues. And we expect to continue on this road. Our installed base is large and growing and with a focus on quality service, we are confident we can continue this trend underpinned by our significant infrastructure investment, such as the global distribution center, which went live in June. Now some good news as we see operational performance trending in the right direction.

EBIT on a similar volume as in quarter 1 came to EUR 37.7 million, resulting in an EBIT margin of 9.1%, which is an improvement, both quarter-on-quarter and year-on-year. The EBIT margin also improved sequentially to 13%. Our continued focus on improvement efforts and cost discipline across the business spend, personnel spend and nonproduct-related spend is starting to come through. Some of these savings are being offset by continued investment in aftermarket. OpEx was flat in quarter 2 compared to quarter 1.

Gross margin improved quarter-on-quarter due to better mix in projects and in aftermarket and also because of better efficiency and cost coverage on the back of our many initiatives. Further cost initiative action include footprint rationalization and more internal benchmarking and synchronized metrics across manufacturing to drive efficiency. Furthermore, due to the short-term uncertainty and the potential business combination with JBT, a hiring freeze was implemented in July to ensure further cost control and attentive workforce planning.

I will go into how each of the segments performed later on. Our order book was EUR 538.5 million and a book-to-bill ratio of 0.95. This is a soft order book representing 32% of trading 12-month revenues. Order book levels are, amongst others, driven by project orders and greenfield orders, a certain lumpiness in the orders received and signed and financially secured is, therefore, to be expected.

Having said that, building up the order book and getting a book-to-bill ratio above 1 is a key priority. As the order book profile determines to a great extent, our revenue forecast, our working capital as well as our cash generation and ability to deleverage. Operating cash flow in quarter 2 was negative by EUR 4 million, impacted by increased working capital commitments. The working capital focus program initiated last year continues to progress well.

We continue to focus on improvements in accounts receivables and account payables even though we had a slight increase in accounts receivables, mainly due to timing. Inventory continues to trend downwards. However, the fourth element, net contract liabilities had a negative EUR 36 million impact on working capital, which is, of course, explained by the fact that net contract liabilities are driven by lower orders received.

This resulted in a net increase in working capital of EUR 53 million in the quarter. CapEx, excluding capitalized R&D, was at EUR 5.6 million in the quarter, 1.3% of revenues, which is low because of our focus on cash flow after a period of elevated CapEx in recent years. A more normalized level is around 2% to 3%. Leverage increased to 3.9x on higher working capital in the quarter. While our leverage is above our target level of 2x to 3x, we have ample liquidity, consisting of cash on hand and committed credit facilities, and we are within our covenant, which was 4.5x in quarter 2.

On poultry, revenues and EBIT for poultry were above expectations at EUR 206 million and 15.6% EBIT. The EBIT margin had a small decline compared to quarter 1 due to the volume drop impacting operating leverage, partially offset by better mix and project control. However, like I mentioned before, project orders in the poultry segment were particularly soft in the quarter, mainly due to order shifting later as customers are taking longer to discuss scope and making a final decision. And needless to say, these larger project orders tend to be quite lumpy in nature with the inherent impact on the order book.

The soft order book and low project orders received are expected to negatively impact revenues and operational performance for poultry in the next quarter compared to quarter 2. However, the pipeline in poultry is healthy, and project orders are expected to materially increase in the second half with the building up of the order book as market fundamentals in the poultry industry are improving.

And there is noted interest in our industry-leading solutions such as the U.S. line split solution. This should support gradual improvement in operational performance in the fourth quarter and into 2025. Meat. Meat had an improved operating performance despite continued challenges in the market environment. Orders received improved in the quarter, with market fundamentals in pork showing signs of improvement in some geographic areas, while beef continues to be challenging. Revenues were stable quarter-on-quarter with aftermarket revenues remaining resilient.

EBIT and EBIT margin improved on better mix and continued cost initiatives. The outlook for the meat industry continues to be challenging. Focus is on continued action toward driving commercial activity and build above the order book, continued cost control and other measures to improve profitability. But it's important to note that the recovery will take time, in particular, for beef.

