Marel hf

ICEX:MAREL

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Marel hf. webcast Q4 2022. Today I am pleased to present CEO Arni Oddur Thordarson. [Operator Instructions] Speaker, please begin.

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. Good morning, dear investors and all that are listening today to our quarter 4 and full year results 2021. Moreover, I hope it will as be -- as well, especially in the Q&A forward-leading, how we are looking at the future, how we see our '23 targets and '26 targets. Maybe you noticed that Tinna was not with us here in beginning. She will join us a little bit later. How ironic is it that she was in logistic problem in the middle of the snow here in Iceland, but she will join us here later in this webcast.Let's go straight to the matters. Maybe the limelight, the highlight of what we are achieving. We made the correct smooth in the middle of the pandemic to step up the sales, service, resources out in the regions as well globally to focus on the consumer at the market. We formulated a special business unit with focus on retail and food service solution and the secondary processing. We are seeing it in the order intake. We are seeing order intake at a run rate of EUR 1.6 billion in back end of the year compared to where we were standing 2 years ago in EUR 1.2 billion a year in order intake. EUR 100 million of that is acquisition growth, the EUR 300 million is organic growth.Furthermore, our leading indicator shows the pipeline very strong. So we truly believe that we will keep on on this high level, and we are aiming first. This is very important that we are taking market share in a market that is having tailwind. We are seeing though, that those years will define the winners and loser here in next 3 to 4 years. If we look at our peers, and we are in very, very good contact with others. We are seeing, unfortunately, for some that they are nearly empty in order intake and order received, those that are lacking the global reach and the infrastructure and the backup. So our customers that are relying on life support for 15, 20 years believe that you will deter and keep the factors up and running.We are as well very pleased to see indications how the performance of our customers is improving. But all in all, order intake EUR 1.5 billion over the year and order intake EUR 1.6 billion run rate in fourth quarter. What is driving this on the customer side? We are doing -- get with continuous innovation, very important continuous innovation in good times, in great times and not so good time. So we have constant new pioneering solution that push the boundaries. Then came the pandemic that is casting the light of -- the value chain has been maximizing the silos too much instead of seamless flow.We are seeing 3 main factors via our customer push forward and are now investing and are planning to invest more. It is the labor scarcity, wage inflation and turnover rate of employees. In recent 2 years, we have seen in geographies like U.S., the base salaries in the factories increasing by 25%. We have seen, in some cases, the turnover rate of employees going from 30% to 40%. Moreover, the market channels are changing. We are seeing in U.S., U.K., e-commerce with food increasing in recent 2 years by 100%. Oceania up by 400%. We are seeing China exploding in e-commerce and even becoming larger than the U.S. market. Comparing that with 5 years ago, the wet markets out there and as well the packet farming, this is changing at speed.Then the third pillar and not the least one is sustainability. It is becoming more fundamental factor in the decision, less resources, less energy, less water and ergonomics insight as well the plants. So you can have equal access to genders, and you can as well have more social distance, safety of the people, food safety and less resources. We started 2017 to [ mentor ] that all our innovation project go through sustainability chart, and then we have our digital solution. So overall, we are very well positioned to tackle the market. We are in full position to tackle what is happening, and this is very valuable growth that we are -- have been crystallizing and we are foreseeing.Let's then go to our results. [indiscernible] first EBIT, long way or not long way to 16% EBIT. We have to bear in mind our muscle memory is 14%, 15% EBIT. And we are going there back on track. We are sacrificing shorter performers for our transformation project this year. I was explaining how our customers are completely changing their flow. We as well. We are, for instance, investing