Marel hf

ICEX:MAREL

Earnings Call Transcript

[Tinna Molphy, executive]

So a warm welcome to our audience who is joining us online. And to those of you present here within our headquarters today, it's great to see so many of you in person, [Foreign Language] and welcome. Today's investor meeting is going to be focused on the third quarter results and some key business highlights.

Our CEO, Arni Oddur Thordarson; and CFO, Stacey Katz now returned from her maternity leave are going to go over the strong results. We'll then conclude with a Q&A. And the full session should last no longer than an hour. If you would like to ask a question, please do so via the conference call. Alternatively, you can also e-mail [e-mail] and we will then relate your name, your company and your question. So onwards and upwards. Over to you, CEO, Arni Oddur Thordarson.

[Arni Thordarson, executive]

Thank you, Tinna, and welcome as well in the headquarter. We are not on this now for, I think, 3 years here physically meeting. We will usually have the online meetings just to have that. But once a year, it's nice to see all of you. Especially, I recognized after the listing in Amsterdam, I am not meeting many investors here in Iceland. So it's good to see you as well here physically.

Stacey Katz with us here, first time as a CFO in our quarterly results. I have to give you a little bit. It has been nice to see Stacey grow with us in recent 9 years, develop and as we grow with our customers, we give opportunities here within the company to move forward and develop. So we have been working extremely well together in recent days. We have, I would say, our meetings, they are maximum 10 minutes. You speak and think fast, Stacey, but welcome onboard. And you will hear that when we go through the presentation.

It's -- I am a very proud CEO that is standing here today. It is in the quarter, it was always on Friday evening when I was looking back on what team Marel was achieving, I was amazed. You know I was not feeling the same in this winter. It was my own performance, the performance of the team and et cetera. It's not about the performance. It is when the headwinds are and et cetera sometimes you need to just synchronize, move forward and it happens to be every 5 years in organization.

However, looking at how the team is working, what the products they are bringing to the table and professionally -- in pricing, we were talking about pricing of our product and our services and software. We are moving miles here in refining the operating model, refining how we work. [indiscernible] there is a time lag between actions and results. So I'm not only talking about the result in the quarter. I'm talking about what we were doing to improve and move forward.

But look at the results. We had a lot of discussion about this, the order book and the order intake valid when is Marel going to deliver revenues from the order book. I've said approximately ballpark, you should see our revenue recognition in each quarter, average for the last 3, 4 quarters in order intake should be the revenues.

You see then that in recent 12 months, we are EUR 40 million, EUR 50 million behind. And we got a question. Are you behind towards your customers? The answer is no. Other suppliers and our customers were late as well in the turbulence in the supply chain, global supply chain.

This means that we need to deliver in order intake, 3, 4 recent quarters in revenues plus a catch-up, some would call it catch-up, but a catch-up into that. Remarkable to see EUR 451 million in revenues, up 36% per year, 20% organic growth there.

EBIT a little bit ahead of 10%, double digit. It's far below what we are used to. It's good to see the improvements that we are having. In the quarter, we needed to take a very difficult decision to cut down 5% of our workforce. Those cost savings are not included in the quarter. It will start to tick in the coming quarters.

It is annual savings of EUR 25 million. The total cost will be EUR 10 million. We adjust for that in the quarter and no other matter except the PPA and acquisition-related cost. So EUR 5.5 million is adjusted in the quarter, EUR 4.5 million in next quarter, adjusted EBIT of 10.3%.

We are paving the way towards our 14% to 16% EBIT in backend of next year. To oversimplify, our gross profit is 36% in this quarter. To achieve 14% to 16%, we need 38% to 40% gross, 36% to 38%, our target is still 40%.

It's a complete homerun to take the SG&A from 19.6% to 18%. And we are at a strategic level in now our innovation cost 6%, although we have never ever pumped out so many new pioneering solution as this year. We are having solutions that are key towards inflation environment. We are having consumer-ready products and we are here to stay with our customers, move forward while consumers start to trade down, moving from meat to poultry.

This is the first time I've seen kilos in meat going down. Kilos in any industry going down in the quarter in pork in Europe. However, we have never ever witnessed as much demand in the poultry. This means we need to be in portfolio management, product, people and show discipline in operation when we present result.

Regarding the 5% reduction of the workers. I have heard from some journalist, investor as well that we were admitting that we were having fast in running the companies. I hope that people that are running companies and have been building infrastructure know that you need to duplicate the work to take not risk.

When we are building the sales and service network around on the globe, now we can go for unifying synergy, I think and, et cetera, the backend. Marel's teams was not here 2020. The digital solutions were not here. Automating, digitalizing our customers and ourselves is the way forward. It's licensed to operate and it's as well right to win.

Remarkable, you can read yourself the balance here, remarkable to see 42% service revenues in the quarter. We are having record project revenues. We are having 11th quarter in a row where we are increasing the service revenues. We had a good cost in second quarter. We had a good cost in the previous quarters. We got a question, what are you doing by splitting the part handle manufacturing services and et cetera? Is it a real good cost? At least we are delivering more now. The demand is more after the services. And we are seeing now the first fruit of those actions.

