Marel hf

ICEX:MAREL

Earnings Call Transcript

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

Okay. So let's get this show on the road. A warm welcome to all of you present here at Marel's headquarters in Iceland, and a warm welcome to you as well who are watching online or have joined us via the conference call. And today, we're going to go over the fourth quarter results and the full year results. We -- Árni Oddur Thórdarson, CEO; and Linda Jónsdóttir, CFO, will go over the fourth quarter results and full year as well as some business highlights. We will then dive into the Q&A session, starting with questions from the conference call and then over to the audience. So over to you, Árni Oddur.

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes. Thanks and good morning. We will try to run this fast and precise, though clarify very well what we are doing. I'm especially looking forward to the Q&A session today, after a very eventful year, disappointing fourth quarter and a very exciting start of the new year. So just to recap, we listed this year as well -- last year, even though for us, it feels like it's 2 years ago. It's -- it was a major event last spring. Yesterday, we announced as well a refinancing of the company, not that we were in need for refinancing, but we had the better terms. We had a larger pool of -- or backup and much better terms and margins.So all in all, we -- as well, it was an eventful whole year. We installed the largest greenfield ever, the Costco greenfield. However, just to underpin, then the work starts. 40% of our revenues are close to that maintenance revenues. What we may be disappointed with last year is that the short-cycle, high-margin standard equipment sales were under targets. And now we are seeing that changing quite a lot in back end of the year and beginning of this year. But all in all, EUR 1.3 billion in revenues, 13.5% EBIT. And what we are used to in recent years and quarters, explained by the fourth quarter. We have to bear in mind though what was happening last year in the world. And we have -- over recent 5 years, we have seen a lot of tailwind in our market. We have seen as well the economics changing, 100 million new active consumers coming into the equations, thereof, 80 million in Asia. And trade constraints started to escalate 18 months ago. Blocking the exports from the Americas markets, 2015 from LatAm America -- around the world, and USA to China in 18 months ago. The highest level of escalation was in October, November last year, beginning of fourth quarter. And investment confidence goes down, and we were missing the short-cycle, high gross margin and the large greenfields quite a lot in that period. And then introduction of opening -- or LatAm to China September last year and only November, December we introduced Phase 1 between USA and China in beginning of December -- November, December. So it changed a lot. However, even though we would not have moved at that point in time, then we have always seen after a long period of slow investments in order intake and in the market, 18 months is long in this dynamic market, then there is always a catch-up. So there was need for investments. We innovate, innovate, innovate, bring new solution to the market. And in general, there is so much where we can go further in increasing the yield, reducing the waste, increasing the safety and et cetera. Let's go to the numbers. EUR 1.3 billion and close to that in revenues. 13.5% in EBIT. Leverage, 0.4x. Our CFO will go much deeper into those numbers. EUR 320 million in the last quarter of the year, 10% EBIT. That's not where we are going forward. However, we are in a ramp-up phase now, and therefore, we indicate that the first quarter of this year will be operationally soft as well.To give you insight to what we mean about ramp up, we go from pipeline. We turn pipeline into orders. In our wonderful aftercare market, it turns immediately, hardly touched. The order book comes into revenues. In short-cycle, high-margin standard equipment, order intake comes in. We take on cost for average 3 months and bank revenues then when we deliver. In our large projects, we take on pipeline, sometimes working on it for 2 years, like Bell & Evans that we will go through today. And then you make the agreement. Then you detail out for 3 months on no revenues. And then you go linear, on average, 12 months. But when you're doing so large, it takes 18 months, linear revenues and cost. It's very important to understand the revenue recognition, we service the order intake. So it's a ramp-up quarter, first quarter, and we will do it throughout the year. Fourth quarter, 10% EBIT, free cash flow strong at EUR 44 million, although it's lower than we estimated when we announced the profit warning earlier this month. However, I think it's very good that the numbers, the indication and everything was correct. Unusually early that we decided to announce it because we saw where it was happening.The main message in a strong cash flow was that the pipeline was building up. And we were seeing the change in the market