in end-to-end spare part in sourcing, warehousing distribution channels around the globe. We are having a record order intake in spare parts in third and fourth quarter and in service level agreements and in software and in standard equipment in the secondary processing.We need more scalability. We need more speed. This generation that is working for our customers, they want answer now when the spare part or the service will arrive. They don't need it necessarily tomorrow, but they need to know it with the snap of the finger when it arrives. Our industry is not there yet. We are going there. But let's peel the onion for [ bottom end ]. Our innovation, like I said, continues on strategic level, 6%, same as '23 target. Our SG&A, 150, 200 points up from our previous level by purpose to go ahead of the growth curve. If you look at SG&A in comparison, the order intake, it's below 18%. We are definitely going to reach the 18% in '23.Then in the gross profit level. We will discuss this year, will we reach 38%, 39%, 40% or 41% next year '23, I'm talking about compared to the 36%, 37% level that we are in fourth quarter and the full year. We are focusing on those matter. It is the mix that is improving. There is more agile pricing. We raised prices in October. We raised prices in January. And to explain our business model, our aftercare service runs through and filters through with the [indiscernible] prices in 6 weeks' time. Our short cycle, standard equipment runs through in like 3 to 6 months and our project runs longer through. This is good, and this is bad. We are not as quick as some of the short cycles in fourth quarter in the EBIT, but we didn't go down in the valley like towards the 20. We navigated well throughout the system.And like I said, transformational projects are on a high scale. One indication is the operational cash flow. You see here the free cash flow after extensive investment as well, our operating cash flow is at level of 15.5% compared to 11% EBIT. However, if we exclude the inventory safety builder, our operating cash flow is at 17%. So all in all, we will discuss this further. We have a clear, clear path of recovery.And let's jump straight into the industries. The poultry industry is clearly back on track. Their memory is 18% to 21% EBIT. Now we are improving the mix in the order intake. The aftercare business is coming even more prominent. And you're seeing that we are touching the 15% level. We are going step by step by step above 80%. We might be a little bit under this level in first quarter, but then we see gradual pickup from second quarter. If we move over to the meat sector, then we are having a 9% EBIT over the course of the year. We are having quite many nonrecurring cost in fourth quarter.We are changing how we do the project execution, not to what basically the customer though so much, it's internal flows, taking it on similar levels as the poultry. And to say it honestly, we are below our plans in our operating result as well last year. And you will see it in our annual accounts as well of bonuses to the executive team that we are clearly delaying compared to the overall results here. I'm not blaming it all on meat. While the transformational results are very clear and our operational performance target '22 - '23 are clear, so we are basically more delaying I'd say, but meat is now changing the mix in the order intake.We are seeing fabulous sales in Accuro, for instance, and et cetera, where we are mixing the grants. We are getting the wins in Oceania, China, LatAm, and then we are strengthening the position in the U.S. This is in line with targets. And it's amazing to see that after acquisition of Valka, yesterday announced full acquisition of Curio. And let's look at Curio a little bit. We decided to acquire 50% there. The founder wanted to stay and not take it overnight. So we said, let's take 4 years before we fully integrate. Then the cooperation partnership is going so well in recent 2 years, we have started to cross-sell, synchronize how do we go to the market.And now to get more synergies, we go fully together, Valka - Marel - Curio, with partnership with Stranda. And this is exciting times. There will be some integration costs as well, '22, but a clear path. And it matters a lot that we are now reaching above EUR 200 million in revenues with high organic growth, at least looking at the order intake in the fourth quarter.It was a little bit -- I told you, I would be short and precise in beginning, Linda. I'm a little bit longer than because I got so excited. But over to you, Linda.