Fish had a weak performance in quarter 2 with a low volume and soft order book. Orders received were stable quarter-on-quarter, but still at a low level. There are some signs of fundamentals improving, especially in the salmon industry. The white fish segment remains challenged. Revenues were up 8.8% quarter-on-quarter, up in both project revenues and aftermarket revenues. However, gross profit showed a decrease driven by lower project margins. EBIT margin remained negative at 5.5% and negative EUR 2.3 million on the back of these lower project markets.

Fish has taken a number of significant measures to lower the cost base and the cost reductions are starting to flow through the P&L. There are some signs of improvement for the order outlook in the second half, although timing continues to impact conversion from pipeline to orders. And of course, a further buildup of the order book is needed to improve on the operational performance, and there's continued focus on actions that increase commercial success and build up the order book as well as margin-enhancing actions like cost control and operational efficiency.

And lastly, plant, pet and feed. PPF had a good quarter with healthy improvement in operational performance. The order book improved on the back of a strong level of orders received, driven mainly in the companion animal segment in the Americas. Revenues were up 25.8% quarter-on-quarter, mainly driven by project revenues, while aftermarket remained stable. The higher EBIT margin was driven by higher gross profit level on higher volumes and improved mix. Outlook is solid for PPF with a good pipeline in improving markets outside North America. Management expectations for PPF's profitability is unchanged and in line with their historical performance. And with this summary, I would like to hand over to Arni for an update on outlook and on JBT's offer.

[Arni Sigurdsson, executive]

Thank you, Sebastiaan. Looking now to the outlook for the full year 2024 and beyond. While we expect orders received to pick up in the second half, the book-to-bill of 0.95 in the second quarter and low order book at 32% of revenue will impact our Q3 revenues and profitability, especially for the poultry segment. We are therefore expecting low single-digit revenue decline, EBITDA margin of 13% to 14% and EBIT margin of 9% to 10% for the full year 2024, which is though a higher margin than last year despite the lower revenues.

As Sebastiaan said, we continue to take action to control costs and manage our business in line with demand. In the quarter, we continued to rationalize our footprint where we, for example, took the last step in consolidating activities in Iceland from 4 sites into 1. We improved our discipline and control over nonproduct-related spends and lower personnel costs. Due to the short-term uncertainty and the potential business combination with JBT, a hiring freeze was also implemented, like Sebastiaan said, to ensure further cost control.

We've also been taking actions on the commercial front with opportunity-focused teams to convert the pipeline into orders, and we have adopted our go-to-market strategy to improve focus on small- to medium-sized customers. As we look to the midterm outlook, we remain confident that as we move through the trough of the cycle, our leading position in the food processing industry, attractive growth markets and focus all underpin our confidence in delivering our midterm targets. We continue to innovate and improve our product portfolio to better serve our customer needs, strengthen our position in the market and drive our business and industry forward.

I want to show you a few new solutions in poultry that we -- where we are, without a doubt, raising the bar in our industry. The first one that I want to talk about is the automated duck breast deboning. You might remember, when we acquired PMJ, back in 2021, a small bolt-on acquisition, 25 employees. It was around EUR 5 million in revenues, but a key pillar to become the leader in the duck market. If you fast forward 3 years, then we're proud to launch the first joint innovation with PMJ on a combined technology platform. This new solution will cement a strong position for Marel in the duck market and is the first automated filleting solution that delivers excellent yield and versatility.

Although the duck market is smaller than broilers, it is a market that is growing and presents exciting market opportunities for Marel. And speaking of broilers, the second one is the ATHENA, a next generation of broiler breast deboning. This is a highly automated solution that delivers serious labor savings for our customers. We're talking 30% to 40% fewer people compared to other solutions in the market. What I find though really impressive about the ATHENA is the vision and sensor technology to detect color and other accurate measurements to tailor the deboning to each individual piece and that results in a higher yield and quality of the end product.

The solution also has traceability of each piece individually, and it can be integrated to other solutions in the next step, such as a sensor X or a portioning machine. And that is to ensure full traceability for each product on the line and improved process management. This is, of course, cloud-enabled and allowing for remote monitoring. And then the third one is the ALPINE, the next generation in anatomic leg processing.