sentiment that we confirmed yesterday with a very strong beginning of the year, and actually, a very strong December and weak October or November. Usually, we don't give so much insight into the quarters, but it's very important. Poultry, 16% EBIT in the last quarter. Good EBIT -- 14% last quarter, but good EBIT it over the course of the year and throughout quarters. And the outlook are extremely good. If we talk about the 14% EBIT in last quarter, why was that? It is -- the biggest portion of that is volume-driven and then the short-cycle, high gross margin standard equipment that came in the back end of the year and turn into revenues in March, April this year. So that's why this is the biggest portion and deviation due to the importance of Poultry segment here.So that's -- maybe you could ask why didn't you indicate stronger in third quarter where you were heading. The reason is that we didn't know that the short cycle would come in the back end. However, we were very, very clear in our communication that the order book in Poultry was weak in beginning of fourth quarter, and it was in the communication there. If we move on to Meat, then it's a mix. It's a mix matter there where we -- why we are under. It's not a volume matter. African swine flu last year. We are missing our sweet spot in Europe in the pork, primary small and medium-sized, 1 million to 3 million of projects, where we are most standardized in the primary. That will come now and then we are under targets in cross-selling and up-selling standard equipment in Meat when it's stronger in fish and Poultry, and we need to improve that. We introduced 20 new solutions in the meat market, and we are strengthening their sales team and the frontline sales team in Meat. Fish is purely -- fourth quarter is a volume matter. Gross margin is fine in Fish. Order intake, very strong in beginning of fourth quarter and it is a volume matter. High tech -- pretty, pretty high tech that we are introducing here in Fish. We are closing the application gaps, strategic move with the acquisition of Curio last year. And we can as well streamline a bit here the cost, both in USA and the Nordics, to be specific. Could we have done better in Fish and Meat? Yes, we could. But in Poultry, it's fully understandable here. And we are now taking some more of actions underneath here in streamlining, but its crossover as well, and we will go deeper into that, especially in the Q&A. To explain as well maybe how we see it, here is a picture of moreover how we are running the regions. We are -- after running a pilot in LatAm last year, and et cetera, we see now opportunities in the back end of the regions. Even though we will run in the front end, sales and service, in LatAm, especially in North America, especially China and Asia, especially, then we can see now that we have opportunities and synergies in better back ends. But let's focus on the front end and the people we have there. You can see here how extremely strong we are fitted with local people on the ground in Europe, EMEA, LatAm and North America. It is our -- we could say, our home market, LatAm, USA, Europe, where we are having 770 people here in the Americas market. Our global hub will always be strong in Europe, where we have the drive for the innovation. We have the core manufacturing. We are expanding manufacturing in Nitra that comes in EMEA. We are having manufacturing in Beijing, China, outside of that. And we are having a good manufacturing in Guarapari in Brazil. So we are building up the network.Very well invested in the front end, Americas. Europe, we need to ramp up the investment in the front end. In China, Asia, Africa, Middle East, pretty clear. We have -- we will as well continue to invest in digitalization, and we have now opportunities to streamline the back end. We have been investing in the IT system. SAP was introduced in Iceland the fourth quarter. A PLM as well, product life cycle management, second quarter in Denmark and so on. So our platform is becoming synchronized. Our way of working has become synchronized, and now it's time to reap the benefits in the back.However, it's a balancing act because we are ramping up fast in order intake in North America now. It was a very, very unusual year last year when 40% of the orders were outside Europe, USA. When -- on the graph, it should go linear from 35% to 50% until 2026. We take this market -- we take our fair share and more than that in the market. There is no other option for a global leader than take the market in China, Asia, when it is. Then stay there with the customer throughout. But of course, it's costly. When you see the FTEs, it's too much fly-in, fly-out. So we are ramping up our resources in Asia when we are well positioned again in LatAm. So just to give you insight in -- so it's sales cost, it's installation cost and et cetera. We are not new in China, North Korea, as I will show later. So it's not a price matter. It's a cost matter. So project execution, very good. So over to you, Linda. I promised to be short, but I think it's the longest intro I've done.