Sometimes you need to take the short-term profitability down and move forward with infrastructure projects. We are investing 5% of our revenues and we request here a return on that. Poultry back on track, 16.5% EBIT. We are having superior profits in poultry going forward. And backward, 18% to 21% profitability EBIT. It's unique in the capital world when you are growing so much as well.

Some capital goods companies are delivering around 20%. But with this growth and this growth outlook, it's a real, real return on capital. Even though we are now investing more, putting the money where the math is in the poultry, improving the flow of flex robotics, automation and et cetera in Boxmeer, packed as well by our single biggest investment in the global distribution for all the industries. However, poultry is, of course, when we are average 42%, we are far above that in poultry.

The other picture is in the meat. Challenging environment. However, I'm not at all satisfied with that when we are having those fabulous solution in secondary meat, Accuro, Magna, that is fat-lean, contamination-free and et cetera, that we are not selling for.

Geographically, the market is hot in Americas, soft in Europe, still not ready in China, but that's around the corner and so on. Anyhow, we can do more here. People are trading down to poultry, people are trading down into minced and et cetera. We have the solutions here.

My dear friend, David Wilson stepped down yesterday in meat --running the meat. We have been working here together. I have been 17 years, he has been 25 years in the company, very close friend here. However, we need now a new leadership in the meat. We are having excellent people in the management team, head of innovation, head of service and manufacturing, sales and so on. Now we need to move forward with leadership in meat. We are in onboarding process, but temporarily Roger Claessens, Head of Poultry will jump into the meat for 3 to 6 months. And we have an excellent team in poultry and sales and service that will co-lead poultry in that temporary period.

You know what we have been talking about standardization, modularization, cross-selling and up-selling, all the recipes that we are doing in the poultry and now we want to go fast tracking this. You see a big minus here. And you see as well, I'm not worried. People ask me, why are you always giving fish the benefit of doubt? Is it because you are from the fish industry, 14 years old in fish factories and et cetera? No. We are moving here forward. We are integrating Valka, Curio and Mara. We were only having EUR 45 million in revenues in fish compared to EUR 55 million what we should have.

We are on speed working on resolving bottlenecks in storing in our salmon business there. That will improve the revenue recognition covering the cost. We went as well pretty deep here in the integration with around 60, 70 less people -- in the total fish after those integration, we are having not a perfect idle or utilization in the 3 manufacturing sites here in Iceland that we will unify and synergies.

It's strange to have 3 manufacturing plants in Iceland. But we will change that. It's not a big country. Then you see the new pillar, plant, pet and feed. It's pet food, just not [indiscernible]. And plant-based foods we are talking about. We are all changing to flex theory. We all need proteins. It will be the set point of the plate.

We are the world leader, global leader in solution services and software for all the proteins that human consumption is having available commercially, although we are not yet in that, but everything else, we are global leaders here. It's very, very important. CO2 targets by some retail stores, biggest contribution will be when you move meat-bowls into plant-based bowls. Why should we not be at our table? Pet food is the biggest here. Wenger, welcome once again, team Wenger. Similar culture, 6% constant innovation throughout the years, excellent solution that are taking care of the nutrition of the material.

Higher nutrition out of each kilos is the biggest CO2 contributor. We need to eat and consume less, so having solutions and I'm sometimes surprised when I see all the solution out in the market that crunch the meat or other material and take all the enzymes and all the proteins out. We have been innovating less water, less energy, higher nutrition, more safety Wenger as well, fabless together in full line systems.

So I've touched on the operational performance before. And the EBIT bridge is a little bit shorter 10% to 16% and 6% to 60%. Stacey?

[Stacey Katz, executive]

Thank you, Arni.

[Arni Thordarson, executive]

Yes, thank you, Stacey.

[Stacey Katz, executive]

So nice to be here today. For those that I haven't met, I assume that we will meet in the coming period. And I'm just looking forward to get to know people both on the phone, but also in the room as well. I do not plan to talk as fast as Arni had mentioned previously. But it is correct that I'm a New Yorker, I am known to speak fast. Let's put it that way.

So I want to first start with financial highlights in the quarter. We are pleased with the results in the quarter, showing operational improvement if you compare it to Q2 and seeing part of the actions that we have taken starting to kick in with further improvements to come to get to the 14% to 16% EBIT at the backend of 2023. Intake of EUR 427 million, lower than last quarter's record intake, though still solid with a continued good pipeline, showing the need for automation and digitalization in food processing.

Revenues hit a new record in the quarter, EUR 451 million, both including and excluding Wenger, an increase of 36%, where we have 16% acquired growth, 20% organic growth. Hard work by Team Marel has gone into this revenue ramp-up with solid customer deliveries in the quarter. So really thank you to Team Marel.