[Linda Jonsdottir]

We'll see here today. I'll give you the highlights of both Q4 and the full year of 2021. And starting on the order intake. We are seeing very positive trends there like both in the quarter and for the full year. The quarter at a level of EUR 400 million. If I look 4 quarters back, we have been delivering order intake in the area of EUR 360 million to EUR 400 million, which translates for the full year to a level of EUR 1,500 million, which is 22% growth between years, which is, of course, excellent trends. And that's happening on the back of further investments in the coverage, which is also paying off. And of course, there's a clear need in the market for further automation and for our solution. So a lot of activity here and lot of excitement, and I think the team is doing great things on the order intake front. So something to celebrate.If we then look at a bit of a mix, like we are also seeing positive trends there like more sales of standard equipment. We're seeing spare parts at a record quarter, now 2 quarters in a row, and aftermarket is around the level of 40% if you look at the percentage of revenues. Looking at the order book at healthy levels, EUR 569 million, which is around 42% of trailing 12 months revenues, which, of course, gives us a very strong foundation and depends a positive outlook. We do see step-up in revenues now in the quarter. We're at the level of EUR 367 million, and that translates for the year to 10% revenue growth.If you then think a bit about the order intake growth of 22% and the revenue growth of 10%, that underpins quite clearly that we are firmly targeting higher revenues in 2022 compared to 2021. We continue to see supply chain challenges that's impacting the prices to us and like the delivery time. So definitely impacting our gross profit levels. We are taking mitigation actions like we are increasing prices of our own equipment. So that's already happening. And of course, something we need to stay very much on top of because I would say, like in general, cost inflation and labor inflation is at escalated levels.At the same time, we feel quite confident on the SG&A, like where we have a startup. We also feel we are reaping benefits from it already. We really think that was the right decision to do. And with more volume with the strong pipeline and the strong order book we see, we feel confident that we will see better cost coverage with increased volume, helping us getting to the targets of 18% in 2023.Profitability for the year at a level of 11.3%, clearly below our targets and, of course, has our highest attention in addition to what's happening in the gross profit area. Cash flow strong, very strong cash flow, like especially if you take into account that we have been building up inventory levels throughout the year using our foundation and strong balance sheet and leverage at the level of 1. But to run a bit through the slides, good quality of earnings. Here, we highlight the industries, related geography split and also the business mix.Looking at the industries, you can see here that poultry is at a level of 47% compared to 51% last year. We did start the year a bit slowly on the poultry side, like in larger projects, which has then really picked up in the last 3 quarters. So the industry mix has been improving like with higher percentage coming from poultry throughout the year. And you see that now we are getting closer to the historical levels, which, of course, is important to mention because it links directly with our profitability.Looking at the geography split, like you can see here that Asia and Oceania moving from 10% to 13%. Like here, we have been securing important orders, especially on the meat side and also like looking at Americas moving from 33% to 36%. So this is balancing a bit. Looking at the business mix, 40% coming from aftermarket. So overall, yes, good balance and good movements on this front.Looking at the operational performance. It's clear on the gross profit side that we are at the level of 36.6%. It is impacted by the supply chain imbalances, and that is having directly affect here. We are also like working on a number of improvement projects like to increase speed and scale. So that's impacting the gross profit as well. But as I mentioned in the beginning, like we are taking mitigation actions to partly offset the increased cost. Then on the OpEx there, we are like very confident. We feel SG&A, even though it's higher than our mid-term targets at the moment, like we feel we've taken the right steps there. With more volume, we will have better coverage.On the G&A side, we are focusing on like also efficiency measures and taking important steps there, for example, like with the shared service. R&D at strategic levels. There, it's all about just continuing what we're doing, like coming out with innovative solutions, solving the issues we see in the market with our customers. So pretty straightforward picture on the OpEx lines. So in my mind, it's all about the gross profit and then directly influencing then the bottom line profitability.Healthy order book, EUR 569 million, close to 42% of trailing 12 months revenues. You can see we started the year at the level of EUR 416 million. And of course, as we've highlighted before, the order book consists of financially secured projects. But like it is at a very healthy level at the moment, which enables us to back the balance and plan and schedule.Earnings per share. Here, like we have the firm target of growing earnings per share faster than revenues. You can see looking at the full year '20, like we are at a level of '21, I say, at the level of 12.5% compared to 13.62%, but like nothing has changed in our target like this is -- this has our focus. Looking at the dividend, to mention it here, like we did pay 40% dividend for the year 2021. And that was around EUR 41 million. We are -- the proposal towards the AGM is for 40% dividend for this -- for 2021 as well. So that will be then addressed in the AGM.Looking at the income statement. I'll go relatively quickly for this because we're showing both the quarter and the full year. And you can see here, revenues are growing by 7% in Q4. It was important to like get this to up a -- to a level of EUR 367 million because we've been