[Linda Jónsdóttir, Chief Financial Officer]

Thank you, Árni. Good morning, everyone. Good to see you here. So I'm going to take you through the highlights of Q4 2019 and also the full year of 2019. So to summarize shortly, like the year, like staffing and order intake, we had order intake growth in 2019 of 3.2%, where Q4 was EUR 303 million. Revenues growing by 7.2%, where Q4 was EUR 320 million. Aftermarket, 37% in 2019, 40% in Q4. So excellent progress in that area. If you look at the gross profit for the year, it was 38.2%, lower than last year. And we had challenges in Q4 on that front, 36% gross profit, which was influenced by many factors. It was the volume, it was the industry mix, it was the business mix, it was overall high cost, which led to an EBIT in Q4 of 10%, but still, for the full year, delivering 13.5% EBIT. Cash flow in the year, both operational and free cash flow, was strong. And leverage is now at a level of 0.4x, outside of our targeted capital structure because of the equity issue we did around the listing, which underpins our capabilities as well to continue to grow. Order book at a level of EUR 414 million at the end of the year, 32% of trailing 12 months revenues, which is below our optimal level.So like, if we look back at 2019, I think, in many ways, it was a challenging year, both looking at geopolitical tension and trade constraints. But at the same time, we still delivered over 7% revenue growth and 13.5% EBIT. Yesterday, excellent news on the financing. We signed a EUR 700 million credit facility with 7 banks with sustainability, very much in line with our vision. But that'll -- I'll take you through the details. If we start on quality of earnings, and like, this is very much the good benefit of our business model, that we are like diversified in terms of industries, geographical areas and also business mix. Revenues by industry, you can see that 54% is coming from Poultry in 2019, 33% from Meat and 12% from Fish. This is a balance that we are focusing on. Of course, we want to strengthen Meat and Fish. So we have a better balance here. And you can see that a bit in Q4 that we are too reliant on Poultry delivering the strong results. So that's something we will continue focusing on, strengthening Meat and Fish, while working -- continue working on Poultry, of course. Revenues by geographies. We are showing this a bit differently now, split into Asia, Oceania, Europe, Middle East and Africa and Americas. This is very much in line with how we control the business and our glocalization. And you can see that if you compare it to 2018, we are growing in Asia, Oceania compared to 2018. But it's clear that we need to continue ramping up in those areas and on that front, especially in Asia and China. And we have, at the moment, too much fly-in, fly-out. And we need to think about how can we fund it and how can we strengthen the frontline while we streamline the back end. In terms of revenues by business mix, total revenues, EUR 1.284 billion in 2019, 37% coming from aftermarket. What we saw as well was that sales of standard equipment were below our plans. And we see that effect in Q4 as well because we see standard equipment sales coming in, in the back end of 2019 and starting the year on a strong note in 2020. If we then move into the revenue development and orders received that I already touched a bit on, orders received growing by 3.2%, revenue, 7.2%, and like, orders received and revenues solid in Q4 even though they're slightly below our -- what we hoped for. But there has been hesitation with our customers to invest, and we see that changing now. Book-to-bill ratio, 0.95 in 2019 compared to 0.99 in 2018. And order book, 32% of trailing 12 months revenues. And again, aftermarket, 37%. EBIT margin is 13.5% for the full year, with a temporary drop in Q4 2019. And we are expecting profitability to gradually increase in 2020. Gross profit, 38% for 2019, only 36% in Q4. As I stated before, it is a volume impact. It is industry mix. So we have higher revenues coming from Meat and Poultry compared to other quarters. We have product mix affecting the numbers, mainly in Meat, where we see the product mix is unfavorable. It's also influencing Poultry because we don't see as much of standard equipment sales as we hoped for. Level of OpEx in Q4 was high. We partly indicated that already in Q3. But SG&A at a level of 19.5% in Q4 and R&D at a level of 6.7% compared to full year numbers of 18.4% and 6.4%. So we are strengthening the frontline. So it's good that, that number is going up. But like, we need to fund it with streamlining the back end. And this calls for actions that we will go a bit further into. Order book, EUR 414 million, up 2.2% year-on-year. Revenues at the level of EUR 320 million. Therefore, order book declines in Q4. And if you look at the full year, order intake growing by 3.2%, revenues by 7.2%. So the order book goes down in 2019. We have been seeing rising orders outside of the traditional market. And to underpin that, we don't count anything in the order book unless it's financially secured. Moving into earnings per share. As we have stated, one of our targets is to grow earnings per share faster than revenues. Looking back, that is the case. But as you see, in 2019, we see a change because of Q4 -- both because of results in Q4, but it's also impacted by one-off items in the quarter. One of them is the financing cost related to the refinancing and the other one is revised tax rate changes in the Netherlands, which is also having one-off impact in 2019, which had a positive impact in 2018. Nothing has changed. Our target is to grow earnings per share faster than revenues. Looking at 2019, operational free cash flow was strong. We continue to invest in our business. And like we all know, in June, we dual listed this year. So the total share capital increased to 771 million shares. The proposal to the AGM on dividend is to pay 40% of net profit. So moving into more details on the income statement. First, looking at Q4, before we go into the year, revenues, EUR 320 million, and we are going down from the same quarter last year. Gross profit going substantially down compared to last year because of unfavorable business mix, industry