We are continuing to work on bouncing between our manufacturing sites. And while we do see some signs of parts availability issues easing, we are still experiencing supply chain inefficiencies in the current environment.

Both intake and revenues at a new level compared to a few quarters ago when we were working to break through the EUR 370 million barrier. Now we are above the EUR 400 million barrier. Wenger is fully built into the numbers in Q3, introducing our new segment, plant, pet and feed, as Arni had mentioned previously, which also includes sales of retail and foodservice solutions into that segment, which were historically in our other segment reported.

Book-to-bill in the quarter of 0.95, showing the revenue growth coming in, healthy order book of EUR 751 million, representing 47% of trailing 12-month revenues. Adjusted EBIT of 10.3% as Arni has gone through, moving in the right direction. We're seeing better coverage of our costs at higher volume levels and we're seeing orders at new price levels coming in through the order book, resulting in improved gross profit.

Difficult decision regarding the 5% head count reduction that was executed in the quarter. As Arni mentioned previously, we have adjusted for EUR 5.5 million of costs in Q3, with the remainder to come in Q4. And the reason here is local laws and accounting regulations in terms of when you can book the provision and if the individual is off on garden leave or not.

We do expect a total of EUR 10 million one-off for annualized savings of up to EUR 25 million going forwards. These savings will start to kick in, in Q4, but then mostly towards the beginning of next year. There is a currency tailwind in the quarter due to the strong U.S. dollar and Marel does have a higher proportion of its revenues in U.S. dollars than its costs.

Cash flow is below expectations in the quarter, operating cash flow at EUR 1 million, free cash flow at minus EUR 35 million. This is impacted by the book-to-bill being below 1, higher levels of investments and we also have unfavorable working capital movements, particularly due to timing of invoicing and payments and we are expecting gradual improvements in the coming quarters.

Our cash flow model remains in place and in our order book is orders that are secured with down payments. We are continuing to invest in our infrastructure in the quarter in our manufacturing locations as well as our end-to-end spare parts journey with the associated good costs. We have officially opened our Woods shared services center that Arni will show you a picture of later on as well in the quarter and in the coming week, we will be officially opening a production facility that is adjacent to our current operations in Nitra, allowing us to scale up in a better cost location. Leverage at 3.9x net debt to EBITDA, which is above our targeted capital structure. Increase in the quarter in net debts is majority due to the strong U.S. dollar, which is pushing up the debts.

We do have a plan to deleverage, and we are expecting to enter 2024 with a leverage that is closer to 2.0x within our capital structure of 2 to 3x net debt EBITDA. An important point, in Q4, we are expecting similar levels of results as Q3, and we then expect a gradual ramp-up towards the 14% to 16% run rate in EBIT at the end of next year.

Healthy order book, as I already mentioned, EUR 751 million, representing 47% of trailing 12-month revenues. Book-to-bill in the quarter of 0.95, showing the increased volume in the quarter. We will still see the price increases of 2022 filtering in through second quarter of next year. Good to remember that the orders that are in the order book are financially secured with down payments, a key item to our cash flow model.

Earnings per share, we do target earnings per share to grow faster than revenues. Earnings per share in the quarter is affected by one-offs. So we have the 5% head count reduction. We have the Stranda insolvency. We have a higher level of investments that we are currently making to enable future growth and we have a higher rate of the purchase price amortization for Wenger going through.

We did run a share buyback program, which was initiated in Q2 and finalized in September with the purpose being to meet Marel's obligations to employees under incentive programs that we have regarding shares.

Now we go to the income statement of Q3 revenue growth, 36% year-over-year, as mentioned, EUR 451 million in revenue compared to EUR 332 million at this time last year. Gross profit, 36%, moving up towards the target, sales and marketing expenses, 12.6%, moving closer to the 12% target year-end 2023.

Here, we are seeing both the higher volume that is covering costs as well, lower marketing costs after we did meet quite a few of our customers in a number of exhibitions in the first half of the year. G&A at 7.1%, including some good costs as well as some doubling up related to our shared services transition, which will ramp down in the coming quarters. R&D, 5.9%, close to our strategic level and pumping out quite a lot of new innovations.

Non-IFRS adjustments are higher than they have been and I do want to walk through that. Of the EUR 27 million that you see here, we have EUR 16 million in purchase price allocation expenses. Here, we will see elevated levels going through the income statement because we have built the inventory uplift to fair value, which will be amortized through this year and next year.

We have EUR 5.5 million of restructuring costs, which were related to the 5% global head count reduction. And then we have EUR 5.6 million of acquisition-related costs which are related to Wenger and are part of the previously announced USD 540 million purchase consideration related to bonuses paid to employees.

Our net finance costs are elevated, though it does not really look like it in this picture because you have FX tailwinds that is going against the cost. Base rates have been increasing in the quarter. Our latest estimate is that we are at EUR 10 million to EUR 11 million interest on borrowings for each quarter. This will come down as we deleverage and repay our drawn debt.