seeing high levels of order intake now for the full year. You can see here like that S&M cost is, yes, quite somewhat higher than it was before, in line with what we said, like we are stepping up there and that has been a very good decision. This is then returning us 11.2% EBIT in the quarter compared to a fairly strong quarter of Q4 '20 at the level of 15.2%. And you can see here like what is moving the need to lease the S&M and of course, like the gross profit trends, which I mentioned on the supply chain side. But net results EUR 28.5 million compared to EUR 29.1 million in Q4 2020.Looking at the full year. Here you can see revenues growing by around 10%, quite a lot driven by what we saw in Q4. Around 4.4% is coming from organic growth and 5.5% from acquired growth. And it's the same flavors here. You can see that S&M is increasing between years, and there is a pressure on the gross profit and net result for the year at the level of EUR 96.2 million compared to EUR 102.6 million in 2020. EBIT, 11.3% compared to 13.5%.Then combining this a bit, like looking at our mid-term targets, like here, you see the gross profit at the level of 36.6%. It's clear that we need to move this one. Here we are focusing on a number of fronts. It's about volume. It's about mix. It's about like value-based pricing. It's also about our customer journey, simplifying that, also streamlining a better the back end of it. So that's where our focus is on this front at the moment. And then we have SG&A at the level of 19.4% above our mid-term targets, but we see a clear path there with more volume and our improvement projects to get to the 18% level. This then combined, of course, with the aim to return 16% EBIT in 2023. So like working on a number of fronts to get there. But like you see high order intake, good pipeline, which should really translate then into higher volume. And with the right focus on the gross profit, we believe the path is clear.Then on the asset side of the balance sheet, not many things to mention here. But since the beginning of the pandemic, we have start-up in inventories, and you can see that reflected here. It's quite a sizable amount, around EUR 74 million, including inventories that come in with the acquired companies. And I think it was like very important to use the balance sheet for this. And I think we -- it really has made operational matters more manageable. And it's complicated enough. So like really having the inventories and the parts availability at the maximum level we can manage has been an important step.You can also see here like property, plant and equipment is going up, increased by around EUR 30 million. Like we are investing in the business, as we have said. We are like opening our demo centers. We are also like working on the end-to-end spare parts journey taking steps there to prepare for improve the back end in that area, in addition to like, yes, improving our facilities across the business. So good steps made here. And as we've said before, like we will stay on higher CapEx levels for the coming 4 years between 4% to 5% of revenues. And then return back to the more normalized levels after that.Then on the liability side. Here you can see the committed facilities we have, close to EUR 670 million that we have in committed liquidity. It just underpins like our financial strength to take on next steps when opportunities arise. Leverage at a level of 1 compared to our target of between 2 to 3. And on the working capital side, like overall, I mean, the main item to mention there is the inventories, which have been building up. But you can see here as well that contract liabilities are increasing by around EUR 70 million because of down payments we're getting on new orders, thinking about the trends in the order book.Robust cash flow. We are delivering very strong cash flow, as I mentioned, like EUR 212 million from operating activities despite the step-up in inventories that we have explained. You can see here that free cash flow is at the level of EUR 116 million. We are paying taxes of around EUR 30 million, investing activities of EUR 67 million, with maturity now is like on the PP&A, but you see like around 65% coming from that. And then net interest paid around EUR 7 million. We are investing in associates and subsidiaries, like that's the acquisitions that have been happening throughout the year that we mentioned PMJ, Curio like final payment for TREIF, et cetera. So that's explained here in the EUR 54 million. And then we paid dividend of EUR 41 million. So these are the highlights of the cash flow.Then on the KPIs. I mean, this is like what we're focusing on all the time. It's about the earnings per share. Like if you look at the revenue growth in the period 2017 until now, it's around 7%. We are targeting 12%. So it's clear that we need to step up in the coming period. We are also seeing different trends in the market. So we are expecting market growth to be at a higher level in the next -- in the coming years, so in the area of 6% to 8%. And Marel, of course, is coming out with innovative solutions. So we should really be in the top end of that. So that is what will move the needle here in addition to, of course, a continued focus on disciplined capital allocation.On the free cash flow, just to highlight again, I mean, EUR 116 million in a year that we have pitched up inventory levels is very good and very strong cash flow. Operating cash flow as a percentage of revenues is around 15.5%. And if you think about that in relation to the EBITDA, you can see like it is very strong. Net debt/EBITDA at a level of 1%. So that clearly underpins our financial capacity to take further steps on our acquisition journey. Of course, it's always about finding the right opportunities or create them.Then just a final one. Yes. We had the Capital Markets Day mini-series, and we did have 5 events. If you haven't watched it, I encourage you to watch it. I think it can give very good insights into our holistic equity story, focusing on growth, the global reach, digital and sustainability. We have like just a very short with you, summing a bit up like the highlights there, but I really encourage you to watch it.And then I'll give the word back to Arni once the video is over. So thank you.[Presentation]