The reason why the ALPINE is so great is not just the high yields, the automated consistent performance and that it can adopt the cutting to individual pieces like the ATHENA, but also the fact that it is an important decision-making factor for our customers on which partner to choose also for the broader line. The reason for that is that the ALPINE is the step before all leg deboning. What makes me excited about those 2 solutions, the ALPINE and the ATHENA is how well they cross-sell with the U.S. line split solution that we have mentioned a couple of times.

So when our customers want to increase the line speed, they need to think about and redesign what happens next in the processing line, giving us a great opportunity to upsell the ALPINE and the ATHENA solutions in the U.S. as it is all designed to work holistically as an integrated line. All combined, we are very well positioned in the poultry market, like we've talked about and very excited about the next quarters and years to come. Moving now to the update on the potential combination with JBT.

We reached a few important milestones in the quarter as we progress to a potential combination with JBT. We signed a transaction agreement in April. And then in June, JBT launched a voluntary takeover offer for all Marel shares. The offer is based on the terms and conditions set out in the transaction agreement, and the offer expires on September 2, but can be extended in the case, for example, if regulatory approvals are taking longer in certain markets.

The Board of Directors of Marel has published its recent statement where the Board unanimously supports the offer and recommends that Marel shareholders accept it. It is worth to note that we expect that Marel shareholders will be able to elect NASDAQ listed shares in Iceland of the combined company as the secondary listing of JBT Marel is expected to be effective at closing. The proposed transaction is subject to customary conditions, including the main 3 conditions.

The first one is the regulatory approvals, and we are progressing well on that front with U.S. waiting period having expired. Our work as it relates to other relevant jurisdictions is progressing well. Second is the JBT stockholder approval. The JBT stockholder meeting will be on August 8, and the proposal requires 50% approval of the casted votes. And then third, modern shareholders need to tender at least 90% of their shares into the offer.

The transaction is then expected to close by year-end. I want to encourage all Marel shareholders to familiarize themselves with the offer and the information which has been disclosed in relation to the offer. We see compelling strategic rationale for the combination. And in a joint investor meeting on June 24, Brian Deck, JBT's CEO; Matt Meister, JBT's CFO; and myself went through the industrial logic of the merger, and I encourage you all to take a look if you haven't done so already. Before I hand it back to Tinna, I want to thank our team.

I really appreciate the dedication and valuable contribution of our teams across the world in navigating this changing environment, driving our business forward and transforming the way food is processed in partnership with our customers. Thank you.

[Tinna Molphy, executive]

Thank you, Arni and Sebastiaan. And just to reiterate that all the information related to JBT offer launch, including stock exchange announcement, presentations and other relevant materials are available on marel.com/jbt as well as on the website of arionbanki.is.Now moving to Q&A. We will start with a question from Akash Gupta, which I see has raised his hand. Please go ahead.

[Akash Gupta, analyst]

I have 2, and I'll ask one by one. The first one is on aftermarket growth. When we look at the chart, it looks like the growth is plateauing at a high level. Sorry, aftermarket revenues is plateauing it at a high level. Could you please talk about what is driving that? Is this because you have already kind of reached out to a very high level of aftermarket penetration in your installed base and therefore, growth should be more of a reflection of your -- your installed base growth, which is low currently due to weakness in new equipment? Or is there any other factor like potentially some disruption from this global service center that you came out in June. So maybe any color on aftermarket growth that was a bit weaker in the quarter?

[Sebastiaan Antonius Boelen, executive]

Yes. I'll answer that. The question on aftermarket, I would like to split it in sort of what happened this quarter and how we look at it going forward. This quarter was indeed slightly lower revenues, mainly driven by a lower number of business days. We tend to have a very good trend on our business days, and that is the main driver of the small drop that we saw this quarter.

Next quarter, for example, or the one we are in now has more business days, so we expect that to come back. You also mentioned an installed base, we have a great installed base, but we know we don't serve all our customers with all the aftermarket that we would like to. So there are a lot of programs in place to actually increase that -- that is the basis for a lot of the forward-looking growth that we would see in our aftermarket, where there's still a lot of things we can do for our customers.

It's the spare parts, it's the surface, and it is, of course, also the remote control and others that we are trying to offer to our customers that will help us on that. So on the aftermarket, I would say the trend has been good in the past, and I would expect that to go forward with the elements that we have.