Stranda, EUR 7 million declared insolvency in the quarter write-off. And here, you see it in the line impairment result of associates. For the 9 months, here, you see a 23% revenue growth, EUR 1.2 billion in the 9 months compared to EUR 993 million. For the rest of the income statement here, I have highlighted the main points already on the previous slide, so I will continue.

Assets, there is more to discuss on the balance sheet in terms of assets than there is for equity and liabilities. In Q2, we brought in Wenger to the balance sheet, which is the majority of the change from end of last year until this year. Our purchase price allocation activities are underway. And in this quarter, we booked the inventory uplift.

Property, plant and equipment include investments to digitize and automate in the quarter, such as the new building we mentioned in Nitra, the manufacturing parts warehouse in Boxmeer and our end-to-end spare parts journey.

Inventories are relatively flat in the quarter, although they might not look so. The purchase price allocation uplift for inventory is included in there. There is some FX tailwind as well as well as some cost price increases, which have been priced through in our current price levels. Focus is on bringing inventory down, which Linda has previously stated. However, this will take time, and our first priority is on revenue ramp up.

Receivables have been increasing in the quarter due to, a), additional volume, but b), timing and invoicing of payments. This is unfavorable at the moment, and there is high focus on collections.

Equity and liabilities. The main thing to mention here is the increase in borrowings quarter-over-quarter, which is majority driven by the stronger U.S. dollar due to the purchase of Wenger.

Then we move over to the cash flow bridge. As already mentioned, cash flow below expectations in the quarter with operating cash flow of EUR 1 million and free cash flow at minus EUR 35 million. The book-to-bill being below 1x drives a lower cash inflow. We have unfavorable movements in net working capital as well as higher investments that are the biggest drivers of cash flow in the quarter.

We have already mentioned the FX impact on borrowings, which is driving the increase in net debt. Our cash flow model remains unchanged as previously and we have shown historically that we can deleverage quickly after transformational acquisitions.

Cash conversion. Historically, our cash conversion and then we're talking about operating cash flow compared to adjusted EBIT has been strong at around 125% average, showing our strong cash flow model. Our objective is to move gradually to 120% of operating cash flow to adjusted EBIT by year-end 2023, though the cash flow is expected to fluctuate quarter-to-quarter.

Marel has deployed capital since 2016 and a number of acquisitions listed here on the slide and we have successfully used our cash flow model to deleverage after those acquisitions and we expect we will be able to do the same now.

Then jumping into leverage. Leverage at 3.9x, temporarily above our targeted capital structure of 2 to 3x net debt to EBITDA, focus on deleveraging, so we can enter 2024 at the lower end of that range, closer to 2.0 than 3.0 within the range. We have seen this model work well for us in the past and our strong cash flow model is still in place, though we are seeing temporarily elevated working capital that we expect to normalize as we see the EBITDA improvements coming through.

New syndicated term loan of USD 300 million was signed yesterday. This has a 3-year term with a 2-year uncommitted extension. Initial margin is 250 basis points on top of the standard financing rate, and the rate will move in line with leverage. The facility will be used to repay the EUR 150 million facility that we drew for operational headroom when we were acquiring Wenger.

As well, at the same time, we have agreed with the banks on additional covenant headroom as a safety measure for FX volatility and for temporary swings. We are complying with our covenants currently using the acquisition spike that we have built in. This new loan will increase our available liquidity to as well fund future growth.

And with that, back over to you, Arni.

[Arni Thordarson, executive]

Thank you. Stacey. Usually, she speaks faster, but you were fast if you look at the clock and to all the slides you went through. So Stacey was touching on our cash flow model. It is a unit model. It is that our customers, they financed their projects. Projects are around 40% of our revenues. 20% is standard agreement and we tend to run them faster and faster. Although, lead time is now around 6 months, target is going forward 4 months.

So we are having more standardization modelization. We are investing in automating and digitalizing our innovation, our product lifecycle management systems and et cetera. And then we can shoot the drawing of the knowledge between the sites, even though we're innovate here in Iceland, Denmark, we can make the products in Nitra, Slovakia, later on in Brazil and China and so on.

So we are investing in the business and that is how we are going to be ahead of the growth curve. And if we keep this on when I'm talking as well, then you can use 2 sides of the brain reading and listening. It is so important to cut the market share in a perfect storm in the world economy.

We are creating a perpetual revenue stream for service and software. 42% now growing and capturing the market share. Investing in the frontend synergy, I think then on the backend, but we do that with our people and our culture, best-in-class products and so on.

The customer focus is key. It's always time to time that companies become inward looking when they go through the processes and et cetera. In -- remember though, 2014, '15, we were then refocusing after customer, for the customer, we gained 25% organic growth in the following 2 years. We are doing the same now. We are here out in the field with the customer's innovation through partnership. We have been using that in the capital goods side. Then we have been talking to our customers. Why on earth have we not been co-creating the service packages?