[Arni Oddur Thordarson, Chief Executive Officer]

Thanks, Linda. And I'm here back going through it. But we had a long discussion. Should we talk about strong order book? Or should we talk about healthy order book? Our conclusion was healthy order book. We are finally after quite a lot of headwinds in the market, first, trade constraints, then the pandemic, above 0.4x annual revenues in the order book. We feel more -- we said previously, we wanted to be in 0.4%, 0.6%. It's slightly low now because the mix is changing to better, not so heavy in the big large project. It's more balanced towards standard equipment that is coming into the revenue gain. We see the mix as well changing more. And moreover, record order intake in the aftercare market because we are the maintainers partner of choice.So we feel very good at this level in the order book, even though I was a little bit harsh to our people of the operating profits. Then, of course, we were sacrificing short-term profit for transformational project as well last year and in recent 2 years. That is pretty clear. And to explain a little bit better, we are not delivering goods through UPS or FedEx that the customer can just take. In many cases, we have to design the matters through the -- our digital tools. We did that instead of being able to visit the customer. We engaged in sales there. Furthermore, we have to have project execution and we need to install. So we have been ramping on learning and development in China, in Asia, in LatAm, and this will distinguish us from the rest of the industry to make it absolutely clear.Then the Atlanta trade shift. The activities are picking up. Great to see again all the trends. Unfortunately, I could not be there at this time, but the highlight is, of course, that, for instance, we were opening the Bell & Evans and Scott and family, it's so great to see our partnership bearing those fruits. You have been on the forefront in sustainability, safety, even the first one with organic chicken in the U.S. and you are ever young pioneer even though you are the oldest branded chicken in the U.S. market. Due to your reuse of water and energy, you get the first green financing there. You know as well as we that we need to collect and elect the data, so we can report it to the financial world. And this is actually happening.Our customers are on net 0 journey as we are an auto [indiscernible] Marel hit all the KPIs in the loan agreement, our green loans as well. Automation agility, sustainability, driving the factor continues innovation throughout and speeding a little bit up because I believe we will get a lot and lot of question. We are ramping the front end in sales and services, especially outside Europe, U.S. We have implemented a regional structure, having a fully local team. It's not a globalization. It's rather localization around the globe.When you're doing that, you have to play a little bit in 2 systems in the backend. Now we will synergize the backend, automate the backend just like our customers are doing. This is what is amazing to see that in 2 years' time, things are happening that we thought would happen in next 10 years. However, many things were late in 2020 than you thought would happen to the year [ 2020 ] with [ Microsoft teams ] or so the [indiscernible] would be 2010. But this is how things works. Now we are accelerating and it will distinguish be it in right to win, right to play or completely lose the game.Sustainability matters. I challenge you to go to our Capital Markets Day where we go thoroughly through it. It is not only a matter on itself. We embedded in everything we do. We embedded in our strategy, our operating model thinking, the local teams, how we distribute the spare parts, how we are close to the source in Slovakia, China, Brazil and so on. And then we set targets. And maybe the most interesting part is the work councils, the unions, top management and capital are agreeing on what matters. And then we need to get the whole organization to run in the same direction.Great example of how acquisition are driving organic growth. PMJ and us here in Marel in the duck market. Even though it sounds small, the acquisition, we are providing first year after coming together, the first full line in the duck market. And just to remember, the metric tons in the duck market are twice as the Atlantic salmon, especially in China, and we have ample opportunities in the next 10 years to thrive there. TRIEF in meat, cross-selling up-selling fish, again, we are creating here a champion that can be with the customers and take the full line concept in the fish sector, salmon, whitefish, farmed whitefish and then we can explore new avenues like the shrimp business in India, in Vietnam and so on.This is how we think. This is how we grow and utilizing our global reach throughout, now we are ready organizational-wise, financially wise, long-term finance to be less than 1x leverage in EBITDA to take on larger acquisitions. We firmly state our '23 targets and '26 targets. Instead of explaining '23 targets in detail, let's go to Q&A because I'm without that, expecting some questions in that area.

[Dröfn Farestveit]

Right. Thank you, Arni Oddur. Mobility challenges are not only happening on a macro level but also in a micro level here with minus 10 degrees in Iceland today. With that, just as a reminder, you would like to ask a question, please do so via the conference call or you can also e-mail [e-mail]. And with that, I'd like to hand over to the conference call moderator.

[Operator]

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

[Akash Gupta, Research Analyst]

I have 2 questions, please, and I'll ask one at a time. The first one I have is for Linda. So if I look at 2021 gross margins, we are at 35.9%, which is 410 basis points below your target for 2023. Having said that, you have some one-off in form of the supply chain impact that may go away in next year. So the question I have for you is that can you give us a flavor in terms of the impact that you have, which could be like temporary or transitory when it comes to supply chain inefficiencies, maybe something related to COVID that is embedded in 35.9% to get some sense of what sort of underlying margin improvement you will need to get to 40% target?

[Linda Jonsdottir]

Yes. So like looking at the gross profit, like for the full year, it's around 36.6%. So like clearly below the 40% target, as you mentioned. Supply chain challenges like have been ongoing. What we have said there is we would quantify it somewhere around 200 basis points to -- as a contribution to like where we are now with the gross profit. The timing of like when this will be relieved is tricky to say. But like what we comment on as well on the Q1 and Q2 and 2022, like we are expecting cost prices and pressure to like to continue for the first half of 2022. So like we are more looking towards the second half of the year to like start seeing improvements on this level. Then in addition to like supply chain challenges, we are, of course, working on a number of improvement projects that shoot and start kicking in and improving the gross profit. So in terms of our plans, like we are more focusing on the second half of 2022 and then very clearly focusing on reaching the 40% target in '23.