[Akash Gupta, analyst]

And my second question is on demand recovery. I think you made some comment on poultry that there were some delays in orders from Q2 to second half. Can you be a bit more specific on when shall we expect some of these orders to close, i.e., could they be in Q3 or more likely in Q4?

And then maybe if you can confirm there is no market share concern where you might be losing market share to your competitors? And finally, on the same topic, could you also provide some breakdown of these large poultry order pipeline into various geographies where you see more active pipeline and versus the others?

[Arni Sigurdsson, executive]

Yes. So on kind of poultry in particular, Akash, then I would say that we talked about the second half. We did not mention quarter 4, in particular, and that was intentional. So I would expect to see some pickup on the poultry side in the third quarter already. And kind of what I would say on the poultry side, we've talked about the line split solution. I went through some of the new innovations that are kind of -- that we're launching as well.

So we feel very good about our comparative kind of advantage compared to some of the other players in the industry. So we're going to be -- we feel very comfortable about that. And if we look towards the different geographies, poultry has been particularly challenged in North America. So I would say that we see that market kind of continue or continues to be strong. I mean, if you look at some of the fundamentals in North America, then pricing continued to be strong in the second quarter, kind of after a pickup in the first one, production cost continue to be low inventories also.

So kind of the dynamics in that market continue to be good for our customers. So we're looking at kind of a bit more activity there and a healthy pipeline for North America. It's obviously kind of also some other areas. But if I were to kind of call out one, that would be the market.

[Tinna Molphy, executive]

Next up, we have Klas Bergelind from Citi.

[Klas Bergelind, analyst]

So my first one is on the gross margin. Obviously, poultry came in better than expected and also better than you expected. But now it seems like trading will worse again, looking to sales and margin here into the third quarter. And obviously, from the -- some pull forward there, as you have said, and then also the weaker orders. Now that suggests that even your new lowered margin guidance is pretty back-end loaded in the year into the fourth quarter because poultry, when they are doing well, then that is good for the gross margin, it's typically higher because of solid mix. So how should we think about the gross margin now quarter-on-quarter into the third? And what can you do on SG&A further to mitigate that potential pressure?

[Arni Sigurdsson, executive]

Yes. I mean you are right that in the margin was kind of quite good. And what is kind of -- our business is not what I would call, we're not in the quarterly business. So if you look at our kind of how our orders come in and sometimes how kind of the revenues are recognized, it can fluctuate between quarters, and that's something we've talked about for a long time because in some cases, when you have these big projects and integrated systems, you sometimes are getting kind of third-party components that are part of the system, but they don't go through your manufacturing side, so that can impact your cost coverage, both on the, what I would call, kind of semi-fixed or kind of the indirect side on the indirect cost, which is included in the gross profit -- so that's a bit the dynamic, which can sometimes make it difficult to compare quarters exactly kind of one to another.

But I would say is that we had a strong on poultry this quarter. We'll see some weakness going into Q3, which is more related to kind of the revenue side and then that cost coverage that we've talked about, but then kind of fourth quarter to kind of recover again. And if you look at also just kind of how we see the pipeline and the insights that we have, then just the nature of the sales cycle and the project, then we have the best visibility into the pipeline on the poultry side. So we kind of -- we've gone through that quite well, and that's why we're comfortable putting out what we did today and yesterday.

[Klas Bergelind, analyst]

Okay. And my second one is on the order pipeline actually and coming back to Akash question. We're getting some signs that the U.S. across our broader industrials coverage is a bit weaker than in the first quarter. I mean you, Arni, you still seem very confident in the second half recovery. I'm trying to understand, is this sort of feed cost going up, prices going -- free cost coming down, prices going up, which is sort of enhancing profitability? Or is this actually Tyson and others telling you that they're going to place more orders. I'm trying to sort of understand where this confidence comes from when we hear that U.S. is getting a bit weaker.

[Arni Sigurdsson, executive]

Yes. So it's a great question. On the poultry side, we have more evidence than just kind of the pricing and the profitability of the customers. So I would say that we can have more insights into kind of how we see that development. We're obviously coming from a pretty kind of, I would say, deep or maybe more fair to say a long kind of cycle that went down. So kind of I think the fundamentals of the industry will, at least on the poultry side, probably outweigh some of the macro dynamics.