The question mark on surprise is the same on the face of the customers. We have though co-created our digital products. And we had a really, really good launch of new digital products in the poultry industry in this quarter. So we are moving forward in capital goods in services and software.

What are we meaning by the infrastructure projects? I need to look here because a new glass is now enter, so end-to-end spare part, what does it mean? It means that now what we are doing in recent quarters is making all the LEGO bricks. You cannot just open a building in the middle year of '24 and now here in fish, poultry and pork meat, you just move it to the warehouse.

We have to split the warehouses in the shipping business, planning unschedulable in the manufacturing and then in the airline business where you use Quantum forecasting in the spare parts and et cetera. You have to have the IT system behind, you have to have the capability software people behind and move gradually into the global distribution system.

However, we are simultaneously starting to pave the way as well in U.S. by splitting it and making the core pillar for the regional distribution system in the U.S. We are doing the same theme in LatAm, China and Asia and so on. You do it step by step and we know all as kids, it's a little bit easier to build a house with LEGO bricks than doing it from the scratch. So we are a LEGO company when we go for organization design and as well in our investment.

In the backend, what are we talking about? It's easier to think about Joe and Susan, our salespeople out in the field with the customers. What happens then behind the scenes all the way back. While we make some of the produce in Denmark, other in Iceland, then in Netherlands, then in Nitra and we have a seamless flow. 15,000 chicken per hour that goes to multiple [indiscernible]. Whole chicken, roasted chicken, 3 chicken pressed in a pack, depending on the weather forecast and et cetera.

There are multiple touch-points in the company. If you do it in a structured systematic way and you map up the processes, you can automate and digitalize. If you start to automate and digitalize from the back to the front, you end in spaghetti and all the LEGO bricks. It sounds a lot Nitra expansion, but that's the consumer rate product. Boxmeer, our poultry hub, where we are now building a new class and sustainable energy and et cetera around the warehouse, the flow flex and the flow for the standard equipment needs to be just like we have here, standard on the projects in the Netherland.

Stovring, we touched on that. We are making Oxygen as well for the salmon industry in Stovring in Denmark as we are doing for the poultry industry in the Netherlands. And then Lichtenvoorde, we are moving meat activities from Boxmeer into Lichtenvoorde making the clustering effect and so on.

So a lot of investments that are paving the way for more scalability and more speed. We are seeing first time since 1975 an inflation recession, a real inflation recession. I'm not talking about like in Iceland, we have seen that every 6, 7 years in the past. But 1975, the oil crisis, they lasted for 6 years. Everything is happening faster now. So why should this not last for 2 to 3 years?

It's not easy for many people in Europe with the energy prices. Probably 25% of the people in Europe seriously need to trade down. So all the 75% are reading the papers and we are critical a little bit down, traveling a little bit less and going, dining in, meaning dining at home rather than dining out. We see it in the number. We see it in the airline business. We see it in the hotel business. What does that mean for Marel?

We have extremely strong market position -- competitive position. The interlinking primary processing into the consumer ready. So we are here, we are as well having solution with less water, less energy and et cetera. That is really needed. Inflation is the best trend of sustainability.

At the same time, as we need to show discipline in operation breathe down, breathe up, primary processing meat. We have the fast largest installed base modernization in that installed base, but go after the secondary processing. Make oxygen in poultry, like I said, and go after the volume growth there. There will always be projects on the center point on the plate, then we have some vegetables and then we decorate the plate with something else, but Marel is 100% focused company and more over 96% proteins.

There is an ease in the supply chain, it is easing even though we are not yet out the wood, I am not talking Marel, I am talking about the global economy, meaning that there will be more availability of parts, but we -- it's much more that we have reorganized ourselves. How we purchase the partnership with the suppliers. And we are seeing logistic cost or freight going dramatically down. The only piece is that the LG prices is still up.

So all in all, I cannot say that I'm looking forward to the inflationary recession. It is a tough environment for many consumers. But we are having the keys to tackle that environment, and we will be out in the field here and taking market share in this environment.

Focus first operating model. We have been working with McKinsey and Dollars here analyzing how can we increase the end-to-end visibility, accountability. Behind the scenes, we are setting up 7 business divisions: poultry, meat, fish, retail and foodservice, Wenger, service, software and so on here that will all have internally their own P&L responsibility.

We have as well customer centers out in the field that we are clarifying counting apple and apples to compare same way of working et cetera, et cetera. Very important that this is behind the scenes. We are moving forward here to increase the speed and the scale of the operation.

Our clear target is EUR 3 billion in revenues in 2026. It's only 1.5 years ago that we were having discussion, investors, analysts, are you not going to restate the targets. EUR 1.2 billion for 2 years in a row. What a nonsense is this EUR 3 billion target. We are having EUR 2 billion next year in revenues around that. It's much shorter from EUR 2 billion to EUR 3 billion.