[Arni Oddur Thordarson, Chief Executive Officer]

And am I allowed as well to add? Even though the question was the challenging outset, what is that causing? It's much more interesting instead of having the excuses of that. What are we doing? And like Linda said, we are doing a lot of transformation projects. But what are we really doing in the spare parts that is running high. We are separating the spare parts handling and the manufacturing. That is planning and scheduling in manufacturing, much faster [indiscernible] in the spare parts, and you have to answer on the spot when will it arrive and even go into proactive maintenance.So all of the business cost and the IT cost related to that, except from the investments, we take it through the books. That's why I said that the operating cash flow of before inventory buildup at 70% against the 11%. We need to do this just like our customers are streamlining. And then in the back end of the sales offices, we didn't dare to consolidate it in them when we were building up 2 system out in the region on the business unit. Now we go for synchronization of it. And pricing in the end, more dynamic pricing.

[Akash Gupta, Research Analyst]

And my second question is also on 2023 target. So you have a target for gross margin and operating margin, but -- what we don't have is the revenues. And the question I have is that can you give us some flavor on what kind of top line growth you will need in the next couple of years to get to these levels given if we -- like if we don't get there, then there may be some shortfall on margins. And then maybe adding up on that, could there be any downside risk to these 2023 targets from M&A? Maybe I don't know if the companies you are looking to acquire also come with 40% gross margin or maybe if you can comment on that.

[Arni Oddur Thordarson, Chief Executive Officer]

So good question. So make it absolutely clear. This is excluding acquisition, our target of 60%. We are not going to fix it with acquisition. And of course, if we would take acquisition in '23, that could color it. So -- and our assumption, you see our assumption. We made the current move in beginning of the year to ramp -- scale up ahead of the growth curve. We are expecting same activities level or higher activities level. We said very explicitly in beginning of last year that we believe that the long-term growth in the market is 4% to 6%. We believe next 5 years from start of year '21 would be 6% to 8% growth in the market.I said previously in this show or discussion as well, we are seeing some empty and all they're doing very well like Marel, and we are seeing order intake growing much faster in beginning of that. And then we will, on top of that, if we talk about 26 target, take now large-scale acquisition. But the EBIT target is clear. We will not fix it with acquisition. We will, though, continue on our path in acquisition. It's not for the sake of the growth. It's to get better delivery to our customers, become a one-stop shop. We simply believe 2026 and beyond, we need to have that scale and scope to service our largest customer on a global scale as a one-stop shop.

[Linda Jonsdottir]

Yes. And perhaps you already mentioned it, but I mean, like then we have, of course, the EUR 3 billion target out there for 2026. And like the mid-term targets should be then a good step in that direction. Like I would also think about it like that.

[Operator]

Our next question comes from Eric Wilmer from ABN ODDO.

[Eric Wilmer, Analyst]

I will also ask them one by one. I've got a few. It seems like both your receivables and inventory position sell through at a cash outflows during Q4. So I guess, looking into Q1 and Q2 this year, where supply chain constraints are expected to remain, would you expect further cash outflows before things normalize in H2? That's my first question.

[Linda Jonsdottir]

Yes. I mean we are following this very carefully. I mean I do think like what we've done now on the inventory side creates like a good balance for us to work from. I would say like if we need more, we will do more, but I would expect it to start balancing a bit out looking at the trends. But I think we really feel like we are using our balance sheet well, taking those decisions on the inventory front. So like if we need to continue doing that, that is what we will take action on.

[Arni Oddur Thordarson, Chief Executive Officer]

But maybe to up to -- Tinna at here logistic problem in the middle of the winter here in Iceland. We believe the spring is coming. Maybe it will only be in the second half for 2023 compared to the winter in the logistic problems. We decided to take more safety. And I'm seeing many companies that are publishing now, taking down the inventories in first quarter. I would not want to be really a customer of companies that is squeezing the inventories down. The supply chain challenges will be quite a lot in first and second quarter this year. And I would be very carefully as an investor as well in those companies that are squeezing the inventories out in back end of last year. Just to be honest and frank about it, we decided to stay on the safe side.

[Eric Wilmer, Analyst]

Understood. Very clear. I also had a question on your aftermarket sales, which equals 40% again in 2021, in line with 2020. You mentioned that spare parts saw another record level after a very strong Q3 also for spare parts. Does this mean that your service revenues were actually somewhat lower this year to still arrive at a 40% total?