But in -- there's a lot of things happening in the U.S. as we speak on the interest rates and kind of geopolitical side. So you can -- we don't know exactly. But due to that kind of have that long cycle and now the improved dynamics, we believe that our customers are in a need to invest -- so kind of more confidence there. If you would look at meat on the other hand, I would say kind of the order -- the pipeline, sorry, that we're tracking there is not as strong.

It's kind of soft, as we outlined, is not as strong as in poultry. So we have less visibility there. So when we talk about improved kind of market dynamics on the meat side, I would characterize that more in the category A, we see production costs going down, profitability as they're in the positive territory now for pork processing, a little bit more positivity from the customer side, but we still need to see that kind of more hard evidence to get more comfortable on the outlook on the meat side, just to kind of contrast the two.

[Tinna Molphy, executive]

Next up, we have a raised hand from Andre Mulder from Kepler.

[Andre Mulder, analyst]

Okay. First question is on the book-to-bill. Do you expect that the book-to-bill will be over 1 in the second half of the year?

[Sebastiaan Antonius Boelen, executive]

Yes. Thank you for the question. Yes, we do believe that. As Arni said earlier, the outlook is from our customers is that the pipeline seems to be good. A bit of difference, of course, as was mentioned, between poultry and meat. We also catch fish and our PPF sector. But overall, we do see that order pipeline improving.

[Andre Mulder, analyst]

So second question is on the merger to JBT. Looking at the shareholder blocks, there are 4 in my view. It's, of course, area with 25% that's already done. You have 2% shares of your own, then something like small 50% is in the hands of the Islandic pension funds. Surely, you will have talked to them. What do you feel is their stance that remaining part would then be something like 25%? Can you give an insight on how that is composed?

[Arni Sigurdsson, executive]

Yes. So kind of what we see is that we -- after the joint call that we talked about earlier or I mentioned earlier, we kind of met kind of some of our shareholders and went through the industrial logic and kind of very similar kind of similar overview as we did on that call and went through Q&A. And what I would say is that kind of our shareholders are kind of, I would say, generally, I would probably characterize it as positive, but some are clearly kind of still doing their work, holding their cards close because they want to fully understand the case, evaluate it from an economic standpoint and also from a wider stakeholder standpoint.

So they're doing their work, and they know they have a bit more time to get to a final decision. And it also, for example, with the pension funds, it is not only the Chief Investment Officers. There's also a Board and so on. So we're just kind of staying close and having the conversation and answering any questions so they can make a well -- an informed decision on what they want to do. On the shareholder base, yes, we have aided, obviously, there with 25%.

We have a good chunk that is kind of a kind of international shareholders, which we built up kind of after the dual listing on the Euronext, we have what kind of somewhere in the mid- to high 30s, the pension funds. And then it is also kind of high net worth individuals, retail and so on. So those are kind of the buckets that I think is worth highlighting in the context of our shareholder registry.

[Andre Mulder, analyst]

Okay. And then the last question, probably the most critical one. Looking at where you currently are in terms of covenants, are there any measures that you already have in mind? Should there be not an improvement in order intake with a negative impact on working capital, and you're moving closer to the covenant levels.

[Sebastiaan Antonius Boelen, executive]

Yes. Great question. We are fairly high indeed on the covenants. I would say though, the outlook on orders received for the next quarters, we expect the working capital to turn around and improve the leverage numbers. We also still see a higher EBITDA level in '24 than in '23, again, improving a bit on those leverage numbers. There is, of course, short-term uncertainty, but we will continue to focus on our working capital and cost controls and hiring team is, for example, the deal teams on sales that we have. We have looked at scenarios, different scenarios on timing as it relates to our facilities, and we are ready to react if our base case doesn't play out. We have great relationship with our banks, who have been with us for quite a while, but that I would answer on this one.

[Tinna Molphy, executive]

Thank you, Andre. So indeed, many interesting questions raised here today. If you have any further questions and follow up, of course, the IR team is available. On behalf of the team, I sincerely thank you for your time and attention today. Take care, and have a great summer.