The EUR 3 billion target was not a target in itself for the number either. It was how does Marel need to look like to be a one-stop shop in U.S., in Europe, in Asia, in LatAm. Our largest customers are having EUR 60 billion in revenues, heading to EUR 200 billion to grow with them and do it different than 15 years ago, where our customers were just going for a low cost, now they want to replicate around 7 factories at the same time into Asia from U.S. Then you have to have this economical scale. If we think forward -- it is a much larger number, but you need to be the real, real one-stop shop throughout beginning to end.

We have been working and growing like LEGO bricks. We started in the middle of the fish sector in secondary processing and then gradually from the boat to delivery, same we have been doing in meat and poultry, same journeys forward in the plant based.

We introduced yesterday as well the new -- sometimes called top structure executive Board that is the top of the pyramid in the governance in the executive team, the executive team remains. This is as well to increase the speed and the scale in current world economy. It is as well freeing up time for me personally to take care of many, many other things that run the daily operation, the public affairs, the risk management and so on.

Moreover, give me time to focus on the people, systems, structures and et cetera. Stacey Katz, CFO; Linda here with us, COO, Head of the functions that are the key enablers for the business division to drive the growth at the appropriate cost and with Linda for instance, innovation underneath the customers at the supply chain, all the disruption that we have been tackling and et cetera.

And then we formulate the 7 business division -- service, software as a stand-alone business that we have a clear P&L responsibility in-house, although we will report 4 pillars toward investors on the outside. Good to see Arni Sigurdsson here stepping in as Chief Business Officer, it was translated very strange in the Icelandic newspapers yesterday, but we didn't translate it ourselves, CBO and Deputy CEO here. Thorsteinn coming closer to me and the people and culture really looking forward to it.

It's becoming not only the business passion, et cetera, I'm recently now chairing the Nordic CEOs as well for sustainable future where we are looking at better world with less CO2, more diversity, more inclusion and so on. So we will be very good here together, David, when we start to talk about how to drive even more divesting, more learning development and et cetera, in the company.

We will explain this better the top structures. However, we have as well the same excellent people, for instance, running poultry, running the fish division, Gudbjorg Heida, Roger Claessens and so on.

Same leverage towards the customers towards leading their people and I will continue to discuss as well with you investors about those -- the strengths of those people. But this is more in line with other capital goods companies that we are comparing with when you are reaching this size.

Everything has its maturity. Towards the 5, I remember clearly, EUR 129 million in revenues, 10% service revenues. You need a different operating model then. Then we went to EUR 600 million. When we took on Scanvaegt store, then you move into another operating model, EUR 1.2 billion, we were stuck there for 2 years, then you have one other operating model.

Now we are moving at speed towards the EUR 3 billion target 2026. And this is the conclusion after comparing to the best-in-class, how to operate, how are we going to target our day, what are we going to achieve and so on.

I talked about the targets quite a lot. You know this slide, they remain both of the targets, 14% to 16% EBIT in back end of next year. EUR 3 billion, 50% from recurring revenues 2026 and onward, you will start to see more digital revenue starting to take in. From '24, although we will not split it, who knows '26 and beyond what will be service revenue and software revenues when we are traveling from reactive to proactive, to preventive maintenance. So back to Q&A, this is a travel. This is a transformation of the industry and ourselves as individual and company. So Tinna, you're going to start the Q&A.

[Tinna Molphy, executive]

Fantastic. So moving on to Q&A. We're going to start with the online audience, and then we're going to take questions from the room and by e-mail. So hand you over to the conference call operator.

[Operator]

[Operator Instructions] Our first question comes from Klas Bergelind at Citi.

[Klas Bergelind, analyst]

Good to see the margin improvement and not only driven by accretion from Wenger. A question though is to what extent is a sustainable into year-end and beyond. You've got operating leverage out of the backlog, better revenue recognition at help your OpEx.

You have less one-off cost linked to the warehouse automation, your gross margin is improving, which is driven by mix, but also better pricing. I would like to something on the pricing. Can you talk through how much pricing you had out of the sales growth in the quarter and a much more pricing in the P&L we can expect in the coming quarters? I know we're still waiting for the savings to kick in, but keen to understand the pricing movement better.

[Arni Thordarson, executive]

Thank you Klas. Maybe I'll start and good question. So to recap, around 40%-plus now in services, around 20% in standard equipment and around ballpark 40% in project. It fluctuates between quarter a little bit the project and standard equipment. So this quarter, and to recap, it was only half month that the pricing of the services and spares were in. So it's full effect of the 42% in this quarter in the new price level.

And notably we are not overpricing. We are on our right price level adjusting to the cost levels in the world. We are at similar price levels compared to when we were delivering 14%, 15% EBIT. So filtering through in this quarter, the 42% are pricing. Filtering next quarter is the standard equipment. Not fully, its fourth quarter and first quarter, full effect coming then in not included so much in this quarter.

And then the project business that have 12 months lead-time will start to kick in, in second quarter next year. So pricing and availability of parts are the far biggest EBIT driver in taking us further up, plus pricing execution, meaning that we go after when we have an agreement with our customers that they take the freight cost, then they should take the freight cost and so on and so on.