[Arni Oddur Thordarson, Chief Executive Officer]

Yes, that's correct. Lower in recent 2 years, the service revenue. The reason is mobility challenges. Now we are seeing the mobility coming in. Our service people visiting the customers. And the good thing about visiting the customer, you see as well opportunities where we can advance the plants together. We don't see more than our customers. But together, we can see the opportunities because we know our portfolio. However, the nice thing as well in second half of last year, we see service level agreements picking up again because, of course, it's like a priority pass in the Disney World or something like that when you have a service level agreement. It is -- we are seeing -- then you are having -- we are proactively analyzing it, delivering, securing it in advance and so on. So it's nice to see that again, but it's correct.But talking about the gross profit, I know it was a growth question. But we are completely changing the system, digitalizing, automating the system in spare part handling. Part of the gross profit is we didn't -- did not only need in some places to work on double shift. We needed to work on triple shifts to be able to handle and deliver their spare parts. You can imagine the cost and the gross there compared to automating, compared to how the ergonomic search that you can have all genders working there and in a nice and bright seamless flow. So just like it is required today, on the second, you have to answer, inside the company and toward the customers.

[Eric Wilmer, Analyst]

Understood. And then 2 very short questions. One on the rising cases of bird flu across the European continent. Is this in any way impacting your customers' decision to invest in the equipment?

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. So we will have Africa swine flu. We will have bird flu. That is actually why we are in poultry, meat or fish. That's actually why we have the geographical spread, and that's actually why we are in all the processing steps. That actually as well why we will expand further our playing field into alternatives of extra pools and et cetera, in cost of the time. And that's how we play the risk metrics. However, overall, not geographic -- by geographies, the indication is industry by industry and then especially our industry is robotics, automation, seamless flow will be higher than we have ever seen, at least what our customers and the many other industries are planning. And no wonder in the labor scarcity and turnover we are seeing.

[Eric Wilmer, Analyst]

Okay. And then lastly, you mentioned that nonrecurring integration costs for the fish division that are going -- likely going to impact H1 profitability for this division. Is this fully related to Curio? I was wondering and to what extent or what would be the order of magnitude for these goals?

[Arni Oddur Thordarson, Chief Executive Officer]

It is Curio and Valka, especially the Valka portfolio and Marel portfolio is more similar. Although the nice thing to give you insight, it looks like the same. But in some steps in the processing, the customer decide to go in a flow or a different way of handling it. So we have -- we standardize the portfolio, and we have A and B options of the [ swimming lanes ] together. So we go through it systematically. We have taken quite significant steps in the integration. We are seeing the orders coming back in Valka. Immediately after we signed it, they are having very good solutions. And we are indicating some integration cost, but not been order intake was higher than usually. So that's positive. And then counterbalancing '22 will be integration cost. And then we are looking at '23 and beyond where we can post the operational results in this above 10%, when I'm okay with a 6% -- 5%, 6% level last year in fish.

[Eric Wilmer, Analyst]

But just maybe a little follow-up to that. I mean, the order book was indeed strong, but the EBIT base is -- it's your smallest division. Should we look at near 0% EBIT margins in H1 for fish?

[Arni Oddur Thordarson, Chief Executive Officer]

We -- you know that we don't give guidance for the year. So we -- but may -- Linda, maybe you take this.

[Linda Jonsdottir]

Yes. Perhaps I comment on it very high level. I would say like that would not be the magnitude. So that would not be my expectation for fish, but we wanted to highlight that we can see some cost connected to integration, but not of this magnitude you mentioned.

[Arni Oddur Thordarson, Chief Executive Officer]

But having said that, if we need -- and we believe that we can integrate faster and do it faster. We basically don't care of cost or forecasted compared to underlying the customer delivery and where will -- where are we reaching the run rate. So pleased with many things that happened in the first year. And it's not an easy one to take on those acquisitions. Even though there is something [ run ] scheme of Marel small, they are quite interesting for fish and Curio and Marel is giving a promise where we can head in this direction.We had the wins in LatAm, in tilapia last year, quite many in new avenues. We will have in the later on in the shrimp business in Asia and so on. And we say it again and again, 1 year ago, when you asked and others rightfully about the OpEx coverage, we said we are not going to slow down the OpEx. We will cover it with volume. Now we are taking from EUR 150 million to EUR 200 million in revenues in fees. Next step will be EUR 250 million, and then we get more and more coverage of our innovation cost. And we needed to innovate because we have some building blocks that means a lot for our customers. So the outlook is pretty good.

[Linda Jonsdottir]

I'm getting some signals that we should shorten the answer because we have some questions pending, so let's continue.

[Operator]

[Operator Instructions] Our next question comes from Andre Mulder from Kepler.

[Andre F. M. Mulder, Analyst]

I need 2 questions. First question, Linda, you mentioned this 200 bps pressure from supply chain and logistics impact. Is there any way that you can split that between the price increases you're facing on the materials? And on the other hand, the extra cost that is related to late delivery or more difficult delivery there? That will be my first question. Second question. Can you give us a feel of how the order intake has been developing in regions, especially, for example, the U.S. and especially the meat part? If you can give some insight, that will be appreciated.