mix and high cost. OpEx increasing between years, especially on the S&M front, where we have been investing in the frontline.Adjusted results are at a level of -- adjusted for PPA at a level of EUR 32 million, 10% in Q4 compared to 14.6% in Q4 last year. Net finance cost going up between years. This is related to the one-off cost I mentioned connected to the refinancing. And -- yes. So basically, we are getting more favorable terms and conditions, and we are like paying off our syndicated loan that we had before, and we're taking the capitalized financing charges and all the costs throughout -- through the P&L in Q4. Tax impact, that's also affecting the comparison here in Q4, wherein -- so the plan was to decrease the rate of taxes in the Netherlands to 20.5%. This has been postponed by a year. And they have also decided to decrease it less than the original plan. So to 21.7% from 25% at -- to 20. -- instead of the 20.5% that we assumed end of last year. So last year, there's a positive impact, and now it has minus EUR 1.7 million impact on the tax line. This is then resulting in net results of EUR 10 million compared to EUR 38 million last year, heavily impacted by one-off items. If I look at the full year gross profit, 38.3%, going down from 2018, but still at 38.3% level. R&D, 6.4%. SG&A, 18.4%, where we have been investing in the frontline. EBIT, 13.5% for the full year. Net results, again, of course, impacted by the one-off items.And if we look at like what do we need to do, it's clear that the cost base is becoming too high. And I mean we saw that in Q4, and we need to take actions on the operational front. The focus will be, of course, on growing the company; improving the product mix, which can have substantial impact; as well as lowering the cost base, and that is across, it's in service, it's in supply chain and it's in the support functions. It's clear that we need to streamline the back end. We have been investing in the frontline, but we need to do more of that. And there is no other way to do that than streamlining the back end at the same time. So that's what we're moving into now. To give you some insights into our midterm plans, we want to improve gross profit closer to a level of 40%, while we retain our strategic innovation around 6% and move SG&A, where we would then step up on S&M but step down on G&A to a level of 18%. The full year is 18.4%, but as you see, the run rate in Q4 is substantially higher. I'm going to move very quickly through the balance sheet. There's not a lot happening there, and we are getting a bit tight on time. Total operating working capital increasing due to higher inventory levels and trade receivables. And the investments in associate, which is a line here, represents our investments in Curio and Cedar Creek. On the liability side, leverage, 0.4x net debt-to-EBITDA. It's clear we have the financial strength to continue to grow. And if you look at the working capital item here, contract liabilities increasing between quarters as order intake was good, and this also increasing in the back end of the year and then in 2020. Strong cash flow. We did announce our preliminary numbers in January quite early in the process, but as soon as we saw where it was heading, all amounts in line with what we've published then, apart from the cash flow, which deviates by EUR 9 million. It's still a very strong cash flow both for the year and the quarter. Here, you see the bridge, how much we are paying in taxes, where are we investing. It's approximately 50-50 between tangibles and intangible assets. In 2019, the CapEx ratio is like slightly lower than in earlier years. We do expect around 3% CapEx on average. Then I'm not taking the innovation part included. Free cash flow, EUR 115 million. Net finance cost, EUR 10 million. Investments in associates and subsidiaries, also shown here on the bridge, where we are investing in proximity, Cedar Creek and Curio. And dividend paid, EUR 36 million, in addition to buyback of treasury shares. Key performance metrics is -- this is like how we are thinking about the business. Key for us is earnings per share, where we plan to grow faster than revenues. Free cash flow, which enable us to invest back in the business, crucial for a strong 2019. Net debt-to-EBITDA low, enables us to continue to grow. Successful listing. It was a big milestone in 2019. So I think it's appropriate to mention it here. It was a successful listing in Amsterdam. We feel that all key objectives were mapped with that project. We increased our access to international investors. Looking at the change, I mean, it was 3% in 2018 AGM, but moved to 30% after dual listing. We improved the liquidity of the shares and the fundability. Now we have the acquisition currency we need to continue to grow, which is important on our M&A journey. And we have also improved our analyst coverages and brand awareness across the world. And I mean we had 4,700 investors participating in the listing compared to shareholders before of 2,500. So it was a big movement and positive in all respect. Senior facility, another very positive step for Marel. We signed yesterday the agreements. It's a senior credit facility with 7 banks, our banking partners. Many of them have been with us for a decade or even longer. And it will -- the facility will improve our flexibility, both on the operational front. The terms and conditions are much better, also strategically, like supporting our growth.It's a 5-year facility with 2 extension options. Margins -- margin is 80 basis points, will vary with our leverage, but substantial improvement from our earlier facility. Our leverage is now 0.4x. So in combination with that and having this facility now and the support, we are -- we can continue to grow our business. At the same time, we are repaying our old facility and taking the financing charges through the P&L in Q4. Our finance cost will be positively impacted by this from now on. Sustainability link, which is an important part for us, very much in line with our vision, where we see a world where quality food is produced sustainably and affordably. So it underpins where -- what we're doing. So I hope I managed to cover Q4. If not, I will take it in the Q&A. Thank you.