[Stacey Katz, executive]

And I would just reiterate that for Q4, we are expecting similar levels in terms of results as Q3, and then we expect gradual improvement up to the 14% to 16% run rate in the back end of 2023. Our current pricing actions are still filtering through, as Arni mentioned, we're then in a regular drumbeat in terms of evaluating our pricing and as well looking forward towards cost forecast into next year. And while we do see some signs of supply chain easing, we do also see an inflationary environment costs continuing to rise in other areas. So we really are balancing all things, which is why we also expect similar results for next quarter.

[Klas Bergelind, analyst]

Yes. But on the actual sort of combined level in the P&L, you're not willing to say how much of the growth was pure pricing?

[Arni Thordarson, executive]

Yes. So it is, I said that 20% were organic growth, but ballpark now quarter-by-quarter is -- the organic growth is 50-50 pricing and volume, you can say it that way and so on. So -- but how to calculate it then cost-by-cost class. So we are compensating the cost here with a higher price, and this is the new price. Today is a day 1, and then we go forward. But pricing is quite significant of the organic growth.

[Klas Bergelind, analyst]

Got it. My second question is on meat. I still think you talked a lot about the growth, Arni, EUR 2 billion, next year EUR 3 billion, potential maybe more. And I still think that you're targeting the 16% group margin longer term when we leave 2023. What kind of level do you think meat you deliver at within that level? It's pretty clear to me that the poultry margin can return to previous peak, but keen to understand if you think the opportunity to drive the meat margin closer to poultry has changed versus the time of the IPO. And I'm thinking about aftermarket penetration, modernization a more broader full-scale offering and so forth.

[Arni Thordarson, executive]

Yes, good question. But let me start with a good part, poultry is going to 18% to 21% higher proportion than we thought before. Plant-based path historically, 14%, 15% cross-selling or up selling there, pretty straightforward to 16% plus there. Meat and fish are now in low margins. The travel forward is clear in fish. However, in back end when we entered 24 part of the 14% to 60% EBIT, Fish will probably not be higher than around 8% to 10% and meet at a point in time, realistic now it's a similar level, although there is nothing that excludes that we will be in 15% plus in mid long term.

We will not take any shortcuts here. We have a fabulous portfolio in the secondary meat, for as questions, keys for current environment. And we need to be out in the field. We need to have portfolio management of product and people.

So this is ballpark. This is not forecasting based on number insight. We have other numbers here. But if we just look at it at helicopter level, around 10%, 10%, 18%, 21%, 14% to 16% in Wenger, hopefully and cross-selling, hopefully, 16% plus.

So all in all, our initiatives go across all of those and the gross profit across 36% to 38% to 40% and back end of that year and home run in the SG&A. But nothing that excludes that we will be in those segments and all of those segments are around 15% EBIT, but traveling from now to the back end of next year and we get closer and closer to the end of this year, it's around 10%, 10%, 18%, 21% and around 16%.

[Klas Bergelind, analyst]

Got it. Very, very quick final one on the interest charge going forward. What did you say, Stacey, EUR 10 million to EUR 15 million per quarter until you start to delever.

[Stacey Katz, executive]

EUR 10 million to EUR 11 million per quarter interest on borrowings at the current leverage rate and debt.

[Klas Bergelind, analyst]

And obviously includes the EUR 300 million now that you've raised yesterday, right?

[Stacey Katz, executive]

Correct.

[Operator]

We have no further questions on the phone line at this time. So I'll hand back to the floor.

[Tinna Molphy, executive]

Right. Before we move on to the audience, we have an e-mail question from Akash from JPMorgan. The first question reads, the cost of debt financing has significantly gone up since you gave the 2 to 3x leverage target during your secondary listing in Amsterdam. Can you tell us your latest thinking on leverage ratios? And would you consider lowering the medium-term leverage target ratio if the cost of debt stays to current high level of 4% to 5%?

[Stacey Katz, executive]

Perhaps I start, Arni, and then you jump in. So no, we do not consider changing our leverage target at this time. So we are at 3.9x. Last quarter, we were at 3.8x. The difference between the quarters is due to majority currency effect on the borrowings. We do expect to deleveraging, which we have done successfully in the past with our cash flow model and transformational acquisitions, and we expect to enter 2024 closer to the 2.0x than 3.0 in our targeted capital structure. We do not plan to change that at this moment.

[Arni Thordarson, executive]

Now we have a wonderful cash flow model, 125% cash conversion compared to EBIT. Just to repeat once again, we will be back on track there. The 2 to 3x leverage is not a coincidence. It's a lot of thinking behind it and scenario planning. When you are having so high quality of earnings, 40% plus in recurring revenues, you are having geographical spread, you are processing step spreads, [indiscernible] strategy, dealing with flexitarian, vegetarian as well a poultry meter fish, 2.5x leverage, you have really, really safe in all kinds of scenarios.