[Linda Jonsdottir]

Yes. On the supply chain part, I think I can't really help you there. Like I think giving the magnitude of 200 point is like giving quite some insights already, like it is a mix of factors that are impacting our gross profit. So I think I need to leave it at that. And Arni, do you want to comment on the order intake?

[Arni Oddur Thordarson, Chief Executive Officer]

Yes. So we are seeing like usually, the U.S. is quite quick to respond and especially the poultry is quiet to respond. And so to recap, overall, the industry fourth quarter first quarter -- fourth quarter the year before in poultry, quite soft and ultra-strong now on the pipeline. We started with last in meat the first quarter last year, quite a lot of softness in third quarter and then good order intake again in fourth quarter. So geographically, China, strong beginning of last year, weakened recent 2 quarters. This is how it has been in recent 20 years, fluctuating. And U.S. is the first, but we are seeing Europe as well surprisingly strong at the moment. And LatAm and then China planning quite a lot, so no further details though.

[Operator]

There appear to be no further questions. I'll return the conference back to you, speaker.

[Arni Oddur Thordarson, Chief Executive Officer]

Okay.

[Dröfn Farestveit]

Excellent. Thank you. We've also received a few questions via e-mail. And the first one is from Tom Cosper of Bayberry Capital.Given inflation and supply chain pressures, should we expect the margin profile to get worse in Q1 '22 and Q2 '22 versus the Q4 '21 before it gets better?

[Linda Jonsdottir]

Yes. Perhaps I start. I mean, as I highlighted a bit, like there is definitely a lot of cost inflation and like labor inflation on escalated levels in the global market. So this is something that has a high attention. Of course, we are doing everything we can to try to limit the potential downside. But I would say like in Q1 and Q2, like we are expecting to see continued pressure on the supply chain side. So that's why we highlight more like our target towards the second half of 2022 and 2023. Could it happen? Yes. Are we trying to do everything we can to limit it? Absolutely. So this has our highest focus and attention at the moment.

[Arni Oddur Thordarson, Chief Executive Officer]

And maybe to add to the big picture where we are heading in second half and next year and following. We have seen 25% labor price by our customers and turnover rate escalating need for seamless flow, 25% increase plus turnover. At the same time, we see our peers and Marel may be increasing prices by 12%. We are convinced taking our pioneering solutions that we have in our hands and the need and the call from the consumers how to change that. We have pricing power to adjust it. We are not short cycle company. It goes fast through in the spare part. It goes a little bit slower than spare part but fast -- relatively fast compared to other companies in the standard equipment. And then our projects take 9 to 18 months. So this is how if it gets through. But do we have pricing power to compensate it? Yes, we have.

[Dröfn Farestveit]

Thank you. And his second question reads, what percentage of the elevated inflation impact is addressed by the 46% price increase? Explain your value-added pricing strategy and perhaps an idea of timing and magnitude of this pricing strategy.

[Arni Oddur Thordarson, Chief Executive Officer]

Value-based pricing is especially when you announce a new equipment solutions to the market, then you go, not only what value you are creating for the customers if you are pioneer. However, you look beyond as well, how likely this -- that other will innovate. So you don't make it in the beginning, but you don't use cost plus. You go where the value is, so you can penetrate the market. Even more interesting in spare parts, you go through with category by category by category, how you do it in some categories in where tiers where third parties can come in where you are not unique, you have to lower it. And in all the categories, you need to go higher. You need to lower it to because our customer want a one-stop shop.But you have to be fair in the pricing. Overall, you then increase it, lower it to get more market set and you increase that overall, it was on average, 4% to 6% increase in October and again around 2%, 3% in beginning of the year. Then you have to be disciplined in the big project as well in the pricing structure and et cetera. And when you have a hefty order book, it matters a lot. It gives you more discipline in the discounts and, et cetera. In the end, this is ever-evolving. The awareness is, of course, much higher now. We cannot give exactly how much it cover. We have been coloring it very much that it could be a downward pressure in that in first and second quarter, the volume and the mix will be the upward pressure.

[Dröfn Farestveit]

Thank you. I understand we also have a question from [indiscernible] via the conference call.

[Operator]

[Operator Instructions] We do not have any audio questions.

[Dröfn Farestveit]

Okay. Very good. Well, I think we've reached the end of our session today. Thank you all very much for your time and your attention. I hope this session was informative and insightful. Indeed, as Arni Oddur mentioned, spring is just around the corner, and we hope to see some of you, our great shareholders at the AGM on the 16th of March. Thank you very much.