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes. When the CEO steals some time in beginning, it puts pressure on the CFO. So you saw here that we are putting forward our midterm targets. And many people ask, what does that mean? Long term is 2026, as -- because we have stated that as a growth plan. Of course, we think in decades, thinking 2 decades, at least, ahead, but we have stated long-term target 2026. Now we are putting forward midterm targets, and you see that we are calculating there 16% EBIT.The reason we are doing that is, of course, investors, analysts, they serve to follow our actions when we streamline the back end and we build the frontline. However, we are not in refocusing, restructuring. We are in very, very strong market position in the market. It's a dynamic market. When the project business goes instead of the actual line, 40% up last year in outside of Europe, USA, and now the pipeline is even 80% Europe, USA, then of course, you need to speed up. Of course, in actual, the plan is to let the revenues and costs follow through the line, but you need to take the market. And now we accelerate the bucket, and we want to do it simultaneously as we work through it. So that's why we put forward where we are heading in the midterm, and we see it as very realistic. You have to bear in mind, embedded in those numbers is both investment that goes through the P&L in the front end outside and very, very substantial digitalization investments. We cannot say now, when we changed the mix into more digital products, after the midterm target because it takes time to ramp up, where will the gross margin be. But remember, software business is higher gross, and it's very often in beginning as well higher sales costs. So -- but it's a -- it changed the mix, and I'm not going to judge fully where the digital market is in 3 years' time. Things are moving very fast. Let's go back to now. And last week, it was a wonderful week in Atlanta last week. Atlanta is special for me and us because there is a melting point, especially in Poultry, where all the key players come together, and as well, the newcomers, and exchange ideas where we are moving forward. It's as well special for me because when I had my first Atlanta show in 2006, I got acquainted with the owners of Scanvaegt. And 6 months later, those 2 companies merged. So we are not only in the sales. We are as well sometimes purchasing. So wonderful week, but let's go to what was the highlight. And thank you, Scott and family, Sechler family, here in -- it was amazing to spend time with them after the hard work of our Poultry team, [ JC, Larry, Rotser ], all the Poultry team, wonderful full work with this wonderful company. May be easier than I'm telling you about how wonderful the company is, is to -- in the dinner to quote the daughter of Scott. She said, "Imagine 15, 20 years ago, some people thought my father was even strange. He started to talk about higher nutrition, more animal welfare, antibiotic-free safe products throughout and then later on talking about sustainability, less water, less energy, et cetera. And -- but now the demand is skyrocketing after those wonderful products." And the vision is so synchronized between those companies. And this is a full-fledged greenfield, a little bit different from the Costco in that case that we announced last year. But here, we are focusing a lot on the whole foods market, et cetera.So different SKUs, different solutions from Marel, and we can serve all the solutions. Both are great, great transactions. So -- and transaction is not the right word. It's a great partnership because this -- here, this greenfield comes and then the maintenance partnership throughout. Let's flip to the next slide. Just to recap, this is illustrative picture of our relation with our customer, and here is a real example. Just to show you as well, Bell & Evans USA, Harim, Korea. Korea is not a new market for us. 2011, we announced our biggest transaction or agreement to date then with Harim. It was more primary focused and 2 lines in beginning and going to 4 lines. 2017, we announced a new -- where we go further into the secondary processing, go into more SKUs and more seamless flow. That is 2017 agreement, commissioned and starting last year. And then immediately, we make another agreement where we take them in together into the convenience food where we are. So 15,000 -- 13,000, 15,000 chicken per hour in one line. That goes a different streaming line. Whole bird, 3 chicken pressed in a bag, tied and sliced for noodles. And then finally, we make chicken nuggets out of the offcuts.So this is the journey, and it's only one decade where we are transforming this, and this is one of the largest poultry plants in the world. So we went for strategic moves as well and very important financing, the listing as well, even though those were not a big transaction last years. Then we are, of course, gearing now. When the European market, just to recap, was weak, USA market was weak, we have the global reach. So we navigate well through it, but it's a dynamic market now. Last year, very, very important move, the Curio, to strengthen the full line offering here in Fish. Curio came in beginning of fourth quarter. It's not part of our numbers last year, more this year, as we hold 50%. But then we will embed it later in our number. If included, it would have positive results on our numbers. But to recap, it's EUR 10 million, [ bit of huge cross of actual ] potential and -- innovation and integration. You know our future plans, they are unchanged. So let's go to Q&A. The only thing that has changed is we provide as well middle step.