If we go much below 2.5, we are not yielding enough to our shareholders. We are here to make value for our stakeholders, customers and shareholders and our employees. We were too long at 1x leverage. So 2.5 is the number that is fitted for this high-quality company. Now we are temporarily above. We have made an agreement with our trusted financial partners with acquisition spike with extra liquidity and et cetera, and we delever fast. Remember when we acquired MPS, 2.9 leverage; 12 months later, 1.9%. We are going to repeat that game, be back on track in the acquisitions journey before end of next year.

So when we are closer to 2 we will start again to accelerate our journey to be the one-stop shop and this is our game and has been since [indiscernible], no changes.

[Tinna Molphy, executive]

Great. His second question reads, the logistics costs are coming down very rapidly. Supply chain headwinds are easing, resulting in additional savings in Q4 from restructuring and higher pricing benefits. Is it fair to assume that Q4 margin could be up sequentially in decent demand? Was there any positive one-off items in terms of customers restocking spares that boosted Q3 mix so much that Q4 could see a limited increase in margin?

[Arni Thordarson, executive]

Just short. We expect similar levels in fourth quarter, third quarter and then gradual pick up in the coming quarters. So we will not go in further details there. We have, of course, tailwind in the currency. We have a tailwind in many other items that we have been touching on, pricing of the standard equipment and et cetera. We are in a volatile environment. And short term, we are looking at fourth quarter at similar levels in all aspects and then gradual buildup.

[Tinna Molphy, executive]

Okay. Then handing over to the conference call, where Andre Mulder from Kepler has a question.

[Andre Mulder, analyst]

2 questions. First, you gave a split of the drivers of sales. Could you also split the order intake in terms of acquisitions, organic and possibly the ForEx part? Second question is, again, on fish, where I do see an improvement of the sales. It's still not delivering the results there. So in the past, it was said that it was mostly volumes that should drive earnings there, but it's still not happening. So what's the reason behind it? And do you expect any further measures to be taken there?

[Arni Thordarson, executive]

Yes. I start with the order intake. There is very, very important to stay focused, and here in this environment there is a first time, like I said, kilos in pork industry in Europe, down 5% this year, year-on-year. And how do our customers react, they increase the prices. So probably, we are going down there 10%. That's all shifting into poultry or plant-based and so on.

The pork industry though and beef industry in U.S. is on up take, so it's important to balance in the geographies and et cetera. There was a 100% increase in order intake between years in first and second quarter in the fish industry. We are not seeing that in the revenue levels because we were in EUR 45 million, we should tap in like EUR 55 million.

We have explained, we have been working on initiatives now in Stovring, moving the food preparation that was named meat preparation before, but it's handling all kind of foods there. We are moving that out to make oxygen for the salmon industry and so on.

Salmon taxation in Norway will put a temporary turbulence in the order intake there for time being. I had Susi yesterday on Friday as well. I will not stop having the salmon and the growth is still there. So we will have an investment in land based here in Iceland. We are seeing 36% increase in export from Chile to U.S. in last quarter of salmon and so on. We are geographically spread.

So just to give you a little bit parameter and heat in order intake, would I like to see even more sales in the secondary where we are having pumping out the new products? Yes. And we need to go after it with a more rigid, more focus because we have been pumping out the meat and now we are moving the intensity, the gravity in innovation into the poultry secondary and so on. So to give you insight, but we don't split it further the order intake.

[Stacey Katz, executive]

And I think it's also good to mention that the product mix has been shifting a bit within fish for the last 2 record quarters. We're heavier on the projects and standard equipment as historical. So that is something that we are also paying attention and focusing on going forward. And then I think as Arni mentioned, we don't split the order intake, but poultry is strong as expected for plant, pet and feed, softer in meat and fish at a good level, although softer than the record quarter last quarter.

[Andre Mulder, analyst]

Additional question. I believe just some statements of the LCA that are pumping USD 250 million into increasing the processing and meat and poultry. I assume you will benefit from that. Is there any time frame given?

[Arni Thordarson, executive]

No. So how the government at et cetera jump in, the biggest transformation is when we work and triangulate some pairs here in the value chain. We have been working on sustainable journeys here. For instance, one of the best stories is when we looked in the Benelux, where you are from as well in the Netherlands where the supermarkets, our processes and us, we're working together, how to utilize the animal and the products within the region. So supermarkets take on the wing and, et cetera, on display, our processes make new receipts and we make new solutions for our processes.

And then of course those supplementing or charging by taxes, the government, this is all intervention but is short term and not driving the long-term transformation. But of course, we will be at the table when those are here. But I was previously talking on the taxation in Norway that is probably above what is acceptable levels. And then we are talking about pumping in money into the midterm poultry some. In general, I'm rather a free market trade guy, as you know, and -- but we will be at the table here.

[Tinna Molphy, executive]

Okay. So now turning to the audience here in Iceland. Any questions from the room? Okay. Thank you. So I think that concludes today's session. Again, our sincere thanks for your time, attention and continued support for Marel.