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

Okay. Thank you, Árni Oddur. And let us start with the online questions, and I'll hand over to the moderator.

[Operator]

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

[Klas Henrik Bergelind, Director]

It's Klas from Citi. So the first one is on equipment sales and the margin weakness. I want to come back to the development through the quarter. So if we take a step back and we look at what happened to orders through the year, they were growing pretty healthy. And then we had a big surprise on sales and gross margin. You say that there were no delivery slippages or cancellations out of the backlog. So on the order, I want to understand a little bit better how short-cycle equipment orders and sales got so much weaker then after falling sharply very quickly there in November. Just trying to understand if this was a surprise to you. And when you say that improved demand is now seen, I assume that you're talking about these short-cycle orders that are quick to invoice that are now coming back.

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes, Klas, thank you for the question, and it's a good question. But to underpin fourth quarter, we always expected a soft fourth quarter compared to the 14%, 15% EBIT. We indicated that we had a soft order book in Poultry. There is no project execution. That is hiccups in this quarter. It's more low cost related in China and et cetera.Just to recap again, the short-cycle orders that is the standard equipment sales that are coming in. We take them on and 2, 3, 4 months later, they turn into revenues at a very high gross margin. Very, very low those order intake in the first 2 months of this quarter and the last month of the third quarter. Unusually long period, we see it so low. Unusually high as well in both December and January to give you indication on that.There are other instances as well in last quarter. There are a few things that we could have done better. It's not in project execution, it's about balancing our people throughout the supply chain, balancing our people throughout the service, and we just need to be more rigorous.In that, we have prepared ourselves very well and we have now all the teams, for instance, in service on the same skill metrics finally, and we have the IT platforms. And now we are, for instance, in service, planning and scheduling the teams in 4 locations instead of 9-0, hold your horses, 9-0 places before. And you can imagine, there are amount of middle management staff we can take out or move into frontline instead.So this is just how we have to run the business, the timing of the takeouts in some of the temps were as well too late in the quarter, and we will become more rigorous. Definitely, we have done it before, and we will show that we do it again. And we ramp up revenues, better mix and lower cost. Long answer to short question.

[Klas Henrik Bergelind, Director]

Okay. No, that's good. My second one is on the gross margin, SG&A and R&D in the medium term. We got more clarity on this now, which was good. This is a midterm target. Implied EBIT, I can see, is 16%, and long term, is still 2026. So then they can, i.e., be higher than 16% by 2026. But just on the gross margin of 40%, before the profit warning, that margin was around 39%, and now it's 38.3% for the year. You're taking out costs now, you say mix will improve. And I get what you say on the SG&A line, but can you please explain, Linda, a bit more on how gross margin from a self-help by cost perspective should improve ahead?

[Linda Jónsdóttir, Chief Financial Officer]

So like you mentioned, of course, it will be focused on the mix as well. But like on the cost, like what's included in the gross profit is also the cost base of our manufacturing, it's supply chain, it's also like high cost in service. So the focus will be across, as I mentioned, it will be in supply chain service and support functions. And we need to take the cost base in that area down, and that will positively impact the gross profit.

[Klas Henrik Bergelind, Director]

Okay. So my final one...

[Árni Oddur Thórdarson, Chief Executive Officer]

Just to add to it, Lincoln, that as well are not in the numbers. We have now carefully analyzed what is the customer-facing time of our front end. It's -- we see there that we can increase it by more fluid, efficient back end. And the ratio of back to front is as well not in line. We're best-in-class, although we are delivering, on average, close to 15% EBIT at this specific client.So there are improvement areas. The learning curve has been pretty steep as well when we go for best cost countries into Nitra, for instance, and now we are reaping the benefit there and getting more efficiency in the production. So we should not underestimate companies that have not tried to go to best cost countries and et cetera, the cost involved and the learning curve. So Nitra, state-of-the-art factory, getting up and running. Next in line then is to a great China and Brazil. So that's why we are -- some would say we are moderate in 38% to 40% gross margin.

[Klas Henrik Bergelind, Director]

My final one is on the margin trajectory through the year. You are now saying that the margin will improve gradually through the year. Can you give us some sense, Árni Oddur, on the increased orders in Poultry, when they will be invoiced and when the cost actions will kick in? Is it reasonable to assume a similar group margin in the first quarter as we have in the fourth and then improving from second? Or will the margin recovery be more back-end loaded in the year?

[Árni Oddur Thórdarson, Chief Executive Officer]

So in many ways, we cannot, of course, pay specific competitive focus on Poultry. We ramp down production gradually throughout fourth quarter and we ramp up production gradually in first quarter in Poultry. So very similar, but it's a V, it's a -- in those 2 quarters. So whether we will be fully back on track in second quarter, we cannot be more specific at this point in time. But March, April, pretty much it's happening in the company.

[Operator]

Our next question comes from the line of Tijs Hollestelle from ING.

[Tijs Hollestelle, Research Analyst]

Just to get it straight, did you say that the order intake last year was 40% of orders came outside of traditional markets? And also does -- your pipeline right now is that 80% of the demand is, again, back from Europe and the U.S., is that correct?

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes. So -- yes, I know -- I was going to be more explicit. So 40% of our business, close to that, is maintainers. Then we have standard equipment and project business. So in the equipment business and projects, then there was 40% order intake in that piece. Not in the maintenance business. In the maintenance business, we are building up new greenfields in Asia and the maintenance business follows. So it's substantial higher, the maintenance business in Europe, USA.But correct, yes, instead of being around 25%, it was 40% outside Europe, USA, the project business in Marel. And now the pipeline and the project business because it is escalating so fast again in U.S.A., especially, it's shrinking to 80. But the market is still strong in China, as you can imagine, when we have to compensate the pork. Then, of course, when it comes so big swing suddenly into -- I'm giving you a starting point at the moment. And so we are more shrinking to the line that we were drawing, that we would be 50-50 Europe-USA and outside 2026. But in actual straight line, a more shrink last year in the project. And now after lying back, I now think it's -- everything is in line with what we said in 2017.

[Tijs Hollestelle, Research Analyst]

Okay. That's helpful. Yes. And then a follow-up question also on China. There's a lot of concerns about the coronavirus and the Chinese government basically halting factories and production sites in China. Potentially, this could disturb the supply chain. What do you see as far as your own business in China? Or what is happening at the moment?

[Árni Oddur Thórdarson, Chief Executive Officer]

So the coronavirus, the question is related to the factory and what is happening. We needed to have the factory closed 1 week more and after the new year as the China and Beijing authorities asked, of course, we follow that. But make it absolutely clear, we are very well structured, we are very well prepared, we follow it well. This is not the first time we are dealing with such things. Of course, it's always some new.If we recap, Ebola in West Africa 2011, '12, '13, we stayed there. We stayed with our customer. We ring-fenced the team. Of course, we take care of the health and safety of our team. We have the [ source swap ] and et cetera. We follow escalation processes and et cetera. We have never had as many greenfields in Western Africa as in the middle of the Ebola because our competitors went out. There is never ever more need for safe food and safety out there and demand for a safe food.Will it have some more cost effect if we closed further 1 week? Yes, some more over time. Will it have some more cost in installation? Yes, it could be. But we always deliver right quality on right time to the customer or to our utmost. So we take it seriously. We follow it through very, very well, and we have strict plans behind the scene. And to be honest, 1 hour of every day, it sounds like much, but all people are spending. Much more of my time has gone into the subject because we need to be there with the customer out there, and safe food is essential at point in time like this.

[Tijs Hollestelle, Research Analyst]

Okay. That's also very clear. And final question. Can you say anything about the M&A price expectations? Are they currently unrealistic in your negotiations with potential targets because of inflated asset prices all around this? Or is it still quite okay and you're making progress on potential acquisitions in the nearby future?

[Árni Oddur Thórdarson, Chief Executive Officer]

So just to recap as well. First, on average, our discussion take 2, 3 years. And then in Curio case, even though it's not a big one, it took 6 years. It's only in the final meters we talk about prices because we talk about do we have shared vision, do we have shared values and et cetera. I think people are very much caring what is the future of my company, where are my people belonging and getting a fair price. The multiples are maybe somewhat higher than we saw a few years ago. But of course, they are. We were financing ourselves when the base rates are 0 on 80 basis points and et cetera, but it's not unrealistic.And we have to bear in mind as well, the profitability of many players are as well temporarily down. We have the global reach. We compensated our revenues with China, Asia, but if you would have been European dependent last year, the revenues are down and the profitability is down. Is there maybe some multiple adjustments, et cetera, compared to that? It's a very good forward-thinking. Realistic, I think, in general, what we're talking about. But it's more important, what are the future of the companies and are we really going to transform the way food is processed. I'm not talking about the view of the people that we discuss with, and that's always the certain point of the discussion.

[Operator]

[Operator Instructions] Our next question comes from the line of Akash Gupta from JPMorgan.

[Akash Gupta, Research Analyst]

My first question is a follow-up from earlier question about 2020. If you look at your backlog, which is consisting of mostly these large lead time projects and you have got one large order in the U.S. in poultry, so if you look at this greenfield portion of the sales, where you have a higher visibility than the rest, is it fair to say that in 2020, you can see a revenue increase? Or maybe if you can comment on what sort of sales growth we should see in that kind of -- in that part of business in 2020. So that's question number one.

[Árni Oddur Thórdarson, Chief Executive Officer]

Yes. It's a firm plan to increase the proportion of the standard equipment. And it's more than third plan, we have put it in motion, both by preparing the project teams that are serving across industries. And you can see it in the sales and marketing cost, it's not only due to fly in, fly out. We are building up our teams on the ground. So is it too soon to tell that we are bearing the fruits of that? Or is it a market condition that we are seeing increased income and across industry?The proportion, many people have asked why was not higher gross margin last year if the service revenues of close to 40%. The reason is standard equipment, very low against high greenfields. Our target, firm target is to grow the proportion of standard equipment and continue with the greenfield, as you are seeing, in Bell & Evans. To be fair as well, sales in standard equipment and Meat are under targets. We have firm targets last year. Now we are firming up the grid and putting the money where the mouth is and really, really add the people and resources and investing in the frontline. So...

[Akash Gupta, Research Analyst]

And my second question is on medium-term margin target of 16% implied by your gross margin and SG&A and R&D. Given you have a big focus on M&A, so does this target include potential M&As that you have in pipeline? Or should it -- or is this just for the current scope of the business?

[Árni Oddur Thórdarson, Chief Executive Officer]

Out of the scope. So that's additional, but the M&A, this is -- the current business target is 16% EBIT in 3 years' time.

[Operator]

And as that was our final question for today, I will hand the word back to the speakers. Please go ahead.

[Tinna Jónsdóttir Molphy, Manager of Investor Relations]

Okay. Thank you. So are there any questions from the audience here today?Okay. If not, then I'd like to thank you all for your time, your attention and your continued support for Marel. Thank you, and goodbye.

[Árni Oddur Thórdarson, Chief Executive Officer]

Thank you.

[Linda Jónsdóttir, Chief Financial Officer]

Thank you.